<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 11, 1996
REGISTRATION NO. 333-13663
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
HYPERION TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 4813 25-1669404
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
5 WEST THIRD STREET -- P.O. BOX 472
COUDERSPORT, PENNSYLVANIA 16915
(814) 274-9830
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-----------
DANIEL R. MILLIARD, PRESIDENT
HYPERION TELECOMMUNICATIONS, INC.
5 WEST THIRD STREET -- P.O. BOX 472
COUDERSPORT, PENNSYLVANIA 16915
(814) 274-9830
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------
PLEASE ADDRESS A COPY OF ALL COMMUNICATIONS TO:
CARL E. ROTHENBERGER, JR., ESQUIRE STEVEN DELLA ROCCA, ESQUIRE
BUCHANAN INGERSOLL LATHAM & WATKINS
PROFESSIONAL CORPORATION 53RD AT THIRD, SUITE 1000
21ST FLOOR, 301 GRANT STREET 885 THIRD AVENUE
PITTSBURGH, PENNSYLVANIA 15219 NEW YORK, NEW YORK 10022-4802
(412) 562-8826 (212) 906-1330
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
-----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 11, 1996
LOGO
[LOGO OF HYPERION TELECOMMUNICATIONS, INC.]
16,500,000 SHARES
HYPERION TELECOMMUNICATIONS, INC.
CLASS A COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
----------
Of the 16,500,000 shares of Class A Common Stock offered hereby, 13,200,000
shares are being offered in a United States offering and 3,300,000 shares are
being offered in a concurrent international offering outside of the United
States. The initial public offering price and the aggregate underwriting
discount per share will be identical for both offerings. See "Underwriting."
Prior to this offering, there has been no public market for the Class A
Common Stock of the Company. It is currently estimated that the initial public
offering price per share will be between $11.00 and $13.00. For factors to be
considered in determining the initial public offering price, see
"Underwriting."
The Company has two classes of common stock. Shares of Class A Common Stock
and Class B Common Stock are substantially identical, except that holders of
Class A Common Stock are entitled to one vote per share and holders of Class B
Common Stock are entitled to 10 votes per share on all matters submitted to a
vote of stockholders. Immediately following the consummation of the Offerings
(assuming no exercise of the over-allotment options granted to the
Underwriters), the holders of the Class B Common Stock will have approximately
92.38% of the combined voting power of the outstanding Class A Common Stock and
Class B Common Stock. See "Description of Capital Stock."
SEE "RISK FACTORS" ON PAGE 12 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE CLASS A COMMON STOCK.
Application has been made for quotation of the Class A Common Stock on the
Nasdaq National Market under the symbol "HYPT."
----------
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.
----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ -----------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total(3)................................ $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting estimated expenses of $615,000 payable by the Company.
(3) The Underwriters have been granted an option for 30 days to purchase an
additional 1,980,000 shares at the initial public offering price, less the
underwriting discount, solely to cover over-allotments. Additionally, the
International Underwriters have been granted a similar option with respect
to an additional 495,000 shares as part of the concurrent international
offering. In the event that the Underwriters exercise such over-allotment
options, the Selling Stockholder (as defined herein) may elect to satisfy
such over-allotment options by selling shares of Class A Common Stock;
however, to the extent that such Selling Stockholder elects not to do so,
then such shares will be issued and sold by the Company. If such over-
allotment options are exercised in full, the total initial public offering
price, underwriting discount and proceeds to (i) the Selling Stockholder,
in the event that such Selling Stockholder sells all of the shares
necessary to satisfy such options, will be $ , $ , and $ ,
respectively and (ii) the Company, in the event that the Company sells all
of the shares necessary to satisfy such options, will be $ , $ , and
$ , respectively. In the event that the Selling Stockholder elects to
satisfy the over-allotment options, the Selling Stockholder has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
----------
The shares offered hereby are offered severally by the U.S. Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1996, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
LAZARD FRERES & CO. LLC
MERRILL LYNCH & CO.
----------
The date of this Prospectus is , 1996.
<PAGE>
[Graphic of map showing the locations in the
Hyperion Telecommunications Network
in the Eastern United States.]
Network Statistics
Route Miles:(1) 2,887
Buildings Connected:(1) 1,101
Networks In Operation:(2) 15
Networks Under Construction: 3
Potential Addressable Market:(3) $5.1 billion
(1) As of September 30, 1996, and excludes networks under construction.
(2) The Company has entered into a non-binding letter of intent with Time Warner
to increase its ownership interests in Buffalo to 50% and in Syracuse to
100%, and to eliminate its ownership interests in and management
responsibility for the Albany and Binghamton networks. See "Prospectus
Summary-Recent Developments."
(3) The addressable market includes traditional access services and switched
services that the Company believes its 18 networks can service. See
"Business."
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<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.
Unless the context otherwise requires, references in this Prospectus (i) to the
"Company" or "Hyperion" mean Hyperion Telecommunications, Inc. together with
its subsidiaries, and (ii) to the "networks," the "Company's networks" or the
"Operating Companies' networks" mean the 18 telecommunications networks in
which the Company currently has ownership interests through 14 Operating
Companies (which, as defined herein, are (a) wholly owned or majority-owned
subsidiaries of the Company and (b) joint venture partnerships or corporations
managed by the Company and in which the Company holds an equity interest of 50%
or less). As of the date of this Prospectus, 14 of the 18 networks were 50% or
less owned by the Company. 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. See "--Ownership of the Company and the
Operating Companies." Unless otherwise specifically indicated herein, all of
the share data contained herein gives effect to or assumes (i) a 2-for-1 split
of the outstanding shares of the Company's common stock, and (ii) a
reclassification of currently outstanding common stock and common stock
reserved for issuance upon the exercise of outstanding Warrants (as defined
herein) (the "Recapitalization Events"), which the Company intends to complete
prior to the closing of the offering of Class A Common Stock hereby.
THE COMPANY
The Company is a leading provider of local telecommunications services over
state-of-the-art fiber optic networks in selected markets within the United
States. Hyperion believes it is the third largest competitive local exchange
carrier ("CLEC") in the United States, based upon route miles and buildings
connected data made publicly available by other CLECs. Each of the Company's 18
networks (including three currently under construction) has been developed by
partnering with a cable operator or utility provider (the "Local Partner") with
operations in that region. This approach has allowed Hyperion to rapidly
construct high-capacity networks which generally have broader coverage of its
markets than those of other CLECs. The Company believes that the breadth of its
networks will allow it to originate and terminate a significant proportion of
its customers' local telephone calls over its own network, instead of relying
on the network of the incumbent local exchange carrier ("LEC"). The Company
also believes that working with a Local Partner significantly reduces the cost
of constructing its fiber optic networks through the utilization of existing
cable or utility facilities and by sharing construction costs with its Local
Partners, who usually upgrade the capacity of their cable or utility
infrastructure during construction of the telecommunications network.
The Company offers a broad array of integrated, high quality voice, video and
enhanced data communications services to end users such as small, medium and
large businesses, as well as to resellers, including interexchange carriers
("IXCs"). The Company believes the design and breadth of its networks is a key
competitive advantage in attracting customers. As IXCs seek to offer their
customers an integrated switched local and long distance service offering, the
Company believes IXCs will increasingly rely on the local networks of CLECs
such as the Company. This is in part due to the IXCs' desire to minimize usage
of the incumbent LEC's network due to the expected entry of incumbent LECs into
the long distance marketplace. The Company believes its networks will be
attractive to IXCs, such as AT&T, MCI and Sprint, and other resellers because
the Company's networks are 100% fiber optic-based and generally offer the
broadest market coverage (other than that of the incumbent LEC). Hyperion
believes its services will also be attractive to end users because it can offer
(i) lower prices than the incumbent LEC, (ii) high-capacity fiber optic network
connection directly to substantially all of its customers' premises in a
particular city, (iii) high quality customer service and reliability, and (iv)
brand name recognition through its alliances with its Local Partners and IXCs.
1
<PAGE>
The Company plans to offer switched services, including customer dial tone,
in each of its 18 networks by mid-1997 and has already installed switches or
remote switching capability in six of its networks. According to industry data,
revenues from switched services, including local dial tone, represented 85% of
local telecommunications revenues in the United States in 1995. The Company
also offers traditional access services to IXCs, and large customers, which to
date have represented the principal source of revenue for the Company's
networks. The Company currently offers enhanced data services to its customers
in four of its networks in a partnership with !NTERPRISE, a wholly owned
subsidiary of U S WEST, and plans to offer such services in all of its
networks. Enhanced data services currently include frame relay, Asynchronous
Transfer Mode ("ATM") data transport, business video conferencing, private line
data interconnect service and LAN connection and monitoring services. 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 LEC in markets served by the Company's
networks.
From the Company's inception in October 1991 through June 30, 1996, the
Company and its partners have invested approximately $158.7 million to build
and develop the network infrastructure and operations (excluding the South
Florida Partnership (as defined herein), see "--Recent Developments"). As of
September 30, 1996, the Company's 15 operating networks served 33 cities, and
included approximately 2,887 route miles of fiber optic cable and were
connected to approximately 1,101 buildings. The Company also has three networks
which are currently under construction. The Company intends to increase the
density of its existing network clusters and expand into new geographic markets
or clusters through the Company's continued construction of new networks with
cable and utility partners.
Hyperion's ownership interest in its networks ranges from 19.7% to 100%. See
"--Ownership of the Company and the Operating Companies." Consistent with the
Company's goal of owning at least a 50% interest in its Operating Companies,
the Company has recently entered into a non-binding letter of intent to
consolidate its interests in its networks in the State of New York. This
transaction would increase its weighted average ownership interest in its
networks from 40% to 44% (based on total fixed assets of the networks). See "--
Recent Developments." The Company reports its interest in joint ventures in
which it owns an interest of 50% or less pursuant to the equity method of
accounting consistent with generally accepted accounting principles. The
Company manages the day-to-day operation of all of the Company's networks, for
which it receives management fees which are based on the Company's costs.
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. 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 to approximately $97.1 billion annually due to the opening of the market
for all switched services which will permit CLECs to offer a full range of
local telecommunications services including local dial tone, local calls,
customer calling features and intraLATA toll services for both businesses and
residential customers. 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
2
<PAGE>
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. In the markets where the Company's 18 networks are
currently operating or are under construction, the Company believes it has an
addressable market of approximately $5.1 billion annually, substantially all of
which is currently provided by the incumbent LECs. This addressable market
estimate does not include the market for enhanced data services (currently
targeted by the Company through its partnerships with !NTERPRISE) or the market
for interLATA toll, which the Company has the ability to enter at its option.
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 resellers, including IXCs, in its markets. By
partnering with local cable television operators and utility companies, the
Company develops networks that will provide customers with greater market
coverage, lower costs and superior service. The Company's networks also
leverage the IXCs' name recognition, reputation for quality and reliability and
existing customer base by becoming preferred suppliers for IXCs of local
telecommunications services in the Company's markets. The IXCs market their
long distance services in conjunction with the Company's local service
offerings to provide end users with a fully integrated telecommunications
service offering in all of the Company's operating markets. Principal elements
of the Company's strategy include:
Develop a Rapid Entry/Low Cost Approach with Local Partners. The Company
works with a Local Partner in order to significantly reduce the cost and time
to construct a fiber optic network, enable the Company to rapidly begin
offering services and lower the overhead associated with operating and
maintaining the Company's networks. Advantages of building the Company's
networks with Local Partners include (i) sharing the cost of building a fiber
optic network, which the Company believes reduces the cost of aerial fiber
construction by approximately 62% in the case of cable partners and 40% in the
case of utility partners, (ii) reducing the time and cost of obtaining access
to rights-of-way and building entrances and (iii) leveraging the Local
Partners' existing fiber optic network maintenance and installation
infrastructure. 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 generally provide funding for the fiber
build in a network and lease the fiber capacity back to the partnership under
long-term agreements, while the partnership funds other capital expenditures,
including switching infrastructure and electronics.
Create Additional Partnerships with Utility Companies. The Company believes
that a significant proportion of the networks the Company constructs in the
future will be through partnerships with utility companies. Utility companies
have a number of attributes which make them particularly attractive as partners
for the Company, including (i) contiguous and broad geographic coverage with
extensive conduits and rights-of-way in both business and residential areas;
(ii) significant access to capital; (iii) existing relationships with business
and residential customers; and (iv) a reputation for reliability and quality
customer service. The Company believes that it is an attractive partner for
utility companies because it builds large metropolitan networks which are
similar to those of the utility company and because it can offer utility
companies a significant stake in its networks, both from a financial and
operational perspective.
3
<PAGE>
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 September 30, 1996, in all of the markets in which the Company and its
networks operate, management believes that the Company has the broadest network
coverage in terms of route miles of any of its CLEC competitors. The Company
believes that expanded network coverage will enable the Company to (i) provide
broader and more reliable coverage for network customers, (ii) carry a greater
amount of traffic on its own networks rather than on the networks of other
carriers thereby increasing the Company's revenues and profit margins, (iii)
increase the potential market available to the Company due to the greater
number of buildings, LEC-COs and customers that the Company's networks can
service, (iv) increase the attractiveness 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.
Expand through Development of Network Clusters. The Company intends to build
on its extensive network size by expanding its existing networks into nearby
areas and establishing new networks in close proximity to existing ones.
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) reduce capital expenditures by
optimizing the networks' switching capacity through the use of remote switch
capacity in nearby cities, (iii) cost-effectively offer services to smaller
markets which are adjacent to its networks and 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.
Leverage 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 enables 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 with AT&T (the "National Service Agreement") pursuant to
which the Company, through its networks, will be an AT&T preferred supplier of
dedicated special access and switched access transport services. The Company
has also passed AT&T's Switch Network Validation Test.
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 customers of the !NTERPRISE Partnerships (as defined herein)
operate their businesses. !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 through its
partnerships with the Company's networks. 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 partnerships with !NTERPRISE in all of the
Company's existing networks and may enter into agreements with other enhanced
service integrators in the future.
OWNERSHIP OF THE COMPANY AND THE OPERATING COMPANIES
Prior to the Offerings (as defined herein), the Company was an 89% owned
subsidiary of Adelphia, the seventh largest cable television company in the
United States, with the balance of the Company owned by senior management.
After the consummation of the Offerings (without giving effect to the over-
allotment options), Adelphia will own 48.77% of the outstanding Class A Common
Stock and Class B Common Stock (collectively, the "Common Stock") of the
Company and will have 82.22% of the voting control through its ownership of
Class B Common Stock. See "Risk Factors--Control by Principal Stockholder." As
of June 30, 1996, Adelphia owned or managed cable television systems that
served approximately 1.8 million subscribers in 15 states.
The Company currently has 18 networks (including three under construction).
The Company owns these networks through (i) partnerships with 10 Local Partners
(the "Operating Partnerships") and (ii) three 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 which are
based on the Company's costs.
The Company's executive offices are located at 5 West Third Street,
Coudersport, Pennsylvania 16915, and its telephone number is (814) 274-9830.
5
<PAGE>
The following is an overview of the Company's current network structure.
<TABLE>
<CAPTION>
ACTUAL OR
EXPECTED DATE HYPERION
COMPANY NETWORKS OF OPERATION(B) INTEREST LOCAL PARTNER(S)
- ---------------- --------------- -------- -------------------------
<S> <C> <C> <C>
Northeast Cluster
Albany, NY(a)................ 2/95 50.0% Time Warner/Advance(c)
Binghamton, NY(a)............ 3/95 20.0 Time Warner/Advance(c)
Buffalo, NY(a)............... 1/95 40.0 Tele-Communications, Inc.
Time Warner/Advance(d)
Syracuse, NY(a).............. 8/92 50.0 Time Warner/Advance(c)(d)
Vermont...................... 11/94 100.0 (d)
Mid-Atlantic Cluster
Charlottesville, VA.......... 11/95 100.0 (d)
Harrisburg, PA............... 4/95 50.0 Lenfest Communications
Morristown, NJ............... 7/96 19.7 TKR Cable(e)
New Brunswick, NJ............ 11/95 19.7 TKR Cable(e)
Philadelphia, PA............. 8/96 50.0 PECO Energy
Richmond, VA................. 9/93 37.0 Continental Cablevision
Scranton/Wilkes-Barre, PA.... mid-1997 100.0 (d)
York, PA..................... mid-1997 50.0 Susquehanna Cable
Mid-South Cluster
Lexington, KY(f)............. 12/96 50.0 TKR Cable(g)
Louisville, KY(f)............ 3/95 50.0 TKR Cable(g)
Nashville, TN(f)............. 11/94 95.0 InterMedia Partners
Other Networks
Jacksonville, FL............. 9/92 20.0 Continental Cablevision
Wichita, KS.................. 9/94 49.9 Gannett
</TABLE>
- --------
(a) The Company has entered into a non-binding letter of intent with Time
Warner to increase its ownership interest in the Buffalo network to 50% and
in the Syracuse network to 100%, and to eliminate its ownership interests
in and management responsibility for the Albany and Binghamton networks.
See "--Recent Developments."
(b) 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 has been completed.
(c) The interests in the Albany, Binghamton and Syracuse networks are all owned
by one Operating Company.
(d) Adelphia or its affiliates lease fiber capacity to the Operating Companies
in these networks.
(e) The interests in the Morristown and New Brunswick networks are owned by one
Operating Company. Sutton Capital Associates also owns a minority interest
in the Operating Company.
(f) The Company's interest in these networks has recently changed. See "--
Recent Developments."
(g) The interests in the Lexington and Louisville networks are owned by one
Operating Company.
6
<PAGE>
RECENT DEVELOPMENTS
Time Warner Letter of Intent. Under a non-binding letter of intent with Time
Warner, dated as of June 17, 1996, the Company would consolidate its Operating
Partnership interests in the State of New York by (i) increasing its ownership
interest in the Buffalo Operating Partnership to 50% and in the Syracuse
network to 100% and (ii) eliminating its ownership interests in and management
responsibility for the Albany and Binghamton networks. In addition, the letter
of intent provides that, upon the consummation of the transaction, neither
party will be subject to the non-competition provisions contained in the
existing partnership agreements with respect to the markets from which they are
withdrawing. The consummation of this transaction is subject to numerous terms
and conditions including the negotiation and execution of definitive, binding
agreements. No assurances can be given as to whether or when, or the terms upon
which, such transaction will be consummated.
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 (the "South Florida Partnership") 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, and the Company was
released from its covenant not to compete with respect to the South Florida
market. 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 and as of the date of sale and the three months
ended June 30, 1996 were approximately $3.4 million and ($0.8) million,
respectively, and $3.2 million and ($0.2) million, respectively.
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 networks. 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.
On August 1, 1996, the Company purchased general and limited partnership
interests in the Nashville, Tennessee Operating Partnership from InterMedia and
Robin Media. The aggregate purchase price was approximately $5.0 million. As a
result of this acquisition, the Company's ownership interest in this
partnership was increased to 95%.
Pursuant to an amendment dated May 8, 1996 to the partnership agreement
relating to the Lexington and Louisville networks, the Company increased its
partnership ownership interest in Louisville and Lexington, Kentucky to 50% for
estimated required additional capital contributions of approximately $3.0
million, of which $1.0 million remained unpaid as of September 30, 1996.
Issuance of 13% Senior Discount Notes and Warrants. On April 15, 1996, the
Company received net proceeds of $168.6 million from the issuance of $329
million in aggregate principal amount at maturity of 13% Senior Discount Notes
due April 15, 2003 (the "Senior Notes") and warrants to purchase an aggregate
of 5.76% of the then outstanding common stock (which will be reclassified as
Class B Common Stock upon the consummation of the Recapitalization Events) (the
"Warrants"). See "Description of Capital Stock--Warrants."
7
<PAGE>
Acquisition of Fiber Backbone. Effective September 30, 1996, the Vermont
Operating Company (as defined herein) purchased approximately 280 miles of
SONET ring fiber backbone presently used by the Company in Vermont from
Adelphia for $5.4 million, Adelphia's historical cost for such assets, subject
to post-closing adjustments. Prior to such purchase, the Company had been
leasing such fiber backbone in the Vermont network from Adelphia at an annual
rate of approximately $1.0 million.
Interconnection Activities. The Company has completed the required
interconnection agreements with NYNEX, subject to state regulatory approval,
for all of its networks in the Northeast Cluster. The Company is also a
participant in a stipulation executed with Bell South in December 1995, that
provides for interconnection in the Jacksonville market, and is involved in
negotiations with Bell South and Bell Atlantic for interconnection agreements
that will cover its operating networks throughout the Mid-South and Mid-
Atlantic Clusters (other than Charlottesville), respectively. The Company
expects that these negotiations will be completed by the end of 1996.
Recent Regulatory Actions. The FCC has adopted many, but not all, of the
rules required to implement the Telecommunications Act. Rulemakings regarding
support for universal telephone service and reform of the current regime of
access charges paid by long distance carriers are expected to be completed in
the first half of 1997. The FCC's orders implementing the provisions of the
Telecommunications Act relating to telephone number portability and local
telephone competition are subject to Petitions for Reconsideration at the FCC
and the FCC's order implementing the Telecommunications Act relating to local
telephone competition is subject to Petitions for Review filed before federal
appeals courts. The Eighth Circuit Court of Appeals has granted a temporary
stay of the FCC's local telephone competition rules. An oral argument was held
on October 3, 1996, on whether to continue the temporary stay until the court
acts on all pending appeals. As of October 9, 1996, the court had not issued a
decision on whether to continue the temporary stay. See "Regulation--
Telecommunications Act of 1996."
8
<PAGE>
THE OFFERINGS
13,200,000 shares of Class A Common Stock are initially being offered in the
United States (the "U.S. Offering") and 3,300,000 shares of Class A Common
Stock are concurrently being offered outside the United States (the
"International Offering"). The U.S. Offering and the International Offering are
referred to collectively in this Prospectus as the "Offerings."
<TABLE>
<S> <C>
Class A Common Stock Offered: (1)
U.S. Offering............................... 13,200,000
International Offering...................... 3,300,000
----------
Total...................................... 16,500,000
==========
Common Stock outstanding
after the Offerings: (1)(2)
Class A Common Stock........................ 16,500,000
Class B Common Stock........................ 20,000,000
----------
Total ..................................... 36,500,000
==========
Use of Proceeds ............................... The Company currently intends
to use the net proceeds from
the Offerings, together with
the remaining net proceeds from
the offering of the Senior
Notes and Warrants, to fund the
Company's capital expenditures,
working cap-ital requirements,
operating losses and pro rata
investments in Operating
Companies and for general
corporate purposes.
Proposed Nasdaq National Market Symbol ........ HYPT
</TABLE>
- --------
(1) The Underwriters have been granted an option to purchase an additional
1,980,000 shares at the initial public offering price, less the
underwriting discount, solely to cover over-allotments. Additionally, the
International Underwriters have been granted a similar option with respect
to an additional 495,000 shares as part of the concurrent international
offering. In the event that the Underwriters exercise such over-allotment
options, Adelphia (the "Selling Stockholder"), the Company's controlling
stockholder, may elect to satisfy such over-allotment options by selling
shares of its Class A Common Stock; however, to the extent that the Selling
Stockholder elects not to do so, such shares will be issued and sold by the
Company. See "Use of Proceeds," "Principal Stockholders" and
"Underwriting."
(2) Excludes, as of October 3, 1996, (i) 21,226,854 shares of Class A Common
Stock reserved for issuance upon the conversion of outstanding Class B
Common Stock and Class B Common Stock issuable upon the exercise of
outstanding Warrants, (ii) 5,000,000 shares of Class A Common Stock
reserved for issuance under the Company's 1996 Plan (as defined herein) and
(iii) 1,226,854 shares of Class B Common Stock issuable upon the exercise
of outstanding Warrants. See "Management--Long-Term Compensation Plan" and
"Description of Capital Stock--Common Stock" and "--Warrants."
9
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary financial data (except the unaudited information for
the fiscal years ended March 31, 1992 and 1993, and the three months ended June
30, 1995 and 1996) are derived from, and should be read in conjunction with,
the audited Consolidated Financial Statements of the Company and the related
Notes thereto contained herein. The unaudited information for the fiscal years
ended March 31, 1992 and 1993 and the three months ended June 30, 1995 and 1996
are derived from other Company information. All of the following information
should be read in conjunction with the Company's Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained elsewhere in this Prospectus.
