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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-38965
OFFER TO EXCHANGE
12 7/8% SERIES B SENIOR EXCHANGEABLE REDEEMABLE PREFERRED STOCK DUE 2007
FOR ANY AND ALL OUTSTANDING 12 7/8% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED
STOCK DUE 2007
OF
HYPERION TELECOMMUNICATIONS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON DECEMBER 8, 1997, UNLESS EXTENDED
Hyperion Telecommunications, Inc. ("Hyperion", the "Company", the
"Registrant" or the "Issuer") hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (which together constitute the "Exchange Offer"), to exchange one
share of its 12 7/8% Series B Senior Exchangeable Redeemable Preferred Stock
due 2007 of the Registrant (the "New Preferred Stock") for each outstanding
share of its 12 7/8% Senior Exchangeable Redeemable Preferred Stock due 2007
(the "Old Preferred Stock," and collectively with the New Preferred Stock, the
"Preferred Stock"). As of the date of this Prospectus, 200,000 shares of Old
Preferred Stock were outstanding. The terms of the New Preferred Stock and the
Old Preferred Stock are substantially identical in all material respects,
except for certain transfer restrictions and registration rights; and except
that holders of Old Preferred Stock are entitled to receive Liquidated Damages
(as defined) if (a) the Registrant fails to file any of the registration
statements required by the Registration Rights Agreement (as defined) on or
before the date specified for such filing, (b) any of such registration
statements is not declared effective by the Securities and Exchange Commission
(the "Commission") on or prior to the date specified for such effectiveness
(the "Effectiveness Target Date"), (c) the Registrant fails to consummate the
Exchange Offer within 30 business days of the Effectiveness Target Date with
respect to the Exchange Offer registration statement, or (d) a shelf
registration statement or the registration statement of which this Prospectus
forms a part (the "Exchange Offer Registration Statement") is declared
effective but thereafter ceases to be effective or usable in connection with
resales of Transfer Restricted Securities (as defined) during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above is a "Registration Default"). In the event of a
Registration Default, the Registrant is required to pay Liquidated Damages to
each holder of Transfer Restricted Securities for the period that the
Registration Default continues, with respect to the first 90-day period
immediately following the occurrence of such Registration Default, at a rate of
0.25% per annum on the principal amount of Transfer Restricted Securities held
by such holder. Such dividend rate will increase by an additional 0.25% per
annum at the beginning of each subsequent 90-day period up to a maximum
aggregate increase of 1.0% per annum until such Registration Defaults have been
cured, at which time the dividend rate borne by the Old Preferred Stock will be
reduced to the original dividend rate. See "Description of the Exchange
Debentures--Registration Rights; Liquidated Damages."
(Continued on following page)
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS NOVEMBER 6, 1997
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The Exchange Offer is being made to satisfy certain obligations of the
Registrant under the Registration Rights Agreement, dated as of October 9,
1997, among the Registrant and the Initial Purchaser (the "Registration Rights
Agreement"). Upon consummation of the Exchange Offer, holders of Old Preferred
Stock that were not prohibited from participating in the Exchange Offer and
did not tender their Old Preferred Stock will not have any registration rights
under the Registration Rights Agreement with respect to such nontendered Old
Preferred Stock and, accordingly, such Old Preferred Stock will continue to be
subject to the restrictions on transfer contained in the legend thereon.
Based on interpretations by the staff of the Commission with respect to
similar transactions, including no action letters, the Registrant believes
that the New Preferred Stock issued pursuant to the Exchange Offer in exchange
for Old Preferred Stock may be offered for resale, resold and otherwise
transferred by any holder of such New Preferred Stock (other than any such
holder which is an "affiliate" of the Registrant within the meaning of Rule
405 under the Securities Act of 1933, as amended (the "Securities Act"))
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such New Preferred Stock is acquired in the
ordinary course of such holder's business, such holder has no arrangement or
understanding with any person to participate in the distribution of such New
Preferred Stock and neither the holder nor any other person is engaging in or
intends to engage in a distribution of the New Preferred Stock. Each broker-
dealer that receives New Preferred Stock for its own account in exchange for
Old Preferred Stock must acknowledge that it will deliver a prospectus in
connection with any resale of its New Preferred Stock. A broker-dealer who
acquires Old Preferred Stock directly from the Registrant cannot exchange such
Old Preferred Stock in the Exchange Offer. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of the
New Preferred Stock received in exchange for the Old Preferred Stock acquired
by the broker-dealer as a result of market-making activities or other trading
activities. The Registrant has agreed that they will make this Prospectus
available to any broker-dealer for use in connection with any such resale for
a period of 365 days after the Exchange Date (as defined) or, if earlier,
until all participating broker-dealers have so resold. See "Plan of
Distribution."
The New Preferred Stock will evidence the same equity interests as the Old
Preferred Stock and will be entitled to the benefits of the Certificate of
Designation (as defined) which governs both the Old Preferred Stock and the
New Preferred Stock. For a more complete description of the terms of the New
Preferred Stock, see "Description of Securities" and "Description of the
Exchange Debentures." There will be no cash proceeds to the Registrant from
the Exchange Offer. The Preferred Stock will rank junior in right of payment
to all indebtedness and other obligations of the Company, its Subsidiaries and
Joint Ventures (as defined). As of June 30, 1997, as adjusted to give effect
to the issuance and sale by the Company of its 12 1/4% Senior Secured Notes
due 2004 (the "Senior Secured Notes"), the Preferred Stock would have been
junior in right of payment to $529.4 million of indebtedness (excluding trade
payables and other accrued liabilities) of the Company, its Subsidiaries and
Joint Ventures, such amount at September 30, 1997 would increase by
approximately $6.8 million related to the Accreted Value (as defined) with
respect to the Senior Secured Notes. See "Description of Securities--
Description of Preferred Stock--Ranking." Subject to compliance with the law,
the Company will have the ability to issue additional shares of Preferred
Stock to pay dividends. See "Description of Securities--Description of
Preferred Stock--Ranking."
The Old Preferred Stock was originally issued and sold on October 9, 1997 in
an offering of 200,000 shares of Old Preferred Stock at $1,000 liquidation
preference per share (the "Offering"). The Offering was exempt from
registration under the Securities Act in reliance upon the exemptions provided
by Rule 144A, Section 4(2) and Regulation S of the Securities Act.
Accordingly, the Old Preferred Stock may not be reoffered, resold or otherwise
pledged, hypothecated or transferred in the United States unless so registered
or unless an exemption from the registration requirements of the Securities
Act and applicable state securities laws is available.
The Registrant has not entered into any arrangement or understanding with
any person to distribute the New Preferred Stock to be received in the
Exchange Offer, and to the best of the Registrant's information and belief,
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each person participating in the Exchange Offer is acquiring the New Preferred
Stock in its ordinary course of business and has no arrangement or
understanding with any person to participate in the distribution of the New
Preferred Stock to be received in the Exchange Offer. Any person participating
in the Exchange Offer who does not acquire the New Preferred Stock in the
ordinary course of business: (i) cannot rely on the above referenced no action
letters; (ii) cannot tender its Old Preferred Stock in the Exchange Offer; and
(iii) must comply with the registration and prospectus delivery requirements
of the Securities Act.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The Exchange Offer will
expire at 5:00 p.m., New York City time, on December 8, 1997, unless extended
(as it may be so extended, the "Expiration Date"), provided that the Exchange
Offer shall not be extended beyond 30 business days from the date of this
Prospectus. The date of acceptance for exchange of the Old Preferred Stock for
the New Preferred Stock (the "Exchange Date") will be the first business day
following the Expiration Date or as soon as practicable thereafter. Old
Preferred Stock tendered pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date; otherwise such tenders are irrevocable.
Prior to this Exchange Offer, there has been no public market for the
Preferred Stock. The Old Preferred Stock has traded on the PORTAL Market. If a
market for the New Preferred Stock should develop, the New Preferred Stock
could trade at a discount from its initial offering price. The Company does
not intend to apply for listing of the New Preferred Stock on any securities
exchange or in any automated quotation system. There can be no assurance that
an active trading market for the New Preferred Stock will develop.
----------------
AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-4 under the Securities Act with respect to the Exchange
Offer. This Prospectus, which is part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Exchange Offer, reference is made to such Registration
Statement and the exhibits and schedules filed as part thereof. The
Registration Statement and the exhibits and schedules thereto filed with the
Commission may be inspected without charge at the Public Reference Section of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, 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.
Electronic registration statements made through the Electronic Data Gathering,
Analysis, and Retrieval system are publicly available through the Commission's
Web site (http://www.sec.gov), which is maintained by the Commission and which
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE REGISTRANT ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD PREFERRED STOCK IN ANY
JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT
BE IN COMPLIANCE WITH THE SECURITIES LAWS OF SUCH JURISDICTION.
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PROSPECTUS SUMMARY
The following information is qualified in its entirety by the more detailed
information and financial statements and notes thereto, appearing elsewhere in
this Prospectus or incorporated by reference herein. 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 22 telecommunications networks in which the Company, as of September
1, 1997, had ownership interests through 17 Operating Companies (which, as
defined herein, are (a) wholly owned or majority-owned subsidiaries of the
Company or (b) joint ventures, partnerships, corporations or limited liability
companies managed by the Company and in which the Company holds an equity
interest of 50% or less). Unless otherwise specified, information regarding the
networks that is contained in this Prospectus is as of September 1, 1997, at
which time the Company had ownership interests in 22 networks, including the
networks in Albany and Binghamton, New York (in which, however, the Company no
longer holds an ownership interest as a result of the consummation of the TWEAN
Agreement on September 12, 1997; see "--Recent Developments"). As of the date
of this Prospectus, 17 of the 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." The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements. Certain information included or
incorporated by reference in this Prospectus, including Management's Discussion
and Analysis of Financial Condition and Results of Operations, is forward-
looking, such as information relating to the effects of future regulation,
future capital commitments and the effects of competition. Such forward-looking
information involves important risks and uncertainties that could significantly
affect expected results in the future from those expressed in any forward-
looking statements made by, or on behalf of, the Company. These risks and
uncertainties include, but are not limited to, uncertainties relating to
economic conditions, acquisitions and divestitures, government and regulatory
policies, the pricing and availability of equipment, materials, inventories and
programming, technological developments and changes in the competitive
environment in which the Company operates. Persons participating in this
Exchange Offer are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
persons participating in this Exchange Offer should specifically consider the
various factors which could cause actual events or results to differ materially
from those indicated by such forward looking statements. Persons participating
in this Exchange Offer should carefully consider the factors set forth herein
under the caption "Risk Factors."
THE COMPANY
The Company is a leading facilities-based provider of local
telecommunications services with state-of-the-art fiber optic networks located
in regionally clustered markets primarily within the eastern half of the United
States. As of June 30, 1997, Hyperion's 17 operating networks served 35 cities
with approximately 3,640 route miles of fiber optic cable connecting 1,603
buildings and 106 local exchange carrier ("LEC") central offices. The Company's
22 networks (which includes five under construction) have generally been
developed by partnering with a local cable operator or utility provider (the
"Local Partner"), which has enabled the Company to finance its network
expansion at a significantly lower cost than other competitive local exchange
carriers ("CLECs") and to rapidly construct high-capacity fiber optic networks
which provide the Company broader coverage than other CLECs in its markets.
According to Company estimates, this broad network coverage enables the Company
to directly reach approximately 60% of the business access lines currently in
service in its markets. In the markets where the Company's 22 networks are
operating or under construction, as of June 30, 1997, the Company believes its
addressable market opportunity was approximately $16.2 billion annually,
substantially all of which is currently serviced by the incumbent LECs and
interexchange carriers ("IXCs"). This addressable market estimate does not
include the enhanced data services market which the Company has entered, or the
Internet access market which it plans to enter in the near future.
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The Company's current service offerings include switched local dial tone (in
13 markets), enhanced data services (in seven markets), including frame relay,
high speed Internet access, video conferencing, dedicated access and long
distance access. The Company also plans to be an Internet Service Provider
("ISP") in a majority of its markets by the end of fiscal 1998. In addition,
the Company will begin selling long distance services by the end of 1997
through a resale agreement with an IXC and expects to begin offering
facilities-based long distance services through the regional interconnection of
the Company's networks in the near future. With 75% of all U.S.
telecommunications intraLATA and interLATA toll traffic terminating, on
average, within 300 miles of its origination point, the Company believes that
the breadth of its networks, their regional clustering, and the current and
planned interconnection of the networks will enable the Company to originate
and terminate a significant proportion of its customers' communications traffic
over its own networks, rather than relying primarily on the network of the
incumbent LEC.
Hyperion's targeted customer base consists of small, medium and large
businesses, governmental and educational end users and IXCs. Some of these end
user customers include America Online, Sprint, Hershey Medical Center and HCA
International. The Company services its customers through a dedicated sales
force of approximately 70 highly trained professionals focused on selling the
Company's portfolio of service offerings. The Company expects to increase its
sales force and marketing efforts significantly by the end of the fiscal year.
Management believes that the Company's ability to utilize its extensive network
clusters to offer a single source solution for all of its customers'
telecommunications needs provides it with a significant competitive advantage
over other CLECs. Further, Hyperion believes it can continue to attract end
user customers by offering (i) a single point of contact for billing,
installation and service coordination, (ii) high-capacity fiber optic network
connection directly to all or substantially all of a customer's premises due to
the breadth of the Company's network coverage and (iii) high quality,
solutions-oriented customer service. The Company also believes that major IXCs
such as AT&T, MCI and Sprint will seek to offer their business customers an
integrated package of switched local and long distance services using the
networks of CLECs such as Hyperion. The Company believes that it is well
positioned to capitalize on this opportunity as its networks generally offer
the broadest coverage in their markets, which is attractive to both end user
customers and major IXCs.
The Company initiated its switched services deployment plan in 1997 and
currently provides switched services in 13 markets, nine of which were placed
in operation during the last five months, with switching for the remaining two
operating markets (excluding Albany and Binghamton, New York) expected to be
operational by the end of 1997. In the markets it currently serves, the Company
estimates that there are approximately 11 million business access lines in
service. The Company has experienced initial success in the sale of access
lines with approximately 16,000 access lines sold as of September 30, 1997, of
which approximately 5,500 lines are installed and the remainder are scheduled
for service by the end of 1997. The timing of certain installations may be
extended due to necessary upgrading of customer facilities, the complexity of
installation or customer scheduling requirements. Delivery of on-network
switched services is expected to provide faster, more reliable access line
provisioning and more responsive customer service and monitoring. The Company
believes that its large upfront capital investment in its networks, coupled
with the selective use of unbundled network elements, will provide higher
operating margins than can be achieved by other CLECs.
Since inception in October 1991 through June 30, 1997, the Company and its
partners have invested approximately $339.4 million to build and develop the
network infrastructure and to fund operations. As of June 30, 1997, the gross
property, plant and equipment of the Company, its networks and the Company's
Network Operations and Control Center (the "NOCC"), including the Company's
investment in Telergy (see "--Recent Developments"), was approximately $286.0
million. The Company anticipates that its future capital expenditure
requirements will be largely based on a selective network build-out strategy
that combines both on-network and off-network connections to customers.
The Company has increased, and intends to continue to increase, its ownership
interests in Operating Companies when it can do so on attractive economic
terms. This goal has been facilitated by the substantial completion of a number
of Hyperion's networks along with the desire of certain of its current Local
Partners to
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reduce their telecommunications investments and focus on their core cable
operations. For example, the Company has entered into agreements to increase or
has recently increased its ownership interest to 100% in Operating Companies in
five of its markets. See "--Ownership of the Company and the Operating
Companies." As a result, since December 31, 1995, the Company's weighted
average ownership interest (based on gross property, plant and equipment) in
its Operating Companies has, after giving effect to pending definitive
agreements, increased to 66.4% from 34.5%.
GROWTH STRATEGY
The Company's objective is to be the leading local telecommunications
services provider to small, medium and large businesses, governmental and
educational end users and IXCs within its markets. To achieve this objective,
the Company has pursued a facilities-based strategy to provide extensive, high
capacity network coverage and to broaden the range of telecommunications
products and services it offers to targeted customers. The principal elements
of the Company's growth strategy include the following:
Provide Bundled Package of Telecommunications Services. The Company believes
that a significant portion of business and government customers prefer a
single-source telecommunications provider that delivers a full range of
efficient and cost effective solutions to meet their telecommunications needs.
These customers require reliability, high quality, broad geographic coverage,
end-to-end service, solutions-oriented customer service and the timely
introduction of new and innovative services. The Company believes it will be
able to continue to compete effectively for end users by offering superior
reliability, product diversity, service and custom solutions to end user needs
at competitive prices. The Company also offers its local services to IXCs and
has entered into national service agreements with AT&T and MCI to be their
preferred supplier of dedicated access and switched access transport services.
See "Business--AT&T Certification" and "--Recent Developments--Preferred
Provider Alliance with MCI."
Expand Solutions-Oriented Sales Effort. The Company provides an integrated
solutions approach to satisfy its end users' communications requirements
through a well trained and focused team of direct sales and engineering support
professionals. In its marketing efforts, the Company emphasizes its extensive
fiber optic network, which provides the reach and capacity to address the needs
of its customers more effectively than many of its competitors who rely solely
upon leased facilities or who have limited network build-outs in their markets.
The Company intends to double the size of its current direct sales force of
over 70 persons by the end of the year and increase the number of its customer
care professionals from 44 to approximately 70 as it increases the breadth of
its product offerings to satisfy the growing communications needs of its
customers. Further, by the end of 1997, the Company expects to initiate direct
marketing and sales of local communications services on an unbundled loop basis
to retail and small business customers in certain markets, generally offering
such services under either the Hyperion name or a co-branded name that includes
the name of the particular Local Partner.
Continue to Increase Broad Based Network Clusters and Interconnect
Networks. The Company intends to build on its extensive networks by (i)
expanding its networks into nearby areas that are under-served by its
competitors, (ii) establishing new networks in close proximity to existing
markets and (iii) interconnecting the networks within its regional clusters.
The Company believes that clustering and interconnecting its large networks
enables it to (i) carry a greater amount of traffic on its own networks, which
leverages the fixed cost structure of its networks, thereby increasing revenues
and margins, (ii) take advantage of economies of scale in management, network
operations and sales and marketing, (iii) increase the number of customers that
the Company's networks can service and (iv) increase the networks' ability to
provide reliable, end-to-end connectivity on a regionally focused basis.