<TABLE>
COMPANY DATA (a):
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30,
-------------------------------------------- ----------------
1992 1993 1994 1995 1996 1995 1996
------ ------- ------- -------- -------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Telecommunications
service and management
fee revenue........... $ -- $ 89 $ 417 $ 1,729 $ 3,322 $ 686 $ 1,102
Operating expenses:
Network operations..... 2 19 330 1,382 2,690 628 859
Selling, general and
administrative........ 209 921 2,045 2,524 3,084 831 1,027
Depreciation and
amortization.......... -- 30 189 463 1,184 250 695
------ ------- ------- -------- -------- ------- -------
Operating loss......... (211) (881) (2,147) (2,640) (3,636) (1,023) (1,479)
Gain on sale of
investment............ -- -- -- -- -- -- 8,405
Interest income........ -- -- 17 39 199 16 1,433
Interest expense and
fees.................. -- -- (2,164) (3,321) (6,088) (1,328) (6,169)
Equity in net loss of
joint ventures........ -- (194) (528) (1,799) (4,292) (797) (1,636)
Net (loss) income ..... $ (211) $(1,075) $(4,725) $ (7,692) $(13,620) $(3,113) $ 551
Net (loss) income per
weighted average share
of common stock....... $(0.01) $ (0.05) $ (0.24) $ (0.38) $ (0.68) $ (0.16) $ 0.03
Weighted average shares
of common stock
outstanding........... 20,000 20,000 20,000 20,000 20,000 20,000 21,050
OTHER COMPANY DATA:
EBITDA (b)............. $ (211) $ (851) $(1,958) $ (2,177) $ (2,452) $ (773) $ (784)
Capital expenditures
and Company
investments (c)....... 60 3,891 8,607 10,376 18,899 5,390 6,568
Cash used in operating
activities............ (184) (725) (2,121) (2,130) (833) (1,621) (2,657)
Cash (used in) provided
by investing
activities............ (60) (3,806) (8,607) (10,376) (18,899) (5,390) 5,050
Cash provided by
financing activities.. 248 4,645 10,609 12,506 19,732 7,011 129,749
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1996
----- ------- ------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 5 $ 118 $ -- $ -- $ -- $132,142
Total assets........... 82 4,316 14,765 23,212 35,269 176,793
Long term debt......... -- 4,814 19,968 35,541 50,855 194,475
Stockholders' equity
(deficiency).......... (211) (1,286) (6,011) (13,703) (27,323) (18,685)
</TABLE>
- --------
(a) Financial information for the Company and its consolidated subsidiaries. As
of June 30, 1996, 13 of the Company's networks were owned by joint ventures
in which it owns an interest of 50% or less, and for which the Company
reports its interest pursuant to the equity method of accounting consistent
with generally accepted accounting principles.
(b) EBITDA consists of net (loss) income before interest, equity in net loss of
joint ventures, gain on sale of investment, 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.
(c) For the fiscal years ended March 31, 1992, 1993, 1994, 1995, 1996 and the
three months ended June 30, 1995 and 1996, the Company's capital
expenditures (including capital expenditures relating to its wholly owned
Operating Companies) were $0.1, $2.0, $3.1, $2.9, $6.1, $1.4 and $1.8
million, respectively, and the Company's investments in its less than
wholly owned Operating Companies and the South Florida Partnership were
$0.0, $1.9, $5.5, $7.5, $12.8, $4.0 and $4.8 million, respectively, for the
same periods. See the Company's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
10
<PAGE>
SUMMARY OPERATING DATA
The following summary operating data is unaudited information that represents
data for 100% of the Operating Companies' networks and is derived from Company
information. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Supplementary Operating Company Financial Analysis."
As of June 30, 1996, 13 of the Company's 17 networks were 50% or less owned by
the Company, and as of September 30, 1996, 14 of the Company's 18 networks were
50% or less owned by the Company. The Company reports its interest in such 50%
or less owned networks pursuant to the equity method of accounting consistent
with generally accepted accounting principles. As a result, the financial
information set forth below 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 Class A Common Stock offered
hereby. The Company was organized in October 1991 and did not offer service
through its Operating Companies until after Fiscal 1992.
<TABLE>
NETWORK DATA
(UNAUDITED)(a):
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED MARCH 31, JUNE 30,
--------------------------------------- --------------
1992 1993 1994 1995 1996 1995 1996
---- ------ ------- ------- -------- ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Network revenues....... $-- $ 195 $ 962 $ 3,056 $ 7,763 $1,505 $2,926
Operating expenses:
Network operations..... -- 504 789 1,946 4,871 819 1,501
Selling, general and
administrative......... -- 353 1,145 2,439 5,316 973 1,941
Depreciation and
amortization........... -- 207 839 2,467 6,137 1,298 2,709
--- ------ ------- ------- -------- ------ ------
Operating loss......... -- (869) (1,811) (3,796) (8,561) (1,585) (3,225)
Net loss............... -- (948) (2,077) (4,569) (11,285) (1,945) (4,112)
OTHER OPERATING DATA:
EBITDA (b)............. $-- $ (662) $ (972) $(1,329) $ (2,424) $ (287) $ (516)
Capital expenditures... -- 4,947 13,790 24,658 45,177 7,980 13,887
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
----------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1996
---- ------ ------- ------- ------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Gross Property, Plant & Equipment
(c).............................. $60 $6,952 $21,907 $49,107 $97,318 $112,497
Capital lease obligations (d).... -- 1,244 3,291 11,166 18,163 24,833
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1996
--------- -------- -------------
<S> <C> <C> <C>
OTHER NETWORK DATA:
Networks in operation......................... 13 13 15
Cities served (e)............................. 19 19 33
Networks under construction................... 4 4 3
Route miles (e)............................... 2,210 2,647 2,887
Fiber miles (e)............................... 106,080 127,063 138,571
Buildings connected........................... 822 908 1,101
LEC-COs collocated (f)........................ 44 69 89
Voice grade equivalent circuits............... 186,292 279,864 316,080
Switches installed (g)........................ 5 5 6
Employees (h)................................. 155 155 179
</TABLE>
- --------
(a) Unless otherwise stated, represents the summation of all of the networks'
financial and operating information for each of the categories presented.
Network Data is derived from the Operating Companies' records and presents
information for the Company's networks, but does not include information
for the South Florida Partnership.
(b) EBITDA consists of net (loss) income before interest, equity in net loss of
joint ventures, gain on sale of investment, 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.
(c) Represents total property, plant and equipment (before accumulated
depreciation) of the networks, the Company's Network Operations and Control
Center (the "NOCC") and the Company. Excludes the $5.4 million (subject to
post-closing adjustments) SONET ring fiber backbone purchased by the
Vermont Operating Company from Adelphia effective September 30, 1996. See
"--Recent Developments."
(d) Represents fiber lease financings with the respective Local Partners for
each network.
(e) Excludes networks under construction.
(f) LEC-CO collocated means that the Company has interconnected its network at
the LEC-CO.
(g) Represents Lucent Technologies ("Lucent") 5ESS switches or remote switch
modules which deliver full switch functionality.
(h) Employees includes combined employees of the Operating Companies and the
Company.
11
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider carefully the following risk factors in evaluating
the Company and its business before purchasing Class A Common Stock in the
Offerings. This Prospectus contains certain statements of a forward-looking
nature relating to future events or the future financial performance of the
Company. Prospective investors are cautioned that such statements are only
predictions and that actual events or results may differ materially. In
evaluating such statements, prospective investors should specifically consider
the various factors identified in this Prospectus, including the matters set
forth below, which could cause actual results to differ materially from those
indicated by such forward-looking statements.
Negative Cash Flow and Operating Losses; Limited History of Operations. The
Company has experienced significant losses since its inception, with operating
losses of approximately ($2.1) million, ($2.6) million and ($3.6) million for
the fiscal years ended March 31, 1994, 1995 and 1996, respectively, and ($1.0)
million and ($1.5) million for the quarters ended June 30, 1995 and 1996,
respectively. The Company expects to continue to incur substantial operating
losses in the foreseeable future as it pursues its plans to expand its
networks, service offerings and customer base. There can be no assurance that
such losses will not continue indefinitely. The Company currently accounts for
its ownership interests in the Operating Companies in which it does not have
majority ownership interest using the equity method and, therefore, the
Company's consolidated financial statements include only the Company's pro
rata share of the Operating Companies' and the South Florida Partnership's net
losses as equity in net losses of joint ventures.
The Company was formed in October 1991 and, as of September 30, 1996, only
four of its 18 networks had been in operation for more than 24 months, and
three networks were not yet in operation. Prospective investors therefore have
limited historical financial information about the Company upon which to base
an evaluation of the Company's performance. The development of the Company's
businesses and the installation and expansion of its networks require
significant expenditures, a substantial portion of which are made before any
revenues may be realized. Certain of the expenditures, including marketing,
sales and general and administrative costs, are expensed as incurred, while
certain other expenditures, including network design and construction,
negotiation of rights-of-way and costs to obtain legal and regulatory
approval, are deferred until the applicable network is operational. The
Company will continue to incur significant expenditures in connection with the
construction, acquisition, development and expansion of the Company's and
Operating Companies' networks, services and customer base.
In light of the Company's limited operating history, its history of
significant operating losses and its expectation that it will continue to
incur significant expenses and operating losses for the foreseeable future,
there can be no assurance that the Company will be able to implement its
growth strategy, or achieve or sustain profitability.
Substantial Leverage. As of June 30, 1996, the Company's total amount of
debt outstanding was $194.5 million and the Company had a stockholders'
deficiency of $18.7 million. In addition, in each year since its inception,
the Company's earnings have been inadequate to cover its fixed charges by a
substantial margin. Commencing on October 15, 2001, semi-annual cash interest
payments of $21.4 million will be due on the Senior Notes, which substantially
exceeds the Company's gross revenues of approximately $3.3 million for the
year ended March 31, 1996.
Because the Company currently has a consolidated cash flow deficit, its
ability to make cash interest payments on the Senior Notes commencing on
October 15, 2001 and to repay its obligations on the Senior Notes at maturity
will be dependent on developing one or more sources of cash flow prior to the
date on which cash interest payment obligations begin on the Senior Notes. To
accomplish this the Company may seek to (i) refinance all or a portion of the
Senior Notes, (ii) sell all or a portion
12
<PAGE>
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.
Risks Associated with Joint Ventures. Most of the Operating Companies' Local
Partner Agreements (as defined) contain mandatory buy/sell provisions that,
after a certain number of years, can be initiated by either partner and result
in one partner purchasing all of the other partner's interests. Accordingly,
there can be no assurance that the Company and its subsidiaries will continue
to be in partnership with their current Local Partner, or any other partner,
in each of their respective markets, or that the Company or its subsidiaries
will have sufficient funds to purchase the partnership interest of such other
partner. In addition, if a partner triggers such buy/sell provisions and the
Company is unable to purchase the initiating partner's interests, the Company
will be forced to sell its interests to the partner, thereby terminating the
partnership, which could result in a material adverse effect on the future
cash flow of the Company.
The bankruptcy or insolvency of a Local Partner or an Operating Company
could result in the termination of the respective Local Partner Agreement and
the related Fiber Lease Agreement (as defined). The effect of such
terminations could be materially adverse to the Company and the respective
Operating Company. Similarly, all of the Management Agreements (as defined),
two of the Local Partner Agreements and five of the Fiber Lease Agreements can
be terminated by the respective Local Partner at various times during the next
seven years. While the Company believes such agreements will be renewed, there
can be no assurance that the Local Partner will not seek to terminate the
agreements. See "Business--Operating Agreements." Accordingly, the failure to
renew such agreements could materially adversely affect the Company and the
respective Operating Companies. In addition, the failure of a Local Partner to
make required capital contributions could have a material adverse effect on
the Company and the respective Operating Company.
The Indenture with respect to the Senior Notes does not restrict the amount
of indebtedness that can be incurred by Operating Companies in which the
Company owns a less than 45% interest. 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 has a substantial
amount of indebtedness, there can be no assurance that such Operating
Companies will not incur substantial indebtedness in the future.
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.
13
<PAGE>
The Telecommunications Act also establishes procedures under which the
Regional Bell Operating Companies ("RBOCs") can obtain authority to provide
long distance services if they comply with certain interconnection
requirements. There has been significant merger activity among the RBOCs in
anticipation of entry into the long distance market. If RBOCs are permitted to
provide such services, they will ultimately be in a position to offer single
source service. This could result in decreased market share for the major
IXCs, which are the Company networks' major customers. Such a result could
have an adverse effect on the Company.
The Company also faces, and will continue to face, competition from other
current and potential market entrants, including other CLECs, AT&T, MCI,
Sprint and other IXCs, cable television companies, electric utilities,
microwave carriers, wireless telecommunications providers and private networks
built by large end users. A number of markets served by the Company already
are served by one or more 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.
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 and certificates
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 new
universal service and other federal regulatory requirements.
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
14
<PAGE>
markets. See "Regulation--Overview" for more detailed information on the
regulatory environment in which the Company and the Operating Companies
operate.
Control by Principal Stockholder. Upon completion of the Offerings (and
assuming no exercise of the over-allotment options), Adelphia will possess
approximately 82.22% of the combined voting power of both classes of Common
Stock. Accordingly, Adelphia will be able to control the vote on corporate
matters requiring stockholder 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 agreements between the Company, Adelphia and certain of
the Company's senior management, Adelphia has the power to control certain
corporate transactions of the Company, including its ability to enter into
joint ventures and other business relationships. As a result, the Company may
be subject to the effect of possible conflicts of interest arising from the
relationship with Adelphia in connection with the pursuit of business
opportunities in the telecommunications industry. Although directors of the
Company who are also directors of Adelphia have certain fiduciary obligations
to the Company under Delaware law, such directors are in positions that may
create conflicts of interest. There can be no assurance that any such conflict
will be resolved in favor of the Company. Three directors of Adelphia serve on
the Special Nominating Committee of the Board of Directors of the Company,
which is empowered to expand the number of seats on the Company's Board of
Directors by up to four and to fill the vacancies created thereby. See
"Management--Board Committees." In addition, Adelphia has agreed to vote its
shares of the Common Stock of the Company to elect the Management Stockholders
(as defined herein) to the Company's Board of Directors. See "Certain
Relationships and Transactions" and "Principal Stockholders."
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.
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 installation of 5ESS switches or
remote switching modules in all of its existing operating markets by mid-1997
and additional 5ESSs or remote switching modules in each of the Company's
future operational markets. Expansion of the Company's networks will include
the geographic expansion of the Company's existing clusters and the
development of new markets. The Company expects to continue to build networks
in additional markets which the Company anticipates will include additional
networks with cable and utility partners that have broader geographic coverage
and require higher capital outlays than those with cable partners in the past.
The Company estimates that it will require approximately $200 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 1997 and
1998. In order to achieve its goal of entering new markets by the end of 1998,
the Company is seeking additional capital through the Offerings. The Company
also expects to fund additional capital requirements through existing
resources, secured credit facilities at
15
<PAGE>
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 also has 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--Operating
Agreements--Local Partner Agreements." There can be no assurance, however,
that the Company will be successful in generating sufficient cash flow or in
raising sufficient debt or equity capital on terms that it will consider
acceptable, or at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
The expectations of required future capital expenditures are based on the
Company's current estimates. There can be no assurance that actual
expenditures will not significantly exceed current estimates.
Holding Company Structure; Inability to Access Cash Flow. The Company is a
holding company with substantially all of its operations conducted through the
Operating Companies, and the Company expects that it could develop new
networks and operations in the future through joint ventures in which the
Company will own less than 50% of the equity interests. Accordingly, the
Company's cash flow and, consequently, its ability to service its debt,
including the Senior Notes, the Adelphia Note (as defined) and any other
indebtedness, 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. See "--Risks Associated with Joint Ventures" and "--Substantial
Leverage."
Expansion Risk. The Company is experiencing a period of rapid expansion
which the Company believes will accelerate following the Offerings. 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.
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 MCI, AT&T and other IXCs. The loss
of access revenues from IXCs in general or the loss of MCI or AT&T as a
customer could have a material adverse effect on the Company's business. See
"Business--Company Strategy."
The Company's growth strategy assumes increased revenues from IXCs and end
users following the deployment of switches in 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.
16
<PAGE>
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.
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 utilities and LECs 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."
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.
Anti-Takeover Provisions and Change of Control Considerations. The Company's
Certificate of Incorporation and Bylaws, the provisions of the Delaware
General Corporation Law and the Indenture with respect to the Senior Notes may
make it difficult in some respects to effect a change of control of the
Company and replace incumbent management. The existence of these provisions
may have a negative impact on the price of the Class A Common Stock, may
discourage third party bidders from making a bid for the Company, or may
reduce any premiums paid to stockholders for their Class A Common Stock. In
addition, the Board of Directors has the authority to fix the rights and
preferences of and issue shares of the Company's Preferred Stock, which may
have the effect of delaying or preventing a change of control of the Company
without action by its stockholders.
The Company and its Operating Companies are subject to regulation by state
public utility commissions ("State PUCs") in the states in which they operate.
Certain State PUCs have passed or are considering passing regulations that
would require an investor who acquires a specified percentage of the Company's
or the relevant Operating Company's securities, to obtain approval to own such
securities from such State PUC. See "Regulation--State Regulation."
No Prior Trading Market for Class A Common Stock; Potential Volatility of
Stock Price. Prior to the Offerings, there has been no public market for the
Class A Common Stock, and there can be no assurance that an active trading
market will develop or be sustained after the Offerings. The initial public
offering price will be determined through negotiations between the Company and
the representatives of the Underwriters (the "Representatives") based on
several factors and may not be indicative of the market price of the Class A
Common Stock after the Offerings. See "Underwriting." The market price of the
shares of Class A Common Stock may be significantly affected by factors such
as actual or anticipated fluctuations in the Company's operating results, new
products or services or new contracts by the Company or its competitors,
legislative and regulatory developments, conditions and trends in the
telecommunications industry, general market conditions and other factors. In
addition, the stock market has, from time to time, experienced significant
price and volume fluctuations that have particularly affected the market
prices for the common stock of telecommunications companies and that have
often been unrelated to the operating performance of particular companies.
These broad market fluctuations may also adversely affect the market price of
the Company's Class A Common Stock.
17
<PAGE>
Dilution. The initial public offering price is substantially higher than the
net tangible book value per share of Common Stock. Investors purchasing Class
A Common Stock in the Offerings at the initial offering price will therefore
incur immediate and substantial net tangible book value dilution of $7.61 per
share of Class A Common Stock (assuming no exercise of the Underwriters' over-
allotment option). To the extent that the Warrants or outstanding options to
purchase the Common Stock are exercised or further Common Stock is issued by
the Company at prices less than the then current net tangible book value,
there will be further dilution. See "Dilution."
Shares Eligible for Future Sale. Sales of substantial amounts of Class A
Common Stock in the public market after the Offerings may have an adverse
effect on the market price of the Class A Common Stock. The Company and the
Selling Stockholder have agreed that they will not, directly or indirectly,
offer, sell, grant any option to purchase or otherwise dispose (or approve any
offer, sale, grant or other disposition) of any shares of Class A Common
Stock, Class B Common Stock or other capital stock of the Company or any
securities convertible into, or exercisable or exchangeable for, any share of
Class A Common Stock or other capital stock of the Company (the "Lock-Up
Agreements") (except in connection with certain transfers to affiliates, the
Company's 1996 Plan and the Warrants), without the prior written consent of
the Representatives for a period of 180 days after the date of this
Prospectus. The Underwriters have agreed that each of Messrs. Drenning,
Fajerski and Fowler may sell up to $1.0 million worth of shares of Class A
Common Stock after 30 days following the date of this Prospectus. Their
remaining shares will be subject to Lock-Up Agreements substantially identical
to those of the Company and the Selling Stockholder. Unless otherwise
restricted, all shares of Class A Common Stock issuable upon conversion of the
outstanding Class B Common Stock will be immediately eligible for sale in the
public market in reliance upon Rules 144 under the Securities Act of 1933, as
amended (the "Securities Act"), subject to the restrictions contained therein.
Additionally, the Company intends to register under the Securities Act up to
5,000,000 shares of Class A Common Stock reserved for future grants under the
Company's 1996 Plan. See "Shares Eligible for Future Sale."
Lack of Dividend History. The Company has never declared or paid any cash
dividends on its Common Stock and does not expect to declare any such
dividends in the foreseeable future. Payment of any future dividends will
depend upon earnings and capital requirements of the Company, the Company's
debt facilities and other factors the Board of Directors considers
appropriate. The Company intends to retain its earnings, if any, to finance
the development and expansion of its business, and therefore does not
anticipate paying any dividends in the foreseeable future. In addition, the
terms of the Senior Notes restrict the payment of dividends. See "Dividend
Policy."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Class A Common Stock
offered hereby, after deducting the underwriting discounts and commissions and
estimated expenses of the Offerings, are estimated to be approximately $186.0
million.
The Company currently intends to use the net proceeds from the Offerings,
together with the remaining net proceeds from the offering of the Senior Notes
and Warrants, to fund the Company's capital expenditures, working capital
requirements, operating losses and pro rata investments in Operating Companies
and for general corporate purposes. The Operating Companies and the Company
will invest a substantial portion of these proceeds in capital expenditures.
These capital expenditures will include: (i) connecting new buildings to the
Company's networks; (ii) purchasing electronics (including switches) to
increase the services provided by the Company's existing networks; (iii)
financing the completion of the networks currently under construction and (iv)
building additional networks in the future. In addition, the Company may use a
portion of the proceeds to acquire existing networks or other
telecommunications-related assets. Management will retain a substantial amount
of discretion over the application of the net proceeds of the Offering and
there can be assurance that the application of net proceeds will not vary
significantly from the Company's current plans. Pending such uses, the net
proceeds will be invested in short-term, highly liquid investment-grade
securities.
The Company expects to accelerate the expansion of its operations to take
advantage of the recent regulatory changes mandated by the passage of the
Telecommunications Act. In particular, the Company expects to continue to
expand the Operating Companies' networks and to build networks in additional
markets which the Company anticipates will include additional networks with
cable and utility partners. The Company expects to fund these efforts through
the sale of the Class A Common Stock offered hereby, the remaining net
proceeds from the offering of the Senior Notes and Warrants, pro rata
investments by Local Partners, Fiber Lease Financings (as defined), additional
external financings and internally generated funds. There can be no assurance
that the Company will be able to secure such sources for the development of
its own networks and those of the Operating Companies. In addition, the
Indenture relating to the Senior Notes limits the ability of the Company and
the Operating Companies to incur additional indebtedness.
The Underwriters have been granted an option to purchase an additional
1,980,000 shares at the initial public offering price, less the underwriting
discount, solely to cover over-allotments. Additionally, the International
Underwriters have been granted a similar option with respect to an additional
495,000 shares as part of the concurrent international offering. In the event
that the Underwriters exercise such over-allotment options, the Selling
Stockholder may elect to satisfy such over-allotment options by selling shares
of Class A Common Stock; however, to the extent that such Selling Stockholder
elects not to do so, then such shares will be issued and sold by the Company.
If such over-allotment options are exercised in full, the total initial public
offering price, underwriting discount and proceeds to (i) the Selling
Stockholder, in the event that such Selling Stockholder sells all of the
shares necessary to satisfy such options, will be $ , $ , and $ ,
respectively and (ii) the Company, in the event that the Company sells all of
the shares necessary to satisfy such options, will be $ , $ , and
$ , respectively. The Company will not receive any of the proceeds from
the sale of Class A Common Stock by the Selling Stockholder. See "Principal
Stockholders."
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 and as adjusted to reflect the receipt of net proceeds from the sale
of 16,500,000 shares of Class A Common Stock offered by the Company (assuming
no exercise of the Underwriters' over-allotment options) at an assumed initial
public offering price of $12.00. This table should be read in conjunction with
the Company's Consolidated Financial Statements and related Notes included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
CASH AND CASH EQUIVALENTS............................. $132,142 $318,142
======== ========
LONG-TERM DEBT
13% Senior Discount Notes due 2003.................. $168,620 $168,620
Note Payable--Adelphia.............................. 25,855 25,855
-------- --------
TOTAL LONG-TERM DEBT.................................. $194,475 $194,475
-------- --------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Class A Common Stock, $.01 par value, 300,000,000
shares
authorized, no shares issued and outstanding
(16,500,000 as
adjusted)(2)....................................... -- 165
Class B Common Stock, $.01 par value, 150,000,000
shares
authorized, 20,000,000 shares issued and outstand-
ing (20,000,000 as adjusted)....................... 200 200
Class B Common Stock Warrants....................... 11,087 11,087
Additional paid-in-capital.......................... -- 185,835
Loans to stockholders............................... (3,000) (3,000)
Accumulated deficit................................. (26,972) (26,972)
-------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY)............... (18,685) 167,315
-------- --------
TOTAL CAPITALIZATION.................................. $175,790 $361,790
======== ========
</TABLE>
- --------
(1) Reflects the effect of $186.0 million in estimated net proceeds from the
issuance and sale by the Company of shares of Class A Common Stock in the
Offerings.
(2) Excludes (i) 21,226,854 shares of Class A Common Stock reserved for
issuance upon conversion of outstanding Class B Common Stock and Class B
Common Stock issuable upon the exercise of outstanding Warrants, (ii)
5,000,000 shares of Class A Common Stock reserved for issuance under the
Company's 1996 Plan, and (iii) 1,226,854 shares of Class B Common Stock
issuable upon exercise of outstanding Warrants. See "Management--Long-Term
Compensation Plan" and "Description of Capital Stock--Common Stock" and
"--Warrants."
DIVIDEND POLICY
The Company has no plans to pay dividends on the Common Stock. The Company
presently intends to retain earnings to reduce outstanding indebtedness and to
fund the growth of the Company's business. The payment of any future dividends
will be determined by the Board of Directors in light of conditions then
existing, including the Company's results of operations, financial condition,
cash requirements, restrictions in financing agreements, business conditions
and other factors. The ability of the Company to pay dividends is restricted
by covenants contained in the Indenture relating to the Senior Notes.
20
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of June 30,
1996 was $(25,589,001) or approximately $(1.28) per share. Net tangible book
value per share represents the amount of the Company's stockholders' equity
(deficiency), less intangible assets, divided by 20,000,000 shares of Common
Stock outstanding.