Create Additional Partnerships with Utility Companies. The Company intends to
continue to construct new networks either through partnerships or long-term
fiber lease agreements with utility companies, which significantly reduces the
cost and time required to construct a fiber optic network. This approach
enables the
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Company to offer services more rapidly as well as lower the overhead costs
associated with operating and maintaining a network. Utility companies are
attractive partners for the Company due to their (i) contiguous and broad
geographic coverage with extensive conduits and rights-of-way in both business
and residential areas, (ii) significant access to capital resources, (iii)
existing relationships with business and residential customers and (iv)
reputation for reliability and quality customer service. In turn, the Company
believes that it is an attractive partner for utility companies because it can
offer them a significant stake in its networks, both from a financial and
operational perspective, and provide network operations management expertise.
RECENT DEVELOPMENTS
12 7/8% Senior Exchangeable Redeemable Preferred Stock Offering. On October
9, 1997, Hyperion issued $200.0 million aggregate liquidation preference of 12
7/8% Senior Exchangeable Redeemable Preferred Stock due 2007 (the "Preferred
Stock") primarily to qualified institutional investors in a private placement
(the "Preferred Stock Offering" or the "Offering"). The net proceeds of
approximately $194.5 million from this issuance will be used to fund the
acquisition of increased ownership interests in certain of its networks, for
capital expenditures, including the construction and expansion of new and
existing networks, and for general corporate and working capital purposes.
Pending such uses, the net proceeds will be invested in cash, short-term
investments and other cash equivalents. Through October 15, 2002, dividends on
the Preferred Stock may be paid, at Hyperion's option, in cash or additional
shares of Preferred Stock. The Preferred Stock is the subject of the within
described Exchange Offer.
Offering of Senior Secured Notes. On August 27, 1997, the Company announced
the sale of $250.0 million aggregate principal amount of 12 1/4% Senior Secured
Notes due 2004 (the "Senior Secured Notes") in a private placement exempt from
registration (the "Senior Secured Note Offering"). The Company secured the
Senior Secured Notes through the pledge of the common stock of certain of its
wholly-owned subsidiaries. Of the net proceeds of the Senior Secured Note
Offering of approximately $243.3 million, $83.4 million was placed in an escrow
account to provide for payment in full when due of the first six scheduled
interest payments on the Senior Secured Notes, with the remainder of the net
proceeds to be used to fund the acquisition of increased ownership interests in
certain of its networks, the continued expansion of its networks, and working
capital.
Preferred Provider Alliance with MCI. On June 13, 1997, the Company entered
into agreements (collectively, the "MCI Preferred Provider Agreement") with
MCImetro Access Transmission Services, Inc. (together with its affiliate, MCI
Communications, "MCI"). Pursuant to these agreements, the Company is designated
MCI's preferred provider of new end user dedicated access circuits and of end
user dedicated access circuits resulting from conversions from the incumbent
LEC in the Company's markets. In addition, Hyperion has a right of first
refusal to provide MCI all new dedicated local network access circuits such as
POP-to-POP or POP-to-LSO connections.
Entergy Agreement. On April 24, 1997, the Company and Entergy Corporation
("Entergy") formed three joint ventures in which the Company, through three of
its wholly owned Subsidiaries, and Entergy each own a 50% interest (the
"Entergy-Hyperion Joint Ventures"). The Entergy-Hyperion Joint Ventures will
offer competitive telecommunications services primarily to commercial customers
in the Little Rock, Arkansas, Jackson, Mississippi, and Baton Rouge, Louisiana,
metropolitan areas (the "Entergy Networks"). In addition, they intend to offer
a full range of switched telecommunications services, dedicated access to long
distance carriers and private line services.
Fiber Interconnection of Northeast Cluster. Pursuant to agreements with
Telergy, Inc. ("Telergy"), the Company will lease dark fiber to connect certain
of its New York networks. Telergy has commenced construction of a fiber optic
backbone network which is scheduled to be completed in stages, with completion
of Buffalo to Syracuse in September 1997, completion of Syracuse to Albany
expected by the end of 1997, and final completion of Albany to New York City
expected by the end of 1999.
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Changes in Network Ownership.
. The Company has entered into purchase agreements (collectively, the "New
Jersey Agreement") dated October 31, 1997 with subsidiaries of Tele-
Communications, Inc. ("TCI") and Sutton Capital Associates, Inc.
("Sutton") to increase its ownership interests in the New Brunswick and
Morristown, NJ networks to 100%.
. On August 11, 1997, the Company entered into agreements (collectively,
the "TCI Agreement") with certain subsidiaries of Tele-Communications,
Inc. ("TCI") pursuant to which the Company will purchase all of TCI's
interest in the Operating Company that owns the Louisville and Lexington
networks.
. On August 4, 1997, the Company entered into an agreement with Lenfest
Telephony ("Lenfest") to increase its interest in the Harrisburg
Operating Partnership to 100%.
. On May 8, 1997, the Company entered into agreements (collectively, the
"TWEAN Agreement") with Time Warner Entertainment Advance/Newhouse and
Advance/Newhouse Partnership (collectively "TWEAN") to, among other
things, consolidate the Company's interests in New York state by
increasing its ownership interest in the Syracuse network to 100%. On
September 12, 1997, the Company consummated the TWEAN Agreement and
thereby (i) increased its ownership interests in the Buffalo and
Syracuse networks to 60% and 100%, respectively, and (ii) eliminated its
ownership interests in the Albany and Binghamton networks.
. Upon the consummation of the TCI Agreement, the Company will increase
its ownership interest in the Buffalo network to 100%.
These transactions are consistent with the Company's goal to own at least a
50% interest in each of its Operating Companies and to dispose of its interests
in those in which acquiring a controlling interest is not economically
attractive. The Company may consider similar transactions from time to time in
its other markets. For an additional discussion of Recent Developments, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Recent Developments."
OWNERSHIP OF THE COMPANY AND THE OPERATING COMPANIES
The Company is an 88% owned subsidiary of Adelphia Communications Corporation
("Adelphia"), the seventh largest cable television company in the United States
which, as of June 30, 1997, owned or managed cable television systems that
served approximately 1.9 million subscribers in 12 states. The balance of the
Company is currently owned by senior executives of the Company. As of September
1, 1997, the Company's 22 networks were owned through (i) partnerships or
limited liability companies with Local Partners (the "Operating Partnerships"),
(ii) three wholly owned subsidiaries of the Company, (iii) one corporation in
which the Company is a minority shareholder and (iv) one company in which the
Company is the majority equityholder (the entities described in clauses (ii),
(iii) and (iv) are collectively referred to as the "Operating Corporations,"
and the Operating Corporations and the Operating Partnerships are collectively
referred to 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.
The Company's executive offices are located at Main at Water Street,
Coudersport, Pennsylvania 16915, and its telephone number is (814) 274-9830.
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The following is an overview of the Company's networks and respective
ownership interests as of September 1, 1997.
<TABLE>
<CAPTION>
ACTUAL OR ACTUAL PRO FORMA
EXPECTED DATE HYPERION HYPERION
COMPANY NETWORKS OF OPERATION(A) INTEREST INTEREST(B) LOCAL PARTNER(S)
- ---------------- --------------- -------- ----------- ----------------------------
<S> <C> <C> <C> <C>
Northeast Cluster
Vermont.................... 11/94 100.0% 100.0%(h) (c)
Syracuse, NY............... 8/92 50.0 100.0(h) Time Warner/Advance(d)
Buffalo, NY................ 1/95 40.0 100.0(h) Tele-Communications, Inc.
Time Warner/Advance(c)
Albany, NY................. 2/95 50.0 -- Time Warner/Advance(d)
Binghamton, NY............. 3/95 20.0 -- Time Warner/Advance(d)
Mid-Atlantic Cluster
Charlottesville, VA........ 11/95 100.0 100.0 (c)
Scranton/Wilkes-Barre, PA.. 12/97 100.0 100.0 (c)
Harrisburg, PA............. 4/95 50.0 100.0 Lenfest Telephony
Philadelphia, PA........... 8/96 50.0 50.0 PECO Energy(e)
Allentown/Bethlehem/Easton/
Reading, PA ("ABER")...... 12/97 50.0 50.0 PECO Energy(e)
York, PA................... 5/97 50.0 50.0 Susquehanna Cable
Richmond, VA............... 9/93 37.0 37.0 Media One
Morristown, NJ............. 7/96 19.7 19.7 Tele-Communications, Inc.(f)
New Brunswick, NJ.......... 11/95 19.7 19.7 Tele-Communications, Inc.(f)
Mid-South Cluster
Lexington, KY.............. 6/97 50.0 100.0(h) Tele-Communications, Inc.(g)
Louisville, KY............. 3/95 50.0 100.0(h) Tele-Communications, Inc.(g)
Nashville, TN.............. 11/94 95.0 95.0(h) InterMedia Partners
Baton Rouge, LA............ 12/97 50.0 50.0 Entergy
Jackson, MS................ 12/97 50.0 50.0 Entergy
Little Rock, AR............ 12/97 50.0 50.0 Entergy
Other Networks
Wichita, KS................ 9/94 49.9 49.9 Gannett
Jacksonville, FL........... 9/92 20.0 20.0(h) Media One
Weighted Average
Ownership(i)............... 56.8 66.4
</TABLE>
- --------
(a) Refers to the date on which (i) the network is connected to at least one
IXC POP, (ii) the network is capable of accepting traffic from IXCs and end
users, (iii) the Company's central office is fully functional and (iv) the
initial network SONET fiber ring has been completed.
(b) Gives effect to pending agreements which provide for the Company to
increase or decrease its ownership interests in its networks. The Company
is permitted to reenter the markets in which it has eliminated its
ownership interests and intends to reenter the Albany market by April 1998.
As of the consummation of the TWEAN Agreement on September 12, 1997, the
Company's interests in the Buffalo and Syracuse networks increased to 60%
and 100%, respectively, and the Company's interests in the Albany and
Binghamton networks were eliminated. See "Recent Developments."
(c) Adelphia or its affiliates lease fiber capacity to the Operating Companies
in these networks.
(d) The interests in the Albany, Binghamton and Syracuse networks are all owned
by one Operating Company.
(e) The interests in the Philadelphia and ABER networks are owned by one
Operating Company.
(f) 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.
(g) The interests in the Lexington and Louisville networks are owned by one
Operating Company.
(h) Represents a network that is owned by an Operating Company or a subsidiary,
all of the Capital Stock of which is or will be pledged by the Company as
security for the Senior Secured Notes.
(i) Based upon gross property, plant and equipment of the Company and the
Operating Companies.
9
<PAGE>
THE EXCHANGE OFFER
Securities Offered.......... Up to $200,000,000 aggregate liquidation
preference of 12 7/8% Series B Senior
Exchangeable Redeemable Preferred Stock due
2007 of the Company (the "New Preferred
Stock," and collectively with the Old
Preferred Stock, the "Preferred Stock"). The
terms of the New Preferred Stock and the Old
Preferred Stock are substantially identical
in all material respects, except for certain
transfer restrictions, registration rights
and liquidated damages ("Liquidated Damages")
for Registration Defaults relating to the Old
Preferred Stock which will not apply to the
New Preferred Stock. See "Description of
Securities" and "Description of the Exchange
Debentures."
The Exchange Offer.......... The Registrant is offering to exchange one
share of New Preferred Stock for each share
of Old Preferred Stock. See "The Exchange
Offer" for a description of the procedures
for tendering Old Preferred Stock. The
Exchange Offer satisfies the registration
obligations of the Registrant under the
Registration Rights Agreement. Upon
consummation of the Exchange Offer, holders
of Old Preferred Stock that were not
prohibited from participating in the Exchange
Offer and did not tender their Old Preferred
Stock will not have any registration rights
under the Registration Rights Agreement with
respect to such nontendered Old Preferred
Stock and, accordingly, such Old Preferred
Stock will continue to be subject to the
restrictions on transfer contained in the
legend thereon.
Tenders, Expiration Date;
Withdrawal; Exchange Date.. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on December 8, 1997, or
such later date and time to which it is
extended (as it may be so extended, the
"Expiration Date"), provided that the
Exchange Offer shall not be extended beyond
30 business days from the date of this
Prospectus. Tender of Old Preferred Stock
pursuant to the Exchange Offer may be
withdrawn and retendered at any time prior to
the Expiration Date. Any Old Preferred Stock
not accepted for exchange for any reason will
be returned without expense to the tendering
holder as promptly as practicable after the
expiration or termination of the Exchange
Offer. The date of acceptance for exchange of
all Old Preferred Stock properly tendered and
not withdrawn for New Preferred Stock (the
"Exchange Date") will be the first business
day following the Expiration Date or as soon
as practicable thereafter.
Accumulated Dividends on
the New Preferred Stock.... The New Preferred Stock will be entitled to
dividends from the most recent date to which
dividends have been paid on the Old Preferred
Stock or, if no such payment has been made,
from October 9, 1997.
Federal Income Tax
Considerations.............. The Exchange Offer will not result in any
income, gain or loss to the holders of
Preferred Stock or the Company for federal
income tax purposes. See "Certain Federal
Income Tax Considerations."
10
<PAGE>
Use of Proceeds............. There will be no proceeds to the Company from
the exchange of New Preferred Stock for the
Old Preferred Stock pursuant to the Exchange
Offer.
Exchange Agent.............. American Stock Transfer and Trust Company,
the Transfer Agent, is serving as exchange
agent (the "Exchange Agent") in connection
with the Exchange Offer.
CONSEQUENCES OF EXCHANGING OR FAILURE TO EXCHANGE OLD PREFERRED STOCK PURSUANT
TO THE EXCHANGE OFFER
Generally, holders of Old Preferred Stock (other than any holder who is an
"affiliate" of the Registrant within the meaning of Rule 405 under the
Securities Act) who exchange their Old Preferred Stock for New Preferred Stock
pursuant to the Exchange Offer may offer their New Preferred Stock for resale,
resell their New Preferred Stock, and otherwise transfer their New Preferred
Stock without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided such New Preferred Stock is acquired
in the ordinary course of the holder's business, such holders have no
arrangement with any person to participate in a distribution of such New
Preferred Stock and neither the holder nor any other person is engaging in or
intends to engage in a distribution of the New Preferred Stock. A broker-dealer
who acquired Old Preferred Stock directly from the Registrant cannot exchange
such Old Preferred Stock in the Exchange Offer. Each broker-dealer that
receives New Preferred Stock for its own account in exchange for Old Preferred
Stock must acknowledge that it will deliver a prospectus in connection with any
resale of its New Preferred Stock. See "Plan of Distribution." To comply with
the securities laws of certain jurisdictions, it may be necessary to qualify
for sale or register the New Preferred Stock prior to offering or selling such
New Preferred Stock. The Company is required, under the Registration Rights
Agreement, to register the New Preferred Stock in any jurisdiction requested by
the holders, subject to certain limitations. Upon consummation of the Exchange
Offer, holders that were not prohibited from participating in the Exchange
Offer and did not tender their Old Preferred Stock will not have any
registration rights under the Registration Rights Agreement with respect to
such nontendered Old Preferred Stock, and accordingly, such Old Preferred Stock
will continue to be subject to the restrictions on transfer contained in the
legend thereon. In general, Old Preferred Stock may not be offered or sold,
unless registered under the Securities Act and applicable state securities
laws. See "The Exchange Offer--Consequences of Failure to Exchange."
11
<PAGE>
SUMMARY DESCRIPTION OF EXCHANGEABLE PREFERRED STOCK AND EXCHANGE DEBENTURES
The Exchangeable Preferred Stock
Issuer.............. Hyperion Telecommunications, Inc.
Securities Offered.. 200,000 shares of 12 7/8% Senior Exchangeable
Redeemable Preferred Stock due 2007 (the "New
Preferred Stock", and collectively with the Old
Preferred Stock, the "Preferred Stock").
Liquidation
Preference.......... $1,000 per share.
Mandatory
Redemption.......... The Company is required to redeem all of the shares of
Preferred Stock outstanding on October 15, 2007 at a
redemption price equal to 100% of the Liquidation
Preference thereof, plus, without duplication,
accumulated and unpaid dividends to the date of
purchase, subject to the legal availability of funds
therefor.
Optional
Redemption.......... The Company may redeem the shares of Preferred
Stock at its option; (i) in whole or in part, at
any time on or after October 15, 2002 at the
redemption prices set forth herein, plus, without
duplication, accumulated and unpaid dividends to
the date of redemption; and (ii) prior to October
15, 2000, in part, out of the net cash proceeds of
one or more Qualified Equity Offerings (as defined)
in an amount not to exceed 35% of the initial
aggregate Liquidation Preference of the Preferred
Shares originally issued in the Offering at a
redemption price equal to 112.875% of the
Liquidation Preference thereof, plus, without
duplication, accumulated and unpaid dividends to
the date of redemption; provided that after any
such redemption, there are outstanding shares of
Preferred Stock having an aggregate Liquidation
Preference of at least 65% of the initial aggregate
Liquidation Preference of the Preferred Stock
originally issued in the Offering.
Dividends........... Dividends will accrue from the Issue Date (as
defined) and will be payable quarterly commencing
January 15, 1998 at a rate per annum of 12 7/8% of
the Liquidation Preference thereof. Dividends may
be paid, at the Company's option, on any Dividend
Payment Date occurring on or before October 15,
2002 either in cash or by issuing additional fully
paid and nonassessable shares of Preferred Stock
with an aggregate Liquidation Preference equal to
the amount of such dividends. After October 15,
2002, dividends are payable only in cash.
Voting.............. Each share of Preferred Stock will be entitled to
one vote per share on all matters to be voted on
generally by stockholders. In addition, under
certain circumstances, including (i) amending
certain rights of the holders of the Preferred
Stock and (ii) the issuance of any class of equity
securities that ranks senior to or, in certain
circumstances, on a parity with the Preferred
Stock, the Preferred Stock will be entitled to vote
as a class. The Certificate of Designation (as
defined) will also provide that, if: (i) the
Company fails to pay dividends in cash or, to the
extent permitted by the Certificate of Designation,
by the issuance of additional Preferred Stock in
respect of six or more quarters in the aggregate
(whether or not consecutive); (ii) the Company
fails to comply with the Change of Control covenant
contained in the Certificate of Designation; or
(iii) the Company fails to comply with the
12
<PAGE>
other covenants contained in the Certificate of
Designation or make certain payments on its
indebtedness, holders of a majority of the
outstanding Preferred Stock, voting as a class,
will be entitled to elect a number of directors of
the Company equal to the lesser of two directors or
that number of directors constituting at least 25%
of the board of directors of the Company.