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Class A Common Stock in
the Offerings and the pro forma net tangible book value per share of the
Common Stock immediately after completion of the Offerings. After giving
effect to the sale by the Company of 16,500,000 shares of Class A Common Stock
in the Offerings at an assumed initial public offering price of $12.00 per
share, after deduction of underwriting discounts and commissions and estimated
offering expenses, the pro forma net tangible book value of the Company as of
June 30, 1996 would have been $160,411,000, or $4.39 per share of Common
Stock. This represents an immediate increase in net tangible book value of
$5.67 per share to existing stockholders and an immediate dilution of net
tangible book value of $7.61 per share to purchasers of Class A Common Stock
in the Offerings, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Public offering price per share of Class A Common Stock......... $12.00
Net tangible book value per share of Common Stock before the
Offerings...................................................... $(1.28)
Increase per share of Common Stock attributable to new
investors...................................................... 5.67
------
Pro forma net tangible book value per share of Common Stock
after the Offerings............................................ 4.39
------
Net tangible book value dilution per share to new investors..... $7.61
======
</TABLE>
The following table sets forth as of June 30, 1996 the difference between
the existing stockholders and the new investors in the Offerings (at an
assumed initial public offering price of $12.00 per share) with respect to the
number of shares purchased from the Company, the total consideration paid and
the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 20,000,000 54.79% $ 200,000 0.10% $ 0.01
New investors............. 16,500,000 45.21 198,000,000 99.90 $12.00
---------- ------ ------------ ------
Total................. 36,500,000 100.00% $198,200,000 100.00%
========== ====== ============ ======
</TABLE>
The foregoing tables assume no exercise of options issued under the
Company's 1996 Plan or outstanding Warrants. As of October 3, 1996, there were
5,000,000 shares of Class A Common Stock reserved for issuance under the
Company's 1996 Plan and 1,226,854 shares of Class B Common Stock issuable upon
the exercise of outstanding Warrants at an exercise price of $0.005 per share.
The Warrants may not be exercised until the earlier of (i) May 1, 1997 and
(ii) in the event a Change of Control (as defined in the warrant agreement
relating to the Warrants which has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part) occurs, the date
the Company mails notice thereof to holders of the Warrants. The foregoing
tables also assume no exercise of the Underwriters' over-allotment options. To
the extent that any of such shares are issued in connection with the 1996
Plan, outstanding Warrants or the Underwriters' over-allotment options, there
will be further dilution to new investors. See "Management--Long-Term
Compensation Plan" and "Description of Capital Stock--Common Stock" and "--
Warrants."
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data (except the unaudited information for
the fiscal years ended March 31, 1992 and 1993, and the three months ended
June 30, 1995 and 1996) are derived from, and should be read in conjunction
with, the audited Consolidated Financial Statements of the Company and the
related Notes thereto contained herein. The unaudited information for the
fiscal years ended March 31, 1992 and 1993 and the three months ended June 30,
1995 and 1996 are derived from other Company information. All of the following
information should be read in conjunction with the Company's Consolidated
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained elsewhere in this Prospectus.
<TABLE>
COMPANY DATA (a):
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30,
-------------------------------------------- ----------------
1992 1993 1994 1995 1996 1995 1996
------ ------- ------- -------- -------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Telecommunications
service and management
fee revenue........... $ -- $ 89 $ 417 $ 1,729 $ 3,322 $ 686 $ 1,102
Operating expenses:
Network operations..... 2 19 330 1,382 2,690 628 859
Selling, general and
administrative........ 209 921 2,045 2,524 3,084 831 1,027
Depreciation and
amortization.......... -- 30 189 463 1,184 250 695
------ ------- ------- -------- -------- ------- -------
Operating loss......... (211) (881) (2,147) (2,640) (3,636) (1,023) (1,479)
Gain on sale of
investment............ -- -- -- -- -- -- 8,405
Interest income........ -- -- 17 39 199 16 1,433
Interest expense and
fees.................. -- -- (2,164) (3,321) (6,088) (1,328) (6,169)
Equity in net loss of
joint ventures........ -- (194) (528) (1,799) (4,292) (797) (1,636)
Net (loss) income ..... $ (211) $(1,075) $(4,725) $ (7,692) $(13,620) $(3,113) $ 551
Net (loss) income per
weighted average share
of common stock....... $(0.01) $ (0.05) $ (0.24) $ (0.38) $ (0.68) $ (0.16) $ 0.03
Weighted average shares
of common stock
outstanding........... 20,000 20,000 20,000 20,000 20,000 20,000 21,050
OTHER COMPANY DATA:
EBITDA (b)............. $ (211) $ (851) $(1,958) $ (2,177) $ (2,452) $ (773) $ (784)
Capital expenditures
and Company
investments (c)....... 60 3,891 8,607 10,376 18,899 5,390 6,568
Cash used in operating
activities............ (184) (725) (2,121) (2,130) (833) (1,621) (2,657)
Cash (used in) provided
by investing
activities............ (60) (3,806) (8,607) (10,376) (18,899) (5,390) 5,050
Cash provided by
financing activities.. 248 4,645 10,609 12,506 19,732 7,011 129,749
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1996
----- ------- ------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 5 $ 118 $ -- $ -- $ -- $132,142
Total assets........... 82 4,316 14,765 23,212 35,269 176,793
Long term debt......... -- 4,814 19,968 35,541 50,855 194,475
Stockholders' equity
(deficiency).......... (211) (1,286) (6,011) (13,703) (27,323) (18,685)
</TABLE>
- --------
(a) Financial Information for the Company and its consolidated subsidiaries.
As of June 30, 1996, 13 of the Company's networks were owned by joint
ventures in which it owns an interest of 50% or less, and for which the
Company reports its interest pursuant to the equity method of accounting
consistent with generally accepted accounting principles.
(b) EBITDA consists of net (loss) income before interest, equity in net loss
of joint ventures, gain on sale of investment, 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.
(c) For the fiscal years ended March 31, 1992, 1993, 1994, 1995, 1996 and the
three months ended June 30, 1995 and 1996, the Company's capital
expenditures (including capital expenditures relating to its wholly owned
Operating Companies) were $0.1, $2.0, $3.1, $2.9, $6.1, $1.4 and $1.8
million, respectively, and the Company's investments in its less than
wholly owned Operating Companies and the South Florida Partnership were
$0.0, $1.9, $5.5, $7.5, $12.8, $4.0 and $4.8 million, respectively, for
the same periods. See the Company's Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
22
<PAGE>
SUMMARY OPERATING DATA
The following summary operating data is unaudited information that
represents data for 100% of the Operating Companies' networks and is derived
from Company information. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Supplementary Operating Company
Financial Analysis." As of June 30, 1996, 13 of the Company's 17 networks were
50% or less owned by the Company, and as of September 30, 1996, 14 of the
Company's 18 networks were 50% or less owned by the Company. The Company
reports its interest in such 50% or less owned networks pursuant to the equity
method of accounting consistent with generally accepted accounting principles.
As a result, the financial information set forth below 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 Class A
Common Stock offered hereby. The Company was organized in October 1991 and did
not provide any service through its Operating Companies until after Fiscal
1992.
<TABLE>
NETWORK DATA
(UNAUDITED)(a):
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED MARCH 31, JUNE 30,
-------------------------------------- --------------
1992 1993 1994 1995 1996 1995 1996
---- ----- ------- ------- -------- ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Network revenues....... $-- $ 195 $ 962 $ 3,056 $ 7,763 $1,505 $2,926
Operating expenses:
Network operations.... -- 504 789 1,946 4,871 819 1,501
Selling, general and
administrative........ -- 353 1,145 2,439 5,316 973 1,941
Depreciation and
amortization.......... -- 207 839 2,467 6,137 1,298 2,709
--- ----- ------- ------- -------- ------ ------
Operating loss......... -- (869) (1,811) (3,796) (8,561) (1,585) (3,225)
Net loss............... -- (948) (2,077) (4,569) (11,285) (1,945) (4,112)
OTHER OPERATING DATA:
EBITDA (b)............. $-- $(662) $ (972) $(1,329) $ (2,424) $ (287) $ (516)
Capital expenditures... -- 4,947 13,790 24,658 45,177 7,980 13,887
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
----------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1996
---- ------ ------- ------- ------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Gross Property, Plant & Equipment
(c).............................. $60 $6,952 $21,907 $49,107 $97,318 $112,497
Capital lease obligations (d).... -- 1,244 3,291 11,166 18,163 24,833
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1996
--------- -------- -------------
<S> <C> <C> <C>
OTHER NETWORK DATA:
Networks in operation......................... 13 13 15
Cities served (e)............................. 19 19 33
Networks under construction................... 4 4 3
Route miles (e)............................... 2,210 2,647 2,887
Fiber miles (e)............................... 106,080 127,063 138,571
Buildings connected........................... 822 908 1,101
LEC-COs collocated (f)........................ 44 69 89
Voice grade equivalent circuits............... 186,292 279,864 316,080
Switches installed (g)........................ 5 5 6
Employees (h)................................. 155 155 179
</TABLE>
- --------
(a) Unless otherwise stated, represents the summation of all of the networks'
financial and operating information for each of the categories presented.
Network Data is derived from the Operating Companies' records and presents
information for the Company's networks, but does not include information
for the South Florida Partnership.
(b) EBITDA consists of net (loss) income before interest, equity in net loss
of joint ventures, gain on sale of investment, 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.
(c) Represents total property, plant and equipment (before accumulated
depreciation) of the networks, the NOCC and the Company. Excludes the $5.4
million (subject to post-closing adjustments) SONET ring fiber backbone
purchased by the Vermont Operating Company from Adelphia effective
September 30, 1996. See "Prospectus Summary--Recent Developments."
(d) Represents fiber lease financings with the respective Local Partners for
each network.
(e) Excludes networks under construction.
(f) LEC-CO collocated means that the Company has interconnected its network at
the LEC-CO.
(g) Represents Lucent 5ESS switches or remote switch modules which deliver
full switch functionality.
(h) Employees includes combined employees of the Operating Companies and the
Company.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's audited Consolidated Financial Statements and the Notes thereto
appearing elsewhere in this Prospectus. Unless otherwise stated or the context
otherwise requires, the following information is as of June 30, 1996.
OVERVIEW
The Company, through its Operating Companies, provides a competitive
alternative to the telecommunications services offered by the incumbent LECs
in its markets. Since its inception in October 1991 through June 30, 1996, the
Company experienced substantial growth, building from its original two
partnerships covering two networks to 13 Operating Companies and 17 networks.
At June 30, 1996, 13 of these 17 networks were operational. Between June 30,
1996 and September 30, 1996, two additional networks became operational and
one additional network under construction was added. The Operating Companies'
customers are principally small, medium and large businesses and government
and educational end users and resellers, including IXCs. The Company believes
that its strategy of utilizing Local Partners to develop its networks has
allowed the Company to build networks with greater coverage, lower upfront and
ongoing costs and superior service and reliability.
As of June 30, 1996, the Company's Operating Companies were made up of three
wholly owned subsidiaries and ten joint ventures (through which the Company
has an interest in 14 networks) where the Company owns 50% or less of the
aggregate equity interests in such Operating Companies. Between June 30, 1996
and September 30, 1996, one of the Company's joint ventures became a majority-
owned subsidiary and the Company added one joint venture. Results of majority-
owned subsidiaries are consolidated into the Company's financial statements in
this Prospectus. The Company's pro rata share of the results of the Operating
Companies where the Company owns 50% or less and the South Florida
Partnership, until the date of sale, are recorded under the caption "Equity in
net loss of joint ventures" in the Company's Consolidated Financial Statements
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 are subsequently adjusted for the
Company's pro rata share of the Operating Companies' and the South Florida
Partnership's net losses, additional capital contributions to the Operating
Companies and the South Florida Partnership, and distributions from the
Operating Companies and the South Florida Partnership to the Company. The
Company is responsible for the design, construction, management and operation
of the networks owned by all of the Operating Companies and receives
management fees from the Operating Companies for its management and network
monitoring services. Management fees, which are generally based on the
Company's costs of providing such services, are determined by Local Partner
Agreements and vary depending upon the market. Management fees are accounted
for as revenues of the Company. To date, the Company's principal source of
revenues has been derived through management fees from its Operating
Companies, although in the future the Company expects that majority-owned
Operating Companies revenues will represent an increasing proportion of the
Company's revenue.
Since its inception, the Company, in conjunction with its Local Partners,
has made substantial investments in designing, constructing and enhancing the
Operating Companies' fiber optic networks. As of June 30, 1996, the Company's
networks had approximately 2,647 route miles, approximately 127,063 fiber
miles and were connected to approximately 908 buildings in 13 operating
networks. As of September 30, 1996, the Company's networks had approximately
2,887 route miles, approximately 138,571 fiber miles and were connected to
approximately 1,101 buildings in 15 operating networks. As of June 30, 1996,
the Operating Companies had also installed five switches or remote modules
which serve five networks, and the Company had built its NOCC in Coudersport,
Pennsylvania, which
24
<PAGE>
provides for remote control, monitoring and diagnosis of all of the Operating
Companies' networks; as of September 30, 1996, the Operating Companies had
installed six switches or remote modules which served six networks. The
Company believes it is the third largest CLEC in the United States based upon
route miles and buildings connected data made publicly available by other
CLECs. Funding for the development of the Operating Companies has come from
investments by the Company and the Local Partners as well as from Fiber Lease
Financings which enable the Company to finance the building of fiber optic
plant through long-term leases. Excluding investments in the South Florida
Partnership, the combined capital invested through June 30, 1996 in the
Operating Companies' networks, the NOCC and other activities totaled
approximately $158.7 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, in the
markets where the Company's 18 networks are currently operating or are under
construction, the Company believes it has an addressable market of
approximately $5.1 billion annually, substantially all of which is currently
provided by the incumbent LECs. This addressable market estimate does not
include the market for enhanced data services (currently targeted by the
Company through its partnership with !NTERPRISE) or the market for interLATA
toll, which the Company has the ability to enter at its option. The Company
plans to deploy switches or remote switching modules in the balance of its
markets by mid-1997 in order to more fully address this potential market
opportunity. See "Business" and "Regulation."
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 in Comparison with Three Months Ended June
30, 1995
Revenues increased 61% to $1.1 million for the three months ended June 30,
1996 from $0.7 million for the same quarter in the prior fiscal year. Growth
in revenues of $0.3 million resulted from continued expansion in the number
and size of Operating Companies and the resultant increase in management fees.
Revenues from the Company's first wholly owned Operating Company, which
operates in the Vermont market (the "Vermont Operating Company"), increased
$0.1 million due to increases in the customer base.
Network operations expense increased 37% to $0.9 million for the three
months ended June 30, 1996 from $0.6 million for the same quarter in the prior
fiscal year. Substantially all of the increase was attributable to the
expansion of operations at the NOCC due to the increased number and size of
the Operating Companies which resulted in increased employee-related costs and
equipment maintenance costs.
Selling, general and administrative expense increased 24% to $1.0 million
for the three months ended June 30, 1996 from $0.8 million for the same
quarter in the prior fiscal year. Corporate and NOCC overhead increased to
accommodate the growth in the number of Operating Companies managed and
monitored by the Company.
Depreciation and amortization expense increased 178% to $0.7 million during
the three months ended June 30, 1996 from $0.3 million for the same quarter in
the prior fiscal year primarily as a result of an increase in amortization of
$0.3 million in connection with the issuance of the Senior Notes and Warrants,
and increased depreciation resulting from higher capital expenditures at the
NOCC and the wholly owned Operating Companies.
25
<PAGE>
Gain on sale of investment recognized in the three month period ended June
30, 1996 was $8.4 million. On May 16, 1996 the Company completed the sale of
its 15.7% partnership interest in the South Florida Partnership to Teleport
Communications Group Inc. for an aggregate sales price of $11.6 million,
resulting in a pre-tax gain of $8.4 million.
Interest income for the three months ended June 30, 1996 increased by $1.4
million from the same quarter in the prior fiscal year as a result of interest
earned on the proceeds of the Senior Notes and Warrants.
Interest expense and fees increased 365% to $6.2 million during the three
months ended June 30, 1996 from $1.3 million for the same period in the prior
fiscal year. The increase was directly attributable to $4.9 million of
interest associated with the Senior Notes.
Equity in net loss of joint ventures increased by 105% to $1.6 million
during the three months ended June 30, 1996 from $0.8 million for the same
quarter in the prior fiscal year as more nonconsolidated Operating Companies
began operations. The net losses of the Operating Companies for the three
months ended June 30, 1996 were primarily the result of revenues only
partially offsetting startup and other costs and expenses associated with
design, construction, operation and managment of the networks of the Operating
Companies, and the effect of the typical lag time between the incurrence of
such costs and expenses and the subsequent generation of revenues by a
network.
The number of nonconsolidated networks paying management fees to the Company
increased from 11 at June 30, 1995 to 12 at June 30, 1996. These networks paid
management and monitoring fees to the Company aggregating approximately $0.8
million for the three months ended June 30, 1996, an increase of approximately
$0.3 million over the same quarter in the prior fiscal year. The networks' net
losses, including networks under construction, for the three months ended June
30, 1996 aggregated approximately $3.6 million as compared to $1.7 million for
the comparable prior period.
Net (loss) income increased from ($3.1) million for the three months ended
June 30, 1995 to $0.6 million for the same quarter in the current fiscal year.
The increase was primarily attributable to higher interest income and the gain
recognized for the sale of the Company's investment in TCG of South Florida,
partially reduced by greater interest expense associated with the Senior
Notes, increased equity in the net losses of the Company's joint ventures, and
increased depreciation and amortization.
EBITDA of ($0.8) million for the three months ended June 30, 1996 was
comparable with EBITDA of ($0.8) million for the same quarter in the prior
fiscal year. Increased revenues from management fees and the Vermont Operating
Company were offset by increased operating costs. EBITDA consists of net
(loss) income before interest, equity in net loss of joint ventures, gain on
sale of investment, income taxes, depreciation and amortization for the
periods presented. It is a measure commonly used in the telecommunications
industry and is presented to assist in understanding the Company's operating
results. However, it is not intended to represent cash flow or result of
operations in accordance with generally accepted accounting principles.
Fiscal 1996 in Comparison with Fiscal 1995
Revenues increased 92.1% to $3.3 million for the year ended March 31, 1996
("Fiscal 1996") from $1.7 million for the prior fiscal year. Approximately
$1.0 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 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.
26
<PAGE>
Selling, general and administrative expense increased 22% to $3.1 million in
Fiscal 1996 from $2.5 million for the prior fiscal year. Of the increase,
approximately $0.4 million was attributable to corporate overhead increases to
accommodate the growth in the number of Operating Companies managed by the
Company, and $0.1 million was attributable to the full twelve-months of
operations at the Vermont Operating Company.
Depreciation and amortization expense increased 156% to $1.2 million in
Fiscal 1996 from $0.5 million for the prior fiscal year primarily as a result
of increased capital expenditures at the Vermont Operating Company and the
NOCC.
Interest expense and fees increased 83% to $6.1 million in Fiscal 1996 from
$3.3 million for the prior fiscal year. The increase was directly attributable
to increased borrowings from Adelphia which were used to fund investments in
Operating Companies and the South Florida Partnership, capital expenditures
and the Company's operations. All of the Company's interest expense was non-
cash and was added to amounts due to Adelphia.
Equity in net loss of joint ventures increased by 139% to ($4.3) million in
Fiscal 1996 from ($1.8) million for the prior fiscal year as two more
nonconsolidated Operating Companies began operations. The net loss for the
nonconsolidated Operating Companies and the South Florida Partnership for the
year ended March 31, 1996 aggregated approximately ($14.5) million. The net
losses of the Operating Companies for the year ended March 31, 1996 were
primarily the result of revenues only partially offsetting startup and other
costs and expenses associated with the design, construction, operation and
management of the networks of the Operating Companies, and the effect of the
typical lag time between the incurrence of such costs and expenses and the
subsequent generation of revenues by a network.
The number of nonconsolidated networks paying management fees to the Company
increased from nine at March 31, 1995 to 12 at March 31, 1996. Such 12
networks 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 to ($13.6) million for Fiscal 1996 from ($7.7)
million for Fiscal 1995. 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 13% to ($2.5) million in Fiscal 1996 from ($2.2) million
for the prior fiscal year. Increased revenues from management fees and the
Vermont Operating Company were more than offset by increased operating costs.
Fiscal 1995 in Comparison with Fiscal 1994
Revenues increased 315% from $0.4 million to $1.7 million from the year
ended March 31, 1994 ("Fiscal 1994") to the year ended March 31, 1995 ("Fiscal
1995"). Approximately $1.0 million of the increase in revenues resulted from
growth in the number of Operating Companies and the resulting management fees.
The number of nonconsolidated networks paying management fees to the Company
increased from three at March 31, 1994 to nine at March 31, 1995.
Approximately $0.2 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.
27
<PAGE>
Selling, general, and administrative expense increased 23% from $2.0 million
in Fiscal 1994 to $2.5 million in Fiscal 1995. The change was primarily due to
increases in accounting, regulatory and marketing personnel to support
increased management and monitoring operations and, to a lesser extent, to
additional personnel and related costs for the commencement of operations at
the Vermont Operating Company.
Depreciation and amortization expense increased by 145% from $0.2 million in
Fiscal 1994 to $0.5 million in Fiscal 1995. Approximately two-thirds of the
increase was attributable to the addition of telecommunications monitoring
equipment totaling $1.5 million and the expansion of the telecommunications
networks in the Company's wholly owned Operating Companies.
Interest expense and fees increased by 53% from $2.2 million in Fiscal 1994
to $3.3 million in Fiscal 1995. The increase was primarily due to the increase
in borrowings from Adelphia to fund investments in Operating Companies and the
South Florida Partnership, capital expenditures and the Company's operations.
All of the Company's interest expense was non-cash and was added to amounts
due to Adelphia.
Equity in net loss of joint ventures increased by ($1.3) million from ($0.5)
million in Fiscal 1994 to ($1.8) million in Fiscal 1995. The increase was
primarily due to the six nonconsolidated networks beginning operations in
Fiscal 1995, resulting in a total of nine nonconsolidated networks at year
end. The net loss for such nonconsolidated Operating Companies and the South
Florida Partnership for the year ended March 31, 1995 was approximately ($7.3)
million. The net losses of the Operating Companies for Fiscal 1995 were
primarily the result of revenues only partially offsetting startup and other
costs and expenses associated with the design, construction, operation and
management of the networks of the Operating Companies, and the effect of the
typical lag time between the incurrence of such costs and expenses and the
subsequent generation of revenues by a network. The nine nonconsolidated
networks 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 ($2.0) million in Fiscal 1994
to ($2.2) 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 FINANCIAL 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 currently has ten 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,
28
<PAGE>
EBITDA and capital expenditures. Revenues and EBITDA of the Operating
Companies indicate the level of activity in the Company's networks. Capital
expenditures of the Operating Companies along with network construction
statistics, such as route miles and buildings connected, indicate the
extensiveness of the Company's 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 Class
A Common Stock offered hereby.
The Operating Companies have shown substantial growth in revenues since the
Company's inception in October 1991. Total combined revenues for the Operating
Companies have more than doubled each year since the Company's inception.
The increase in revenue during Fiscal 1995 as compared to Fiscal 1994 of
$2.1 million or 218% was due to the expansion of the Syracuse and Jacksonville
networks and the commencement of operations in the Vermont, Albany,
Binghamton, Richmond, Nashville and Wichita networks. Revenues during Fiscal
1996 of $7.8 million were $4.7 million or 154% higher than during Fiscal 1995
due to the expansion of the above mentioned networks and the initial
generation of revenues in the Buffalo and Louisville networks. Revenues
continued to expand in all markets during the three months ended June 30, 1996
as compared with the corresponding period in the prior year.
There can be no assurance 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 Operations." 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."
EBITDA decreased by ($0.3) million in Fiscal 1995 to ($1.3) million as
compared to ($1.0) million in Fiscal 1994. The decrease was primarily
attributable to operating losses in many of the networks as operations
commenced, particularly in Vermont, Buffalo, Richmond, Louisville and
Nashville, offset somewhat by increased EBITDA in the more established
Syracuse and Jacksonville markets. For Fiscal 1996, EBITDA decreased by ($1.1)
million to ($2.4) million from ($1.3) million in Fiscal 1995. The decrease was
primarily due to a continued increase in operating expenses in several
networks, including Vermont, Buffalo, New Brunswick, Harrisburg,
Charlottesville and Louisville, offset somewhat by increased EBITDA in the
Syracuse, Richmond, Nashville and Wichita networks.
The Operating Companies' capital expenditures for Fiscal 1995 and 1996 have
grown consistently, reflecting the addition of new networks and the expansion
and growth of existing networks. Capital expenditures for the quarter ended
June 30, 1996 were somewhat lower than expected due to the timing of certain
capital projects. The Company expects capital expenditures for the quarter
ended September 30, 1996 to be higher than during the prior quarter as a
result of these timing considerations. There can be no assurance, however,
that the Company and Operating Companies will continue to be able to fund the
Company's significant requirements for future capital expenditures of the
Operating Companies. See "Risk Factors--Significant Future Capital
Requirements."