Exchange Provision.. The Preferred Stock will be exchangeable for
Exchange Debentures, at the Company's option,
subject to certain conditions, in whole, but not in
part, on any scheduled Dividend Payment Date.
Ranking............. The Preferred Stock will, with respect to dividend
rights and rights upon liquidation, winding-up and
dissolution of the Company, rank senior to all
Common Stock (as defined) of the Company.
Change of Control... In the event of a Change of Control, the Company
will be required to offer to purchase all
outstanding shares of Preferred Stock at a purchase
price equal to 101% of the Liquidation Preference
thereof, plus, without duplication, accumulated and
unpaid dividends to the date of purchase. The
Company does not currently have adequate financial
resources to effect a repurchase of the Preferred
Stock upon a Change of Control, and there can be no
assurance that the Company will have such resources
in the future. In addition, there are currently and
may be in the future restrictions contained in the
instruments evidencing indebtedness incurred by the
Company or its Subsidiaries which restrict or
prohibit the ability of the Company to effect any
repurchase of Preferred Stock required in
connection with a Change of Control.
Certain Covenants... The Certificate of Designation will contain
covenants that limit the ability of the Company,
its Subsidiaries and Joint Ventures to incur
Indebtedness and the ability of the Company to
merge or consolidate with or sell all or
substantially all of its assets to any other
person. The Certificate of Designation will contain
provisions that allow for the modification and
amendment of the covenants contained in the
Certificate of Designation by a vote of holders
owning a majority of the outstanding Preferred
Stock, including the covenant relating to a Change
of Control, except during the pendency of an Offer
to Purchase. In addition, the holders of a majority
of the outstanding shares of Preferred Stock, on
behalf of all holders of Preferred Stock, may waive
compliance by the Company with certain provisions
of the Certificate of Designation.
Registration
Rights.............. Hyperion has entered into a registration rights
agreement with the Initial Purchaser (the
"Registration Rights Agreement") pursuant to which
Hyperion agreed to file a registration statement
(the "Exchange Offer Registration Statement") with
respect to an offer to exchange the Old Preferred
Stock for a new issue of preferred stock of
Hyperion (the "New Preferred Stock") registered
under the Securities Act, with terms substantially
identical to those of the Old Preferred Stock (the
"Exchange Offer").
13
<PAGE>
The Exchange Debentures
Issue............... 12 7/8% Senior Subordinated Debentures due 2007
(the "Exchange Debentures") issuable in exchange
for the Preferred Stock in an aggregate principal
amount equal to the then aggregate Liquidation
Preference of the Preferred Stock, plus, without
duplication, accumulated and unpaid dividends to
the date fixed for the exchange thereof (the
"Exchange Date"), plus any additional Exchange
Debentures issued in lieu of cash interest.
Interest............ Interest on the Exchange Debentures will be payable
semiannually in cash or, at the option of the
Company, on or prior to October 15, 2002 in
additional Exchange Debentures, in arrears on each
April 15 and October 15, commencing on the first
such date.
Maturity............ October 15, 2007.
Ranking............. The Exchange Debentures will be subordinated to all
existing and future Senior Debt (as defined) of the
Company and effectively subordinated to obligations
of the Company's Subsidiaries and Joint Ventures.
As of June 30, 1997, as adjusted for the issuance
of the Senior Secured Notes there was approximately
$469.8 million of Senior Debt outstanding (such
amount at September 30, 1997 would increase by
approximately $6.8 million related to the Accreted
Value (as defined) with respect to the Senior
Notes), and $59.6 million of additional obligations
of the Company, its Subsidiaries and Joint Ventures
(excluding trade payables and accrued liabilities).
Optional
Redemption.......... The Company may, at its option, redeem the Exchange
Debentures: (i) in whole or in part, at any time on
or after October 15, 2002 at the redemption prices
set forth herein, plus, without duplication,
accrued and unpaid interest to the date of
redemption; and (ii) prior to October 15, 2000, in
part, out of the net cash proceeds of one or more
Qualified Equity Offerings in an amount up to an
aggregate principal amount of Exchange Debentures
equal to 35% of the initial aggregate Liquidation
Preference of the Preferred Stock originally issued
in the Offering at a redemption price equal to
112.875% of the principal amount thereof, plus,
without duplication, accrued and unpaid interest to
the date of redemption; provided, however, that
after any such redemption, the aggregate principal
amount of the Exchange Debentures outstanding must
equal at least 65% of the initial aggregate
Liquidation Preference of the Preferred Stock
originally issued in the Offering.
Change of Control... In the event of a Change of Control, the Company
will be required to offer to purchase all
outstanding Exchange Debentures at a purchase price
equal to 101% of the principal amount thereof,
plus, without duplication, accrued and unpaid
interest to the date of purchase. The Company does
not currently have adequate financial resources to
effect a repurchase of the Exchange Debentures upon
a Change of Control, and there can be no assurance
that the Company will have such resources in the
future. In addition, there are currently and may be
in the future restrictions contained in the
instruments evidencing indebtedness incurred by the
Company or its Subsidiaries which restrict or
prohibit the ability of the Company to effect any
repurchase of Exchange Debentures required in
connection with a Change of Control.
14
<PAGE>
Certain Covenants... The Indenture pursuant to which the Exchange
Debentures would be issued (the "Indenture") will
contain certain covenants that, among other things,
limit the ability of the Company, its Subsidiaries
and Joint Ventures to (i) incur additional
indebtedness, (ii) pay dividends or make certain
other restricted payments, (iii) permit
restrictions on the ability of subsidiaries to pay
dividends or make certain payments to the Company,
(iv) sell assets, (v) create certain liens, (vi)
enter into certain transactions with affiliates or
(vii) merge or consolidate with or sell all or
substantially all of its assets to any other
Person. The Indenture will contain provisions that
allow for the modification and amendment of the
covenants contained in the Indenture by a vote of
holders owning a majority of the Exchange
Debentures, including the covenant relating to a
Change of Control, except during the pendency of an
Offer to Purchase. In addition, the holders of a
majority in aggregate principal amount of the
Exchange Debentures, on behalf of all holders of
Exchange Debentures, may waive compliance by the
Company with certain restrictive provisions of the
Indenture. See "Description of the Exchange
Debentures--Amendment, Supplement and Waiver."
Registration
Rights.............. See "Description of the Exchange Debentures--
Registration Rights; Liquidated Damages" for a
description of the registration rights of the
Exchange Debentures.
RISK FACTORS
Prospective participants in the Exchange Offer should consider all of the
information contained in this Prospectus in connection with the Exchange Offer.
In particular, prospective participants should consider the factors set forth
herein under "Risk Factors."
15
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data for each of the four years
in the period ended March 31, 1997 have been derived from the audited
consolidated financial statements of the Company and the related notes thereto.
The unaudited information for the fiscal year ended March 31, 1993 is derived
from other Company information. These data should be read in conjunction with
the consolidated financial statements and related notes thereto for each of the
three years in the period ended March 31, 1997 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus. The statement of operations data with respect to the fiscal
year ended March 31, 1994 have been derived from audited consolidated financial
statements of the Company not included herein. The data as of June 30, 1997 and
for the three months ended June 30, 1996 and 1997 are unaudited; however, in
the opinion of management, such data reflect all adjustments (consisting only
of normal recurring adjustments) necessary to fairly present the data for such
interim periods. Operating results for the three months ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ending March 31, 1998.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30,
---------------------------------------------- ------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (A)(B):
Telecommunications
service and management
fee revenue........... $ 89 $ 417 $ 1,729 $ 3,322 $ 5,088 $ 1,102 $ 1,520
Operating expenses:
Network operations..... 19 330 1,382 2,690 3,432 859 1,180
Selling, general and
administrative........ 921 2,045 2,524 3,084 6,780 1,027 2,380
Depreciation and
amortization.......... 30 189 463 1,184 3,945 695 1,372
------- ------- -------- -------- -------- -------- --------
Operating loss......... (881) (2,147) (2,640) (3,636) (9,069) (1,479) (3,412)
Gain on sale of
investment............ -- -- -- -- 8,405 8,405 --
Interest income........ -- 17 39 199 5,976 1,433 763
Interest expense and
fees ................. -- (2,164) (3,321) (6,088) (28,377) (6,169) (8,077)
Equity in net loss of
joint ventures........ (194) (528) (1,799) (4,292) (7,223) (1,636) (2,540)
Net (loss) income...... (1,075) (4,725) (7,692) (13,620) (30,547) 551 (13,266)
OTHER COMPANY DATA (A):
EBITDA (c)............. $ (851) $(1,958) $ (2,177) $ (2,452) $ (5,124) $ (784) $ (2,040)
Capital expenditures
and Company
investments (d)....... 3,891 8,607 10,376 18,899 79,396 6,568 36,797
Cash used in operating
activities............ (725) (2,121) (2,130) (833) (4,823) (2,657) (2,407)
Cash (used in) provided
by investing
activities............ (3,806) (8,607) (10,376) (18,899) (72,818) 5,050 (36,797)
Cash provided by
financing activities.. 4,645 10,609 12,506 19,732 137,455 129,749 698
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------------
ACTUAL AS ADJUSTED (E)
-------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (A):
Cash and cash equivalents......... $ 21,308 $375,708
Restricted cash (f)............... -- 83,400
Total assets...................... 169,907 614,407
Long term debt and exchangeable
redeemable preferred stock....... 222,251 666,751
Stockholders' equity (deficiency). (63,493) (63,493)
</TABLE>
- --------
(a) Financial information for the Company and its consolidated Subsidiaries. As
of June 30, 1997, 18 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) Statement of Operations Data does not reflect the issuance of the Senior
Secured Notes or the Offering. Interest expense and fees on a pro forma
basis, assuming the issuance of the Senior Secured Notes occurred on April
1, 1996 would have been $59.0 and $15.7 million for the year ended March
31, 1997 and the three months ended June 30, 1997, respectively. Preferred
stock dividends on a pro forma basis, assuming the Offering occurred on
April 1, 1996 and 1997 would have been $27.0 and $6.4 million for the year
ended March 31, 1997 and the three months ended June 30, 1997,
respectively.
(c) Earnings before interest expense, income taxes, depreciation and
amortization, other non-cash charges, gain on sale of investment, interest
income and equity in net loss of joint ventures ("EBITDA") and similar
measurements of cash flow are commonly used in the telecommunications
industry to analyze and compare telecommunications companies on the basis
of operating performance, leverage, and liquidity. While EBITDA is not an
alternative indicator of operating performance to operating income or an
alternative to cash flows from operating activities as a measure of
liquidity as defined by generally accepted accounting principles, and while
EBITDA may not be comparable to other similarly titled measures of other
companies, the Company's management believes EBITDA is a meaningful measure
of performance.
(d) For the fiscal years ended March 31, 1993, 1994, 1995, 1996 and 1997 and
the three months ended June 30, 1996 and 1997, the Company's capital
expenditures (including capital expenditures relating to its wholly owned
Operating Companies) were $2.0, $3.1, $2.9, $6.1, $24.6, $1.8 and $18.8
million, respectively, and the Company's investments in its less than
wholly owned Operating Companies and the South Florida Partnership were
$1.9, $5.5, $7.5, $12.8, $34.8, $4.8 and $18.0 million, respectively, for
the same periods. Furthermore, during the fiscal year ended March 31, 1997,
the Company invested $20.0 million in fiber assets and a senior secured
note. See the Company's consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus.
(e) As adjusted to give effect to the Offering and the issuance of the Senior
Secured Notes, as if each such event occurred as of June 30, 1997.
(f) $83.4 million of the proceeds from the issuance of the Senior Secured Notes
was placed in an escrow account for the purchase of U.S. government
securities to provide for payment in full when due of the first six
scheduled interest payments on the Senior Secured Notes.
16
<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, 1997, 18 of the Company's 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 in connection with the
Exchange Offer.
<TABLE>
<CAPTION>
NETWORK DATA
(UNAUDITED)(A):
THREE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------------- ----------------
1993 1994 1995 1996 1997 1996 1997
------ ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATIONS DATA:
Network revenues....... $ 195 $ 962 $ 3,056 $ 7,763 $ 15,223 $ 2,932 $ 5,343
Operating expenses:
Network operations..... 504 789 1,946 4,871 8,069 1,490 2,532
Selling, general and
administrative......... 353 1,145 2,439 5,316 8,827 1,957 3,995
Depreciation and
amortization........... 207 839 2,467 6,137 14,305 2,709 4,855
------ ------- ------- ------- -------- ------- -------
Operating loss......... $ (869) $(1,811) $(3,796) $(8,561) $(15,978) $(3,224) $(6,039)
====== ======= ======= ======= ======== ======= =======
OTHER OPERATING DATA:
EBITDA (b)............. $ (662) $ (972) $(1,329) $(2,424) $ (1,673) $ (515) $(1,184)
Capital expenditures... 4,947 13,790 24,658 45,177 128,270 13,887 49,595
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31, JUNE 30,
--------------------------------------- --------
1993 1994 1995 1996 1997 1997
------ ------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSET AND LIABILITY DATA:
Gross property, plant &
equipment (c)................ $6,952 $21,907 $49,107 $97,318 $228,384 $277,467
Capital lease obligations
(d).......................... 1,244 3,291 11,166 18,163 47,423 57,091
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF JUNE 30,
--------------- --------------
1996 1997 1997
------ ------ ------
<S> <C> <C> <C>
OTHER NETWORK DATA:
Networks in operation........................... 13 15 17
Networks under construction..................... 4 6 5
Cities served (e)............................... 19 33 35
Route miles (e)................................. 2,210 3,461 3,640
Fiber miles (e)................................. 106,080 166,131 174,708
Buildings connected............................. 822 1,270 1,603
LEC-COs collocated (f).......................... 44 104 106
Voice grade equivalent circuits................. 186,292 466,056 531,144
Switches installed (g).......................... 5 7 13
Employees (h)................................... 155 261 323
</TABLE>
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(a) Unless otherwise stated, the data presented 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 in which the Company
sold its investment during fiscal 1997.
(b) Earnings before interest expense, income taxes, depreciation and
amortization, other non-cash charges, gain on sale of investment, interest
income and equity in net loss of joint ventures ("EBITDA") and similar
measurements of cash flow are commonly used in the telecommunications
industry to analyze and compare telecommunications companies on the basis
of operating performance, leverage, and liquidity. While EBITDA is not an
alternative indicator of operating performance to operating income or an
alternative to cash flows from operating activities as a measure of
liquidity as defined by generally accepted accounting principles, and while
EBITDA may not be comparable to other similarly titled measures of other
companies, the Company's management believes EBITDA is a meaningful measure
of performance.
(c) Represents total property, plant and equipment (before accumulated
depreciation) of the networks, the NOCC and the Company.
(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 employees of both the Operating Companies and the
Company.
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RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be carefully considered in evaluating the Company and its
business in connection with the Exchange Offer.
Certain information included or incorporated by reference in this
Prospectus, is forward-looking, such as information relating to the effects of
future regulation, future capital commitments and the effects of competition.
These statements appear in a number of places in this Prospectus, including
"Prospectus Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," and include statements
regarding the intent, belief and current expectations of the Company and its
directors and officers. Such forward-looking information involves important
risks and uncertainties that could significantly affect expected results in
the future from those expressed in any forward-looking statements made by, or
on behalf of, the Company. These risks and uncertainties include, but are not
limited to, uncertainties relating to economic conditions, acquisitions and
divestitures, government and regulatory policies, the pricing and availability
of equipment, materials, and inventories, technological developments and
changes in the competitive environment in which the Company operates. Persons
reading this Prospectus are cautioned that such statements are only
predictions and that actual events or results may differ materially. In
evaluating such statements, readers should specifically consider the various
factors which could cause actual events or results to differ materially from
those indicated by such forward looking statements. See "--Forward Looking
Statements."
Consequences of Failure to Exchange. Upon consummation of the Exchange
Offer, holders of Old Preferred Stock that were not prohibited from
participating in the Exchange Offer and did not tender their Old Preferred
Stock will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Old Preferred Stock and,
accordingly, such Old Preferred Stock will continue to be subject to the
restrictions on transfer contained in the legend thereon. In general, the Old
Preferred Stock may not be offered or sold, unless registered under the
Securities Act and applicable state securities laws, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not intend to register the
Old Preferred Stock under the Securities Act. Based on interpretations by the
staff of the Commission with respect to similar transactions, the Company
believes that the New Preferred Stock issued pursuant to the Exchange Offer
may be offered for resale, resold and otherwise transferred by any holder of
such New Preferred Stock (other than any such holder which is an "affiliate"
of the Registrants within the meaning of Rule 405 under the Securities Act)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such New Preferred Stock is acquired in the
ordinary course of such holder's business, such holder has no arrangement or
understanding with any person to participate in the distribution of such New
Preferred Stock and neither the holder nor any other person is engaging in or
intends to engage in a distribution of the New Preferred Stock. A broker-
dealer who acquired Old Preferred Stock directly from the Registrant cannot
exchange such Old Preferred Stock in the Exchange Offer. Each broker-dealer
that receives New Preferred Stock for its own account in exchange for Old
Preferred Stock must acknowledge that it will deliver a prospectus in
connection with any resale of its New Preferred Stock. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of the New Preferred Stock received in exchange for the Old
Preferred Stock acquired by the broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale for a period of 365 days after the Exchange Date or, if
earlier, until all participating broker-dealers have so resold. See "Plan of
Distribution." The New Preferred Stock may not be offered or sold unless it
has been registered or qualified for sale under applicable state securities
laws or an exemption from registration or qualification is available and is
complied with. The Registrant is required, under the Registration Rights
Agreement, to register the New Preferred Stock in any jurisdiction requested
by the holders, subject to certain limitations.