29
<PAGE>
Supplementary Operating Company Financial Information by Cluster (unaudited)
<TABLE>
<CAPTION>
REVENUES
----------------------------------
THREE MONTHS
FISCAL FISCAL FISCAL ENDED
1994 1995 1996 JUNE 30, 1996
------ ------ ------ -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Northeast................................ $703 $1,393 $3,991 $1,265
Mid-Atlantic............................. 4 267 735 345
Mid-South................................ -- 44 473 239
Other Networks........................... 255 1,352 2,564 1,077
---- ------ ------ ------
Total.................................. $962 $3,056 $7,763 $2,926
==== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
EBITDA
---------------------------------------
THREE MONTHS
FISCAL FISCAL FISCAL ENDED
1994 1995 1996 JUNE 30, 1996
------ ------- ------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Northeast............................ $ 180 $ (183) $ (765) $ 215
Mid-Atlantic......................... (170) (308) (766) (753)
Mid-South............................ -- (605) (878) (231)
Other Networks....................... (982) (233) (15) 253
----- ------- ------- -----
Total.............................. $(972) $(1,329) $(2,424) $(516)
===== ======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
CAPITAL EXPENDITURES
-------------------------------------
THREE MONTHS
FISCAL FISCAL FISCAL ENDED
1994 1995 1996 JUNE 30, 1996
------- ------- ------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Northeast............................. $ 5,629 $ 8,167 $ 6,978 $ 2,031
Mid-Atlantic.......................... 2,831 3,923 14,351 7,802
Mid-South............................. 1,591 4,002 7,321 1,610
Other Networks........................ 3,739 8,566 16,527 2,444
------- ------- ------- -------
Total............................... $13,790 $24,658 $45,177 $13,887
======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The development of the Company's business and the installation and expansion
of the Operating Companies' networks, combined with the construction of the
Company's NOCC, have resulted in substantial capital expenditures and
investments during the past several years. Capital expenditures by the Company
were $3.1 million, $2.9 million and $6.1 million for Fiscal 1994, Fiscal 1995
and Fiscal 1996, respectively and $1.4 million and $1.8 million for the three
months ended June 30, 1995 and 1996, respectively. Further, investments made
in the Company's nonconsolidated Operating Companies and the South Florida
Partnership by the Company were $5.5 million, $7.5 million and $12.8 million
in Fiscal 1994, Fiscal 1995 and Fiscal 1996, respectively, and $4.0 million
and $4.8 million for the three months ended June 30, 1995 and 1996,
respectively. The Company expects that it will continue to have substantial
capital and investment requirements. The Company also expects to have to
continue to fund operating losses as the Company develops and grows its
business. See "Risk Factors--Significant Future Capital Requirements."
Through June 30, 1996, Adelphia had made loans and advances totaling
approximately $64.8 million, including accrued interest, in the Company and
$6.7 million in fiber network construction leased to certain Operating
Companies. During April 1996, the Company repaid $37.8 million of such loans
and advances. In addition, Local Partners have invested approximately $57.4
million as their pro rata
30
<PAGE>
investment in those networks. These amounts exclude previous investments in
the South Florida Partnership which were sold on May 16, 1996. These partners
have also provided additional capital of $20.6 million for the construction of
the Company's networks through the partnership agreements by funding the fiber
construction of the network and leasing the fiber to the partnership under
long-term, renewable agreements. In addition, the Company used $9.2 million to
fund its pro rata investment in the networks, capital expenditures and
operations. Collectively, these investments and the Fiber Lease Financings
have totaled $158.7 million from the Company's inception through June 30,
1996.
The Company has experienced negative cash flow since its inception. A
combination of operating losses, the substantial capital investments required
to build the Company's wholly owned networks and its state-of-the-art NOCC,
and incremental investments in the Operating Companies has resulted in
substantial negative cash flow. See "Risk Factors--Negative Cash Flow and
Operating Losses; Limited History of Operations." For the fiscal years ended
March 31, 1994, 1995 and 1996, cash used in operating activities totalled $2.1
million, $2.1 million and $.8 million, respectively, cash used in investing
activities totalled $8.6 million, $10.4 million and $18.9 million,
respectively, and cash provided by financing activities totalled $10.6
million, $12.5 million and $19.7 million, respectively. For the three month
periods ended June 30, 1995 and 1996, cash used in investing activities
totalled $5.4 million and cash provided by investing activities totalled $5.1
million, respectively. The cash provided by investing activities in the three
month period ended June 30, 1996 is primarily from the sale of the South
Florida Partnership. Cash provided by financing activities totalled $7.0
million and $129.7 million, respectively, for the three month periods ended
June 30, 1995 and 1996. Prior to April 15, 1996, funding of the Company's cash
flow deficiency was principally accomplished through additional borrowings
from Adelphia. Prior to April 15, 1996, interest and fees on this unsecured
credit facility were based upon the weighted average cost of unsecured
borrowings of Adelphia. The average interest rate charged for all periods was
11.3% through April 15, 1996 (excluding fees charged which were based on the
amount borrowed) and 16.5% for the period since April 16, 1996.
On April 15, 1996, the Company issued $329.0 million of 13% Senior Discount
Notes due April 15, 2003, and 329,000 Warrants to purchase an aggregate of
613,427 shares of its common stock, prior to adjustment for the
Recapitalization Events. See "Description of Capital Stock--Warrants."
Proceeds to the Company, net of discounts, commissions, and other transaction
costs were approximately $168.6 million. Such net proceeds were used to fund
the Company's capital expenditures, working capital requirements, operating
losses and its pro-rata investments in joint ventures, to pay $25.0 million of
indebtedness owing to Adelphia and to make loans of $3.0 million to certain
key members of management. Proceeds from the Senior Notes and Warrants were
also used to repay amounts related to capital expenditures, working capital
requirements, operating losses and pro-rata investments in joint ventures
totaling $12.8 million incurred during the period from January 1, 1996 to
April 15, 1996. These amounts had been funded during the same time period
through advances from Adelphia. 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 (the "Adelphia Note"), that
accrues interest at 16.5% and is subordinated to the Senior Notes. Interest on
the Adelphia Note is payable quarterly in cash, through the issuance of
identical subordinated notes, or in any combination thereof, at the option of
the Company. See "Certain Relationships and Transactions."
On May 16, 1996, the Company completed the sale of its 15.7% partnership
interest in the South Florida Partnership to Teleport Communications Group
Inc. for an aggregate sales price of approximately $11.6 million resulting in
a pre-tax gain of approximately $8.4 million. Amounts related to the South
Florida Partnership included in the Company's investments and equity in net
loss of joint ventures as of the sale date and for the three months ended June
30, 1996 were approximately $3.2 million and ($0.2) million, respectively. As
part of the transaction, the Company was released from its covenant not to
compete with respect to the South Florida market. The Company plans to use the
proceeds from the sale to continue to expand and develop its existing markets,
complete new networks under construction and enter additional markets.
31
<PAGE>
Effective September 30, 1996, the Company purchased approximately 280 miles
of SONET ring fiber backbone used by the Vermont Operating Company from
Adelphia for $5.4 million, Adelphia's historical cost for such assets, subject
to post-closing adjustments. Prior to such purchase, the Company had been
leasing such fiber backbone in the Vermont network from Adelphia at an annual
rate of approximately $1.0 million.
The competitive local telecommunication service business is a capital-
intensive business. The Company's operations have required and will continue
to require substantial capital investment for (i) the installation of
electronics for switched services in the Company's networks, (ii) the
expansion and improvement of the Company's NOCC and (iii) the design,
construction and development of additional networks. The Company plans to make
substantial capital investments and investments in Operating Companies in
connection with the deployment of switches in all of its operating markets by
mid-1997, the expansion of existing networks and the construction and
development of new networks. Expansion of the Company's networks will include
the geographic expansion of the Company's existing clusters and the
development of new markets. The Company expects to continue to build new
networks in additional markets which the Company anticipates will include
additional networks with utility partners. In addition, the Company may
acquire existing networks in the future. The Company estimates that it will
require approximately $200 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 years 1997
and 1998. The Company expects that it will have adequate resources to fund
such expenditures through the proceeds from the Offerings and the offering of
the Senior Notes and Warrants and internal sources of funds including cash
flow from operations. See "Use of Proceeds". 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." The Company recently 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 1997 and 1998.
There can be no assurance as to the availability of funds from internal cash
flow, the Local Partners or other external sources or as to the terms of such
financings. In addition, the 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.
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.
32
<PAGE>
BUSINESS
MARKET POTENTIAL
Deregulation, technological change and the increasingly information
intensive nature of the United States economy have significantly expanded the
role of telecommunications in business. In particular these changes have
accelerated the growth of certain aspects of the telecommunications market.
For example, industry sources estimate that voice traffic is growing at a rate
of approximately seven percent per year while data communications are growing
at three to five times that rate due to the increase in computerized
transaction processing and video applications, the movement to distributed
data processing and the rise of decentralized management structures, all of
which require the transmission of large amounts of information with speed,
accuracy and reliability.
The present structure of the U.S. telecommunications market resulted largely
from the divestiture of the "Bell System" in 1984 (the "Divestiture"). As part
of the Divestiture, seven RBOCs were created to offer services in
geographically defined areas called LATAs. The RBOCs were separated from the
long distance provider, AT&T, resulting in the creation of two distinct
industries: local exchange and interexchange (commonly known as long
distance). The Divestiture facilitated direct, open competition in the long
distance segment of the telecommunications market; however, it did not promote
competition in the local telecommunications market. Nonetheless, several
factors have served to promote competition in the local telecommunications
market and the emergence of competitive access providers ("CAPs"), including
(i) the incumbent LECs' monopoly position and regulated pricing structure,
which provided little incentive for incumbent LECs to reduce prices, improve
service or upgrade their networks, (ii) customer demand for an alternative to
the incumbent LEC monopoly, which demand grew rapidly and was spurred in part
by the development of competitive activities in the long distance market and
increasing demand for high quality, 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 IXC 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 Company believes the passage of the Telecommunications Act on February
8, 1996 will substantially expand the market opportunities for the Company and
its networks. Based upon data compiled by the FCC, the Company believes that
the passage of the Telecommunications Act increases the potential market for
CLECs to approximately $97.1 billion annually due to the opening of the market
for all switched services which will permit CLECs to offer a full range of
local telecommunications services including local dial tone, local calls,
customer calling features and intraLATA toll services for both businesses and
residential customers. 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
33
<PAGE>
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. According to industry data, revenues from switched
services, including local dial tone, represented 85% of local
telecommunications revenues in the United States in 1995. In the markets where
the Company's networks are currently operating or are under construction, the
Company believes it has an addressable market of approximately $5.1 billion
annually, substantially all of which is currently provided by the incumbent
LECs. This addressable market estimate does not include the market for
enhanced data services (currently targeted by the Company through its
partnerships with !NTERPRISE) or the market for interLATA toll, which the
Company has the ability to enter at its option.
THE COMPANY
The Company is a leading provider of local telecommunications services over
state-of-the-art fiber optic networks in selected markets within the United
States. Hyperion believes it is the third largest CLEC in the United States,
based upon route miles and buildings connected data made publicly available by
other CLECs. Each of the Company's 18 networks (including three currently
under construction) has been developed by partnering with a Local Partner with
operations in that region. This approach has allowed Hyperion to rapidly
construct high-capacity networks which generally have broader coverage of its
markets than those of other CLECs. The Company believes that the breadth of
its networks will allow it to originate and terminate a significant proportion
of its customers' local telephone calls over its own network, instead of
relying on the network of the incumbent LEC. The Company also believes that
working with a Local Partner significantly reduces the cost of constructing
its fiber optic networks through the utilization of existing cable or utility
facilities and by sharing construction costs with its Local Partners, who
usually upgrade the capacity of their cable or utility infrastructure during
construction of the telecommunications network.
The Company offers a broad array of integrated, high quality voice, video
and enhanced data communications services to end users such as small, medium
and large businesses, as well as to resellers, including IXCs. The Company
believes the design and breadth of its networks is a key competitive advantage
in attracting customers. As IXCs seek to offer their customers an integrated
switched local and long distance service offering, the Company believes IXCs
will increasingly rely on the local networks of CLECs such as the Company.
This is in part due to the IXCs' desire to minimize usage of the incumbent
LEC's network due to the expected entry of incumbent LECs into the long
distance marketplace. The Company believes its networks will be attractive to
IXCs, such as AT&T, MCI and Sprint, and other resellers because the Company's
networks are 100% fiber optic-based and generally offer the broadest market
coverage (other than that of the incumbent LEC). Hyperion believes its
services will also be attractive to end users because it can offer (i) lower
prices than the incumbent LEC, (ii) high-capacity fiber-optic network
connection directly to substantially all of its customers' premises in a
particular city, (iii) high quality customer service and reliability, and (iv)
brand name recognition through its alliances with its Local Partners and IXCs.
The Company plans to offer switched services, including customer dial tone,
in each of its 18 networks by mid-1997, and has already installed switches or
remote switching capability in six of its networks. According to industry
data, revenues from switched services, including local dial tone, represented
85% of local telecommunications revenues in the United States in 1995. The
Company also offers traditional access services to IXCs, and large customers,
which to date have represented the principal source of revenue for the
Company's networks. The Company currently offers enhanced data services to its
customers in four of its networks in a partnership with !NTERPRISE, a wholly
owned subsidiary of U S WEST, and plans to offer such services in all of its
networks. Enhanced data services currently include frame relay, ATM data
transport, business video conferencing, private line data interconnect service
and LAN connection and monitoring services. 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 LEC in markets served by the Company's networks.
34
<PAGE>
From the Company's inception in October 1991 through June 30, 1996, the
Company and its partners have invested approximately $158.7 million to build
and develop the network infrastructure and operations (excluding the South
Florida Partnership; see "Management Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources"). As of
September 30, 1996, the Company's 15 operating networks served 33 cities, and
included approximately 2,887 route miles of fiber optic cable and were
connected to approximately 1,101 buildings. The Company also has three
networks which are currently under construction. The Company intends to
increase the density of its existing network clusters and expand into new
geographic markets or clusters through the Company's continued construction of
new networks with cable and utility partners.
Hyperion's ownership interest in its networks ranges from 19.7% to 100%. See
"--The Company's Markets." Consistent with the Company's goal of owning at
least a 50% interest in its Operating Companies, the Company has recently
entered into a non-binding letter of intent to consolidate its interests in
its networks in the State of New York. This transaction would increase its
weighted average ownership interest in its networks from 40% to 44% (based on
total fixed assets of the networks). See "Prospectus Summary--Recent
Developments." The Company reports its interest in joint ventures in which it
owns an interest of 50% or less pursuant to the equity method of accounting
consistent with generally accepted accounting principles. The Company manages
the day-to-day operation of all of the Company's networks, for which it
receives management fees which are based on the Company's costs.
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 resellers, including IXCs, in its markets. By
partnering with local cable television operators and utility companies, the
Company develops 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 and
existing customer base 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:
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 a fiber
optic network, which the Company believes reduces the cost of aerial fiber
construction by approximately 62% in the case of cable partners and 40% in the
case of utility partners, (ii) reducing the time and cost of obtaining access
to rights-of-way and building entrances and (iii) leveraging the Local
Partners' existing fiber optic network maintenance and installation
infrastructure. 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 generally provide funding for the fiber
build in a network and lease the fiber capacity back to the partnership under
long-term agreements, while the partnership funds other capital expenditures,
including switching infrastructure and electronics.
The Company estimates that approximately 70% of its network construction
will be aerial and in many cases, where conduit is available, the Company can
achieve similar savings in underground construction. 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
35
<PAGE>
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>
WITH LOCAL WITH LOCAL WITHOUT
COSTS CABLE PARTNER UTILITY PARTNER LOCAL PARTNER
- ----- ------------- --------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Make Ready Costs.................... $ --(a) $ --(b) $18.0(c)
Pole Attachment Costs............... 3.4(d) --(b) 5.0
Fiber Costs and Installation........ 8.0(e) 18.5(e) 8.0
Splicing Costs...................... 0.6(f) 0.6(f) 0.6
----- ----- -----
Total............................. $12.0(g) $19.1(g) $31.6
===== ===== =====
</TABLE>
- --------
(a) Assumes a fiber overlash of existing cable plant.
(b) Assumes placing fiber in the space allocated for the local utility partner
on the pole.
(c) Assumes an average cost of $200 per pole, 40 poles per mile, to move the
telephone and cable television wires in the space allocated for
communications providers on the pole and the replacement of two poles per
mile.
(d) 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.
(e) Represents the cost of the Operating Company's fiber and its installation
on the pole.
(f) Represents the cost of cutting and integrating new fiber components.
(g) In the above analysis, this would be the amount amortized by an applicable
fiber lease financing between an Operating Company and its Local Partner.
Create Additional Partnerships with Utility Companies. The Company believes
that a significant proportion of the networks the Company constructs in the
future will be through partnerships with utility companies. Utility companies
have a number of features which make them particularly attractive as partners
for the Company, including (i) contiguous and broad geographic coverage with
extensive conduits and rights-of-way in both business and residential areas;
(ii) significant access to capital; (iii) existing relationships with business
and residential customers; and (iv) a reputation for reliability and quality
customer service. The Company believes that it is an attractive partner for
utility companies because it builds large metropolitan networks which are
similar to those of the utility company and because it can offer utility
companies a significant stake in its networks, both from a financial and
operational perspective.
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 September 30, 1996, in all of the markets in which the Company
and its networks operate, management believes that the Company has the
broadest network coverage in terms of route miles of any of its CLEC
competitors. The Company believes that expanded network coverage will enable
the Company to (i) provide broader and more reliable coverage for network
customers, (ii) carry a greater amount of traffic on its own networks rather
than on the networks of other carriers thereby increasing the Company's
revenues and profit margins, (iii) increase the potential market available to
the Company due to the greater number of buildings, LEC-COs and customers that
the Company's networks can service, (iv) increase the attractiveness 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.
36
<PAGE>
Expand 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
educational end users and telecommunications traffic. The Company intends to
build on its extensive network size by expanding its existing networks into
nearby areas and establishing new networks in close proximity to existing
ones. 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) reduce capital
expenditures by optimizing the networks' switching capacity through the use of
remote switch capacity in nearby cities, (iii) cost-effectively offer services
to smaller markets which are adjacent to its networks and 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.
Leverage 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 enables 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
with AT&T pursuant to which the Company, through its networks, will be an AT&T
preferred supplier of dedicated special access and switched access transport
services. The Company has also passed AT&T's Switch Network Validation test.
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 customers of the !NTERPRISE Partnerships operate their
businesses. !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 through its
partnerships with the Company's networks. 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 in all of
the Company's existing networks and may enter into agreements with other
service integrators in the future.
COMPANY SERVICES
The Company currently offers traditional access services to all of its
customers. The Company has installed six switches or remote switching modules,
and plans to offer switched services, including dial tone, in its 18 networks
by mid-1997. The Company currently offers enhanced data services in four
networks, and plans to offer these services in all of its networks.
37
<PAGE>
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 intraLATA
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, as well as intraLATA toll.
Long Distance Services. Switching and transport of interexchange traffic,
including voice, data and video billed on a minutes-of-use basis. The Company
currently offers these services to its customers in conjunction with IXCs.
Enhanced Data 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, a wholly owned subsidiary of U S WEST, and the Company plans to
offer such services in all of its markets.
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 total local telecommunications revenue for calendar year 1995 in the
markets where the Company's 18 networks are currently located. The estimates,
however, do not include estimates for enhanced data 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 Class A Common Stock offered hereby.
<TABLE>
<CAPTION>
TRADITIONAL TOTAL REVENUE
CLUSTER ACCESS SERVICES SWITCHED SERVICES POTENTIAL(A)
- ------- --------------- ----------------- -------------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Northeast....................... $ 47.8 $1,387.5 $1,435.3
Mid-Atlantic.................... 109.7 2,332.3 2,442.0
Mid-South....................... 31.1 693.2 724.3
Other Networks.................. 24.7 505.1 529.8
------ -------- --------
Total......................... $213.3 $4,918.1 $5,131.4
====== ======== ========
</TABLE>
- --------
(a) Excludes the potential market for enhanced data services and long distance
services.
38
<PAGE>
THE COMPANY'S MARKETS
Overview
The Company currently has 18 networks (including three under construction).
The networks are owned by the Operating Companies, ten of which are Operating
Partnerships and four of which are Operating Corporations. Three of the
Operating Corporations are wholly owned subsidiaries of the Company. The
Company manages and operates these networks through a combination of local
management, the Company's headquarters and NOCC in Coudersport, Pennsylvania,
and the Company's marketing offices in Pittsburgh, Pennsylvania. The following
table describes the Company's current networks:
<TABLE>
<CAPTION>
ACTUAL OR
EXPECTED DATE HYPERION
COMPANY NETWORKS OF OPERATION(B) INTEREST LOCAL PARTNER(S)
- ---------------- --------------- -------- -------------------------
<S> <C> <C> <C>
Northeast Cluster
Albany, NY(a)................ 2/95 50.0% Time Warner/Advance(c)
Binghamton, NY(a)............ 3/95 20.0 Time Warner/Advance(c)
Buffalo, NY(a)............... 1/95 40.0 Tele-Communications, Inc.
Time Warner/Advance(d)
Syracuse, NY(a).............. 8/92 50.0 Time Warner/Advance(c)(d)
Vermont...................... 11/94 100.0 (d)
Mid-Atlantic Cluster
Charlottesville, VA.......... 11/95 100.0 (d)
Harrisburg, PA............... 4/95 50.0 Lenfest Communications
Morristown, NJ............... 7/96 19.7 TKR Cable(e)
New Brunswick, NJ............ 11/95 19.7 TKR Cable(e)
Philadelphia, PA............. 8/96 50.0 PECO Energy
Richmond, VA................. 9/93 37.0 Continental Cablevision
Scranton/Wilkes-Barre, PA.... mid-1997 100.0 (d)
York, PA..................... mid-1997 50.0 Susquehanna Cable
Mid-South Cluster
Lexington, KY(f)............. 12/96 50.0 TKR Cable(g)
Louisville, KY(f)............ 3/95 50.0 TKR Cable(g)
Nashville, TN(f)............. 11/94 95.0 InterMedia Partners
Other Networks
Jacksonville, FL............. 9/92 20.0 Continental Cablevision
Wichita, KS.................. 9/94 49.9 Gannett
</TABLE>
- --------
(a) The Company has entered into a non-binding letter of intent with Time
Warner to increase its ownership interest in the Buffalo network to 50%
and in the Syracuse network to 100%, and to eliminate its ownership
interests in and management responsibility for the Albany and Binghamton
networks. See "Prospectus Summary--Recent Developments."
(b) 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.
(c) The interests in the Albany, Binghamton and Syracuse networks are all
owned by one Operating Company.
(d) Adelphia or its affiliates lease fiber capacity to the Operating Companies
in these networks.
(e) The interests in the Morristown and New Brunswick networks are owned by
one Operating Company. Sutton Capital Associates also owns a minority
interest in the Operating Company.
(f) The Company's interest in these networks has recently changed. See
"Prospectus Summary--Recent Developments."
(g) The interests in the Lexington and Louisville networks are owned by one
Operating Company.
39
<PAGE>
CLUSTER STATISTICS(A)
<TABLE>
<CAPTION>
THREE MONTHS
ROUTE FIBER BUILDINGS ENDED JUNE 30, 1996
CLUSTER MILES MILES CONNECTED VGES(B) REVENUES
- ------- ----- ------- --------- ------- -------------------
<S> <C> <C> <C> <C> <C>
Northeast................... 1,084 52,054 294 101,952 $1,265
Mid-Atlantic................ 786 37,714 309 65,664 345
Mid-South................... 364 17,472 201 39,264 239
Other Networks.............. 653 31,331 297 109,200 1,077
----- ------- ----- ------- ------
Total..................... 2,887 138,571 1,101 316,080 $2,926
===== ======= ===== ======= ======
</TABLE>
- --------
(a) Non-financial information is as of September 30, 1996 and does not include
networks under construction.
(b) Voice grade equivalents circuits.
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. Typically
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 operator or utility company (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 Partnership and the Company or one
of its subsidiaries (the "Management Agreement"). Four of the Operating
Companies have also entered into agreements with !NTERPRISE, a wholly owned
subsidiary of U S WEST, to co-market enhanced services.
The following chart summarizes the allocation of responsibilities and certain
payments to be made under the Local Partner Agreements, Fiber Lease Agreements
and Management Agreements.
[CHART APPEARS HERE]
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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 generally
paid on an installment basis as determined by the management committee of the
Operating Partnership, which is comprised of representatives of each partner.
Additional capital contributions in excess of the initial capital contribution
may be required in several Local Partner Agreements, but generally either must
be initiated by the manager of the Operating Partnership or approved by at
least a majority vote of the management committee. 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
distribution should be made. In one Local Partner 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. All
distributions are required to be made in proportion to each partner's
percentage interest in the partnership.
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. See "Risk Factors--Risks Associated with Joint Ventures."
Generally, after a specified period of time, usually three to six years after
the inception of the Operating Partnership, 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. The right of first refusal usually requires that the
selling partner sell all, and not less than all, of its partnership interest
pursuant to an offer by a bona fide third party. The selling party must first
give the other partners the opportunity to purchase (on a pro rata basis) the
interest at the same price and under the same terms as the third party's
offer.
Several of the Local Partner Agreements set forth rights of first refusal in
connection with the sale of cable television systems. These provisions give
partners the right to sell all of their partnership interests in conjunction
with the sale of all or substantially all of the assets of, or controlling
interest in,
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the cable television systems operated by the selling partner or its affiliates
in the defined business area, on any terms and conditions agreed to among the
selling partners, its affiliates and the purchaser; provided, however, that if
a partner elects to sell its interest in the partnership to an entity that, at
the time of the potential sale, is engaged in a competitive business in the
business area, the remaining partner generally has a right of first refusal to
purchase the selling partner's interest at a price and terms comparable to the
offer made by the competitor. In addition, in most of the Operating
Partnerships, either partner can, after a specified period of time, usually
five years after the inception of the partnership, make an offer to the other
partner(s) to sell its own interest. Within 30 days of submitting a price
which generally must be based on a written third party valuation of the
partnership interest, 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. In many
cases, Local Partners upgrade the capacity of their cable or utility
infrastructure, and as a result, share construction costs equally with the
Operating Partnership. Monthly lease payments in both instances are based on
the amortization of the Operating Partnership's share 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 five 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. Several of the Fiber Lease
Agreements contain termination rights which provide the lessor with the option
to terminate the lease if the lessor becomes subject to telecommunications
regulation, an action is brought against the lessor challenging or seeking to
adversely modify the lessor's continued validity or authority to operate,
legal or regulatory determination renders it unlawful or impossible for the
lessor to satisfy its obligations under the lease or in case of an imposition
of public utility or common carrier status on the lessor as a result of its
performance of the lease.
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.
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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 fee based on the Company's cost of providing such
services: 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 Data Services Agreements
Four of the Operating Companies have entered into partnerships with
!NTERPRISE, a wholly owned subsidiary of U S WEST (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 each have a 50% ownership interest and are required to
contribute equal amounts in order to retain their shares. The business area
serviced by the !NTERPRISE Partnerships is generally the same as that serviced
by the applicable Operating Company. 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 !NTERPRISE Partnership.
Generally, the !NTERPRISE Partnerships have a 20 year duration.
AT&T CERTIFICATION
AT&T 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 AT&T
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
AT&T's ORT for access services in order to provide access services to AT&T and
AT&T's ORT for switched services in order to provide switched services to
AT&T. The Company has passed AT&T's ORA, NVT and SNVT.
SALES AND MARKETING
The Company targets its network sales and marketing activities at resellers,
including IXCs, and business, government and educational end users. The
Company and the Operating Companies currently have 45 local sales
representatives and eight national account representatives. The Company's
primary reseller customers are the major IXCs as well as smaller and regional
IXCs; however, the Company also targets other resellers, such as PCS, cellular
and local distance resellers. 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.
Resellers
Resellers utilize the Operating Companies' services primarily as a local
component of their own service offerings to end users. 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.
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
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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 provide local services which the IXC can integrate with its long distance
offering, and thereby provide a single source for the customers'
telecommunications needs. 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
through its networks will be an AT&T 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 LEC rates. See "--AT&T Certification."
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.
End Users
The Company targets end users which include small, medium and large
businesses as well as government and educational institutions. Each Operating
Company works in conjunction with IXCs to offer an integrated package of local
and long distance service offerings to end users. Initially, the Operating
Company offers high quality access services to these end users in combination
with an IXC's long distance offerings. Building on its success with the end
users, the Operating Company attempts to increase the size and number of
service offerings it provides by working with customers to analyze the
customers' local telecommunications needs. In particular, the typical
Operating Company offers end users a variety of services, including local dial
tone, frame relay, ATM transport, business video conferencing and other
services. The Company believes that, based upon the Operating Companies'
reputation developed in conjunction with major IXCs, the Operating Companies
will be able to systematically increase their share of the end users'
telecommunications expenditures. The Company believes the networks will be
able to compete for end users' needs based upon price, reliability, product
diversity, service and custom solutions to end user needs. A significant
component of an Operating Company's reliability will be its ability to offer
customers end-to-end SONET ring construction for many localized applications.
The Operating Companies' construction of SONET rings combined with the
Company's large network size will enable the Operating Companies to offer
fiber optic coverage superior to the incumbent LEC in its 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.
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Special Purpose Networks
The Company develops special purpose networks in conjunction with the
Operating Companies in order to meet specific customer network requirements.
To date, these special purpose networks have included construction of IXC
backbone networks, campus networks, private carriage networks and other
similar network applications. The terms and conditions for these special
purpose networks are generally specified in agreements with three to five year
terms which automatically renew on a month-to-month basis. In addition,
special customer networks are normally constructed with excess fiber bandwith
capacity, which allows the Company to make additional capacity available to
other end users.
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, educational 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, which 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,
Adelphia, or one of Adelphia's affiliates, design a large regional network
targeted to provide access to the identified business, educational and
government 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
. Density of telecommunications 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 "--Operating
Agreements--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.
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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 approximately 1,101 building connections, six switches or remote switching
modules and approximately 2,887 network route miles. The NOCC is designed to
accommodate the Company's anticipated growth.
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, 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 three Lucent 5ESS Switches ("5ESSs") and three Lucent remote
switching modules, which deliver full switching functionality, in six of their
current markets. The Company and the Operating Companies plan to deploy 5ESSs
or remote switching modules in all of its existing networks by mid-1997 and
additional 5ESSs or remote switching modules in each of the Company's future
networks.
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.
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The following diagram is an illustration of an Operating Company fiber optic
transport network in a typical market.
[CHART APPEARS HERE]
EMPLOYEES
As of September 30, 1996, the Operating Companies and the Company employed a
total of 99 and 80 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 "--The 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 September 30, 1996, the Company's total telecommunications equipment in
service consists of fiber optic telecommunications equipment, fiber optic
cable, furniture and fixtures, leasehold improvements and construction in
progress. Such properties do not lend themselves to description by character
and location of principal units.
Substantially all of the fiber optic telecommunications equipment used in
the Company's networks is housed in multiple leased facilities in various
locations throughout the metropolitan areas served by
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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.
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
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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 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
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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."
The Vermont Public Service Board ("PSB") is currently considering actions
that would attempt to preserve universal service and protect the public safety
and welfare. The actions would impose conditions on the certificate issued to
the Vermont Operating Company which would require it to offer service on a
geographically widespread basis through the construction of facilities to
serve all residents and business customers in such areas, the acquisition from
other carriers of network facilities required to provide such service, or the
resale of other carriers' services. The Company does not believe that the
Vermont PSB has the authority to impose such requirements under the
Telecommunications Act. The imposition of such conditions by the Vermont PSB
or other state commissions could increase the cost to the Operating Companies
to provide local exchange services.
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, 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.
50
<PAGE>
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. Further, the Number Portability Order is
subject to Petitions for Reconsideration filed at the FCC. To the extent that
the outcome of the Petitions results in new rules that decrease the LEC
obligation to provide number portability or increase the CLEC obligation to
pay for number portability, changes to the Number Portability Order could
decrease the Company's ability to offer service in competition with the
incumbent LECs.
On August 8, 1996 the FCC released its First Report and Order and Second
Report and Order and Memorandum Opinion and Order promulgating rules and
regulations to implement Congress' statutory directive concerning the
interconnection of CLEC and incumbent LEC networks and incumbent LEC pricing
of unbundled elements (the "Local Competition Orders"). The Local Competition
Orders adopt a national framework for interconnection but leave to the
individual states the task of implementing the FCC's rules. Because
implementation of the Local Competition Orders will be at the state level, it
is uncertain how these new requirements will affect the Company. The Local
Competition Orders indicate that the FCC intends to take up access charge
reform as early as the fourth quarter of 1996 with new rules in place as early
as the first quarter of 1997. To the extent that the Local Competition Orders
reduce the ability of incumbent LECs to impose non-cost-based access charges
of IXCs, the Company's competitive advantage in providing customers with
access services will decrease. However, to the extent that CLECs are able to
interconnect with incumbent LEC networks on favorable terms, the Company's
ability to provide competitive local exchange services will increase. The
First Report and Order of the Local Competition Orders is subject to Petitions
for Reconsideration filed at the FCC and Petitions for Review filed at the
United States Court of Appeals for the Eighth Circuit. Additionally, the
Eighth Circuit has granted a temporary stay of the First Report and Order
pending a decision on the issue of whether to stay the Order until the court
acts on all pending appeals. Oral argument on whether the stay should be
continued was held on October 3, 1996. As of October 9, 1996, the Eighth
Circuit had not issued a decision on whether to continue the stay. To the
extent that one or more of the stay motions are granted or that the outcome of
these Petitions results in new rules, the Company's ability to provide
competitive local exchange services could decrease.
Although the Number Portability Order, the Local Competition Orders 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 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. In addition, the ability of CLECs to resell incumbent LEC services
obtained at wholesale rates may permit some CLECs to compete with the
Operating Companies without investing in facilities.
51
<PAGE>
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, although unlike incumbent LECs, the Operating Companies are not
required to offer services for resale at discounted rates. 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, although the prohibition had been stayed by
several courts and was not being enforced by the FCC. 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.
Prior to the Telecommunications Act repeal, some LECs were investing in fiber
optic networks on a limited basis through the FCCs "video dialtone" regulatory
regime. With the telco/cable cross ownership 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 on
a widespread basis 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 "--Access and
Interconnection with LEC Facilities."
The ability of the RBOCs to provide interLATA services enables them to
provide customers with a full range of local and long distance
telecommunications services. The provision of interLATA services by RBOCs is
expected to reduce the market share of the major long distance carriers, who
are the Company's networks' primary customers. Consequently, the entry of the
RBOCs into the long distance market may have adverse consequences on the
ability to generate revenues from the IXCs.
Relaxation of Regulation
A long-term goal of the Telecommunications Act is to increase competition
for telecommunications services, thereby reducing the need for regulation of
these services. To this end, the Telecommunications Act requires the FCC to
streamline its regulation of incumbent LECs and permits the FCC to forbear
from regulating particular classes of telecommunications services or
providers. Since the Company is a non-dominant carrier and, therefore, is not
heavily 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.
52
<PAGE>
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 non-dominant carriers, the Operating
Companies are subject to relatively limited regulation by the FCC. The
Operating Companies must offer interstate services at just and reasonable
rates in a manner that is not unreasonably discriminatory, subject to the
complaint provisions of the Communications Act of 1934, as amended.
Presently, the Operating Companies are required to file tariffs listing the
terms, conditions and rates for their 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
53
<PAGE>
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. Under 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 states have not yet implemented the FCC's rules under 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.
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 de-average 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 Local Competition
Orders indicate that the FCC intends to take up access charge reform as early
as the fourth quarter of 1996 with new rules in place as early as the first
quarter of 1997. To the extent these regulatory initiatives enable or require
incumbent LECs to offer selectively reduced rates for access services, the
rates the Operating Companies may charge for access services will be
constrained. The Operating Companies' rates also will be constrained by the
fact that competitors other than the incumbent LECs are subject to the same
streamlined regulatory regime as the Operating Companies and can price their
services to meet competition.
54
<PAGE>
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 generally 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.
An investor who acquires ten percent or more of the Company's outstanding
voting securities may have to obtain approval of the Vermont PSB to own ten
percent or more of such securities because such ownership might be deemed to
constitute an indirect controlling interest in the Vermont Operating Company.
See "Risk Factors--Anti-Takeover Provisions and Change of Control
Considerations."
55
<PAGE>
LOCAL GOVERNMENT AUTHORIZATIONS
An Operating Company may be required to obtain from municipal authorities
street opening and construction permits to install and expand its fiber optic
networks in certain cities. In some cities, the Local Partners or
subcontractors may already possess the requisite authorizations to construct
or expand the Company's networks. An Operating Company or its Local Partners
also must obtain a license to attach facilities to utility poles in order to
build and expand facilities. Because utilities that are owned by a cooperative
or municipality are not subject to federal pole attachment regulation, there
are no assurances that an Operating Company or its Local Partners will be able
to obtain pole attachments from these utilities at reasonable rates, terms and
conditions.
In some of the areas where the Operating Companies provide service, their
Local Partners pay license or franchise fees based on a percent of gross
revenue. In addition, in areas where the Company does not use 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.
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<PAGE>
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, Chief Executive Officer and
Director
Michael J. Rigas............ 42 Vice Chairman and Director
Timothy J. Rigas............ 40 Vice Chairman, Chief Financial Officer,
Treasurer and Director
Daniel R. Milliard.......... 49 President, Chief Operating Officer,
Secretary and Director
Charles R. Drenning......... 51 Senior Vice President, Engineering
Operations and Director
Paul D. Fajerski............ 47 Senior Vice President, Marketing and Sales
and Director
Randolph S. Fowler.......... 45 Senior Vice President, Business Development
and Regulatory Affairs and Director
</TABLE>
Within 90 days of the consummation of the Offerings and pursuant to Nasdaq
National Market requirements, the Company intends to identify and elect two
new Directors, each of whom will be an independent director who is not an
employee of the Company or its subsidiaries.
The bylaws of the Company provide that the Board of Directors shall consist
of a minimum of seven and a maximum of 21 directors, such number to be
determined from time to time by the Board of Directors. The Board of Directors
currently consists of eight members. All directors hold office until the next
annual meeting of stockholders or until their successors have been elected and
qualified. Executive officers serve at the discretion of the Board of
Directors.
John J. Rigas is the Chairman of the Board of the Company. He also is the
founder, Chairman, Chief Executive Officer and President of Adelphia. Mr.
Rigas has owned and operated cable television systems since 1952. Among his
business and community service activities, Mr. Rigas is Chairman of the Board
of Directors of Citizens Bank Corp., Inc., Coudersport, Pennsylvania and a
member of the Board of Directors of the Charles Cole Memorial Hospital. He is
a director of the National Cable Television Association and a member of its
Pioneer Association and a past President of the Pennsylvania Cable Television
Association. He is also a member of the Board of Directors of C-SPAN and the
Cable Advertising Bureau, and is a Trustee of St. Bonaventure University. He
graduated from Rensselaer Polytechnic Institute with a B.S. in Management
Engineering in 1950.
John J. Rigas is the father of Michael J. Rigas, Timothy J. Rigas and James
P. Rigas, each of whom currently serves as a director and executive officer of
the Company.
James P. Rigas is Vice Chairman, Chief Executive Officer and a Director of
the Company, Executive Vice President, Strategic Planning and a Director of
Adelphia and a Vice President and Director 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 a Director of the Company, Executive
Vice President, Operations and a Director of Adelphia and a Vice President and
Director 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.
57
<PAGE>
Timothy J. Rigas is Vice Chairman, Chief Financial Officer, Treasurer and a
Director of the Company, Executive Vice President, Chief Accounting Officer,
Treasurer and a Director of Adelphia, and a Vice President and Director 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, Chief Operating Officer, Secretary and a
Director of the Company, and Senior Vice President and Secretary and a
Director of Adelphia and its other subsidiaries. Mr. Milliard currently spends
substantially all 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 has served as Senior Vice President, Engineering
Operations effective October 1996, and has been a Director of the Company
since October 1991. Prior to joining Hyperion as Vice President, Engineering
Operations 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 has served as Senior Vice President, Marketing and Sales
effective October 1996, and has been a Director of the Company since October
1991. Prior to joining Hyperion as Vice President, Marketing and Sales 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 has served as Senior Vice President, Business Development
and Regulatory Affairs effective October 1996, and has been a Director of the
Company since October 1991. Prior to joining Hyperion as Vice President,
Business Development and Regulatory Affairs 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.
In addition to the above, Edward E. Babcock, an officer and Vice President,
Finance of the Company, serves as Chief Accounting Officer.
58
<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(b)..... 1996 $207,474 $ -- $5,250(c)
President and Secretary 1995 187,412 -- 5,350(c)
1994 183,484 -- 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.
BOARD COMMITTEES
The Special Nominating Committee of the Board of Directors was established
in October 1996 and consists of the following members: John J. Rigas, Michael
J. Rigas and Daniel R. Milliard (with Timothy J. Rigas and James P. Rigas as
alternates). The Special Nominating Committee is empowered to expand the
number of seats on the Board of Directors from eight to 12 at any time prior
to the next annual meeting of the stockholders of the Company, and to fill the
vacancies created thereby. In addition to other actions it may have, it is
expected that within the 90 days of the consummation of the Offerings, the
Special Nominating Committee will expand the number of seats on the Board of
Directors by two and fill the vacancies created thereby with independent
persons who are not employees of the Company or its subsidiaries. Such
appointments will meet the requirements for quotation on the Nasdaq National
Market and will avoid liquidated damages under the Indenture for the Senior
Notes. See "--Directors and Executive Officers."
Effective upon the consummation of the Offerings, the Board of Directors
expects to appoint a Compensation Committee that will establish salaries,
incentives and other forms of compensation for officers and employees of the
Company and administer the Company's 1996 Plan.
The Audit Committee, which will also be established following the Offerings
as provided above, will review, act on and report to the Board of Directors
with respect to various auditing and accounting matters, including the
selection of the Company's auditors, the scope of the annual audits, fees paid
to auditors, the performance of the Company's auditors and the accounting
practices of the Company.
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DIRECTOR COMPENSATION
The directors do not currently receive any compensation for services
rendered to the Company in their capacities as directors.
LONG-TERM COMPENSATION PLAN
The Company's 1996 Long-Term Compensation Plan (the "1996 Plan") provides
for the grant of options which qualify as "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), options which do not so qualify, share awards (with or without
restrictions on vesting), stock appreciation rights and stock equivalent or
phantom units. The number of shares of Class A Common Stock available for the
issuance of such options, awards, rights and phantom stock units under the
1996 Plan initially will be 3,500,000. Such number is to increase each year by
a number of shares equal to one percent (1%) of outstanding shares of all
classes of Common Stock, up to a maximum of 5,000,000 shares. Options, awards
and units may be granted under the 1996 Plan to directors, officers, employees
and consultants. The purposes of the 1996 Plan are to encourage ownership of
the Class A Common Stock by directors, executive officers, employees and
consultants; to induce them to remain employed or involved with the Company;
and to provide additional incentive for such persons to promote the success of
the Company. No stock options, stock awards, stock appreciation rights or
phantom stock units have been granted under the Plan.
EMPLOYMENT CONTRACTS
The Company and Mr. Milliard are expected to enter into an employment
agreement which will provide for his employment as President and Chief
Operating Officer of the Company which will include the following
provisions:(i) at a base salary of at least $230,000, to be increased from
time to time to be comparable to salaries paid by comparable companies for
comparable positions, (ii) an annual cash bonus, subject to achievement of
certain benchmarks, of up to 50% of base salary, (iii) stock options to be
granted currently to purchase up to 200,000 shares of Class A Common Stock at
an exercise price of 50% of fair market value, stock options to purchase
150,000 shares of Class A Common Stock at an exercise price equal to the fair
market value of the Class A Common Stock on the closing date of the Offerings,
stock options to purchase 50,000 shares of Class A Common Stock at fair market
value granted on the first day of each of the next four fiscal years,
commencing April 1, 1997 and the ability to receive, upon attainment of
certain benchmarks, stock options to purchase 50,000 shares of Class A Common
Stock at fair market value during fiscal 1997 and the next four fiscal years,
and (iv) a current cash bonus of $75,000, a portion of which will be used to
repay outstanding loans to Adelphia and certain employee benefits. It is
expected that all such stock options would be granted under the 1996 Plan. The
initial term of the proposed employment agreement expires on March 31, 2001,
unless terminated earlier for cause (as defined therein) or due to death or
disability. The agreement also is expected to provide that upon a change-in-
control (as defined therein) of the Company, the obligations under the
agreement, if not assumed, would be cancelled in exchange for a payment by the
Company equal to its then fair value. In the event of a change-in-control of
the Company and Adelphia in which no party assumes the Company's obligations
under the agreement, Mr. Milliard would receive a lump sum payment from the
Company equal to two times his annual base salary then in effect. The
employment agreement will also contain provisions with respect to
confidentiality, non-competition and non-solicitation of customers, suppliers
and employees. Mr. Milliard will continue to serve as a senior vice president
and secretary of Adelphia, although he will receive no additional compensation
for serving in such capacities.
Each of Messrs. Drenning, Fajerski and Fowler (the "Management
Stockholders") 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
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paid to each Management Stockholder that are comparable to industry average
base pay and bonuses paid by comparable companies for comparable positions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors currently does not, and during Fiscal 1996
did not, have a Compensation Committee. Consequently, all Directors have
participated in deliberations concerning executive officer compensation,
including decisions relative to their own compensation. See "Certain
Relationships and Transactions."
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 prior to the Offerings, 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 of Senior Notes and Warrants on April 15, 1996, on
which date the 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 the Adelphia Note, 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. Interest on the Adelphia 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. Proceeds from the Senior
Notes and Warrants were also used to repay amounts related to capital
expenditures, working capital requirements, operating losses and pro-rata
investments in joint ventures totaling $12.8 million incurred during the
period from January 1, 1996 to April 15, 1996. These amounts had been funded
during the same time period through advances from Adelphia.
Messrs. Drenning, Fajerski and Fowler together hold 11% of the Company's
outstanding Common Stock prior to the Offerings, 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 Stockholder or (b)
after October 7, 1998, such Management Stockholder 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 Stockholder to the Board of Directors of the Company; and (iii) for
certain buy/sell and termination rights and duties among Adelphia and the
Management Stockholders. The Shareholder Agreement terminates automatically
upon the date when the Company's Common Stock is registered under the 1933 Act
or 1934 Act and the Management Stockholders have the opportunity to sell their
shares pursuant to the registration rights agreement discussed below.
The Company has also entered into Term Loan and Stock Pledge Agreements
("Loan Agreements") with each of the Management Stockholders. Pursuant to the
Loan Agreements, each Management Stockholder 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 Stockholders 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.
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The Company has agreed to provide the Management Stockholders with one
collective demand registration right and with certain piggyback registration
rights in an initial public offering of the Company's Common Stock. The
Company has also agreed to provide Adelphia with two demand registration
rights per year under certain conditions, including that any such demand be
with respect to shares with a minimum of $10 million in market value, and with
certain piggyback registration rights in future public offerings of the
Company's Common Stock.
During Fiscal 1994, 1995, 1996 and the three months ended June 30, 1996, the
Company incurred charges from Adelphia of $0.5, $0.5, $0.4 and $0.1 million,
respectively, for the provision to the Company of shared corporate overhead
services in areas such as personnel, payroll, management information services,
shared use of office, aircraft and network facilities and support equipment.
The Company expects that charges for the provision of similar services by
Adelphia to the Company, or by the Company to Adelphia, will continue to be
incurred or charged by the Company in the future. The transactions related to
the provision of these services have been based on allocation of Adelphia's
costs incurred for these services, and do not necessarily represent the cost
to the Company had these services been provided on an arm's length basis.
During Fiscal 1995, 1996 and the three months ended June 30, 1996, the Company
paid Adelphia or certain of Adelphia's affiliates, fiber lease payments of
$0.3, $1.0 and $0.3 million, respectively.
Effective September 30, 1996, the Vermont Operating Company purchased from
Adelphia approximately 280 miles of SONET ring fiber backbone presently used
by the Vermont Operating Company for $5.4 million, Adelphia's historical cost
for such assets, subject to post-closing adjustments.
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PRINCIPAL STOCKHOLDERS
The following table provides information, as of October 1, 1996, with
respect to the beneficial ownership of the Company's Class A Common Stock and
Class B Common Stock by (i) each person known by the Company to be a
beneficial owner of more than 5% of either the Class A Common Stock or Class B
Common Stock, (ii) the directors and executive officers and (iii) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
CLASS A CLASS B TOTAL TOTAL
COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK
OWNED PRIOR TO OWNED PRIOR TO OWNED PRIOR TO OWNED AFTER
AND AFTER OFFERINGS AND AFTER OFFERINGS OFFERINGS (%) OFFERINGS (%)
-------------------- ------------------- -------------- -------------
<S> <C> <C> <C> <C>
Adelphia Communications
Corporation (a)(b)(c).. (c) 17,800,040 89.00 48.77
Charles R. Drenning (d). (c) 733,320 3.67 2.01
Paul D. Fajerski (d).... (c) 733,320 3.67 2.01
Randolph S. Fowler (d).. (c) 733,320 3.67 2.01
All executive officers
and directors as a
group (eight
persons)(a)............. (c) 20,000,000(e) 100.00 54.79
</TABLE>
- --------
(a) The business address of Adelphia Communications Corporation is the same as
that of 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 owned by Adelphia,
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.
(b) In the event that the Underwriters exercise the over-allotment options,
Adelphia may elect to sell shares of Class A Common Stock to satisfy such
over-allotment options. The information presented assumes no exercise of
such over-allotment options by the Underwriters. In the event that the
over-allotment options are exercised in full by the Underwriters and
Adelphia elects to satisfy such over-allotment options through the sale of
shares of Class A Common Stock, Adelphia would own 15,325,040 shares of
Class B Common Stock after the conversion and sale of shares of Class A
Common Stock in connection with the over-allotment options and the
resulting percentage of total Common Stock owned by Adelphia after the
Offerings would be 41.99%. In the event that Adelphia does not elect to
sell shares in connection with the Underwriters over-allotment options,
Adelphia would own 17,800,040 shares of Class B Common Stock, which would
represent 45.67% of the total Common Stock outstanding after the
Offerings.
(c) Each share of Class B Common Stock is convertible at any time at the
option of the holder into an equal number of shares of Class A Common
Stock. Holders of Class A Common Stock are entitled to one vote per share
and holders of Class B Common Stock are entitled to 10 votes per share on
all matters submitted to a vote of stockholders. Upon completion of the
Offerings, Adelphia will possess approximately 82.22% of the combined
power of both classes of Common Stock. See "Description of Capital Stock."
(d) The business address of each such holder is 2570 Boyce Plaza, Pittsburgh,
Pennsylvania 15241.
(e) Includes 17,800,040 shares of Class B Common Stock held by Adelphia, for
which the following executive officers and directors of the Company share
or may be deemed to share voting and dispositive power over the shares,
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.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of Hyperion and certain
provisions of Hyperion's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by Hyperion's Certificate of Incorporation
and Bylaws, which documents are filed as exhibits to the Registration
Statement of which this Prospectus is a part and are incorporated herein by
reference.
Following the Recapitalization Events, Hyperion's authorized capital stock
will consist of 300,000,000 shares of Class A Common Stock, par value $.01 per
share, 150,000,000 shares of Class B Common Stock, par value $.01 per share,
and 5,000,000 shares of Preferred Stock, par value $0.01 per share.
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COMMON STOCK
Shares of Class A Common Stock and Class B Common Stock are substantially
identical, except that holders of Class A Common Stock are entitled to one
vote per share and holders of Class B Common Stock are entitled to 10 votes
per share on all matters submitted to a vote of stockholders.