18
<PAGE>
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, $3.6 million, $9.1
million, $1.5 million and $3.4 million for the fiscal years ended March 31,
1994, 1995, 1996 and 1997 and the three months ended June 30, 1996 and 1997,
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 such Operating Companies' and the South Florida Partnership's
net losses as equity in net losses of joint ventures.
The Company was formed in October 1991 and, as of June 30, 1997, only 11 of
its 17 operational networks had been in operation for more than 24 months and
five 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, 1997, the Company's total amount of
debt outstanding was $222.3 million and the Company had a stockholders'
deficiency of $63.5 million. As of June 30, 1997, as adjusted to give effect
to the issuance of the Senior Secured Notes and the Preferred Stock, the
Company's total amount of debt and redeemable preferred stock outstanding
would have been $672.3 million (such amount at September 30, 1997 would
increase by approximately $6.8 million related to the Accreted Value (as
defined) with respect to the Senior Notes issued pursuant to the Senior Notes
Indenture dated as of April 15, 1996 (the "Senior Notes"). In addition, in
each year since its inception, despite increasing revenues, the Company's
earnings have been inadequate to cover its combined fixed charges and
preferred stock dividends by a substantial and increasing margin. Moreover,
the Company anticipates that earnings will be insufficient to cover combined
fixed charges and preferred stock dividends for the foreseeable future.
Commencing on October 15, 2001, semi-annual cash interest payments of $21.4
million will be due and payable on the Senior Notes, commencing on March 1,
1998, semi-annual cash payments of $15.3 million on the Senior Secured Notes
will become due and payable, and commencing on October 15, 2002, quarterly
cash dividends of $12.2 million on the Preferred Stock (assuming that all
dividends prior to such date are paid in additional shares of Preferred Stock)
will become due and payable.
The degree to which the Company is leveraged could have important
consequences to holders of the Preferred Stock, including the following: (i) a
substantial portion of the Company's cash flow from operations will be
dedicated to payment of the principal and interest on its indebtedness, and to
payments of dividends on and the redemption of the Preferred Stock, thereby
reducing funds available for other purposes; (ii) the Company's significant
degree of leverage could increase its vulnerability to changes in general
economic conditions or increases in prevailing interest rates; (iii) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes could
be impaired; (iv) a substantial portion of the indebtedness of the Company
will mature in accordance with its terms prior to the mandatory redemption of
the Preferred Stock; and (v) the Company may be more leveraged than certain of
its competitors, which may be a competitive disadvantage.
19
<PAGE>
Because the Company currently has, and anticipates that it will continue to
have, a substantial consolidated cash flow deficit, its ability to (i) make
cash interest payments on the Senior Notes commencing on October 15, 2001 and
to repay its obligations on the Senior Notes at maturity, (ii) make cash
interest payments on the Senior Secured Notes commencing on March 1, 1998, and
to repay its obligations on the Senior Secured Notes at maturity and (iii)
make cash dividend payments on the Preferred Stock commencing on October 15,
2002, and to redeem the Preferred Stock at maturity, will be dependent on
developing one or more sources of cash flow prior to the date on which such
cash payment obligations arise. To accomplish this, the Company may seek to
(i) refinance all or a portion of the Senior Notes, the Senior Secured Notes
and/or the Preferred Stock (or the Exchange Debentures, as the case may be),
(ii) sell all or a portion of its interests in one or more of the Operating
Companies, (iii) negotiate with its current Local Partners to permit any
excess cash generated by its Operating Companies to be distributed to partners
rather than invested in the businesses of such Operating Companies and/or (iv)
invest in companies that will make substantial cash distributions. 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 or dividend payments and to
repay the Senior Notes, the Senior Secured Notes and/or the Preferred Stock
(or the Exchange Debentures, as the case may be) 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,
members 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 time such payments are due.
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 and will
install additional 5ESSs or remote switching modules in each of the Company's
future operational markets. To date, the Company has installed switches which
service 13 of its markets and expects that it will complete the installation
of switches in all of its markets by the end of 1997. In addition, the Company
intends to increase spending on marketing and sales significantly in the
foreseeable future in connection with the expansion of its sales force and
marketing efforts generally. The Company estimates that it will require
approximately $175 million to $200 million to fund anticipated capital
expenditures, working capital requirements and operating losses of the
Company, investments in existing Operating Companies and the acquisition of
100% of the ownership interests in the Buffalo, Louisville, Lexington and
Syracuse networks, through the fiscal year ended March 31, 1999. The Company
currently expects that the proceeds from this
Offering together with cash on hand, anticipated bank and vendor financings,
internal cash flow, fiber lease financings and investments to be made by its
Local Partners should be adequate to fund through March 31, 1999 anticipated
capital expenditures, operating losses and working capital for existing
networks. However, there can be no assurance (i) that the Company's future
cash requirements will not vary significantly from those presently planned due
to a variety of factors including acquisition of additional networks,
continued acquisition of increased ownership in its networks and material
variances from expected capital expenditure requirements for existing networks
or (ii) that anticipated financings, Local Partner investments and other
sources of capital will become available to the Company. Accordingly, there
can be no assurance that the Company will not seek to raise additional capital
prior to March 31, 1999. In addition, 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 with utility partners, which have broader
geographic coverage and require higher capital outlays than those with cable
partners in the past.
The Company also has funded the purchase of certain partnership interests
and expects to fund additional purchases of the partnership interests. See "--
Risks Associated with Joint Ventures," "Prospectus Summary--Recent
Developments" and "Business--Operating Agreements--Local Partner Agreements."
20
<PAGE>
The Company expects to fund its capital requirements through existing
resources, credit facilities and vendor financings at the Company and
Operating Company levels, internally generated funds, equity invested by Local
Partners in Operating Companies and additional debt or equity financings, as
appropriate, and expects to fund its repurchase of partnership interests of
Local Partners through existing resources, internally generated funds and
additional debt or equity financings, as appropriate. 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 or that the
Company will not accelerate its capital expenditure spending.
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 to develop new networks and
operations in the future through joint ventures. In addition, as of June 30,
1997, 18 of the Company's 22 networks were owned by Joint Ventures in which
the Company owned 50% or less of the equity interests, and future Joint
Ventures may be developed 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 Senior Secured
Notes, the Exchange Debentures, if any, any other indebtedness and its
obligations with respect to the Preferred Stock, is dependent on the Company
receiving 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, the Senior
Secured Notes, the Preferred Stock 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 its portion of 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 to the partners or equity holders. In addition, such entities will
be permitted to incur indebtedness that may severely restrict or prohibit the
making of distributions, the payment of dividends or the making of loans. See
"--Risks Associated with Joint Ventures" and "--Substantial Leverage."
Risk of New Service Acceptance by Customers. The Company is in the process
of introducing a number of services, primarily local exchange services, that
the Company believes are important to its long-term growth. The success of
these services will be dependent upon, among other things, the willingness of
customers to accept the Company as a new provider of such new
telecommunications services. No assurance can be given that such acceptance
will occur, and the lack of such acceptance could have a material adverse
effect on the Company.
Restrictions on the Company's Ability to Pay Dividends on the Preferred
Stock. To date, the Company has not paid dividends on its shares of capital
stock. The ability of the Company to pay cash dividends on the Preferred
Stock, commencing on October 15, 2002, and to redeem the Preferred Stock upon
maturity is substantially restricted under various covenants and conditions
contained in the indentures with respect to the Senior Notes, (the "Senior
Indenture") and the Senior Secured Indenture. In addition to the limitations
imposed on the payment of dividends by the Senior Indenture and the Senior
Secured Indenture, under Delaware law the Company is permitted to pay
dividends on its capital stock, including the Preferred Stock, only out of its
surplus, or in the event that it has no surplus, out of its net profits for
the year in which a dividend is declared or for the immediately preceding
fiscal year. At June 30, 1997, the Company had a stockholders' deficiency of
$63.5 million. In order to pay dividends in cash, the Company must have
surplus or net profits equal to the full amount of the cash dividend at the
time such dividend is declared. The Company cannot predict what the value of
its assets or the amount of its liabilities will be in the future and,
accordingly, there can be no assurance the at the Company will be able to pay
cash dividends on the Preferred Stock.
21
<PAGE>
Subordination of the Preferred Stock. The Company's obligations with respect
to the Preferred Stock are subordinate and junior in right of payment to all
present and future indebtedness of the Company, its Subsidiaries and Joint
Ventures, including the Senior Notes and the Senior Secured Notes, and to all
subsequent series of preferred stock of the Company which by its terms ranks
senior to the Preferred Stock. See "Description of Certain Indebtedness." In
addition to the substantial dividend and redemption restrictions set forth in
the Senior Indenture and the Senior Secured Indenture, no cash dividends or
mandatory redemption payments may be made with respect to the Preferred Stock
if (i) the obligations with respect to the Senior Notes and the Senior Secured
Notes are not paid when due or (ii) any other event of default has occurred
under the Senior Indenture and the Senior Secured Indenture and is continuing
or would occur as a consequence of such payment. As of June 30, 1997, the
Preferred Stock would have been junior in right of payment to $529.4 million
of indebtedness (such amount at September 30, 1997 would increase by
approximately $6.8 million related to the Accreted Value (as defined) with
respect to the Senior Notes) of the Company, its Subsidiaries and Joint
Ventures (excluding trade payables and other accrued liabilities). In the
event of bankruptcy, liquidation or reorganization of the Company, the assets
of the Company will be available to pay obligations on the Preferred Stock
only after all Senior Securities (as defined) and all indebtedness of the
Company has been paid, and there may not be sufficient assets remaining to pay
amounts due on any or all of the Preferred Stock then outstanding. See
"Description of Securities--Description of Preferred Stock--Ranking."
Subordination of the Exchange Debentures. The payment of principal, premium
if any, and interest on, and any other amounts owing in respect of, the
Exchange Debentures, if issued, will be subordinated to the prior payment in
full of all existing and future Senior Debt, including indebtedness
represented by the Senior Notes and the Senior Secured Notes, and will be
effectively subordinated to all indebtedness and other liabilities and
commitments of the Company's Subsidiaries and Joint Ventures. As of June 30,
1997, the Exchange Debentures would have been subordinated to $529.4 million
of indebtedness (such amount at September 30, 1997 would increase by
approximately $6.8 million related to the Accreted Value (as defined) with
respect to the Senior Notes) of the Company, its Subsidiaries and Joint
Ventures (excluding trade payables and other accrued liabilities). The Senior
Indenture, the Senior Secured Indenture, and the Indenture pursuant to which
the Exchange Debentures would be issued permit the incurrence by the Company,
its Subsidiaries and Joint Ventures of additional indebtedness, all of which
may constitute Senior Debt, under certain circumstances. In addition, the
Company may not pay principal of, premium, if any, or interest on or any other
amounts owing in respect of, the Exchange Debentures, or purchase, redeem or
otherwise retire the Exchange Debentures, if (i) the obligations with respect
to the Senior Notes and the Senior Secured Notes are not paid when due or (ii)
any other event of default has occurred under the Senior Indenture or the
Senior Secured Indenture, and is continuing or would occur as a consequence of
such payment. In the event of bankruptcy, liquidation or reorganization of the
Company, the assets of the Company will be available to pay obligations on the
Exchange Debentures only after all Senior Debt has been paid, and there may
not be sufficient assets remaining to pay amounts due on any or all of the
Exchange Debentures then outstanding. See "Description of the Exchange
Debentures--Subordination."
Effect of Substantial Additional Indebtedness on the Company's Ability to
Make Payments on the Preferred Stock and Exchange Debentures. The Senior
Indenture, the Senior Secured Indenture, the Certificate of Designation and
the Indenture limit, but do not prohibit, the incurrence of additional
indebtedness by the Company, its Subsidiaries and Joint Ventures, and the
Company will likely incur substantial additional indebtedness during the next
few years to finance the construction of networks and purchase of network
electronics, including local long distance voice and data switches. All
additional indebtedness of the Company will rank senior in right of payment to
any payment obligations with respect to the Preferred Stock and Exchange
Debentures (to the extent that such additional indebtedness represents Senior
Debt) and the debt service requirements of any Preferred Stock and Exchange
Debentures.
Inability to Purchase Preferred Stock or Exchange Debentures Upon a Change
of Control. The Senior Indenture, the Senior Secured Indenture and the
Certificate of Designation each provide, that a Change of Control, which could
result from, among other things, certain business combinations or strategic
alliances by the Company, requires the Company to commence an offer to repay
the Senior Notes and the Senior Secured Notes
22
<PAGE>
and redeem the shares of Preferred Stock outstanding under such instruments.
If a Change of Control occurs, there is no assurance that the Company will (i)
have the ability to make a Change of Control Offer to the holders of the
Preferred Stock or the Exchange Debentures, as the case may be, (ii) have
sufficient funds to make such repayments and redemption or (iii) that the
Company could obtain any additional debt or equity financing in an amount
sufficient to repay the Senior Notes, the Senior Secured Notes and to redeem
the Preferred Stock. Upon the failure of the Company to make a Change of
Control Offer (as defined) on the terms and in accordance with the conditions
described under the caption "Description of Securities--Description of
Preferred Stock--Change of Control," the sole remedy to the holders of the
outstanding Preferred Stock will be the voting rights arising from a Voting
Rights Triggering Event. See "Description of Securities--Description of
Preferred Stock--Voting Rights; Amendment."
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.
Neither the Senior Indenture, the Senior Secured Indenture, the Certificate
of Designation nor the Indenture restricts the amount of indebtedness that can
be incurred by Operating Companies in which the Company owns a less than 45%
interest. The Company expects that certain of the Operating Companies may
begin to incur substantial indebtedness in the foreseeable future.
Accordingly, the Company's ability to access the cash flow and assets of such
Operating Companies may be severely limited.
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 of 1996 (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 or selectively, 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 and adversely
affected.
The Telecommunications Act also establishes procedures under which the
Regional Bell Operating Companies ("RBOCs") can obtain authority to provide
long distance services if they comply with certain interconnection
requirements. Some of the RBOCs in the markets served by the Company have
filed or plan to
23
<PAGE>
file for such authority in 1997 or 1998, including Bell South in Louisiana in
late 1997. There has been significant merger activity among the RBOCs in
anticipation of entry into the long distance market, including the merger of
Bell Atlantic and NYNEX, whose combined territory covers a substantial portion
of the Company's markets. If RBOCs are permitted to provide such services,
they will ultimately be in a position to offer single source service for local
and long distance communications. Thus far, applications by Ameritech
(Michigan) and Southwestern Bell (Oklahoma) have been rejected. However, an
approval could result in decreased market share for the major IXCs, which are
among the Operating Companies' 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. The Telecommunications Act facilitates such entry by
requiring incumbent LECs to allow new entrants to acquire local services at
wholesale prices for resale, and to purchase unbundled networks at cost-based
rates. Substantially all of the Company's markets are served by one or more
CLECs other than the Company. In addition, all three major IXCs are expected
to enter the market for local telecommunications services. Both AT&T and MCI
have announced that they have begun to offer local telephone services in some
areas of the country, and AT&T recently announced a new wireless technology
for providing local telephone service. Although the Company has good
relationships with the IXCs, there are no assurances that any of these IXCs
will not build their own facilities, purchase other carriers or their
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 Federal
Communications Commission (the "FCC"), nor is it currently required to obtain
FCC authorization for the installation, acquisition or operation of its
network facilities. However, the Operating Companies that provide intrastate
services are generally subject to certification and tariff filing requirements
by state regulators and may also be subject to state reporting, customer
service, service quality, unbundling and universal service or other
requirements. Challenges to these tariffs and certificates by third parties or
independent action by state public service commissions could cause the Company
to incur substantial legal and administrative expenses.
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, including access charge and
universal service issues, would not have a material adverse effect on the
Company. In particular, the Company's belief that the entire $97 billion local
exchange market may ultimately be open to CLEC competition depends upon
favorable interpretation of the Telecommunications Act, and the ability of the
Company and the Operating Companies to compete in these new market segments
may be adversely affected if incumbent LECs are granted greater pricing
flexibility and other regulatory relief that enables them to impose costs on
potential competitors or otherwise restrict the Company's ability to serve its
customers and attract new customers. In addition, the Telecommunications Act
removes entry barriers for all companies and could increase substantially the
number of competitors offering comparable services in the Company's markets.
See "Regulation--Overview" for more detailed information on the regulatory
environment in which the Company and the Operating Companies operate.
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While the Telecommunications Act requires incumbent LECs, including RBOCs,
to enter into agreements to interconnect with, and generally to sell unbundled
network elements or to resell services to CLECs, LEC-CLEC interconnection
agreements may have short terms, requiring the CLEC to renegotiate the
agreements continually. LECs may not provide timely provisioning or adequate
service quality thereby impairing a CLEC's reputation with customers who can
easily switch back to the LEC. In addition, the prices set in the agreements
may be subject to significant rate increases if state regulatory commissions
establish prices designed to pass on to the CLECs part of the cost of
providing universal service.
Dependence upon Network Infrastructure; Risk of System Failure; Security
Risks. The Company's success in marketing its services to business and
government users requires that the Company provide superior reliability,
capacity and security via its network infrastructure. The Company's networks
are subject to physical damage, power loss, capacity limitations, software
defects, breaches of security (by computer virus, break-ins or otherwise) and
other factors, certain of which may cause interruptions in service or reduced
capacity for the Company's customers. Interruptions in service, capacity
limitations or security breaches could have a material adverse effect on the
Company's business, financial condition and results of operations.
Control by Principal Stockholder. Adelphia owns 88% of the outstanding
capital stock of the Company, with the remaining 12% owned by Messrs.
Milliard, Drenning, Fajerski and Fowler, all of whom are senior executives of
the Company. See "Certain Relationships and Transactions." Accordingly,
Adelphia is 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 a
stockholder agreement, as amended, between the Company, Adelphia and Messrs.
Drenning, Fajerski and Fowler (the "Management Stockholders"), Adelphia has
the power to control certain corporate transactions of the Company, including
its ability to enter into joint ventures and other business relationships and
Adelphia has the right, under certain circumstances, to purchase the interests
of the Management Stockholders. As a result, the Company may be subject to
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 up
to twelve 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 to the Company's
Board of Directors. See "Certain Relationships and Transactions."
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.