Class A Common Stock
The holders of Class A Common Stock are entitled to one vote per share on
all matters to be voted on by the stockholders. Subject to preferences that
may be applicable to any outstanding Preferred Stock, the holders of Class A
Common Stock and Class B Common Stock are entitled to receive dividends
ratably, if any such dividends are declared, from time to time by the Board of
Directors out of funds legally available therefor. Stock dividends declared on
Class A Common Stock shall be in shares of Class A Common Stock, and stock
dividends on Class B Common Stock shall be in shares of Class B Common Stock.
In the event of a liquidation, dissolution or winding up of the Company, the
holders of Class A Common Stock and Class B Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
rights of the holders of the Preferred Stock then outstanding. There are no
redemption or sinking fund provisions available to the Class A Common Stock.
All outstanding shares of Common Stock are fully paid and non-assessable, and
the shares of Class A Common Stock to be issued upon completion of this
offering will be fully paid and non-assessable.
Class B Common Stock
The holders of Class B Common Stock are entitled to ten votes per share on
all matters to be voted on by the stockholders. Each share of Class B Common
Stock is convertible at the option of the holder into one share of Class A
Common Stock. In all other respects, the provisions of the Class B Common
Stock are identical to those of the Class A Common Stock.
Neither the holders of Class A Common Stock nor the holders of Class B
Common Stock have cumulative voting rights. For a discussion of the effects of
the disproportionate voting rights of the Class A Common Stock and Class B
Common Stock, see "Risk Factors--Control by Principal Stockholder."
PREFERRED STOCK
The Board of Directors will be authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue from time to
time such shares of Preferred Stock, in one or more classes or series. Each
class or series of Preferred Stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or
relative rights or privileges as shall be determined by the Board of
Directors, which may include, among others, dividend rights, voting rights,
redemption and sinking fund provisions, liquidation preferences, conversion
rights and preemptive rights. The ownership and control of the Company by the
holders of Common Stock would be diluted if the Company were to issue
Preferred Stock that had voting rights or that was convertible into Common
Stock. In addition, the holders of Preferred Stock issued by the Company would
be entitled by law to vote on certain transactions such as a merger or
consolidation, and thus the issuance of Preferred Stock could dilute the
voting rights of the holders of Common Stock on such issues.
The Company currently has no shares of Preferred Stock outstanding. At
present, the Company has no plans to issue any shares of Preferred Stock.
WARRANTS
The Warrants were issued pursuant to the Warrant Agreement between the
Company and Bank of Montreal Trust Company, as warrant agent (the "Warrant
Agent") on April 15, 1996 as part of a
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private placement by the Company of 329,000 units consisting of $329.0 million
aggregate principle amount at maturity of Senior Notes and Warrants to
purchase an aggregate of 613,427 shares of common stock of the Company, prior
to adjustment for the Recapitalization Events. Following the Recapitalization
Events, there were outstanding Warrants for the purchase of an aggregate of
1,226,854 shares of Class B Common Stock. The following summary of certain
provisions of the Warrant Agreement and the Warrants does not purport to be
complete and is qualified in its entirety by reference to the Warrant
Agreement and the Warrants, including the definitions therein of certain
terms. As used in this section, the term "Company" refers only to Hyperion
Telecommunications, Inc. and not to its subsidiaries.
After the Recapitalization Events each Warrant, when exercised, will entitle
the holder thereof to purchase 3.729 shares of Class B Common Stock (the
"Warrant Shares") at the exercise price of $0.005 per share. The exercise
price and the number of Warrant Shares issuable on exercise of a Warrant are
both subject to adjustment in certain cases referred to below. The Warrants
are exercisable at any time on or after the earlier to occur of (i) May 1,
1997 and (ii) in the event a Change of Control occurs, the date the Company
mails notice thereof to holders of the Senior Notes and to the holders of the
Warrants, Warrant Shares and any other securities issued or issuable with
respect thereto. Unless exercised, the Warrants will automatically expire on
April 1, 2001, the Expiration Date. The Company will give notice of expiration
not less than 90 and not more than 120 days prior to the Expiration Date to
the registered holders of the then outstanding Warrants. If the Company fails
to give such notice, the Warrants will not expire until 90 days after the
Company gives such notice. In no event will holders be entitled to any damages
or other remedy for the Company's failure to give such notice other than any
such extension.
In connection with the issuance of the Warrants, the Company agreed to file
Warrant Shelf Registration Statements under the Securities Act (i) covering
the Warrants, on or prior to October 1, 1996, and (ii) covering the Warrant
Shares, on or prior to January 1, 1997, and to use its best efforts to cause
such Warrant Shelf Registration Statements to be declared effective by the
Commission on or prior to 90 days after the dates specified for such filings.
The Company filed a registration statement covering the Warrants and the
Warrant Shares on September 25, 1996. The Warrant Shelf Registration Statement
has not been declared effective by the Commission as of the date of this
Prospectus. The Company has agreed to keep the Warrant Shelf Registration
Statements with respect to the Warrants and the Warrant Shares as described in
the immediately preceding paragraph effective until October 1, 1999 and
January 1, 2000, respectively. If the Company does not comply with its
registration obligations under the Warrant Registration Rights Agreement, it
will be required to pay liquidated damages to holders of the Warrants or
Warrant Shares under certain circumstances.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
DELAWARE LAW
Delaware General Corporation Law
Although the Company's Certificate of Incorporation currently provides that
the Company is not subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), the Company could become subject to Section 203 through
stockholder action in the future. Section 203, subject to certain exceptions,
prohibits a Delaware corporation, the voting stock of which is generally
publicly traded (i.e., listed on a national securities exchange or authorized
for quotation on an inter-dealer quotation system of a registered national
securities association) or held of record by more than 2,000 stockholders,
from engaging in any "business combination" with any "interested stockholder"
for a period of three years following the time that such stockholder became an
interested stockholder, unless (i) prior to such time, the Board of Directors
of the corporation approved either such business combination or the
transaction which resulted in such stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in such
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time such transaction commenced, excluding for purposes of determining the
number of shares outstanding
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those shares owned (y) by persons who are directors and also officers and (z)
by employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (iii) at or subsequent to such
time, such business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation; (iii) subject to
certain exceptions, any transaction which results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transactions involving the corporation beneficially
owned by the interested stockholder; or (v) the receipt by the interested
stockholder of the benefit of any loans, advances, guarantees, pledges or
other financial benefits provided by or through the corporation. In general,
Section 203 defines an interested stockholder as any entity or person
beneficially owning (or within the past three years having owned) 15% or more
of the outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
Certificate of Incorporation
In addition to the voting rights of the Class A and Class B Common Stock
described above, the Company's Certificate of Incorporation, as amended, by
means of a "blank check preferred" provision authorizes the Board of
Directors, at any time, to divide any or all of the shares of Preferred Stock
into one or more series and to fix and determine the number of shares and the
designation of such series so as to distinguish it from the shares of all
other series. Further, the Board of Directors, when issuing a series of
Preferred Stock, may fix and determine the voting rights, designations,
preferences, qualifications, privileges, limitations, options, conversion
rights, restrictions and other special or relative rights of the Preferred
Stock of such series.
This blank check preferred provision gives the Board of Directors
flexibility in dealing with methods of raising capital and responding to
possible hostile takeover attempts. The provision may have the effect of
making it more difficult for a third party to acquire the Company, discourage
a third party from attempting to acquire the Company or deter a third party
from paying a premium to acquire a majority of the outstanding voting stock of
the Company. Additionally, depending on the rights and preferences of any
series of Preferred Stock issued and outstanding, the issuance of Preferred
Stock may adversely affect the voting and other rights of the holders of the
Common Stock, including the possibility of the loss of voting control to
others.
For a discussion of the effects of the disproportionate voting rights of the
Class A Common Stock and Class B Common Stock, see "Risk Factors--Control by
Principal Stockholder" and "Description of Capital Stock--Common Stock."
DIVIDEND RESTRICTIONS
The terms of the Indenture for the Senior Notes contain restrictions on the
ability of the Company to pay dividends on the Common Stock. The payment of
dividends on the Common Stock is also subject to the preferences that may be
applicable to any then outstanding Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is the American Stock
Transfer & Trust Company. The Transfer Agent and Registrar for the Warrants is
Bank of Montreal Trust Company, New York, New York.
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CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Class A
Common Stock applicable to "Non-United States Holders." A "Non-United States
Holder" is any beneficial owner of Class A Common Stock that, for United
States federal income tax purposes, is a non-resident alien individual, a
foreign corporation, a foreign partnership or a non-resident fiduciary of a
foreign estate or trust as such terms are defined in the Code. This discussion
is based on the Code and administrative and judicial interpretations as of the
date hereof, all of which are subject to change either retroactively or
prospectively. This discussion does not address all aspects of United States
federal income and estate taxation that may be relevant to Non-United States
Holders in light of their particular circumstances and does not address any
tax consequences arising under the laws of any state, local or foreign taxing
jurisdiction. Prospective investors are urged to consult with their tax
advisors regarding the United States federal, state and local income and other
tax consequences, and the non-United States tax consequences, of owning and
disposing of Class A Common Stock.
DIVIDENDS
Subject to the discussion below, any dividend paid to a Non-United States
Holder generally will be subject to United States withholding tax either at a
rate of 30% of the gross amount of the dividend or such lower rate as may be
specified by an applicable income tax treaty. For purposes of determining
whether tax is to be withheld at a 30% rate or at a reduced rate as specified
by an income tax treaty, the Company ordinarily will presume that dividends
paid to an address in a foreign country are paid to a resident of such country
absent knowledge that such presumption is not warranted. However, under
proposed United States Treasury regulations not currently in effect, a Non-
United States Holder would be required to file certain forms accompanied by a
statement from a competent authority of the treaty country in order to claim
the benefits of a tax treaty. Dividends paid to a holder with an address
within the United States generally will not be subject to withholding tax,
unless the Company has actual knowledge that the holder is a Non-United States
Holder.
Dividends received by a Non-United States Holder that are effectively
connected with a United States trade or business conducted by such Non-United
States Holder are exempt from withholding tax. However, such effectively
connected dividends are subject to regular United States income tax in the
same manner as if the Non-United States Holder were a United States resident.
A Non-United States Holder may claim exemption from withholding under the
effectively connected income exception by filing Form 4224 (Statement Claiming
Exemption from Withholding of Tax on Income Effectively Connected With the
Conduct of Business in the United States) each year with the Company or its
paying agent prior to the payment of the dividends for such year. Effectively
connected dividends received by a corporate Non-United States Holder may be
subject to an additional "branch profits tax" at a rate of 30% (or such lower
rate as may be specified by an applicable tax treaty) of such corporate Non-
United States Holder's effectively connected earnings and profits, subject to
certain adjustments.
A Non-United States Holder eligible for a reduced rate of United States
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
United States Internal Revenue Service (the "IRS").
GAIN ON DISPOSITION OF ORDINARY COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax with respect to a gain realized upon the sale or a
disposition of Class A Common Stock unless: (i) such gain is effectively
connected with a United States trade or business of the Non-United States
Holder, (ii) the Non-United States Holder is an individual who is present in
the United States for a period or
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periods aggregating 183 days or more during the taxable year in which such
sale or disposition occurs and certain other conditions are met, or (iii) the
Company is or has been a "United States real property holding corporation" for
federal income tax purposes at any time within the shorter of the five-year
period preceding such disposition or such holder's holding period and certain
other conditions are met. The Company has determined that it is not, has not
been for the last five years, and does not believe that it will become a
"United States real property holding corporation" for federal income tax
purposes. If a Non-United States Holder falls under clause (i) above, the Non-
United States holder will be taxed on the net gain derived from the sale under
regular graduated United States federal income tax rates (and, with respect to
corporate Non-United States Holders, may also be subject to the branch profits
tax described above). If an individual Non-United States Holder falls under
clause (ii) above, the Non-United States Holder generally will be subject to a
30% tax on the gain derived from the sale, which gain may be offset by United
States capital losses recognized within the same taxable year of such sale.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, the Company must report to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax
withheld. A similar report is sent to the holder. Pursuant to tax treaties or
other agreements, the IRS may make its reports available to tax authorities in
the recipient's country of residence.
Unless the Company has actual knowledge that a holder is a non-United States
person, dividends paid to a holder at an address within the United States may
be subject to backup withholding at a rate of 31% if the holder is not an
exempt recipient as defined in Treasury Regulation Section 1.6049-4(c)(1)(ii)
(which includes corporations) and fails to provide a correct taxpayer
identification number and other information to the Company. Backup withholding
will generally not apply to dividends paid to holders at an address outside
the United States (unless the Company has knowledge that the holder is a
United States person.)
If the proceeds of the disposition of Class A Common Stock by a Non-United
States Holder are paid over, by or through a United States office of a broker,
the payment is subject to information reporting and to backup withholding at a
rate of 31% unless the disposing holder certifies as to its name, address and
status as a Non-United States Holder under penalties of perjury or otherwise
establishes an exemption. Generally, United States information reporting and
backup withholding will not apply to a payment of disposition proceeds if the
payment is made outside the United States through a non-United States office
of a non-United States broker. However, United States information reporting
requirements (but not backup withholding) will apply to a payment of
disposition proceeds outside the United States if (a) the payment is made
through an office outside the United States of a broker that is either (i) a
United States person for United States federal income tax purposes, (ii) a
"controlled foreign corporation" for United States federal income tax
purposes, or (iii) a foreign person which derives 50% or more of its gross
income for certain periods from the conduct of a United States trade or
business, and (b) the broker fails to maintain documentary evidence in its
files that the holder is a Non-United States Holder and that certain
conditions are met or that the holder otherwise is entitled to an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to 31% backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
The United States Treasury has recently issued proposed regulations
regarding the withholding and information reporting rules discussed above. In
general, the proposed regulations do not alter the substantive withholding and
information reporting requirements but unify current certification
68
<PAGE>
procedures and forms and clarify reliance standards. If finalized in their
current form, the proposed regulations would generally be effective for
payments made after December 31, 1997, subject to certain transition rules.
ESTATE TAX
An individual Non-United States Holder who is treated as the owner of Class
A Common Stock at the time of his or her death or has made certain lifetime
transfers of an interest in Class A Common Stock will be required to include
the value of such Class A Common Stock in his or her gross estate for United
States federal estate tax purposes and may be subject to United States federal
estate tax, unless an applicable estate tax treaty provides otherwise.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have 36,500,000 shares of
Class A Common Stock outstanding or issuable on the conversion of outstanding
Class B Common Stock (assuming no exercise of the Underwriters' over-allotment
options or of outstanding Warrants). Of these shares, the 16,500,000 shares of
Class A Common Stock sold in the Offerings will generally be freely tradeable
without restriction or further registration under the Securities Act.
1,226,854 shares of Class A Common Stock which are issuable on conversion of
shares of Class B Common Stock issuable upon the exercise of outstanding
Warrants, which are not subject to the Lock-Up Agreements, will be eligible
for resale in the public market upon their issuance, which may occur at the
opinion of the holders of such a Warrant, on or after (i) May 1, 1997, or (ii)
in the event a Change of Control (as defined in the warrant agreement relating
to Warrants which has been filed as an exhibit to the Registration Statement
of which this Prospectus forms a part) occurs, the date the Company mails
notice thereof to holders of the Warrants, in accordance with a registration
statement filed by the Company. Assuming no exercise of the Underwriters'
over-allotment options, 20,000,000 shares of Class A Common Stock issuable
upon conversion of outstanding Class B Common Stock will be subject to Lock-Up
Agreements described below. Upon the expiration of the Lock-Up Agreements, or
earlier at the discretion of the Representatives, all of such shares of Class
A Common Stock issuable upon the conversion of Class B Common Stock, will be
"restricted shares" which are nonetheless eligible for sale in the public
market pursuant to the provisions and limitations of Rule 144 under the
Securities Act ("Rule 144"). See "--Sale of Restricted Shares." Additionally,
the Company intends to register all shares of Class A Common Stock reserved
for issuance under its 1996 Plan, thus permitting the issuance of such shares
to plan participants under the Securities Act.
SALE OF RESTRICTED SHARES
In general, pursuant to Rule 144, beginning November 10, 1996, a person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares ("Restricted Shares") for at least two years, will be entitled to sell,
within any three-month period, a number of shares of Class A Common Stock
equal to the greater of (i) one percent of the shares of Class A Common Stock
outstanding, or (ii) the average weekly trading volume of the Class A Common
Stock on the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which notice of such sale is filed with the Securities
and Exchange Commission. Sales pursuant to Rule 144 are also subject to
certain requirements relating to the manner of sale, notice and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not an Affiliate (as such term is
defined under the Securities Act) and has not been an Affiliate of the Company
at any time during the three months immediately preceding the sale and who has
beneficially owned Restricted Shares for at least three years is entitled to
sell such shares pursuant to Rule 144(k) without regard to the Rule 144
limitations described above.
69
<PAGE>
The Company intends to file a registration statement under the Securities
Act covering the shares issuable on the exercise of options for the purchase
of Class A Common Stock granted under the Company's 1996 Plan. The Company
expects that this registration will automatically become effective upon
filing. Accordingly, shares registered under such registration statement will
immediately thereafter be available for sale in the public market, subject to
Rule 144 volume limitations applicable to Affiliates, and subject to any
applicable vesting restrictions.
LOCK-UP AGREEMENTS
The Lock-Up Agreements provide that the Company and the Selling Stockholder
will not, directly or indirectly, offer, sell, grant any option to purchase or
otherwise dispose (or approve any offer, sale, grant or other disposition) of
any shares of Class A Common Stock, Class B Common Stock or other capital
stock of the Company or any securities convertible into, or exercisable or
exchangeable for, any shares of Class A Common Stock, Class B Common Stock or
other capital stock of the Company (except in connection with certain
transfers to affiliates, the Company's 1996 Plan and the Warrants) without the
prior written consent of the Representatives for a period of 180 days after
the date of this Prospectus. The Underwriters have agreed that each of Messrs.
Drenning, Fajerski and Fowler may sell up to $1.0 million worth of shares of
Class A Common Stock after 30 days following the date of this Prospectus.
Their remaining shares will be subject to Lock-Up Agreements substantially
identical to those of the Company and the Selling Stockholder. The
Representatives, in its discretion, may waive the foregoing restrictions in
whole or in part, with or without a public announcement of such action.
70
<PAGE>
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon
on behalf of the Company by Buchanan Ingersoll Professional Corporation,
Pittsburgh, Pennsylvania. Certain legal matters will be passed upon on behalf
of the Company by its special local regulatory counsel, Dow, Lohnes &
Albertson, Washington, D.C.; Downs Rachlin & Martin, St. Johnsbury, Vermont;
Gullett Sanford Robinson & Martin, Nashville, Tennessee; Pennington,
Culpepper, Moore, Wilkinson, Dunbar & Dunlap, P.A., Tallahassee, Florida;
Roland, Fogel, Koblenz & Carr, Albany, New York; and Sonnenschein, Nath &
Rosenthal, Kansas City, Missouri. Certain legal matters relating to the
securities offered hereby will be passed upon on behalf of the Representatives
by Latham & Watkins, New York, New York.
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.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form S-1 under the Securities Act with respect to
the Common Stock offered hereby. 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 Common Stock, reference is
made to such Registration Statement and the exhibits and schedules filed as
part thereof. Statements contained in this Prospectus regarding the contents
of any contract or any other document are necessarily summaries and each such
statement is qualified in its entirety by reference to the copy of such
contract or document filed as an Exhibit to the Registration Statement.
The Company is currently subject to the informational reporting requirements
of the Securities Exchange Act of 1934, as amended, and in accordance
therewith will file periodic reports, proxy statements and other information
with the Commission. The Registration Statement and the exhibits and schedules
thereto, as well as such periodic reports, proxy statements and other
information 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, D.C. 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.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent auditors.
71
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets, March 31, 1995 and 1996, and June 30, 1996
(Unaudited)............................................................... F-3
Consolidated Statements of Operations, Years Ended March 31, 1994, 1995 and
1996, and Three Months Ended June 30, 1995 and 1996 (Unaudited)........... F-4
Consolidated Statements of Stockholders' Equity (Deficiency), Years Ended
March 31, 1994,
1995 and 1996, and Three Months Ended June 30, 1996 (Unaudited)........... F-5
Consolidated Statements of Cash Flows, Years Ended March 31, 1994, 1995 and
1996, and Three Months Ended June 30, 1995 and 1996 (Unaudited)........... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Hyperion Telecommunications, Inc.:
We have audited the accompanying consolidated balance sheets of Hyperion
Telecommunications, Inc. and subsidiaries as of March 31, 1995 and 1996 and
the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for each of the three years in the period ended
March 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Hyperion Telecommunications,
Inc. and subsidiaries at March 31, 1995 and 1996 and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 8 to the consolidated financial statements, effective
April 1, 1993, the Company changed its method of accounting for income taxes.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
June 28, 1996 (October 3, 1996 as to
Notes 4 and 5, the
sixth paragraph of Note 6
and the last paragraph of Note 7)
F-2
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
---------------- JUNE 30,
1995 1996 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
- -------
Current assets:
Cash and cash equivalents...................... $ -- $ -- $132,142
Other current assets........................... 511 282 304
Due from affiliates--net....................... 1,799 -- 2,115
------- ------- --------
Total current assets......................... 2,310 282 134,561
Investments...................................... 12,564 21,087 20,988
Property, plant and equipment--net............... 7,538 12,561 14,044
Other assets--net................................ 712 1,045 6,906
Deferred income taxes--net....................... 88 294 294
------- ------- --------
Total........................................ $23,212 $35,269 $176,793
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY):
- ------------------------------------
Current liabilities:
Accounts payable............................... $ 1,169 $ 2,529 $ 492
Due to affiliates--net......................... -- 8,707 --
Other current liabilities...................... 205 501 511
------- ------- --------
Total current liabilities.................... 1,374 11,737 1,003
13% Senior Discount Notes due 2003............... -- -- 168,620
Note payable--Adelphia........................... 35,541 50,855 25,855
------- ------- --------
Total liabilities............................ 36,915 62,592 195,478
------- ------- --------
Commitments and contingencies (Note 6)
Stockholders' equity (deficiency):
Class A Common Stock, $0.01 par value,
300,000,000 shares authorized and 0 shares
oustanding.................................... -- -- --
Class B Common Stock, $0.01 par value,
150,000,000 shares authorized and 20,000,000
shares oustanding............................. 200 200 200
Class B Common Stock Warrants.................. -- -- 11,087
Loans to Stockholders.......................... -- -- (3,000)
Accumulated deficit............................ (13,903) (27,523) (26,972)
------- ------- --------
Total stockholders' equity (deficiency)...... (13,703) (27,323) (18,685)
------- ------- --------
Total........................................ $23,212 $35,269 $176,793
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
-------------------------- ---------------
1994 1995 1996 1995 1996
------- ------- -------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.......................... $ 417 $ 1,729 $ 3,322 $ 686 $1,102
------- ------- -------- ------- ------
Operating expenses:
Network operations.............. 330 1,382 2,690 628 859
Selling, general and
administrative.................. 2,045 2,524 3,084 831 1,027
Depreciation and amortization... 189 463 1,184 250 695
------- ------- -------- ------- ------
Total......................... 2,564 4,369 6,958 1,709 2,581
------- ------- -------- ------- ------
Operating loss.................... (2,147) (2,640) (3,636) (1,023) (1,479)
Other income (expense):
Gain on sale of investment...... -- -- -- -- 8,405
Interest income................. 17 39 199 16 1,433
Interest expense and fees....... (2,164) (3,321) (6,088) (1,328) (6,169)
------- ------- -------- ------- ------
(Loss) income before income taxes,
equity in net loss of joint
ventures and cumulative effect of
change in accounting principle... (4,294) (5,922) (9,525) (2,335) 2,190
Income tax benefit (expense)...... 55 29 197 19 (3)
------- ------- -------- ------- ------
(Loss) income before equity in net
loss of joint ventures and
cumulative effect of change in
accounting principle............. (4,239) (5,893) (9,328) (2,316) 2,187
Equity in net loss of joint
ventures.......................... (528) (1,799) (4,292) (797) (1,636)
------- ------- -------- ------- ------
(Loss) income before cumulative
effect of change in accounting
principle........................ (4,767) (7,692) (13,620) (3,113) 551
Cumulative effect of change in
accounting for income taxes...... 42 -- -- -- --
------- ------- -------- ------- ------
Net (loss) income................. $(4,725) $(7,692) $(13,620) $(3,113) $ 551
======= ======= ======== ======= ======
(Loss) income per weighted average
share of common stock before
cumulative effect of change in
accounting principle............. $ (0.24) $ (0.38) $ (0.68) $ (0.16) $ 0.03
Cumulative effect per weighted
average share of common stock of
change in accounting for income
taxes............................ -- -- -- -- --
------- ------- -------- ------- ------
Net (loss) income per weighted
average share of common stock.... $ (0.24) $ (0.38) $ (0.68) $ (0.16) $ 0.03
======= ======= ======== ======= ======
Weighted average shares of common
stock outstanding................ 20,000 20,000 20,000 20,000 21,050
======= ======= ======== ======= ======
</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>
CLASS B
CLASS A CLASS B COMMON STOCKHOLDERS'
COMMON COMMON STOCK LOANS TO ACCUMULATED EQUITY
STOCK STOCK WARRANTS STOCKHOLDERS DEFICIT (DEFICIENCY)
------- ------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1993. $-- $200 $ -- $ -- $ (1,486) $ (1,286)
Net loss.............. -- -- -- -- (4,725) (4,725)
---- ---- ------- ------- -------- --------
Balance, March 31, 1994. -- 200 -- -- (6,211) (6,011)
Net loss.............. -- -- -- -- (7,692) (7,692)
---- ---- ------- ------- -------- --------
Balance, March 31, 1995 -- 200 -- -- (13,903) (13,703)
Net loss.............. -- -- -- -- (13,620) (13,620)
---- ---- ------- ------- -------- --------
Balance, March 31, 1996. -- 200 -- -- (27,523) (27,323)
Proceeds from issuance
of Class B Common
Stock warrants
(unaudited).......... -- -- 11,087 -- -- 11,087
Loans to stockholders'
(unaudited).......... -- -- -- (3,000) -- (3,000)
Net income (unau-
dited)............... -- -- -- -- 551 551
---- ---- ------- ------- -------- --------
Balance, June 30, 1996
(unaudited)............ $-- $200 $11,087 $(3,000) $(26,972) $(18,685)
==== ==== ======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
--------------------------- -----------------
1994 1995 1996 1995 1996
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net (loss) income............ $(4,725) $ (7,692) $(13,620) $(3,113) $ 551
Adjustments to reconcile net
(loss) income to net cash
used in operating
activities:
Depreciation............... 183 397 1,061 214 335
Amortization............... 6 66 123 36 360
Equity in net loss of joint
ventures.................. 528 1,799 4,292 797 1,636
Non-cash interest expense.. 2,164 3,321 6,088 1,328 4,915
Cumulative effect of
accounting change......... (42) -- -- -- --
Deferred income taxes...... (9) (37) (206) -- --
Gain on sale of investment. -- -- -- -- (8,405)
Changes in operating assets
and liabilities:
Other assets--net........ (535) (550) (227) 26 (22)
Accounts payable......... 223 499 1,360 (966) (2,037)
Other liabilities--net... 86 67 296 57 10
------- -------- -------- ------- --------
Net cash used in operating
activities.................... (2,121) (2,130) (833) (1,621) (2,657)
------- -------- -------- ------- --------
Cash flows from investing
activities:
Expenditures for property,
plant and equipment........ (3,097) (2,850) (6,084) (1,370) (1,818)
Proceeds from sale of
investment................. -- -- -- -- 11,618
Investments in joint
ventures................... (5,510) (7,526) (12,815) (4,020) (4,750)
------- -------- -------- ------- --------
Cash (used in) provided by
investing activities.......... (8,607) (10,376) (18,899) (5,390) 5,050
------- -------- -------- ------- --------
Cash flows from financing
activities:
Proceeds from debt.......... -- -- -- -- 163,705
Proceeds from issuance of
Class B Common Stock
warrants................... -- -- -- -- 11,087
Costs associated with debt
financing.................. -- -- -- -- (6,221)
Loans to stockholders....... -- -- -- -- (3,000)
Borrowings on (repayment of)
note payable--Adelphia..... 12,990 12,252 9,226 5,524 (25,000)
Advances from (to) related
parties.................... (2,381) 254 10,506 1,487 (10,822)
------- -------- -------- ------- --------
Net cash provided by financing
activities.................... 10,609 12,506 19,732 7,011 129,749
------- -------- -------- ------- --------
Net (decrease) increase in cash
and cash equivalents.......... (119) -- -- -- 132,142
Cash and cash equivalents
beginning of period........... 119 -- -- -- --
------- -------- -------- ------- --------
Cash and cash equivalents end
of period..................... $ -- $ -- $ -- $ -- $132,142
======= ======== ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1)THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The consolidated financial statements include the accounts of Hyperion
Telecommunications, Inc. and its wholly owned subsidiaries (the "Company").