Expansion Risk; Additional Personnel. The Company is experiencing a period
of rapid expansion which the Company believes will accelerate in the
foreseeable future. The operating complexity of the Company, as well as the
responsibilities of management personnel, have 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. In addition, the
Company and the Operating Companies intend to significantly increase the
hiring of additional sales and marketing personnel. There can be no assurance
that such new personnel will be successfully integrated into the Company or
the Operating Companies, as the case may be, or whether a sufficient number of
qualified personnel will be
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available at all. The Company's inability to effectively manage its hiring of
additional personnel and expansion could have a material adverse effect on its
business and results of operations.
Dependence on Business from IXCs. For the fiscal year ended March 31, 1997,
approximately 61% 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."
In addition, the Telecommunications Act establishes procedures under which
RBOCs can obtain authority to compete with the IXCs in the long distance
market, and there have been indications that certain RBOCs in markets served
by the Company may seek such authority in the near future. See "--Competition"
and "Competition." 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 or conduit use
agreements with incumbent LECs, utilities or other 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."
The amount of lease payments could be affected by the costs the Local
Partners incur for attachments to poles, or use of conduit, owned by incumbent
LECs or electric utilities. Various state public utility commissions ("State
PUCs"), and the FCC are reviewing whether use of Local Partner facilities for
telecommunications purposes (as occurs when the Operating Companies lease
fiber optic capacity from Local Partners) should entitle incumbent LECs and
electric utilities to higher pole attachment or conduit occupancy fees. Such
increased fees could result in an increase in the amount of the lease payments
made by the Operating Companies to the Local Partners and could have a
significant impact on the profitability of the Operating Companies.
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.
Certain Tax Considerations. For a discussion of certain material federal
income tax considerations which are relevant to the purchase, ownership and
disposition of the Preferred Stock and Exchange Debentures, see "Certain
Federal Income Tax Considerations."
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 on its Common Stock in the foreseeable future. Payment of any future
dividends on its Common Stock 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 on its Common
Stock in the foreseeable future. The Company's ability to declare dividends on
its Common Stock is affected by certain covenants in the Senior Indenture,
Senior Secured Indenture and the Certificate of Designation.
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Absence of a Public Market for the Preferred Stock; Possible Volatility of
Preferred Stock Price. Prior to the Exchange Offer, there has been no public
market for the Old Preferred Stock. Although the Initial Purchaser has
informed the Company that it currently intends to make a market in the
Preferred Stock, it is not obligated to
do so and any such market making may be discounted at any time without notice.
Accordingly, there can be no assurance as to the development or liquidity of
any market for the Preferred Stock. The Preferred Stock is eligible for
trading in the PORTAL market. The Company does not intend to apply for listing
of the Preferred Stock on any securities exchange or for quotation through the
Nasdaq National Market. If a market for the Preferred Stock were to develop,
the Preferred Stock could trade at prices that may be higher or lower than
their initial offering price depending upon many factors, including prevailing
interest rates, the Company's operating results and the markets for similar
securities. Historically, the market for securities such as the Preferred
Stock has been subject to disruptions that have caused substantial volatility
in the prices of securities similar to the Preferred Stock. There can be no
assurance that, if a market for the Preferred Stock were to develop, such a
market will not be subject to similar disruptions.
Forward Looking Statements. The statements contained in this Prospectus that
are not historical facts are "forward looking statements" (as such term is
defined in the Private Securities Litigation Reform Act of 1995), which
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "intends" or "anticipates" or
the negative thereof or other variations thereon or comparable terminology, or
by discussions of strategy that involve risks and uncertainties. Management
cautions the reader that these forward-looking statements, such as the
Company's plans to build and acquire networks in new areas, the market
opportunity presented by larger metropolitan areas, its anticipated
installation of local exchange service line and revenues from designated
markets during 1997, and statements regarding the development of the Company's
business, the markets for the other statements contained above and herein in
this Prospectus regarding matters that are not historical facts, are only
predictions. No assurance can be given that the future results will be
achieved; actual events or results may differ materially as a result of risks
facing the Company. Such risks include, but are not limited to, the Company's
ability to successfully market its services to current and new customers,
access markets, identify, finance and complete suitable acquisitions, design
and construct fiber optic networks, install cable and facilities, including
switching electronics, and obtain rights-of-way, building access rights and
any required governmental authorizations, franchises and permits, all in a
timely manner, at reasonable costs and on satisfactory terms and conditions,
as well as regulatory, legislative and judicial developments that could cause
actual results to vary materially from the future results indicated, expressed
or implied, in such forward-looking statements.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
On October 9, 1997, the Registrant issued 200,000 shares of Old Preferred
Stock with an aggregate liquidation preference of $200,000,000 to Bear,
Stearns & Co. Inc. (the "Initial Purchaser"). The issuance was not registered
under the Securities Act in reliance upon the exemptions under Rule 144A,
Section 4(2) and Regulation S of the Securities Act. In connection with the
issuance and sale of the Old Preferred Stock, the Registrant entered into a
Registration Rights Agreement with the Initial Purchaser dated as of October
9, 1997 (the "Registration Rights Agreement"), which requires the Registrant
to cause the Old Preferred Stock to be registered under the Securities Act or
to file with the Commission a registration statement under the Securities Act
with respect to an issue of New Preferred Stock of the Registrant identical in
all material respects to the Old Preferred Stock, and use its best efforts to
cause such registration statement to become effective under the Securities Act
and, upon the effectiveness of that registration statement, to offer to the
holders of the Old Preferred Stock the opportunity to exchange their Old
Preferred Stock for a like liquidation preference of New Preferred Stock,
which will be issued without a restrictive legend and may be reoffered and
resold by the holder without restrictions or limitations under the Securities
Act. A copy of the Registration Rights Agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part. The Exchange
Offer is being made pursuant to the Registration Rights Agreement to satisfy
the Registrant's obligations thereunder.
Based on no-action letters issued by the staff of the Commission to third
parties, the Registrant believes that the New Preferred Stock issued pursuant
to the Exchange Offer in exchange for Old Preferred Stock may be offered for
resale, resold and otherwise transferred by any holder of such New Preferred
Stock (other than any such holder which is an "affiliate" of the Registrant
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such New Preferred Stock are acquired in the ordinary
course of such holder's business, such holder has no arrangement or
understanding with any person to participate in the distribution of such New
Preferred Stock and neither the holder nor any other person is engaging in or
intends to engage in a distribution of the New Preferred Stock. A broker-
dealer who acquired Old Preferred Stock directly from the Registrant cannot
exchange such Old Preferred Stock in the Exchange Offer. Any holder who
tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Preferred Stock cannot rely on such interpretation by
the staff of the Commission and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Preferred Stock for
its own account in exchange for Old Preferred Stock, where such Old Preferred
Stock was acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such New Preferred Stock. See
"Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Registrant will accept any and all Old Preferred Stock
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date (as defined herein). The Registrant will issue a principal
amount of New Preferred Stock in exchange for an equal liquidation preference
of outstanding Old Preferred Stock tendered and accepted in the Exchange
Offer. Holders may tender some or all of their Old Preferred Stock pursuant to
the Exchange Offer. The date of acceptance for exchange of the Old Preferred
Stock for the New Preferred Stock (the "Exchange Date") will be the first
business day following the Expiration Date or as soon as practicable
thereafter.
The terms of the New Preferred Stock and the Old Preferred Stock are
substantially identical in all material respects, except for certain transfer
restrictions, registration rights and Liquidated Damages for Registration
Defaults relating to the Old Preferred Stock which will not apply to the New
Preferred Stock. See "Description of the Securities" and "Description of
Exchange Debentures." The New Preferred Stock will evidence the same debt as
the Old Preferred Stock. The New Preferred Stock will be issued under and
entitled to the benefits of the Indenture pursuant to which the Old Preferred
Stock was issued.
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As of the date of this Prospectus, 200,000 shares of the Old Preferred Stock
are outstanding. This Prospectus, together with the Letter of Transmittal, is
being sent to all registered holders.
Holders of Old Preferred Stock do not have any appraisal or dissenters'
rights under state law or the Certificate of Designation in connection with
the Exchange Offer. The Registrant intends to conduct the Exchange Offer in
accordance with the provisions of the Registration Rights Agreement and the
applicable requirements of the Exchange Act, and the rules and regulations of
the Commission thereunder. Old Preferred Stock which are not tendered and were
not prohibited from being tendered for exchange in the Exchange Offer will
remain outstanding and continue to accrue dividends and to be subject to
transfer restrictions, but will not be entitled to any rights or benefits
under the Registration Rights Agreement.
Upon satisfaction or waiver of all the conditions to the Exchange Offer, on
the Exchange Date the Registrant will accept all Old Preferred Stock properly
tendered and not withdrawn and will issue New Preferred Stock in exchange
therefor. For purposes of the Exchange Offer, the Registrant shall be deemed
to have accepted properly tendered Old Preferred Stock for exchange when, as
and if the Registrant had given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders for the
purposes of receiving the New Preferred Stock from the Registrant.
In all cases, issuance of New Preferred Stock for Old Preferred Stock that
are accepted for exchange pursuant to the Exchange Offer will be made only
after timely receipt by the Exchange Agent of such Old Preferred Stock, a
properly completed and duly executed Letter of Transmittal and all other
required documents; provided, however, that the Registrant reserves the
absolute right to waive any defects or irregularities in the tender or
conditions of the Exchange Offer. If any tendered Old Preferred Stock is not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Preferred Stock is submitted for a greater principal amount
than the holder desires to exchange, such unaccepted or nonexchanged Old
Preferred Stock or substitute Old Preferred Stock evidencing the unaccepted
portion, as appropriate, will be returned without expense to the tendering
holder thereof as promptly as practicable after the expiration or termination
of the Exchange Offer.
Holders who tender Old Preferred Stock in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
Old Preferred Stock pursuant to the Exchange Offer. The Registrant will pay
all charges and expenses, other than certain applicable taxes described below,
in connection with the Exchange Offer. See "Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
December 8, 1997, unless the Registrant, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended; provided that the
Exchange Offer shall not be extended beyond 30 business days after the date of
this Prospectus.
In order to extend the Expiration Date, the Registrant will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, prior to 9:00 a.m., New York City
time, on the next business day after the then Expiration Date.
The Registrant reserves the right, in its sole discretion, (i) to delay
accepting any Old Preferred Stock, to extend the Exchange Offer or to
terminate the Exchange Offer if any of the conditions set forth below under
"Conditions" shall not have been satisfied, by giving oral or written notice
of such delay, extension or termination to the Exchange Agent or (ii) to amend
the terms of the Exchange Offer. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof. If the Exchange Offer is amended in a manner
determined by the Registrant to constitute a material change, the Registrant
will promptly disclose such amendment in a manner reasonably calculated to
inform the holders of Old Preferred Stock of such amendment.
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<PAGE>
Without limiting the manner in which the Registrant may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Registrant shall have no obligation to publish, advertise,
or otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
DIVIDENDS ON THE NEW PREFERRED STOCK
New Preferred Stock will be entitled to dividends from the most recent date
to which dividends has been paid on the Old Preferred Stock or, if no such
dividends has been paid on the Old Preferred Stock, from October 9, 1997.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Registrant will
not be required to exchange any New Preferred Stock for any Old Preferred
Stock, and may terminate or amend the Exchange Offer before the acceptance of
any Old Preferred Stock for exchange, if:
(a) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer
which seeks to restrain or prohibit the Exchange Offer or, in the
Registrant's judgment, would materially impair the ability of the
Registrant to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or enacted,
or any existing law, statute, rule, order or regulation is interpreted,
by any government or governmental authority which, in the Registrant's
judgment, would materially impair the ability of the Registrant to
proceed with the Exchange Offer; or
(c) the Exchange Offer or the consummation thereof would otherwise violate
or be prohibited by applicable law.
If the Registrant determines in its sole discretion that any of these
conditions is not satisfied, the Registrant may (i) refuse to accept any Old
Preferred Stock and return all tendered Old Preferred Stock to the tendering
holders, (ii) extend the Exchange Offer and retain all Old Preferred Stock
tendered prior to the expiration of the Exchange Offer, subject, however, to
the rights of holders who tendered such Old Preferred Stock to withdraw their
tendered Old Preferred Stock, or (iii) waive such unsatisfied conditions with
respect to the Exchange Offer and accept all properly tendered Old Preferred
Stock which has not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Registrant will promptly disclose such
waiver by means of a prospectus supplement that will be distributed to the
registered holders, and the Registrant will extend the Exchange Offer for a
period of five to ten business days, depending upon the significance of the
waiver and the manner of disclosure to the registered holders, if the Exchange
Offer would otherwise expire during such five to ten business day period.
The foregoing conditions are for the sole benefit of the Registrant and may
be asserted by the Registrant regardless of the circumstances giving rise to
any such condition or may be waived by the Registrant in whole or in part at
any time and from time to time in their sole discretion. The failure by the
Registrant at any time to exercise any of the foregoing rights shall not be
deemed a waiver of any such right, and each such right shall be deemed an
ongoing right which may be asserted at any time and from time to time. Any
determination by the Registrant concerning the events described above shall be
final and binding on all parties.
PROCEDURES FOR TENDERING
The tender of Old Preferred Stock by a holder as set forth below (including
a tender by book-entry delivery in accordance with the DTC Automated Tender
Offer Program ("ATOP") or other procedures of DTC for such transfer) and the
acceptance thereof by the Registrant will constitute an agreement between such
holder and the
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Registrant in accordance with the terms and subject to the conditions set
forth in this Prospectus and in the Letter of Transmittal.
Only a holder of Old Preferred Stock may tender such Old Preferred Stock in
the Exchange Offer. To tender in the Exchange Offer, a holder must (i)
complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile, together with the Old Preferred Stock (unless such tender is being
effected pursuant to the procedure for book-entry transfer described below)
and any other required documents, to the Exchange Agent prior to 5:00 p.m.,
New York City time, on the Expiration Date, or (ii) comply with the guaranteed
delivery procedures described below. Delivery of all documents must be made to
the Exchange Agent at its address set forth herein.
THE METHOD OF DELIVERY OF OLD PREFERRED STOCK AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD PREFERRED STOCK SHOULD BE
SENT TO THE REGISTRANT. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner whose Old Preferred Stock is registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact the registered holder promptly and instruct
such registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering of
such owner's Old Preferred Stock, either make appropriate arrangements to
register ownership of the Old Preferred Stock in such owner's name or obtain a
properly completed bond power from the registered holder. The transfer of
registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by any Eligible Institution (as defined) unless the
Old Preferred Stock tendered pursuant thereto is tendered (i) by a registered
holder who has not completed the box entitled "Special Payment Instructions"
or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for
the account of an Eligible Institution. In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Preferred Stock listed therein, such Old Preferred Stock
must be endorsed or accompanied by a properly completed bond power, signed by
such registered holder as such registered holder's name appears on such Old
Preferred Stock, with the signature thereon guaranteed by an Eligible
Institution. If the Letter of Transmittal or any Old Preferred Stock or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
unless waived by the Registrant, evidence satisfactory to the Registrant of
their authority to so act must be submitted with the Letter of Transmittal.
Any financial institution that is a participant in DTC, the book-entry
transfer facility for the Old Preferred Stock, may make book-entry delivery of
Old Preferred Stock by causing DTC to transfer such Old Preferred Stock into
the Exchange Agent's account with respect to the Old Preferred Stock in
accordance with DTC's procedures for such transfer (which procedures may
include those, if applicable, under ATOP). Although
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delivery of Old Preferred Stock may be effected through book-entry transfer
into the Exchange Agent's account at DTC, an appropriate Letter of Transmittal
with any required signature guarantee and all other required documents must in
each case be, or be deemed to be, transmitted to and received and confirmed by
the Exchange Agent at its address set forth below on or prior to the
Expiration Date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Preferred Stock and withdrawal of
tendered Old Preferred Stock will be determined by the Registrant in its sole
discretion, which determination will be final and binding. The Registrant
reserves the absolute right to reject any and all Old Preferred Stock not
properly tendered or any Old Preferred Stock the Registrant's acceptance of
which would, in the opinion of counsel for the Registrant, be unlawful. The
Registrant also reserves the right to waive any defects, irregularities or
conditions of tender as to particular Old Preferred Stock. The Registrant's
interpretation of the terms and conditions of the Exchange Offer (including
the instructions in the Letter of Transmittal) will be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of Old Preferred Stock must be cured within such time as the
Registrant shall determine. Although the Registrant intends to notify holders
of defects or irregularities with respect to tenders of Old Preferred Stock,
neither the Registrant, the Exchange Agent nor any other person shall incur
any liability for failure to give such notification. Tenders of Old Preferred
Stock will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Preferred Stock received by
the Exchange Agent that is not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned by the
Exchange Agent to the tendering holders, unless otherwise provided in the
Letter of Transmittal, as soon as practicable following the Expiration Date.