All significant intercompany accounts and transactions have been eliminated in
consolidation. The Company was formed in 1991 and is an 89% owned subsidiary
of Adelphia Communications Corporation ("Adelphia"). The remaining 11% is
owned by certain key Company officers.
The Company provides telecommunications service through its subsidiaries and
joint ventures, in which it has less than a majority equity interest. The
Company's efforts have been directed primarily toward becoming an owner and
manager of competitive local exchange carrier ("CLEC") business
telecommunications services in selected mid-sized cities. The Company
generally partners with a local cable television or utility company, whose
fiber facilities are located in the market areas, to build competitive access
fiber optic networks. The Company then operates the networks for a management
fee. Each network provides local special access, carrier-to-carrier, and
point-to-point telecommunications services to major businesses and government
customers. The Company's revenues are derived from a combination of direct
business telecommunication services provided by its subsidiaries and
management fees from its unconsolidated joint ventures.
Joint ventures in which the Company does not have a majority interest are
accounted for under the equity method of accounting.
Unaudited Interim Information
In the opinion of management, all adjustments, consisting of only normal
recurring accruals necessary to present fairly the unaudited results of
operations for the three months ended June 30, 1995 and 1996, have been
included.
Cash and cash equivalents
Cash and cash equivalents generally consist of highly liquid instruments
with an initial maturity date of three months or less.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Costs capitalized include amounts directly associated with
network engineering, design and construction.
Provision for depreciation of property, plant and equipment is computed
using the straight-line method over the estimated useful lives of the assets
beginning in the month the asset is available for use or is acquired.
The estimated useful lives of the Company's principal classes of property,
plant and equipment are as follows:
<TABLE>
<S> <C>
Telecommunications networks...................................... 10-20 years
Network monitoring equipment..................................... 5-10 years
Other............................................................ 3-10 years
</TABLE>
F-7
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1)THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Revenue Recognition
The Company recognizes revenues related to management and network monitoring
of the joint ventures in the month that the related services are provided. The
Company recognizes revenue from telecommunications services in the month the
related service is provided. Revenues on billings to customers for services in
advance of providing such services are deferred and recognized when earned.
Income (Loss) Per Common Share
The computation of income (loss) per common share is based upon the weighted
average number of common shares outstanding. All references in the
accompanying consolidated financial statements to the number of shares of
common stock have been retroactively restated to reflect the stock splits (See
Note 5).
Income Taxes
Deferred income taxes are recognized for the tax effects of temporary
differences between financial statement and income tax bases of assets and
liabilities and for loss carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance is established
to reduce deferred tax assets to the net amount that management believes will
more likely than not be realized. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Other Assets
Costs incurred in developing new networks or expanding existing networks,
including network design, negotiating rights-of-way and obtaining
legal/regulatory authorizations are deferred and amortized over five years.
Pre-operating costs represent certain nondevelopment costs incurred during the
pre-operating phase of a newly constructed network and are amortized over
five-year periods commencing with the start of operations.
Asset Impairments
The Company reviews the carrying value of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable. Measurement of any
impairment would include a comparison of estimated future operating cash flows
anticipated to be generated during the remaining life of the assets with their
net carrying value. An impairment loss would be recognized as the amount by
which the carrying value of the assets exceeds their fair value.
Financial Instruments
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of accounts receivable. Concentration of
credit risk with respect to accounts receivable is limited due to the
dispersion of the Company's customer base among different entities and
geographic areas. The carrying value of the Note Payable--Adelphia (see Note
4) at March 31, 1995 and 1996 approximates its fair value based upon the terms
of the note in comparison with other similar instruments.
F-8
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1)THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
For the fiscal years ended March 31, 1994, 1995 and 1996, certain amounts
have been reclassified to conform with the June 30, 1996 presentation.
(2)PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------
JUNE 30,
1995 1996 1996
------ ------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Telecommunications networks..................... $1,704 $ 6,312 $ 6,668
Network monitoring equipment.................... 3,244 5,267 6,332
Construction in process......................... 2,910 2,245 2,636
Other........................................... 270 388 394
------ ------- -----------
8,128 14,212 16,030
Less accumulated depreciation................... (590) (1,651) (1,986)
------ ------- -----------
Total......................................... $7,538 $12,561 $ 14,044
====== ======= ===========
</TABLE>
(3)INVESTMENTS
The equity method of accounting is used to account for investments in joint
ventures in which the Company owns less than a majority interest. Under this
method, the Company's initial investment is recorded at cost and subsequently
adjusted for the amount of its equity in the net income or losses of its joint
ventures. Dividends or other distributions are recorded as a reduction of the
Company's investment. Investments in joint ventures accounted for using the
equity method reflect the Company's equity in their underlying net assets.
F-9
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(3)INVESTMENTS, CONTINUED
The Company's nonconsolidated investments are as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------
OWNERSHIP JUNE 30,
PERCENTAGE 1995 1996 1996
---------- ------- ------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
EQUITY BASIS INVESTMENTS:
Continental Fiber Technologies
(Jacksonville)..................... 20% $ 1,467 $ 4,701 $ 5,399
Multimedia Hyperion
Telecommunications (Wichita)....... 49.9% 1,445 2,620 2,719
Louisville Lightwave............... 50% 531 996 1,640(1)
NewChannels Hyperion
Telecommunications (Albany)........ 50% 924 999 924
NewChannels Hyperion
Telecommunications (Binghamton).... 20% 355 504 504
NHT Partnership (Buffalo).......... 40% 1,369 2,457 2,937
NewChannels Hyperion
Telecommunications (Syracuse)...... 50% 2,957 3,140 3,215
Hyperion of Harrisburg............. 50% 701 1,600 1,919
Hyperion of Tennessee (Nashville).. 25% 695 1,345 1,345
Alternet of Virginia (Richmond).... 37% 1,633 3,406 3,813
New Jersey Fiber Technologies (New
Brunswick)......................... 19.7% 9 956 1,231
TCG of South Florida............... 15.7% 2,981 4,679 --
PECO-Hyperion (Philadelphia) ...... 50% -- -- 1,692
Other ............................. Various 18 497 622
------- ------- -----------
15,085 27,900 27,960
Cumulative equity in net losses.... (2,521) (6,813) (6,972)
------- ------- -----------
Total Investments.................. $12,564 $21,087 $ 20,988
======= ======= ===========
</TABLE>
(1) As discussed in Note 6, the Company has committed to make additional
capital contributions of approximately $2,300 relating to the increase in
its ownership percentage.
Summarized unaudited combined financial information for the Company's
investments being accounted for using the equity method of accounting as of
and for the years ended March 31, 1994, 1995, 1996, and the three months ended
June 30, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
JUNE 30,
1994 1995 1996 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Current assets............................. $ 7,278 $ 6,842 $ 5,709 $ 7,075
Non-current assets......................... 29,410 59,870 109,583 85,182
Current liabilities........................ 10,345 6,444 11,683 7,580
Non-current liabilities.................... 2,743 20,858 25,912 19,427
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, JUNE 30,
------------------------- --------------------
1994 1995 1996 1995 1996
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues.................... $ 1,028 $ 3,894 $11,513 $1,435 $2,651
Net loss.................... (2,059) (7,319) (14,475) (1,619) (3,572)
</TABLE>
F-10
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(3) INVESTMENTS, CONTINUED
Amounts shown above as of and for the years ended March 31, 1994, 1995 and
1996 include TCG of South Florida. Amounts shown above as of and for the three
months ended June 30, 1995 and 1996 exclude TCG of South Florida.
On May 16, 1996, the Company sold its 15.7% interest in TCG of South Florida
to a third party for approximately $11,618 cash resulting in a pre-tax gain of
approximately $8,400. Amounts related to TCG of South Florida included in the
Company's investments and equity in net loss of joint ventures as of and for
the year ended March 31, 1996 were $3,422 and $778, respectively. The
Company's equity in net loss of joint ventures included a loss of $221 for TCG
of South Florida for the three months ended June 30, 1996.
(4)FINANCING ARRANGEMENTS
Note Payable--Adelphia
The Company has an unsecured credit arrangement with Adelphia which had no
repayment terms prior to April 15, 1996. On April 15, 1996, $25,000 of the
proceeds from the sale of the 13% Senior Discount Notes and Class B Common
Stock Warrants discussed below were used to repay a portion of this
obligation. Interest expense and fees on this credit arrangement were based
upon the weighted average cost of unsecured borrowings of Adelphia during the
corresponding periods.
Interest at 11.28% per annum plus fees was charged on the Note Payable--
Adelphia for the years ended March 31, 1994, 1995 and 1996. The total amount
of interest converted to note principal at March 31, 1996 and June 30, 1996 is
$9,007.
Effective April 15, 1996, the remaining balance due on the Note Payable--
Adelphia is evidenced by an unsecured subordinated note due April 16, 2003.
This obligation bears interest at 16.5% per annum with interest payable
quarterly in cash; by issuing additional subordinated notes; or a combination
of cash and additional subordinated notes, all of which is at the Company's
option.
13% Senior Discount Notes and Class B Common Stock 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 1,226,854 shares of its Class B Common Stock, after giving effect
for the two-for-one stock split (see Note 5). Proceeds to the Company, net of
discounts, commissions, and other transaction costs were approximately
$168,600. Such net proceeds were used to pay $25,000 of the Note Payable--
Adelphia discussed above, to make loans of $3,000 to certain key Company
officers (see Note 5) and to fund the Company's capital expenditures, working
capital requirements, operating losses and its pro-rata investments in joint
ventures. Use of proceeds from the Senior Notes also included the repayment of
amounts related to capital expenditures, working capital requirements,
operating losses and pro-rata investments in joint ventures totaling $12,800
incurred during the period from January 1, 1996 to April 15, 1996. These
amounts had been funded during the same time period through advances from
Adelphia.
Prior to April 15, 2001, interest on the Senior Notes is not payable in
cash, but is added to principal. Thereafter, interest is payable semi-annually
commencing October 15, 2001. The Senior
F-11
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1966
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(4) FINANCING ARRANGEMENTS, CONTINUED
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 filed a
registration statement offering to exchange the Senior Notes for Series B
Senior Discount Notes registered under the Securities Act of 1933, as amended
(the "Securities Act"). Terms of the Series B Senior Discount Notes are
substantially the same as the Senior Notes. The above exchange was consummated
within the time periods stipulated in the agreement. The Company's filing
became effective as of August 12, 1996 and the Company did not incur any
liquidated damages.
The Class B Common Stock Warrants are exercisable at $0.005 per share, after
giving effect for the two-for-one stock split (see Note 5), upon the earlier
of May 1, 1997 or a Change of Control. Unless exercised, the Class B Common
Stock 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 $0.0025 to $0.0125 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 Class B Common Stock Warrants had been issued on
April 1, 1995, interest expense would have been approximately $27,796 for the
year ended March 31, 1996.
(5)STOCKHOLDERS' EQUITY
The Class B 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.
F-12
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(5) STOCKHOLDERS' EQUITY, CONTINUED
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 Class B shares (the "Officers'
Option"). At any time after October 7, 2001, Adelphia could have required the
Officers to sell all of their outstanding Class B 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 Class B 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 Class B Common
Stock 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 Class B 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 October 3, 1996, the Board of Directors of the Company approved charter
amendments to (i) increase the Company's authorized shares from 30,000,000
shares of Common Stock to 150,000,000 shares of Class B Common Stock, (ii)
authorize 300,000,000 shares of a second class of common stock (Class A Common
Stock), and (iii) reclassify each previously authorized and outstanding share
of Common Stock as Class B Common Stock. Holders of the Class A Common Stock
and Class B Common Stock vote as a single class on all matters submitted to a
vote of the stockholders, with each share of Class A Common Stock entitled to
one vote and each share of Class B Common Stock entitled to ten votes. In
addition, each share of Class B Common Stock is automatically convertible into
one share of Class A Common Stock. In the event a cash dividend is paid, the
holders of the Class A Common Stock and the Class B Common Stock will be paid
an equal amount.
On March 19, 1996, the Board of Directors of the Company approved a ten
thousand-for-one stock split of its Class B Common Stock and the reduction of
the par value from $1.00 per share to $.01 per share. On October 3, 1996, the
Board of Directors of the Company approved a two-for-one stock split of its
Class B Common Stock. In addition, on March 19, 1996, the Board of Directors
approved charter amendments to increase the Company's authorized shares of
Class B 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.
F-13
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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 the stock splits, the par value reduction and the charter
amendments authorized on March 19, 1996 and October 3, 1996.
On October 3, 1996, the Board of Directors and stockholders of the Company
approved the Company's 1996 Long-Term Compensation Plan (the "1996 Plan"). The
1996 Plan provides for the grant of (i) options which qualify as "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended, (ii) options which do not so qualify, (iii) share awards
(with or without restrictions on vesting), (iv) stock appreciation rights and
(v) stock equivalent or phantom units. The number of shares of Class A Common
Stock available for issuance initially will be 3,500,000. Such number is to
increase each year by (1%) of outstanding shares of all classes of the
Company's Common Stock, up to a maximum of 5,000,000 shares. Options, awards
and units may be granted under the 1996 Plan to directors, officers, employees
and consultants. The 1996 Plan provides that incentive stock options must be
granted with an exercise price of not less than the fair market value of the
underlying Common Stock on the date of grant. Options outstanding under the
Plan may be exercised by paying the exercise price per share through various
alternative settlement methods. No stock options, stock awards, stock
appreciation rights or phantom stock units have been granted under the Plan.
(6)COMMITMENTS AND CONTINGENCIES
The Company rents office space, node space and fiber under leases with terms
which are generally less than one year or under agreements that are generally
cancelable on short notice. Total rental expense under all operating leases
aggregated $65, $478 and $1,210 for the years ended March 31, 1994, 1995 and
1996, respectively.
The minimum future lease obligations under the noncancelable operating
leases as of March 31, 1996 are approximately:
<TABLE>
<CAPTION>
PERIOD ENDING MARCH 31,
-----------------------
<S> <C>
1997................................................. $140
1998................................................. 14
1999................................................. 13
2000................................................. 4
2001................................................. 4
Thereafter........................................... --
</TABLE>
Under certain investment agreements, the Company has committed to make
specific capital contributions to the joint ventures. Total capital
commitments to be made as a result of these agreements at March 31, 1996 were
$2,299. Total capital commitments to be made as of June 30, 1996 increased to
$15,405 due to additional commitments related to the PECO-Hyperion
(Philadelphia) investment.
Certain investors in two of the joint ventures have the right after a
specified period of time to sell their interest to the Company. Under one
agreement, the sales price represents the investor's aggregate capital
contribution less distributions plus interest accrued at the prime rate. The
Company's obligation under this commitment at March 31 and June 30, 1996 was
approximately $2,946 and $3,079 respectively. The sales price under the second
agreement is equal to the fair market value of such investor's interest.
F-14
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(6) COMMITMENTS AND CONTINGENCIES, CONTINUED
The Company has agreed that it will make all required capital contributions
to Louisville Lightwave that are necessary to increase its ownership to 50%.
As of June 30, 1996, the Company expects these capital contributions will
aggregate approximately $2,300.
On August 1, 1996, the Company purchased additional general and limited
partnership interests in Hyperion of Tennessee for approximately $5,000, which
increases the Company's ownership of Hyperion of Tennessee to 95%. The
following unaudited financial information of the Company for the year ended
March 31, 1996 assumes that this acquisition had occurred on April 1, 1995:
<TABLE>
<S> <C>
Revenues $ 3,963
Net loss before extraordinary items 15,239
Net loss 15,239
Net loss per weighted average share of common
stock $0.76
</TABLE>
The Company has entered into employment agreements with certain key Company
officers, the terms of which expire on October 20, 1998, as amended. The
employment agreements provide for base salary, benefits and bonuses payable if
specified management goals are attained. In addition, the employment
agreements contain noncompetition and nondisclosure provisions.
The President of the Company has an employment agreement with Adelphia where
he is a vice president and secretary. His agreement provides for base salary,
benefits and insurance premium payments. The Company reimburses Adelphia for
such payments.
The Company's operations and the operations of its joint ventures may be
adversely affected by changes and developments in governmental regulation,
competitive forces and technology. The telecommunications industry is subject
to extensive regulation at the federal, state and local levels. On February 8,
1996, President Clinton signed the Telecommunications Act of 1996 (the
"Telecommunications Act"), the most comprehensive reform of the nation's
telecommunications laws since the Communications Act of 1934.
The more significant provisions of the Telecommunications Act and certain
of its possible effects are as follows:
The Telecommunications Act removes legal barriers of entry in local
telephone markets. This provision should enable the Company to provide a
full range of services in any state while potentially increasing the level
of competition the Company faces in all its markets.
The Telecommunications Act requires incumbent Local Exchange Company's
("LECs") to "interconnect" with competitors which will provide access to
certain networks under reasonable rates, terms and conditions. It is
uncertain how effective these requirements will be or their impact on the
Company until the FCC completes its rulemaking proceedings requiring the
LECs to provide telephone number portability, dialing parity, reciprocal
compensation, resale, access to rights-of-way and unbundling of network
services.
The Telecommunications Act establishes procedures for LEC and Bell
Operating Company ("BOC") entry into new markets, including long distance
and cable television service. The
F-15
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(6) COMMITMENTS AND CONTINGENCIES, CONTINUED
Company's management believes LECs are now more likely to invest in fiber
optic networks and enter the video market which will generate a revenue
stream previously unavailable to them.
These facilities can then also be used to provide services that compete
with the Company. By allowing the BOC to enter the long distance market,
this may reduce the market share of the major long distance carriers (the
Company's joint ventures' primary customers) and have adverse consequences
on the Company's joint ventures' ability to generate revenues from the long
distance carriers.
The Telecommunications Act eliminates the requirement that LECs obtain FCC
authorization before constructing new facilities for interstate services
and limits the FCC's ability to review LEC tariff filings. The changes will
increase the speed with which the LECs are able to introduce new service
offerings and new pricing of existing services, thereby increasing the
LEC's ability to compete with the Company.
The Telecommunications Act requires the FCC to establish an explicit
mechanism for subsidizing service to markets that are less desirable,
either because of the high cost of providing service or the limited
revenues that might be available. This could be advantageous to the Company
or it could be beneficial to the Company's competitors depending on the
geographic areas and the type of customers for which subsidies are
available.
On July 2, 1996 the FCC released its First Report and Order and Further
Notice of Proposed Rulemaking promulgating rules and regulations to
implement Congress' statutory directive concerning number portability (the
"Number Portability Order"). The FCC ordered all LECs to begin phased
development of a long-term service provider portability method in the 100
largest Metropolitan Statistical Areas ("MSAs") no later than October 1,
1997, and to complete deployment in those MSAs by December 31, 1998. Number
portability must be provided in those areas by all LECs to all requesting
telecommunications carriers. As new carriers are at a competitive
disadvantage without telephone number portability, the Company believes the
Number Portability Order should enhance the Company's ability to offer
service in competition with the incumbent LECs, but it is uncertain how
effective these regulations will be in promoting number portability. The
Number Portability Order does not address how the costs of implementing
long-term service portability will be recovered. This issue is subject to
an additional comment period and is not expected to be decided until 1997.
On August 8, 1996 the FCC released its First Report and Order and Second
Report and Order and Memorandum Opinion and Order promulgating rules and
regulations to implement Congress' statutory directive concerning the
interconnection of CLEC and incumbent LEC networks and incumbent LEC
pricing of unbundled elements (the "Local Competition Orders"). The Local
Competition Orders adopt a national framework for interconnection but
leaves to the individual states the task of implementing the FCC's rules.
Because implementation of the Local Competition Orders will be at the state
level, it is uncertain how these new requirements will affect the Company.
The Local Competition Orders indicate that the FCC intends to take up
access charge reform as early as the fourth quarter of 1996 with new rules
in place as early as the first quarter
F-16
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
of 1997. To the extent that the Local Competition Orders reduce the ability
of incumbent LECs to impose non-cost-based access charges on IXCs, the
Company's competitive advantage in providing customers with access services
will decrease. However, to the extent that CLECs are able to interconnect
with incumbent LEC networks on favorable terms, the Company believes its
ability to provide competitive local exchange services will increase.
(7)RELATED PARTY TRANSACTIONS
The following table summarizes the transactions with related parties which
are included in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE
MARCH 31, 30,
-------------------- -------------
1994 1995 1996 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Management fees........................ $ 261 $1,045 $1,950 $ 373 $ 679
Network monitoring fees................ 51 217 446 99 119
Special access fees.................... -- 189 651 188 180
------ ------ ------ ------ ------
Total.................................. $ 312 $1,451 $3,047 $ 660 $ 978
====== ====== ====== ====== ======
EXPENSES:
Interest expense and fees.............. $2,164 $3,321 $6,088 $ 773 $1,254
Allocated corporate costs.............. 473 511 417 147 121
Fiber leases........................... -- 303 1,022 255 282
------ ------ ------ ------ ------
Total.................................. $2,637 $4,135 $7,527 $1,175 $1,657
====== ====== ====== ====== ======
</TABLE>
Management fees from related parties represent fees received by the Company
from its unconsolidated joint ventures for the performance of financial,
legal, regulatory and other administrative services.
Network monitoring fees represent fees received by the Company for technical
support for the monitoring of each individual joint venture's
telecommunications system.
Special access fees represent amounts charged to joint ventures for use of
the network of a wholly owned subsidiary of the Company.
Interest expense and fees relate to the Note Payable--Adelphia (See Note 4).
Allocated corporate costs represent costs incurred by Adelphia on behalf of
the Company for the administration and operation of the Company. These costs
include charges for office space, corporate aircraft 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.
F-17
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Interest income charged on certain affiliate receivable balances with joint
ventures was $0, $65, $199, $16 and $13 for the periods ended March 31, 1994,
1995, and 1996 and the three months ended June 30, 1995 and 1996,
respectively.
On September 30, 1996, the Company purchased from Adelphia for approximately
$5,446 certain fiber that had previously been leased from Adelphia.
(8)INCOME TAXES
The Company and its corporate subsidiaries adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
effective April 1, 1993. The cumulative effect of adopting SFAS No. 109 at
April 1, 1993 was to decrease net loss by $42 for the year ended March 31,
1994. Adoption of SFAS No. 109 had no other effect on net loss for the year
ended March 31, 1994.