In addition, the Registrant reserves the right in its sole discretion to
purchase or make offers for any Old Preferred Stock that remains outstanding
subsequent to the Expiration Date or, as set forth below under "Conditions,"
to terminate the Exchange Offer and, to the extent permitted by applicable
law, purchase Old Preferred Stock in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
By tendering, each holder will also represent to the Registrant (i) that the
New Preferred Stock acquired pursuant to the Exchange Offer is being obtained
in the ordinary course of business of the person receiving such New Preferred
Stock, whether or not such person is the holder, (ii) that neither the holder
nor any such person has an arrangement or understanding with any person to
participate in the distribution of such New Preferred Stock and (iii) that
neither the holder nor any such other person is an "affiliate," as defined in
Rule 405 under the Securities Act, of the Registrant, or that if it is an
"affiliate," it will comply with the registration and prospective delivery
requirements of the Securities Act to the extent applicable.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Preferred Stock and (i) whose Old
Preferred Stock is not immediately available, (ii) who cannot deliver their
Old Preferred Stock, the Letter of Transmittal or any other required documents
to the Exchange Agent prior to the Expiration Date, or (iii) who cannot
complete the procedures for book-entry transfer of Old Preferred Stock to the
Exchange Agent's account with DTC prior to the Expiration Date, may effect a
tender if:
(a) The tender is made through an Eligible Institution;
(b) On or prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice
of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the holder, the
certificate number(s) of such Old Preferred Stock (if possible) and the
principal amount of Old Preferred Stock tendered, stating that the
tender is being made thereby and guaranteeing that, within five
business trading days after the
32
<PAGE>
Expiration Date, (i) the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Old Preferred Stock
and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent, or (ii)
that book-entry transfer of such Old Preferred Stock into the Exchange
Agent's account at DTC will be effected and confirmation of such book-
entry transfer will be delivered to the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all
tendered Old Preferred Stock in proper form for transfer and all other
documents required by the Letter of Transmittal, or confirmation of
book-entry transfer of the Old Preferred Stock into the Exchange
Agent's account at DTC, are received by the Exchange Agent within five
business trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Preferred Stock according to the
guaranteed delivery procedures set forth above.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer:
The holder tendering Old Preferred Stock exchanges, assigns and transfers the
Old Preferred Stock to the Registrant and irrevocably constitutes and appoints
the Exchange Agent as the holder's agent and attorney-in-fact to cause the Old
Preferred Stock to be assigned, transferred and exchanged. The holder
represents and warrants to the Registrant and the Exchange Agent that (i) it
has full power and authority to tender, exchange, assign and transfer the Old
Preferred Stock and to acquire the New Preferred Stock in exchange for the Old
Preferred Stock, (ii) when the Old Preferred Stock is accepted for exchange,
the Registrant will acquire good and unencumbered title to the Old Preferred
Stock, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim, (iii) it will, upon request, execute and
deliver any additional documents deemed by the Registrant to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Old
Preferred Stock and (iv) acceptance of any tendered Old Preferred Stock by the
Registrant and the issuance of New Preferred Stock in exchange therefor will
constitute performance in full by the Registrant of its obligations under the
Registration Rights Agreement and the Registrant will have no further
obligations or liabilities thereunder to such holders (except with respect to
accrued and unpaid Liquidated Damages, if any). All authority conferred by the
holder will survive the death or incapacity of the holder and every obligation
of the holder will be binding upon the heirs, legal representatives,
successors, assigns, executors and administrators of the holder.
Each holder will also certify that it (i) is not an "affiliate" of the
Registrant within the meaning of Rule 405 under the Securities Act or that, if
it is an "affiliate," it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable, (ii) is
acquiring the New Preferred Stock in the ordinary course of its business and
(iii) has no arrangement with any person or intent to participate in, and is
not participating in, the distribution of the New Preferred Stock.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Preferred Stock may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Old Preferred Stock in the Exchange Offer, a
telegram, telex, facsimile transmission or letter indicating notice of
withdrawal must be received by the Exchange Agent at its address set forth
herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having tendered
the Old Preferred Stock to be withdrawn (the "Depositor"), (ii) identify the
Old Preferred Stock to be withdrawn (including the certificate number or
numbers and principal amount of such Old Preferred Stock), (iii) be signed by
the holder in the same manner as the
33
<PAGE>
original signature on the Letter of Transmittal by which such Old Preferred
Stock was tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with
respect to the Old Preferred Stock register the transfer of such Old Preferred
Stock into the name of the person withdrawing the tender and (iv) specify the
name in which any such Old Preferred Stock is to be registered, if different
from that of the Depositor. If Old Preferred Stock has been tendered pursuant
to the procedure for book-entry transfer, any notice of withdrawal must specify
the name and number of the account at DTC to be credited with the withdrawn Old
Preferred Stock or otherwise comply with DTC's procedures. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Registrant, whose determination shall be final and
binding on all parties. Any Old Preferred Stock so withdrawn will be deemed not
to have been validly tendered for purposes of the Exchange Offer and no New
Preferred Stock will be issued with respect thereto unless the Old Preferred
Stock so withdrawn is validly retendered. Any Old Preferred Stock which has
been tendered but not accepted for payment will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Old Preferred Stock may be retendered by following one of the procedures
described above under "Procedures for Tendering" at any time prior to the
Expiration Date.
UNTENDERED OLD PREFERRED STOCK
Holders of Old Preferred Stock whose Old Preferred Stock is not tendered or
is tendered but not accepted in the Exchange Offer will continue to hold such
Old Preferred Stock and will be entitled to all the rights and preferences and
subject to the limitations applicable thereto under the Certificate of
Designation. Following consummation of the Exchange Offer, the holders of Old
Preferred Stock will continue to be subject to the existing restrictions upon
transfer thereof and the Registrant will have no further obligations to such
holders, other than the Initial Purchaser, to provide for the registration
under the Securities Act of the Old Preferred Stock held by them. To the extent
that Old Preferred Stock is tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Preferred Stock
could be adversely affected.
EXCHANGE AGENT
American Stock Transfer and Trust Company, the Transfer Agent under the
Certificate of Designation, has been appointed as Exchange Agent of the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notices of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
By Registered or Certified Mail, By Facsimile:
by Hand or by Overnight Courier American Stock Transfer and Trust
American Stock Transfer and Trust Company
Company Attention: Reorganization Department
6201 15th Avenue 3rd Floor (718) 234-5001
Brooklyn, NY 11219 Confirm by Telephone:
Attention: Reorganization Department (718) 921-8200
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Registrant. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers, regular employees
or agents of the Registrant and its affiliates.
The Registrant has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Registrant,
34
<PAGE>
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith and will pay the reasonable fees and expenses of holders
in delivering their Old Preferred Stock to the Exchange Agent.
The cash expenses of the Registrant to be incurred in connection with the
Registrant's performance and completion of the Exchange Offer will be paid by
the Registrant. Such expenses include fees and expenses of the Exchange Agent,
accounting and legal fees and printing costs, among others.
The Registrant will pay all transfer taxes, if any, applicable to the
exchange of Old Preferred Stock pursuant to the Exchange Offer. If, however,
certificates representing New Preferred Stock or Old Preferred Stock for
principal amounts not tendered or accepted for exchange are to be delivered
to, or are to be issued in the name of, any person other than the registered
holder of the Old Preferred Stock tendered, or if tendered Old Preferred Stock
are registered in the name of any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of Old Preferred Stock pursuant to the Exchange Offer, then
the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes
will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Preferred Stock that
were not prohibited from participating in the Exchange Offer and did not
tender their Old Preferred Stock will not have any registration rights under
the Registration Rights Agreement with respect to such nontendered Old
Preferred Stock and, accordingly, such Old Preferred Stock will continue to be
subject to the restrictions on transfer contained in the legend thereon. In
general, the Old Preferred Stock may not be offered or sold, unless registered
under the Securities Act and applicable state securities laws, except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act
and applicable state securities laws. The Registrant does not intend to
register the Old Preferred Stock under the Securities Act. Based on
interpretations by the staff of the Commission with respect to similar
transactions, the Registrant believes that the New Preferred Stock issued
pursuant to the Exchange Offer in exchange for Old Preferred Stock may be
offered for resale, resold and otherwise transferred by any holder of such New
Preferred Stock (other than any such holder which is an "affiliate" of the
Registrant within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Preferred Stock is acquired in the
ordinary course of such holder's business, such holder has no arrangement or
understanding with any person to participate in the distribution of such New
Preferred Stock and neither the holder nor any other person is engaging in or
intends to engage in a distribution of the New Preferred Stock. If any holder
has any arrangement or understanding with respect to the distribution of the
New Preferred Stock to be acquired pursuant to the Exchange Offer, the holder
(i) could not rely on the applicable interpretations of the staff of the
Commission and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Preferred Stock for its own account in
exchange for Old Preferred Stock must acknowledge that it will deliver a
prospectus in connection with any resale of its New Preferred Stock. See "Plan
of Distribution." The New Preferred Stock may not be offered or sold unless it
has been registered or qualified for sale under applicable state securities
laws or an exemption from registration or qualification is available and is
complied with. The Registrant is required, under the Registration Rights
Agreement, to register the New Preferred Stock in any jurisdiction requested
by the holders, subject to certain limitations.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Preferred Stock are
urged to consult their financial and tax advisors in making their own
decisions on what action to take.
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<PAGE>
Upon consummation of the Exchange Offer, holders of the Old Preferred Stock
that were not prohibited from participating in the Exchange Offer and did not
tender their Old Preferred Stock will not have any registration rights under
the Registration Rights Agreement with respect to such nontendered Old
Preferred Stock and, accordingly, such Old Preferred Stock will continue to be
subject to the restrictions on transfer contained in the legend thereon.
However, in the event the Company fails to consummate the Exchange Offer or a
holder of Old Preferred Stock notifies the Company in accordance with the
Registration Rights Agreement that it will be unable to participate in the
Exchange Offer due to circumstances delineated in the Registration Rights
Agreement, then the holder of the Old Preferred Stock will have certain rights
to have such Old Preferred Stock registered under the Securities Act pursuant
to the Registration Rights Agreement and subject to conditions contained
therein.
The Registrant has not entered into any arrangement or understanding with
any person to distribute the New Preferred Stock to be received in the
Exchange Offer, and to the best of the Registrant's information and belief,
each person participating in the Exchange Offer is acquiring the New Preferred
Stock in its ordinary course of business and has no arrangement or
understanding with any person to participate in the distribution of the New
Preferred Stock to be received in the Exchange Offer. In this regard, the
Registrant will make each person participating in the Exchange Offer aware
(through this Prospectus or otherwise) that if the Exchange Offer is being
registered for the purpose of secondary resale, any holder using the Exchange
Offer to participate in a distribution of New Preferred Stock to be acquired
in the registered Exchange Offer (i) may not rely on the staff position
enunciated in Morgan Stanley and Co. Inc. (avail. June 5, 1991) and Exxon
Capital Holding Corp. (avail. May 13, 1988) or similar letters and (ii) must
comply with registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction.
ACCOUNTING TREATMENT
The New Preferred Stock will be recorded at the same carrying value as the
Old Preferred Stock as reflected in the Registrant's accounting records on the
Exchange Date. Accordingly, no gain or loss for accounting purposes will be
recognized by the Registrant.
36
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering on October 9, 1997, after
deducting the discount to the Initial Purchaser and estimated offering
expenses, were approximately $194.5 million.
The Company intends to use the net proceeds from the Offering to fund (i)
the Company's capital expenditures, which will include, among other things:
(a) connecting new buildings to the Company's networks, (b) purchasing
electronics (including switches) to increase the services provided by the
Company's existing networks, (c) financing the completion of the networks
currently under construction and (d) building additional networks, (ii) the
acquisition of additional ownership interests in certain of the Operating
Companies, and (iii) working capital and general corporate purposes for the
Company and the Operating Companies. Management will retain a substantial
amount of discretion over the application of the net proceeds of the Offering
and there can be no 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.
Hyperion will not receive any proceeds from the Exchange Offer.
37
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company as
of June 30, 1997 and as adjusted to reflect the receipt of net proceeds from
the Offering and the sale of the Senior Secured Notes. This table should be
read in conjunction with the Company's consolidated financial statements and
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------
ACTUAL AS ADJUSTED (A)
-------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents, excluding restricted
cash............................................... $ 21,308 $375,708
Restricted cash (b)................................. -- 83,400
-------- --------
Total cash and cash equivalents, including
restricted cash.................................. $ 21,308 $459,108
======== ========
Long-term debt:
13% Senior Discount Notes due 2003................ $193,900 $193,900
12 1/4% Senior Secured Notes due 2004............. -- 250,000
Note Payable--Adelphia............................ 25,855 25,855
Other debt........................................ 2,496 2,496
-------- --------
Total long-term debt............................. $222,251 $472,251
-------- --------
Series B senior exchangeable redeemable preferred
stock due 2007, $.01 par value, 380,000 shares
authorized, and 200,000 shares outstanding, as
adjusted (aggregate liquidation preference
$200,000,000)...................................... $ -- $194,500
Series A senior exchangeable redeemable preferred
stock due 2007, $.01 par value, 380,000 shares
authorized and none outstanding.................... -- --
Common stockholders' equity (deficiency):
Class A Common Stock, $.01 par value, 300,000,000
shares authorized, 122,000 shares issued
and outstanding (c).............................. 1 1
Class B Common Stock, $.01 par value, 150,000,000
shares authorized, 10,000,000 shares issued
and outstanding (d).............................. 100 100
Additional paid-in capital........................ 182 182
Class B Common Stock Warrants..................... 11,087 11,087
Loans to stockholders............................. (3,000) (3,000)
Accumulated deficit............................... (71,863) (71,863)
-------- --------
Total common stockholders' equity (deficiency)... (63,493) (63,493)
-------- --------
Total capitalization............................. $158,758 $603,258
======== ========
</TABLE>
- --------
(a) Reflects the effect of $194.5 million in estimated net proceeds from the
Offering, $243.3 million in net proceeds from the sale of the Senior
Secured Notes and the effects of the Exchange Offer.
(b) $83.4 million of the proceeds from the sale of the Senior Secured Notes
were placed in an escrow account for the purchase of U.S. government
securities to provide for payment in full when due of the first six
scheduled interest payments on the Senior Secured Notes.
(c) Excludes (i) 10,613,427 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 Class B Warrants,
(ii) 2,378,000 shares of Class A Common Stock reserved for issuance under
the Company's 1996 Plan (as defined) and (iii) 281,040 shares of Class A
Common Stock issuable to MCI pursuant to the MCI Preferred Provider
Agreement. See "Management--Long-Term Compensation Plan" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
(d) Excludes 613,427 shares of Class B Common Stock issuable upon the exercise
of outstanding Class B Warrants. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for each of the
four years in the period ended March 31, 1997 have been derived from the
audited consolidated financial statements of the Company and the related notes
thereto. The unaudited information as of and for the fiscal year ended March
31, 1993 is derived from other Company information. These data should be read
in conjunction with the consolidated financial statements and related notes
thereto for each of the three years in the period ended March 31, 1997 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The balance sheet data as
of March 31, 1994 and 1995 and the statement of operations data with respect
to the fiscal year ended March 31, 1994 have been derived from audited
consolidated financial statements of the Company not included herein. The data
as of June 30, 1997 and for the three months ended June 30, 1996 and 1997 are
unaudited; however, in the opinion of management, such data reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
fairly present the data for such interim periods. Operating results for the
three months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending March 31, 1998.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30,
---------------------------------------------- ------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (A)(B):
Telecommunications
service and management
fee revenue........... $ 89 $ 417 $ 1,729 $ 3,322 $ 5,088 $ 1,102 $ 1,520
Operating expenses:
Network operations..... 19 330 1,382 2,690 3,432 859 1,180
Selling, general and
administrative........ 921 2,045 2,524 3,084 6,780 1,027 2,380
Depreciation and
amortization.......... 30 189 463 1,184 3,945 695 1,372
------- ------- -------- -------- -------- -------- --------
Operating loss......... (881) (2,147) (2,640) (3,636) (9,069) (1,479) (3,412)
Gain on sale of
investment............ -- -- -- -- 8,405 8,405 --
Interest income........ -- 17 39 199 5,976 1,433 763
Interest expense and
fees.................. -- (2,164) (3,321) (6,088) (28,377) (6,169) (8,077)
Equity in net loss of
joint ventures........ (194) (528) (1,799) (4,292) (7,223) (1,636) (2,540)
Net (loss) income...... (1,075) (4,725) (7,692) (13,620) (30,547) 551 (13,266)
Net (loss) income per
weighted average share
of common stock....... (0.11) (0.47) (0.77) (1.36) (2.88) 0.05 (1.24)
Common Stock dividends. -- -- -- -- -- -- --
Ratio of earnings
available to cover
combined fixed charges
and preferred stock
dividends (c)......... -- -- -- -- -- -- --
OTHER COMPANY DATA (A):
EBITDA (d)............. $ (851) $(1,958) $ (2,177) $ (2,452) $ (5,124) $ (784) $ (2,040)
Capital expenditures
and Company
investments (e)....... 3,891 8,607 10,376 18,899 79,396 6,568 36,797
Cash used in operating
activities............ (725) (2,121) (2,130) (833) (4,823) (2,657) (2,407)
Cash (used in) provided
by investing
activities............ (3,806) (8,607) (10,376) (18,899) (72,818) 5,050 (36,797)
Cash provided by
financing activities.. 4,645 10,609 12,506 19,732 137,455 129,749 698
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
---------------------------------------------- AS OF
1993 1994 1995 1996 1997 JUNE 30, 1997
------- ------- -------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (A):
Cash and cash equivalents.............. $ 118 $ -- $ -- $ -- $ 59,814 $ 21,308
Total assets........................... 4,316 14,765 23,212 35,269 174,601 169,907
Long term debt......................... 4,814 19,968 35,541 50,855 215,675 222,251
Stockholders' equity (deficiency)...... (1,286) (6,011) (13,703) (27,323) (50,254) (63,493)
</TABLE>
- --------
(a) Financial information for the Company and its consolidated Subsidiaries.
As of June 30, 1997, 18 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) Statement of Operations Data does not reflect the issuance of the Senior
Secured Notes or the Offering. Interest expense and fees on a pro forma
basis, assuming the issuance of the Senior Secured Notes occurred on April
1, 1996, would have been $59.0 and $15.7 million for the year ended March
31, 1997 and the three months ended June 30, 1997, respectively. Preferred
stock dividends on a pro forma basis, assuming the Offering occurred on
April 1, 1996 and 1997 would have been $27.0 and $6.4 million for the year
ended March 31, 1997 and the three months ended June 30, 1997,
respectively.
(c) For purposes of calculating the ratio of earnings available to cover
combined fixed charges and preferred stock dividends (i) earnings consist
of loss before income taxes and extraordinary items plus fixed charges
excluding capitalized interest and (ii) fixed charges consist of interest,
whether expensed or capitalized, plus amortization of debt issuance costs.
For the years ended March 31, 1993, 1994, 1995, 1996 and 1997 and for the
three months ended June 30, 1997, the Company's earnings were insufficient
to cover its combined fixed charges and preferred stock dividends by $1.1,
$4.8, $7.7, $13.8, $30.3 and $13.3 million, respectively. On a pro forma
basis, the Company's earnings were insufficient to cover its combined
fixed charges and preferred stock dividends by $87.9 and $27.3 million for
the year ended March 31, 1997 and for the three months ended June 30,
1997, respectively.
(d) Earnings before interest expense, income taxes, depreciation and
amortization, other non-cash charges, gain on sale of investment, interest
income and equity in net loss of joint ventures ("EBITDA") and similar
measurements of cash flow are commonly used in the telecommunications
industry to analyze and compare telecommunications companies on the basis
of operating performance, leverage, and liquidity. While EBITDA is not an
alternative indicator of operating performance to operating income or an
alternative to cash flows from operating activities as a measure of
liquidity as defined by generally accepted accounting principles, and
while EBITDA may not be comparable to other similarly titled measures of
other companies, the Company's management believes EBITDA is a meaningful
measure of performance.
(e) For the fiscal years ended March 31, 1993, 1994, 1995, 1996 and 1997 and
the three months ended June 30, 1996 and 1997, the Company's capital
expenditures (including capital expenditures relating to its wholly owned
Operating Companies) were $2.0, $3.1, $2.9, $6.1, $24.6, $1.8 and $18.8
million, respectively, and the Company's investments in its less than
wholly owned Operating Companies and the South Florida Partnership were
$1.9, $5.5, $7.5, $12.8, $34.8, $4.8 and $18.0 million, respectively, for
the same periods. Furthermore, during the fiscal year ended March 31,
1997, the Company invested $20.0 million in fiber assets and a senior
secured note. See the Company's consolidated financial statements and
notes thereto appearing elsewhere in this Prospectus.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, 1997, the
Company experienced substantial growth, building from its original two
partnerships covering two networks to 17 Operating Companies and 22 networks.
At June 30, 1997, 17 of these 22 networks were operational. The Operating
Companies' customers are principally small, medium and large businesses,
governmental and educational end users and 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, 1997, the Company's Operating Companies were made up of three
wholly owned subsidiaries, one majority-owned partnership and 13 joint
ventures (through which the Company has an interest in 18 networks) where the
Company owns 50% or less of the aggregate equity interests in such Operating
Companies. Results of majority-owned subsidiaries are consolidated into the
Company's financial statements. The Company's pro rata share of the results of
the Operating Companies where the Company owns 50% or less and the Company's
ownership interest in TCG of South Florida (the "South Florida Partnership"),
until it was sold on May 16, 1996, 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 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, 1997, the Company's
networks had approximately 3,640 route miles, approximately 174,708 fiber
miles and were connected to approximately 1,603 buildings and 106 LEC central
offices in 17 operating networks. As of June 30, 1997, the Operating Companies
had installed 13 switches or remote modules. The Company expects to offer
switched services in all of its markets during 1997. The Company's NOCC in
Coudersport, Pennsylvania provides for remote control, monitoring and
diagnosis of all Operating Company networks. Funding for the development of
the Operating Companies has come from investments by the Company and the Local
Partners as well as from Fiber Lease Financings which enable the Company to
finance the building of fiber optic plant through long-term leases. Excluding
investments in the South Florida Partnership, which was sold on May 16, 1996,
the combined capital invested by the Company and the local partners through
June 30, 1997 in the Operating Companies' networks, the NOCC and other
activities totaled approximately $339.4 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.
In the markets where the Company's 22 networks are operating or are under
construction, as of June 30, 1997, the Company believes its addressable market
opportunity was approximately $16.2 billion annually,
40
<PAGE>
substantially all of which is currently serviced by the incumbent LECs and
IXCs. This addressable market estimate does not include the enhanced data
services markets which the Company has entered or the Internet access market
which it plans to enter in the near future.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 in comparison with Three Months Ended June
30, 1996
Revenues increased 38% to $1.5 million for the three months ended June 30,
1997, from $1.1 million for the same quarter in the prior fiscal year. Growth
in revenues of $0.4 million resulted primarily from increased revenues from
telecommunications services from majority and wholly owned Operating Companies
as compared to the same quarter in the prior fiscal year due to increases in
the customer base and the impact of consolidation of the Nashville Operating
Company for the current fiscal quarter.
Network operations expense increased 37% to $1.2 million for the three
months ended June 30, 1997 from $0.9 million for the same quarter in the prior
fiscal year. The increase was attributable to the expansion of operations at
the NOCC and the consolidation of the Nashville Operating Company for the
current fiscal quarter.
Selling, general and administrative expense increased 132% to $2.4 million
for the three months ended June 30, 1997 from $1.0 million for the same
quarter in the prior fiscal year. The increase was due to both corporate and
NOCC overhead cost increases to accommodate the growth in the number of
operating companies managed and monitored by the Company.
Depreciation and amortization expense increased 97% to $1.4 million during
the three months ended June 30, 1997 from $0.7 million for the same quarter in
the prior fiscal year primarily as a result of increased depreciation
resulting from higher depreciable asset base at the NOCC and the majority and
wholly owned Operating Companies.
Gain on Sale of Investment for the three months ended June 30, 1996 was due
to the sale of the Company's 15.7% partnership interest in TCG of South
Florida to Teleport Communications Group, Inc. on May 16, 1996 for an
aggregate sales price of $11.6 million. This sale resulted in a gain of $8.4
million. There were no such similar transactions in the three months ended
June 30, 1997.
Interest income for the three months ended June 30, 1997 decreased 47% to
$0.8 million from $1.4 million for the same quarter in the prior fiscal year
as a result of reduced cash and cash equivalents due to utilization of the
proceeds of the Senior Notes and Class B Warrants.
Interest expense and fees increased 31% to $8.1 million during the three
months ended June 30, 1997 from $6.2 million for the same period in the prior
fiscal year. The increase was attributable to higher interest expense
associated with the accretion of the Senior Notes.
Equity in net loss of joint ventures increased by 55% to $2.5 million during
the three months ended June 30, 1997 from $1.6 million for the same quarter in
the prior fiscal year as the nonconsolidated Operating Companies increased
operations. The net losses of the Operating Companies for the three months
ended June 30, 1997 were primarily the result of increased revenues only
partially offsetting startup and other costs and expenses associated with
design, construction, operation and management of the networks of the
Operating Companies, and the effect of the typical lag time between the
incurrence of such costs and expenses and the subsequent generation of
revenues by a network.
The number of nonconsolidated Operating Companies paying management fees to
the Company increased from 11 at June 30, 1996 to 14 at June 30, 1997. These
Operating Companies and networks under construction paid management and
monitoring fees to the Company, which are included in revenues, aggregating
approximately $0.8 million for the three months ended June 30, 1996 and 1997.
The nonconsolidated Operating Companies' net losses, including networks under
construction, for the three months ended June 30, 1996 and 1997 aggregated
approximately $3.6 million and $6.3 million respectively.
41
<PAGE>
Net (loss) income changed from net income of $0.6 million for the three
months ended June 30, 1996 to a net loss of $13.3 million for the same quarter
in the current fiscal year. The increased net loss was primarily attributable
to a higher operating loss, interest expense associated with the Senior Notes,
increased equity in the net losses of the Company's joint ventures and
increased depreciation and amortization combined with lower interest income
and no gain on sale of investment.
Fiscal 1997 in comparison with Fiscal 1996
Revenues increased 53% to $5.1 million for the fiscal year ended March 31,
1997 ("Fiscal 1997") from $3.3 million in the prior fiscal year. Growth in
revenues of $1.8 million resulted primarily from continued expansion in the
number and size of Operating Companies and the resultant increase in
management fees of $0.8 million over the prior fiscal year. Revenues from
majority and wholly owned Operating Companies also increased approximately
$1.0 million as compared to the prior fiscal year due to increases in the
customer base and the impact of consolidation of the Nashville Operating
Company.
Network operations expense increased 28% to $3.4 million in Fiscal 1997 from
$2.7 million in the prior fiscal year. Substantially all of the increase was
attributable to the expansion of operations at the NOCC, as well as the
increased number and size of the Operating Companies which resulted in
increased employee related costs and equipment maintenance costs.
Selling, general and administrative expense increased 120% to $6.8 million
in Fiscal 1997 from $3.1 million in the prior fiscal year. Approximately $0.9
million of the $3.7 million increase was due to an increase in the amount of
allocated costs from Adelphia. These costs include charges for office space,
senior management support and shared services such as finance activities,
information systems, computer services, investor relation activities, payroll
and taxation. Such costs were estimated by Adelphia and do not necessarily
represent the actual costs that would be incurred if the Company was to secure
such services on its own. In addition, $0.7 million of the increase was due to
a write off of costs in connection with the postponement of the Company's
contemplated initial public offering in November 1996. The remainder of the
increase was due to increased administrative and sales and marketing efforts
as well as corporate and NOCC overhead cost increases due to growth in the
number of Operating Companies managed and monitored by the Company.
Depreciation and amortization expense increased 233% to $3.9 million during
Fiscal 1997 from $1.2 million in the prior fiscal year primarily as a result
of the amortization of $1.0 million of costs incurred in connection with the
issuance of the Senior Notes and increased depreciation resulting from higher
capital expenditures at the NOCC and the majority and wholly owned Operating
Companies.
Gain on sale of investment is due to the sale of the Company's 15.7%
partnership interest in the South Florida Partnership to Teleport
Communications Group Inc. on May 16, 1996 for an aggregate sales price of
approximately $11.6 million. This sale resulted in a gain of $8.4 million.
Interest income for Fiscal 1997 increased to $6.0 million from $0.2 million
in the prior fiscal year as a result of interest income earned on investment
of the proceeds of the Senior Notes and the Class B Warrants (defined herein).
Interest expense and fees increased 366% to $28.4 million during Fiscal 1997
from $6.1 million in the prior fiscal year. The increase was attributable to
$23.5 million of non-cash interest expense associated with the Senior Notes
partially reduced by lower affiliate interest expense due to decreased
borrowings from Adelphia.
Equity in net loss of joint ventures increased by 68% to $7.2 million during
Fiscal 1997 from $4.3 million in the prior fiscal year as more nonconsolidated
Operating Companies began operations. The net losses of the Operating
Companies for Fiscal 1997 were primarily the result of revenues only partially
offsetting startup and other costs and expenses associated with design,
construction, operation and management of the networks of the Operating
Companies, and the effect of the typical lag time between the incurrence of
such costs and expenses and the subsequent generation of revenues by a
network.
42
<PAGE>
The number of nonconsolidated networks paying management fees to the Company
increased from 13 at March 31, 1996 to 14 at March 31, 1997. These networks
paid management and monitoring fees to the Company, which are included in
revenues, aggregating approximately $3.2 million for Fiscal 1997, an increase
of approximately $0.8 million over the prior fiscal year. The nonconsolidated
networks' net losses, including networks under construction, for Fiscal 1997
aggregated approximately $17.1 million.
Net loss increased by 124% to $30.5 million during Fiscal 1997 from $13.6
million in the prior fiscal year. The increase was primarily attributable to
greater interest expense associated with the Senior Notes, increased equity in
the net losses of the Company's joint ventures, increased depreciation and
amortization, and increased selling, general, and administrative expenses
partially offset by higher interest income and the gain recognized on the sale
of the Company's investment in the South Florida Partnership.
Earnings before interest expense, income taxes, depreciation and
amortization, other non-cash charges, gain on sale of investment, interest
income and equity in net loss of joint ventures ("EBITDA") decreased 109% to
($5.1) million in Fiscal 1997 from ($2.5) million for the prior fiscal year.
Increased revenues from management fees and the majority and wholly owned
Operating Companies were more than offset by increased operating costs. EBITDA
and similar measurements of cash flow are commonly used in the
telecommunications industry to analyze and compare telecommunications
companies on the basis of operating performance, leverage, and liquidity.
While EBITDA is not an alternative indicator of operating performance to
operating income or an alternative to cash flows from operating activities as
a measure of liquidity as defined by generally accepted accounting principles,
and while EBITDA may not be comparable to other similarly titled measures of
other companies, the Company's management believes EBITDA is a meaningful
measure of performance.
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.
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
43
<PAGE>
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 13 at March 31, 1996. Such 13
networks paid management and monitoring fees to the Company aggregating
approximately $2.4 million for Fiscal 1996, an increase of approximately $1.0
million over Fiscal 1995.
Net 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.
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.
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 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, 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.
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 doubled each year since the Company's inception.
Revenues during Fiscal 1997 of $15.2 million were $7.5 million or 96%
higher than Fiscal 1996 primarily due to the Buffalo, Vermont, Richmond,
Louisville, Jacksonville and Wichita markets. 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 existing networks and the initial generation of revenues
in the Buffalo and Louisville networks. Revenues continued to increase in all
markets during the three months ended June 30, 1997 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. Furthermore, there can be
no assurance that the Company will be able to benefit from such growth in
revenues if such growth occurs.
EBITDA increased for Fiscal 1997 by $0.8 to ($1.7) million, as compared to
Fiscal 1996. The increase was due to higher revenues in most of the networks
which had commenced operations in the prior fiscal year, offset by increased
operating expenses in those networks, and start up costs in several new
networks, particularly Philadelphia and New Jersey. Excluding the start up
losses in the Philadelphia and New Jersey markets, EBITDA
44
<PAGE>
would have been $1.4 million for Fiscal 1997. 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 increases in operating expenses in
several networks, including Vermont, Buffalo, New Jersey, Harrisburg,
Charlottesville and Louisville, offset somewhat by increased EBITDA in the
Syracuse, Richmond, Nashville and Wichita networks. EBITDA continued to
decrease during the three months ended June 30, 1997 as compared to the
corresponding period in the prior year due to start up costs associated with
entering the switched services market.
The Operating Companies' capital expenditures for Fiscal 1996 and Fiscal
1997 have grown consistently, reflecting the addition of new networks and the
expansion and growth of existing networks. Capital expenditures for the three
months ended June 30, 1997 also increased substantially over the corresponding
period in the previous year. 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.
Supplementary Operating Company Financial Information by Cluster (unaudited)
<TABLE>
<CAPTION>
REVENUES
------------------------------------------------
THREE MONTHS ENDED
JUNE 30,
FISCAL FISCAL FISCAL --------------------
1995 1996 1997 1996 1997
------- ------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Northeast..................... $ 1,393 $ 3,991 $ 5,553 $ 1,271 $ 1,527
Mid-Atlantic.................. 267 735 2,227 345 1,194
Mid-South..................... 44 473 1,264 239 426
Other Networks................ 1,352 2,564 6,179 1,077 2,196
------- ------- -------- --------- ---------
Total....................... $ 3,056 $ 7,763 $ 15,223 $ 2,932 $ 5,343
======= ======= ======== ========= =========
<CAPTION>
EBITDA
------------------------------------------------
THREE MONTHS ENDED
JUNE 30,
FISCAL FISCAL FISCAL --------------------
1995 1996 1997 1996 1997
------- ------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Northeast..................... $ (183) $ (765) $ 594 $ 215 $ (457)
Mid-Atlantic.................. (308) (766) (3,681) (752) (1,160)
Mid-South..................... (605) (878) (503) (231) (181)
Other Networks................ (233) (15) 1,917 253 614
------- ------- -------- --------- ---------
Total....................... $(1,329) $(2,424) $ (1,673) $ (515) $ (1,184)
======= ======= ======== ========= =========
<CAPTION>
CAPITAL EXPENDITURES
------------------------------------------------
THREE MONTHS ENDED
JUNE 30,
FISCAL FISCAL FISCAL --------------------
1995 1996 1997 1996 1997
------- ------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Northeast..................... $ 8,167 $ 6,978 $ 28,654 $ 2,030 $ 5,822
Mid-Atlantic.................. 3,923 14,351 67,892 7,803 20,879
Mid-South..................... 4,002 7,321 19,455 1,611 10,262
Other Networks................ 8,566 16,527 12,269 2,443 12,632
------- ------- -------- --------- ---------
Total....................... $24,658 $45,177 $128,270 $13,887 $49,595
======= ======= ======== ========= =========
</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
45
<PAGE>
capital expenditures and investments during the past several years. Capital
expenditures by the Company were $2.9 million, $6.1 million $24.6 million,
$1.8 million and $18.8 million for Fiscal 1995, Fiscal 1996, Fiscal 1997, and
the three months ended June 30, 1996 and 1997, respectively. Further,
investments made in the Company's nonconsolidated Operating Companies and the
South Florida Partnership by the Company were $7.5 million, $12.8 million,
$34.8 million, $4.8 million and $18.0 million in Fiscal 1995, Fiscal 1996,
Fiscal 1997, and the three months ended June 30, 1996 and 1997, respectively.
Also, during Fiscal 1997, the Company invested $20.0 million in fiber assets
and a senior secured note in furtherance of its strategy to interconnect its
networks in the northeastern United States. 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.
The Company recently received a firm commitment for a $25.0 million long
term lease facility from AT&T Capital Corporation. The lease facility provides
for financing for certain of the Operating Companies' switching equipment and
is expected to be available by the end of 1997.
Through June 30, 1997, Adelphia had made loans and advances totalling
approximately $68.3 million, including accrued interest, to the Company and
leased $3.4 million in fiber network construction 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 $91.2
million as their pro rata investment in those networks through June 30, 1997.
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 $56.4 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 $120.1 million to fund its pro rata
investment in the networks, capital expenditures and operations. Collectively,
these investments and the Fiber Lease Financings have totaled $339.4 million
from the Company's inception through June 30, 1997.
The Company has experienced substantial 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. For the fiscal years ended
March 31, 1995, 1996 and 1997 and the three months ended June 30, 1996 and
1997, cash used in operating activities totalled $2.1 million, $0.8 million,
$4.8 million, $2.7 million and $2.4 million, respectively, cash used in
(provided by) investing activities totalled $10.4 million, $18.9 million,
$72.8 million, $(5.1) million and $36.8 million, respectively, and cash
provided by financing activities totalled $12.5 million, $19.7 million, $137.5
million, $129.7 million and $0.7 million, respectively. 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 Senior Notes and
329,000 Class B Warrants to purchase an aggregate of 613,427 shares of its
common stock. Proceeds to the Company, net of discounts, commissions, and
other transaction costs were approximately $168.6 million. Such net proceeds
were used to 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 Class B 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 $25.9 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
46
<PAGE>
of identical subordinated notes, or in any combination thereof, at the option
of the Company. Interest accrued on the Adelphia Note was $5.9 million as of
June 30, 1997.
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 year ended March 31,
1997 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.
Pursuant to an agreement dated July 25, 1996, the Company purchased general
and limited partnership interests in the Nashville, Tennessee Operating
Partnership from InterMedia and Robin Media on August 1, 1996. The aggregate
purchase price was $5.0 million. As a result of this acquisition, the
Company's ownership interest in this partnership increased to 95%.
During the year ended March 31, 1997, the Company purchased approximately
341 miles of SONET ring fiber backbone used by the Vermont Operating Company
from Adelphia for $6.5 million, Adelphia's historical cost for such assets.