Adelphia and its corporate subsidiaries (including the Company) file a
consolidated federal income tax return. For financial reporting purposes,
current and deferred income tax assets and liabilities are computed on a
separate company basis. The valuation allowance is adjusted for benefits
associated with filing a consolidated income tax return, similar to provisions
of the Internal Revenue Code. At March 31, 1996, the Company had net operating
loss carryforwards for federal income tax purposes of $23,100 expiring through
2011.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
(b) operating loss carryforwards.
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1995 1996
------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Differences between book and tax basis of intangible
assets................................................... $ 404 $ 119
Net operating loss carryforwards........................ 4,823 9,302
Investment in Partnerships.............................. 327 1,401
Other................................................... 27 134
------- --------
Total.................................................. 5,581 10,956
Valuation allowance..................................... (5,295) (10,459)
------- --------
Total.................................................. 286 497
------- --------
DEFERRED TAX LIABILITIES:
Differences between book and tax basis of property,
plant and
equipment.............................................. 198 203
------- --------
Net deferred tax asset................................... $ 88 $ 294
======= ========
</TABLE>
The net change in the total valuation allowance for the years ended March
31, 1995 and 1996 was an increase of $3,111 and $5,164, respectively.
F-18
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996
AND THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(8)INCOME TAXES, CONTINUED
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>
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-19
<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 up to 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.
InterLATA 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 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-CO--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.
Overlash--An aerial cable construction technique that involves the
attachment of a new cable to an existing cable by placing the new cable beside
the existing cable, and lashing (or binding) the two cables together by means
of a lashing wire that is wrapped around both cables. This technique allows
for the addition of new cable facilities utilizing existing pole attachments
without the requirement for additional space on the pole.
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 or 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 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.
Remote Modules (or Remote Switching Modules)--Telephone switching units that
are attached to a host switch (usually via DS1 lines) in a different
geographic location. Remote modules provide the capability of offering
switching functionality to areas that will not economically support a host
switch.
Rights of Way--Rights of certain entities (usually utility, cable TV or
telephone companies and local government agencies) to "pass over" or place
facilities on, over, or underneath property. This includes the ability to
place cable on poles, in conduit, and to bury cable underground.
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-switched. 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>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the U.S. Underwriters named below, and
each of such U.S. Underwriters, for whom Goldman, Sachs & Co., Bear, Stearns &
Co. Inc., Lazard Freres & Co. LLC and Merrill Lynch, Pierce, Fenner & Smith
Incorporated are acting as representatives, have severally agreed to purchase
from the Company, the respective number of shares of Class A Common Stock set
forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
CLASS A
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co.............................................
Bear, Stearns & Co. Inc.........................................
Lazard Freres & Co. LLC.........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................
----------
Total......................................................... 13,200,000
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The U.S. Underwriters propose to offer the shares of Class A Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The U.S. Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain brokers and dealers. After the shares of Class A Common Stock
are released for sale to the public, the offering price and other selling
terms may from time to time be varied by the representatives.
The Company and the Selling Stockholder have entered into an underwriting
agreement (the "International Underwriting Agreement") with the underwriters
of the international offering (the "International Underwriters") providing for
the concurrent offer and sale of 3,300,000 shares of Class A Common Stock in
an international offering outside the United States. The offering price and
aggregate underwriting discounts and commissions per share for the two
Offerings are identical. The closing of the U.S. Offering made hereby is a
condition to the closing of the International Offering, and vice versa. The
representatives of the International Underwriters are Goldman Sachs
International, Bear, Stearns International Limited, Lazard Capital Markets and
Merrill Lynch International.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two Offerings, each of
the U.S. Underwriters named herein has agreed that, as a part of the
distribution of the shares offered hereby and subject to certain exceptions,
it will offer, sell or deliver the shares of Class A Common Stock, directly or
indirectly, only in the United States of America (including the States and the
District of Columbia), its territories, its possessions and other areas
subject to its jurisdiction (the "United States") and to U.S. persons, which
term shall mean, for purposes of this paragraph: (a) any individual who is a
resident of the United States or (b) any corporation, partnership or other
entity organized in or under the laws of the United States or any political
subdivision thereof and whose office most directly involved with the purchase
is located in the United States. Each of the International Underwriters has
agreed pursuant to the Agreement Between that, as a part of the distribution
of the shares offered as a part of the international offering, and subject to
certain exceptions, it will (i) not, directly or indirectly, offer, sell or
deliver shares of Class A Common Stock (a) in the United States or to any U.S.
persons or (b) to any person who it believes intends to
U-1
<PAGE>
reoffer, resell or deliver the shares in the United States or to any U.S.
persons, and (ii) cause any dealer to whom it may sell such shares at any
concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall
be the initial public offering price, less an amount not greater than the
selling concession.
The U.S. Underwriters have been granted an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 1,980,000
additional shares of Class A Common Stock solely to cover over-allotments, if
any. In the event that the Underwriters exercise such over-allotment options,
the Selling Stockholder may elect to satisfy such over-allotment options by
selling shares of Class A Common Stock; however, to the extent that such
Selling Stockholder elects not to do so, then such shares will be issued and
sold by the Company. If the U.S. Underwriters exercise their over-allotment
option, the U.S. Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of shares to be purchased by each of them, as shown in the foregoing
table, bears to the 13,200,000 shares of Class A Common Stock offered. The
Company has granted the International Underwriters a similar option to
purchase up to an aggregate of 495,000 additional shares of Class A Common
Stock.
The Company and the Selling Stockholder have agreed that, during the period
beginning from the date of this Prospectus and continuing to and including the
date 180 days after the date of the Prospectus, they will not offer, sell,
contract to sell or otherwise dispose of any securities of the Company (other
than pursuant to certain transfers to affiliates, the 1996 Plan and the
Warrants) without the prior written consent of the representatives, except for
the shares of Class A Common Stock offered in connection with the concurrent
U.S. and International Offerings. The Underwriters have agreed that each of
Messrs. Drenning, Fajerski and Fowler may sell up to of $1.0 million worth of
shares of Class A Common Stock after 30 days following the date of this
Prospectus. Their remaining shares will be subject to Lock-Up Agreements
substantially identical to those of the Company and the Selling Stockholder.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Class A Common Stock offered by them.
Prior to the Offerings, there has been no public market for the shares. The
initial public offering price was negotiated among the Company and the
representatives of the U.S. Underwriters and the International Underwriters.
Among the factors considered in determining the initial public offering price
of the Common Stock, in addition to prevailing market conditions, were the
Company's historical performance, estimates of the business potential and
earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
The Class A Common Stock is expected to be quoted on the Nasdaq National
Market under the symbol "HYPT".
The Company and, in the event that the Selling Stockholder sells shares to
satisfy the over-allotment options, if any, the Selling Stockholder have
agreed to indemnify the several Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of the Class A Common Stock, including shares initially sold
in the international offering, to persons located in the United States.
U-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE
HEREOF.
-----------
TABLE OF CONTENTS
PAGE
<TABLE>
<S> <C>
Prospectus Summary.......................................................... 1
Risk Factors................................................................ 12
Use of Proceeds............................................................. 19
Capitalization.............................................................. 20
Dividend Policy............................................................. 20
Dilution.................................................................... 21
Selected Consolidated Financial and
Operating Data............................................................. 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................. 24
Business.................................................................... 33
Competition................................................................. 48
Regulation.................................................................. 49
Management.................................................................. 57
Certain Relationships and Transactions...................................... 61
Principal Stockholders...................................................... 63
Description of Capital Stock................................................ 63
Certain United States Tax Consequences to Non-United States Holders......... 67
Shares Eligible for Future Sale............................................. 69
Legal Matters............................................................... 71
Experts..................................................................... 71
Additional Information...................................................... 71
Index to Financial Statements............................................... F-1
Glossary.................................................................... A-1
Underwriting................................................................ U-1
</TABLE>
-----------
THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
16,500,000 SHARES
HYPERION TELECOMMUNICATIONS, INC.
CLASS A COMMON STOCK (PAR VALUE $0.01 PER SHARE)
LOGO
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
LAZARD FRERES & CO. LLC
MERRILL LYNCH & CO.
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an estimate of expenses which will be incurred in
connection with the issuance and distribution of the securities being
registered. In the event that the Selling Stockholder sells any shares of
Class A Common Stock pursuant to the Underwriters' over-allotment options,
expenses with respect to any such sale will be paid for by the Company.
<TABLE>
<CAPTION>
PAYABLE BY
THE COMPANY
-----------
<S> <C>
SEC filing fee................................................ $ 69,697
Legal fees and expenses....................................... 200,000
NASD filing fees and expenses................................. 23,500
Nasdaq National Market application fee........................ 50,000
Printing and engraving fees................................... 170,000
Accounting fees and expenses.................................. 75,000
Blue sky legal fees, filing fees and expenses................. 20,000
Transfer agent and registrar fees............................. 3,500
Miscellaneous expense......................................... 3,303
--------
Total....................................................... $615,000
========
</TABLE>
- --------
*To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides in general that
a corporation may indemnify its directors, officers, employees or agents
against expenditures (including judgments, fines, amounts paid in settlement
and attorneys' fees) made by them in connection with certain lawsuits to which
they may be made parties by reason of their being directors, officers,
employees or agents and shall so indemnify such persons against expenses
(including attorneys' fees) if they have been successful on the merits or
otherwise. The bylaws of Hyperion provide for indemnification of the officers
and directors of Hyperion to the full extent permissible under Delaware law.
Hyperion's Certificate of Incorporation also provides, pursuant to Section
102(b)(7) of the Delaware General Corporation Law, that directors of Hyperion
shall not be personally liable to Hyperion or its stockholders for monetary
damages for breach of fiduciary duty as a director for acts or omissions,
provided that directors shall nonetheless be liable for breaches of the duty
of loyalty, bad faith, intentional misconduct, knowing violations of law,
unlawful distributions to stockholders, or transactions from which a director
derived an improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On April 15, 1996, the Company issued 329,000 Units consisting of $329.0
million aggregate principal amount at maturity of 13% Senior Discount Notes
due April 15, 2003 (the "Senior Notes") and 329,000 Warrants to purchase an
aggregate of 613,427 shares (prior to adjustment) of common stock (the
"Warrants") in a private placement to institutional investors pursuant to the
exemptions from registration under Section 4(2) of the 1933 Act and Rule 144A.
Gross proceeds were approximately $175.3 million and net proceeds to the
Company were approximately $168.6 million after discounts and commissions of
approximately $6.1 million and other transaction costs. The initial purchasers
of the Unit placement were Bear, Stearns & Co. Inc., Chase Securities Inc. and
NationsBanc Capital Markets, Inc.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a complete list of Exhibits filed as part of this
Registration Statement, which are incorporated herein:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REFERENCE
- ----------- ----------- ---------
<S> <C> <C>
1.1 Form of Underwriting Agreement To be filed by amendment.
2.1 Purchase Agreement effective as of May Incorporated herein by reference is
13, 1996 between Teleport Communica- Exhibit 2.1 to Registration Statement
tions Group Inc. and Hyperion Telecom- No. 333-06957 on Form S-4.
munications of Florida, Inc.
3.1 Certificate of Incorporation of Regis- Incorporated herein by reference is
trant, together with all amendments Exhibit 3.1 to Registration Statement
thereto. No. 333-06957 on Form S-4.
3.2 Bylaws of Registrant. Incorporated herein by reference is
Exhibit 3.2 to Registration Statement
333-06957 on Form S-4.
4.1 Indenture, dated as of April 15, 1996, Incorporated herein by reference is
between the Registrant and Bank of Exhibit 4.1 to Registration Statement
Montreal Trust Company. No. 333-06957 on Form S-4.
4.2 First Supplemental Indenture, dated as Incorporated herein by reference is
of September 11, 1996, between, the Exhibit 4.2 to Registration Statement
Registrant and Bank of Montreal Trust No. 333-12619 on Form S-1.
Company
4.3 Form of 13% Senior Discount Note. Incorporated herein by reference is
Exhibit 4.3 to Registration Statement
No. 333-12619 on Form S-1.
4.4 Registration Rights Agreement dated as Incorporated herein by reference is
of April 15, 1996, between the Regis- Exhibit 4.3 to Registration Statement
trant and the Initial Purchasers. No. 333-06957 on Form S-4.
4.5 Subordinated Note dated April 15, 1996 Incorporated herein by reference is
by the Company in favor of Adelphia. Exhibit 4.4 to Registration Statement
No. 333-06957 on Form S-4.
4.6 Form of Class A Common Stock Certifi- To be filed by amendment.
cate.
5.1 Opinion of Buchanan Ingersoll Profes- To be filed by amendment.
sional Corporation.
10.1 Purchase Agreement dated as of April Incorporated herein by reference is
10, 1996 between the Registrant and Exhibit 1.1 to Registration Statement
Bear, Stearns & Co. Inc., Chase Secu- No. 333-06957 on Form S-4.
rities Inc. and NationsBanc Capital
Markets, Inc. (collectively, the "Ini-
tial Purchasers").
10.2 Employment Agreement between the Reg- Incorporated herein by reference is
istrant and Charles R. Drenning. Exhibit 10.1 to Registration Statement
No. 333-06957 on Form S-4.
10.3 Employment Agreement between the Reg- Incorporated herein by reference is
istrant and Paul D. Fajerski. Exhibit 10.2 to Registration Statement
No. 333-06957 on Form S-4.
10.4 Employment Agreement between the Reg- Incorporated herein by reference is
istrant and Randolph S. Fowler. Exhibit 10.3 to Registration Statement
No. 333-06957 on Form S-4.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REFERENCE
----------- ----------- ---------
<C> <S> <C>
10.5 Employment Agreement dated July 1, Incorporated herein by reference is
1986 between Adelphia and Daniel R. Exhibit 10.15 to Adelphia's
Milliard. Registration Statement No. 33-6974 on
Form S-1.
10.6 Pre-Incorporation and Shareholder Re- Incorporated herein by reference is
strictive Agreement between Adelphia, Exhibit 10.5 to Registration Statement
Paul D. Fajerski, Charles R. Drenning No. 333-06957 on Form S-4.
and
Randolph S. Fowler.
10.7 Term Loan Note dated May 10, 1996 be- Incorporated herein by reference is
tween Charles R. Drenning in favor of Exhibit 10.6 to Registration Statement
Registrant in the amount of No. 333-06957 on Form S-4.
$1,000,000.
10.8 Term Loan Note dated May 10, 1996 be- Incorporated herein by reference is
tween Paul D. Fajerski in favor of Exhibit 10.7 to Registration Statement
Registrant in the amount of No. 333-06957 on Form S-4.
$1,000,000.
10.9 Term Loan Note dated May 10, 1996 be- Incorporated herein by reference is
tween Randolph S. Fowler in favor of Exhibit 10.8 to Registration Statement
Registrant in the amount of No. 333-06957 on Form S-4.
$1,000,000.
10.10 Term Loan and Stock Pledge Agreement Incorporated herein by reference is
dated May 10, 1996 between the Regis- Exhibit 10.9 to Registration Statement
trant and Charles R. Drenning. No. 333-06957 on Form S-4.
10.11 Term Loan and Stock Pledge Agreement Incorporated herein by reference is
dated May 10, 1996 between the Regis- Exhibit 10.10 to Registration
trant and Paul D. Fajerski. Statement No. 333-06957 on Form S-4.
10.12 Term Loan and Stock Pledge Agreement Incorporated herein by reference is
dated May 10, 1996 between the Regis- Exhibit 10.11 to Registration
trant and Randolph S. Fowler. Statement No. 333-06957 on Form S-4.
10.13 Letter Agreement dated March 19, 1996 Incorporated herein by reference is
between the Registrant, Charles R. Exhibit 10.12 to Registration
Drenning, Paul D. Fajerski, Randolph Statement No. 333-06957 on Form S-4.
S. Fowler and Adelphia.
10.14 Warrant Agreement dated as of April Incorporated herein by reference is
15, 1996, by and among Hyperion Tele- Exhibit 10.13 to Registration
communications, Inc. and Bank of Mon- Statement No. 333-06957 on Form S-4.
treal Trust Company.
10.15 Warrant Registration Rights Agreement Incorporated herein by reference is
dated as of April 15, 1996, by and Exhibit 10.14 to Registration
among Hyperion Telecommunications, Statement No. 333-06957 on Form S-4.
Inc. and the Initial Purchasers.
10.16 Form of Management Agreement. Incorporated herein by reference is
Exhibit 10.15 to Registration
Statement No. 333-06957 on Form S-4.
10.17 1996 Long-Term Compensation Plan. To be filed by amendment.
21.1 Subsidiaries of the Registrant. Incorporated herein by reference is
Exhibit 21.1 to Registration Statement
No. 333-06957 on Form S-4.
23.1 Consent of Buchanan Ingersoll Profes- To be filed by amendment.
sional Corporation (contained in its
opinion filed as Exhibit 5.1 hereto).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REFERENCE
----------- ----------- ---------
<C> <S> <C>
23.2 Consent of Deloitte & Touche LLP. Filed herewith.
24.1 Power of Attorney. Previously filed.
27.1 Financial Data Schedule. Incorporated herein by reference is
Exhibit 27.01 to Registrant's Form 10-
Q for the quarter ended June 30, 1996.
</TABLE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
The undersigned hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended (the "Securities Act"), the information omitted from the
form of prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this Registration Statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, 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 that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<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 11th day of October, 1996.
HYPERION TELECOMMUNICATIONS, INC.
/s/ Daniel R. Milliard
By: ________________________________
Daniel R. Milliard President and
Chief Operating 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
* October 11,
- ------------------------- 1996
John J. Rigas
Vice Chairman and Director
* October 11,
- ------------------------- 1996
Michael J. Rigas
Vice Chairman, Treasurer,
Chief Financial Officer and October 11,
- ------------------------- Director 1996
Timothy J. Rigas
Vice Chairman, Chief Executive
* Officer and Director October 11,
- ------------------------- 1996
James P. Rigas
/s/ Daniel R. Milliard President, Secretary, Chief
- ------------------------- Operating Officer and Director October 11,
Daniel R. Milliard 1996
Senior Vice President and
* Director October 11,
- ------------------------- 1996
Charles R. Drenning
Senior Vice President and
* Director October 11,
- ------------------------- 1996
Paul D. Fajerski
Senior Vice President and
* Director October 11,
- ------------------------- 1996
Randolph S. Fowler
Vice President and Chief
* Accounting Officer October 11,
- ------------------------- 1996
Edward E. Babcock
* /s/ Daniel R. Milliard
- -------------------------
Daniel R. Milliard, as attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REFERENCE
- ----------- ----------- ---------
<S> <C> <C>
1.1 Form of Underwriting Agreement To be filed by amendment.
2.1 Purchase Agreement effective as of May Incorporated herein by reference is
13, 1996 between Teleport Communica- Exhibit 2.1 to Registration Statement
tions Group Inc. and Hyperion Telecom- No. 333-06957 on Form S-4.
munications of Florida, Inc.
3.1 Certificate of Incorporation of Regis- Incorporated herein by reference is
trant, together with all amendments Exhibit 3.1 to Registration Statement
thereto. No. 333-06957 on Form S-4.
3.2 Bylaws of Registrant. Incorporated herein by reference is
Exhibit 3.2 to Registration Statement
333-06957 on Form S-4.
4.1 Indenture, dated as of April 15, 1996, Incorporated herein by reference is
between the Registrant and Bank of Exhibit 4.1 to Registration Statement
Montreal Trust Company. No. 333-06957 on Form S-4.
4.2 First Supplemental Indenture, dated as Incorporated herein by reference is
of September 11, 1996, between, the Exhibit 4.2 to Registration Statement
Registrant and Bank of Montreal Trust No. 333-12619 on Form S-1.
Company
4.3 Form of 13% Senior Discount Note. Incorporated herein by reference is
Exhibit 4.3 to Registration Statement
No. 333-12619 on Form S-1.
4.4 Registration Rights Agreement dated as Incorporated herein by reference is
of April 15, 1996, between the Regis- Exhibit 4.3 to Registration Statement
trant and the Initial Purchasers. No. 333-06957 on Form S-4.
4.5 Subordinated Note dated April 15, 1996 Incorporated herein by reference is
by the Company in favor of Adelphia. Exhibit 4.4 to Registration Statement
No. 333-06957 on Form S-4.
4.6 Form of Class A Common Stock Certifi- To be filed by amendment.
cate.
5.1 Opinion of Buchanan Ingersoll Profes- To be filed by amendment.
sional Corporation.
10.1 Purchase Agreement dated as of April Incorporated herein by reference is
10, 1996 between the Registrant and Exhibit 1.1 to Registration Statement
Bear, Stearns & Co. Inc., Chase Secu- No. 333-06957 on Form S-4.
rities Inc. and NationsBanc Capital
Markets, Inc. (collectively, the "Ini-
tial Purchasers").
10.2 Employment Agreement between the Reg- Incorporated herein by reference is
istrant and Charles R. Drenning. Exhibit 10.1 to Registration Statement
No. 333-06957 on Form S-4.
10.3 Employment Agreement between the Reg- Incorporated herein by reference is
istrant and Paul D. Fajerski. Exhibit 10.2 to Registration Statement
No. 333-06957 on Form S-4.
10.4 Employment Agreement between the Reg- Incorporated herein by reference is
istrant and Randolph S. Fowler. Exhibit 10.3 to Registration Statement
No. 333-06957 on Form S-4.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REFERENCE
----------- ----------- ---------
<C> <S> <C>
10.5 Employment Agreement dated July 1, Incorporated herein by reference is
1986 between Adelphia and Daniel R. Exhibit 10.15 to Adelphia's
Milliard. Registration Statement No. 33-6974 on
Form S-1.
10.6 Pre-Incorporation and Shareholder Re- Incorporated herein by reference is
strictive Agreement between Adelphia, Exhibit 10.5 to Registration Statement
Paul D. Fajerski, Charles R. Drenning No. 333-06957 on Form S-4.
and Randolph S. Fowler.
10.7 Term Loan Note dated May 10, 1996 be- Incorporated herein by reference is
tween Charles R. Drenning in favor of Exhibit 10.6 to Registration Statement
Registrant in the amount of No. 333-06957 on Form S-4.
$1,000,000.
10.8 Term Loan Note dated May 10, 1996 be- Incorporated herein by reference is
tween Paul D. Fajerski in favor of Exhibit 10.7 to Registration Statement
Registrant in the amount of No. 333-06957 on Form S-4.
$1,000,000.
10.9 Term Loan Note dated May 10, 1996 be- Incorporated herein by reference is
tween Randolph S. Fowler in favor of Exhibit 10.8 to Registration Statement
Registrant in the amount of No. 333-06957 on Form S-4.
$1,000,000.
10.10 Term Loan and Stock Pledge Agreement Incorporated herein by reference is
dated May 10, 1996 between the Regis- Exhibit 10.9 to Registration Statement
trant and Charles R. Drenning. No. 333-06957 on Form S-4.
10.11 Term Loan and Stock Pledge Agreement Incorporated herein by reference is
dated May 10, 1996 between the Regis- Exhibit 10.10 to Registration
trant and Paul D. Fajerski. Statement No. 333-06957 on Form S-4.
10.12 Term Loan and Stock Pledge Agreement Incorporated herein by reference is
dated May 10, 1996 between the Regis- Exhibit 10.11 to Registration
trant and Randolph S. Fowler. Statement No. 333-06957 on Form S-4.
10.13 Letter Agreement dated March 19, 1996 Incorporated herein by reference is
between the Registrant, Charles R. Exhibit 10.12 to Registration
Drenning, Paul D. Fajerski, Randolph Statement No. 333-06957 on Form S-4.
S. Fowler and Adelphia.
10.14 Warrant Agreement dated as of April Incorporated herein by reference is
15, 1996, by and among Hyperion Tele- Exhibit 10.13 to Registration
communications, Inc. and Bank of Mon- Statement No. 333-06957 on Form S-4.
treal Trust Company.
10.15 Warrant Registration Rights Agreement Incorporated herein by reference is
dated as of April 15, 1996, by and Exhibit 10.14 to Registration
among Hyperion Telecommunications, Statement No. 333-06957 on Form S-4.
Inc. and the Initial Purchasers.
10.16 Form of Management Agreement. Incorporated herein by reference is
Exhibit 10.15 to Registration
Statement No. 333-06957 on Form S-4.
10.17 1996 Long-Term Compensation Plan. To be filed by amendment.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REFERENCE
----------- ----------- ---------
<C> <S> <C>
21.1 Subsidiaries of the Registrant. Incorporated herein by reference is
Exhibit 21.1 to Registration Statement
No. 333-06957 on Form S-4.
23.1 Consent of Buchanan Ingersoll Profes- To be filed by amendment.
sional Corporation (contained in its
opinion filed as Exhibit 5.1 hereto).
23.2 Consent of Deloitte & Touche LLP. Filed herewith.
24.1 Power of Attorney. Previously filed.
27.1 Financial Data Schedule. Incorporated herein by reference is
Exhibit 27.01 to Registrant's Form 10-
Q for the quarter ended June 30, 1996.
</TABLE>
<PAGE>
EXHIBIT NO. 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-13663 of Hyperion Telecommunications, Inc. of our report dated June 28,
1996 (October 3, 1996 as to Notes 4 and 5, the sixth paragraph of Note 6 and
the last paragraph of Note 7) (which expresses an unqualified opinion and
includes an explanatory paragraph referring to a change in the method of
accounting for income taxes), appearing in the Prospectus, which is a part of
this Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
October 11, 1996