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 existing networks and
(iii) the design, construction and development of additional networks. The
Company plans to make substantial capital investments and investments in
Operating Companies in connection with the deployment of switches in all of
its operating markets by the end of 1997. In addition, the Company intends to
increase spending on marketing and sales significantly in the foreseeable
future in connection with the expansion of its sales force and marketing
efforts generally. The Company estimates that it will require approximately
$175 million to $200 million to fund anticipated capital expenditures, working
capital requirements and operating losses of the Company, investments in its
existing Operating Companies and the acquisition of 100% of the ownership
interests in the Buffalo, Louisville, Lexington and Syracuse networks through
the fiscal year ending March 31, 1999. In addition, 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 and, in the future, the
Company may increase its ownership in the Operating Companies and acquire
existing networks. The Company expects that it will have adequate resources to
fund such expenditures through the net proceeds from the Offering and the
Senior Secured Note Offering, the remaining proceeds from the Senior Notes,
anticipated bank and/or vendor financings by the Operating Companies, internal
sources of funds, including cash flow from operations generated by the
Company, and additional debt or equity financings, as appropriate. There can
be no assurance, however, as to the availability of funds from internal cash
flow or from the private or public equity or debt markets. In addition, the
expectations of required future capital expenditures are based on the
Company's current estimate. There can be no assurance that actual expenditures
will not significantly exceed current estimates or that the Company will not
accelerate its capital expenditures program.
In addition, the Company expects that pro rata investments by the Company
and its Local Partners as well as Fiber Lease Financings and anticipated bank
or 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 relating to the Senior
Notes 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
47
<PAGE>
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.
Recent Developments
On October 9, 1997, the Company completed the Preferred Stock Offering and
on August 27, 1997, the Company completed the Senior Secured Note Offering.
See "Prospectus Summary--Recent Developments."
On February 20, 1997, the Company entered into several agreements regarding
the lease of dark fiber in New York state. Pursuant to these agreements and in
consideration of a payment of $20.0 million, the Company received (i) a $20
million Senior Secured Note due February 2002 from Telergy, Inc., and (ii) a
fully prepaid lease from a Telergy affiliate for at least 25 years (with two
additional ten-year extensions), as a preferred customer, for 24 strands of
dark fiber installed or to be installed in a New York fiber optic
telecommunications backbone network. The fiber optic backbone network will
cover approximately 500 miles from Buffalo to Syracuse to Albany to New York
City, New York, and will provide interconnection capability for the Company's
operating networks in the state of New York.
On April 24, 1997, the Company and Entergy Corporation formed three joint
ventures, in which the Company, through three of its wholly owned
Subsidiaries, and Entergy each own a 50% interest. The Entergy-- Hyperion
Joint Venture will offer competitive telecommunications services primarily to
commercial customers in the Little Rock, Arkansas, Jackson, Mississippi and
Baton Rouge, Louisiana metropolitan areas. In addition, they intend to offer a
full range of switched telecommunications services, dedicated access to long
distance carriers and private line services. The Company expects the networks
for these three cities to total approximately 350 route miles of fiber optic
cable.
On June 13, 1997, the Company entered into the MCI Preferred Provider
Agreement pursuant to which the Company is designated MCI's preferred provider
of new end user dedicated access circuits and of end user dedicated access
circuits resulting from conversion from the incumbent LEC in the Company's
markets. In addition, Hyperion has a right of first refusal to provide MCI all
new dedicated local network access circuits such as POP-to-POP or POP-to-LSO
connections. These arrangements will apply to virtually all of the Company's
current networks and the term of these arrangements is five years with a five
year renewal option. The agreements allow MCI to purchase local loop transport
services from Hyperion where Hyperion is collocated with the incumbent LEC.
The agreement also provides that the parties negotiate in good faith the terms
of a separate agreement for the utilization of the Company's local switches
and operating support systems to provide MCI branded local service. In
connection with the transaction, the Company has issued a warrant to MCI to
purchase 281,040 shares of Class A Common Stock, par value $.01 per share
("Class A Common Stock"), of the Company, which expires June 13, 2000, at the
lower of (i) $20 per share of Class A Common Stock or (ii) the public offering
price of the Company's Class A Common Stock if the Company completes an
initial public offering of its Class A Common Stock. MCI could receive
additional warrants to purchase Class A Common Stock with an exercise price
equal to the fair market value of the Class A Common Stock at the time of
issuance if MCI meets certain agreed upon purchase volume revenue thresholds.
Collectively, the warrants would entitle MCI to purchase Class A Common Stock
of the Company representing between 2.5% and 8.5% of the Common Stock of the
Company, with adjustments for future issuances of common stock.
On August 4, 1997 the Company signed an Equity Contribution and Exchange
Agreement with Lenfest Telephony, Inc. ("Lenfest") whereby Lenfest will
receive 225,115 shares of Class A Common Stock of the Company in exchange for
its partnership interest in the Harrisburg, Pennsylvania network. The
transaction is subject to normal closing conditions and receipt of regulatory
approvals.
On August 11, 1997, the Company entered into the TCI Agreement pursuant to
which the Company will purchase all of TCI's interest in the Buffalo, New
York, Louisville, Kentucky and Lexington, Kentucky markets. Upon consummation
of the transactions contemplated by the TCI Agreement, which is subject to
normal closing conditions and receipt of regulatory approval, the Company will
own 100% of each of the Louisville, Lexington and Buffalo networks.
48
<PAGE>
On September 12, 1997, the Company closed the TWEAN Agreement whereby the
Company consolidated its Operating Companies' interests in the state of New
York by (i) increasing its ownership interest in the Buffalo network to 60%
and in the Syracuse network to 100% and (ii) eliminating its ownership
interests in the Albany and Binghamton networks. In addition, the agreement
provides that 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 Company has entered into purchase agreements (collectively, the "New
Jersey Agreement") dated October 31, 1997 with subsidiaries of Tele-
Communications, Inc. ("TCI") and Sutton Capital Associates, Inc. ("Sutton"),
local partners in the New Brunswick and Morristown, NJ networks, whereby the
Company will pay TCI and Sutton $26.0 million and $0.3 million, respectively,
for their partnership interests in these New Jersey networks. Upon
consummation of these transactions, which are subject to normal closing
conditions and receipt of regulatory approval, the Company's ownership
interest in these networks will increase to 100%.
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.
49
<PAGE>
BUSINESS
INDUSTRY OVERVIEW
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.
More recently, as a result of legal and regulatory developments, in
particular the enactment of the Telecommunications Act, certain CAPS have
expanded their various offerings to include switched local exchange services,
services that have been traditionally offered to residential and business
customers by the local telephone company. Such companies are referred to as
competitive local exchange companies (as previously defined, "CLECs"). The
combination of CAP and CLEC services is generically referred to as "local
services".
THE COMPANY
The Company is a leading facilities-based provider of local
telecommunications services with state-of-the-art fiber optic networks located
in regionally clustered markets primarily within the eastern half of the
United States. As of June 30, 1997, Hyperion's 17 operating networks served 35
cities with approximately 3,640 route miles of fiber optic cable connecting
1,603 buildings and 106 LEC central offices. The Company's 22 networks (which
includes five under construction) have generally been developed by partnering
with a Local Partner, which has enabled the Company to finance its network
expansion at a significantly lower cost than other CLECs and to rapidly
construct high capacity networks which provide the Company broader coverage
than other CLECs
50
<PAGE>
in its markets. According to Company estimates, this broad network coverage
enables the Company to directly reach approximately 60% of the business access
lines currently in service in its markets. In the markets where the Company's
22 networks are operating or under construction, as of June 30, 1997, the
Company believes its addressable market opportunity was approximately $16.2
billion annually, substantially all of which is currently serviced by the
incumbent LECs and IXCs. This addressable market estimate does not include the
enhanced data services market which the Company has entered, or the Internet
access market which it plans to enter in the near future.
The Company's current service offerings include switched local dial tone (in
13 markets), and enhanced data services (in seven markets), including frame
relay, high speed Internet access, video conferencing, dedicated access and
long distance access. The Company also plans to be an ISP in a majority of its
markets by the end of fiscal 1998. In addition, the Company will begin selling
long distance services by the end of 1997 through a resale agreement with an
IXC and expects to begin offering facilities-based long distance services
through the regional interconnection of the Company's networks in the near
future. With 75% of all U.S. telecommunications intraLATA and interLATA toll
traffic terminating, on average, within 300 miles of its origination point,
the Company believes that the breadth of its networks, their regional
clustering, and their current and planned interconnection will enable the
Company to originate and terminate a significant proportion of its customers'
communications traffic over its own networks, rather than relying primarily on
the network of the incumbent LEC.
Hyperion's targeted customer base consists of small, medium and large
businesses, governmental and educational end users and IXCs. Some of the
Company's customers include America Online, Sprint, Hershey Medical Center and
HCA International. The Company services it customers through a dedicated sales
force of approximately 70 highly trained professionals focused on selling the
Company's portfolio of service offerings. The Company expects to increase its
sales force and marketing efforts significantly by the end of the fiscal year.
Management believes that the Company's ability to utilize its extensive
network clusters to offer a single source solution for all of its customers'
telecommunications needs provides it with significant competitive advantage
over other CLECs. Further, Hyperion believes it can continue to attract end
user customers by offering (i) a single point of contact for billing,
installation and service coordination, (ii) high-capacity fiber optic network
connection directly to all or substantially all of a customer's premises due
to the breadth of the Company's network coverage and (iii) high quality,
solutions-oriented customer service. The Company also believes that major IXCs
such as AT&T, MCI and Sprint will seek to offer their business customers an
integrated package of switched local and long distance services using the
networks of CLECs such as Hyperion. The Company believes that it is well
positioned to capitalize on this opportunity as its networks generally offer
the broadest coverage in their markets, which is attractive to both end user
customers and major IXCs.
The Company initiated its switched services deployment plan in 1997 and
currently provides switched services in 13 markets, nine of which were placed
in operation during the last five months, with switching for the remaining two
operating markets (excluding Albany and Binghamton, New York) expected to be
operational by the end of 1997. In the markets it currently serves, the
Company estimates that there are approximately 11 million business access
lines in service. The Company has experienced initial success in the sale of
access lines, with approximately 16,000 access lines sold as of September 30,
1997, of which approximately 5,500 lines are installed. The timing of certain
installations may be extended due to necessary upgrading of customer
facilities, the complexity of installation or customer scheduling
requirements. Delivery of on-network switched services is expected to provide
faster, more reliable access line provisioning and more responsive customer
service and monitoring. The Company believes that its large upfront capital
investment in its networks, coupled with the selective use of unbundled
network elements, will provide higher operating margins than can be achieved
by other CLECs.
Since inception in October 1991 through June 30, 1997, the Company and its
partners have invested approximately $339.4 million to build and develop the
network infrastructure and to fund operations. As of June 30, 1997, the gross
property, plant and equipment of the Company, its networks and the Company's
NOCC, including the Company's investment in Telergy (see "Prospectus Summary--
Recent Developments"), was approximately $286.0 million. The Company
anticipates that its future capital expenditure requirements will be largely
based on a selective network build-out strategy that combines both on-network
and off-network connections to customers.
51
<PAGE>
The Company has, and intends to continue to, increase its ownership
interests in Operating Companies when it can do so on attractive economic
terms. This goal has been facilitated by the substantial completion of a
number of Hyperion's networks along with the desire of certain of its current
Local Partners to reduce their telecommunications investments and focus on
their core cable operations. For example, the Company has entered into
agreements to increase or has recently increased its ownership interest to
100% in Operating Companies for five of its markets. See "Prospectus Summary--
Ownership of the Company and the Operating Companies." As a result, since
December 13, 1995, the Company's weighted average ownership interest (based on
gross property, plant and equipment), after giving effect to pending
definitive agreements, in its Operating Companies has increased to 66.4% from
34.5%.
The Company operates in a single, domestic industry segment-
telecommunications services. Information about the amounts of revenues,
operating profit or loss and identifiable assets of the Company as of and for
each of the three years in the period ended March 31, 1997, and for the three
months ended June 30, 1997 is set forth in the Company's consolidated
financial statements and notes thereto included herein.
The Company has worked with Local Partners 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 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
- ----- ------------- --------------- -------------
(DOLLARS 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.
52
<PAGE>
GROWTH STRATEGY
The Company's objective is to be the leading local telecommunications
services provider to medium and large businesses, governmental and educational
end users and IXCs within its target markets. To achieve this objective, the
Company has pursued a facilities-based strategy to provide extensive, high
capacity network coverage and to broaden the range of telecommunications
products and services it offers to targeted customers. The principal elements
of the Company's growth strategy include the following:
Provide Bundled Package of Telecommunications Services. The Company believes
that a significant portion of business and government customers prefer a
single-source telecommunications provider that delivers a full range of
efficient and cost effective solutions to meet their telecommunications needs.
These customers require reliability, high quality, broad geographic coverage,
end-to-end service, solutions-oriented customer service and the timely
introduction of new and innovative services. The Company believes it will be
able to continue to compete effectively for end users by offering superior
reliability, product diversity, service and custom solutions to end user needs
at competitive prices. The Company also offers its local services to IXCs and
has entered into national service agreements with AT&T and MCI to be their
preferred supplier of dedicated access and switched access transport services.
See "--AT&T Certification" and "Prospectus Summary--Recent Developments--
Preferred Provider Alliance with MCI."
Expand Solutions-Oriented Sales Effort. The Company provides an integrated
solutions approach to satisfy its end users' communications requirements
through a well trained and focused team of direct sales and engineering
support professionals. In its marketing efforts, the Company emphasizes its
extensive fiber optic network, which provides the reach and capacity to
address the needs of its customers more effectively than many of its
competitors who rely solely upon leased facilities or who have limited network
build-outs in their markets. The Company intends to double the size of its
current 70 person direct sales force by the end of the year and to increase
the number of its customer care professionals from 44 to approximately 70 as
it increases the breadth of its product offerings to satisfy the growing
communications needs of its customers. Further, by the end of 1997, the
Company expects to initiate direct marketing and sales of local communications
services on an unbundled loop basis to retail and small business customers in
certain markets, generally offering such services under either the Hyperion
name or a co-branded name that includes the name of the particular Local
Partner.
Continue to Increase Broad Based Network Clusters and Interconnect
Networks. The Company intends to build on its extensive networks by (i)
expanding its networks into nearby areas that are under-served by its
competitors, (ii) establishing new networks in close proximity to existing
markets and (iii) interconnecting the networks within its regional clusters.
The Company believes that clustering and interconnecting its large networks
enables it to (i) carry a greater amount of traffic on its own networks, which
leverages the fixed cost structure of its networks, thereby increasing
revenues and margins, (ii) take advantage of economies of scale in management,
network operations and sales and marketing, (iii) increase the number of
customers that the Company's networks can service and (iv) increase the
networks' ability to provide reliable, end-to-end connectivity on a regionally
focused basis.
Create Additional Partnerships with Utility Companies. The Company intends
to continue to construct new networks either through partnerships or long-term
fiber lease agreements with utility companies, which significantly reduces the
cost and time required to construct a fiber optic network. This approach
enables the Company to offer services more rapidly as well as lower the
overhead costs associated with operating and maintaining a network. Utility
companies are attractive partners for the Company due to their (i) contiguous
and broad geographic coverage with extensive conduits and rights-of-way in
both business and residential areas, (ii) significant access to capital
resources, (iii) existing relationships with business and residential
customers and (iv) reputation for reliability and quality customer service. In
turn, the Company believes that it is an attractive partner for utility
companies because it can offer utility companies a significant stake in its
networks, both from a financial and operational perspective, and provide
network operations management expertise.
53
<PAGE>
COMPANY SERVICES
The Company initiated its switched services deployment plan in 1997 and
currently provides switched services in 13 markets, nine of which were placed
in operation during the last five months, with switching for the remaining two
operating markets (excluding Albany and Binghamton, New York) expected to be
operational by the end of 1997.
Switched Services
Local Exchange Services. Switched services providing dial tone to business
customers including local calling and intraLATA toll calls. These local
services also provide the customer with operator and directory assistance
services, 911 service, enhanced local features, which include PBX trunks,
business access lines, and ISDN, and custom calling features such as call
waiting, call forwarding, and voice mail.
Long Distance Services. Switching and transport of interexchange traffic,
including voice, data and video billed on a minutes-of-use basis. Long
distance services include provision of local access services to IXCs for the
local origination and completion of long distance calls. The Company also
plans to offer a full range of long distance services, including "toll free"
services.
Traditional Access Services
Special Access and Private Line Services. Non-switched dedicated
connections, including high capacity interconnections between (i) POPs of an
IXC, (ii) the POPs of different IXCs, (iii) large end users and their selected
IXCs and (iv) different locations of particular customers. These services are
billed at a flat, non-usage sensitive, monthly rate.
Collocated Special Access Services. A dedicated line carrying switched
transmissions from the IXC POP, through the LEC-CO to the end user.
Switched Access Transport Services. A dedicated line carrying switched
transmissions from the LEC-CO to an IXC POP.
Long Distance Transport Services. Non-switched, high capacity intraLATA
services sold on a wholesale basis to IXCs and cellular and PCS operators.
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 and intranet
access and high speed video conferencing. The Company currently offers, or
intends to offer, enhanced services to customers in all of its networks
through its partnerships with !NTERPRISE, a wholly owned subsidiary of U S
WEST.
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 22 networks are located. The estimates, however,
do not include the enhanced data services market which the Company has entered
or the Internet access market which it plans to enter in the near future. 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.
54
<PAGE>
<TABLE>
<CAPTION>
TRADITIONAL TOTAL REVENUE
CLUSTER ACCESS SERVICES SWITCHED SERVICES LONG-DISTANCE POTENTIAL
- ------- --------------- ----------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Northeast............... $ 269 $2,765 $1,466 $4,500
Mid-Atlantic............ 617 4,647 2,494 7,758
Mid-South............... 175 1,381 740 2,296
Other Networks.......... 139 1,007 540 1,686
------ ------ ------ -------
Total................. $1,200 $9,800 $5,240 $16,240
====== ====== ====== =======
</TABLE>
OWNERSHIP OF THE COMPANY AND THE OPERATING COMPANIES
Overview
The Company is an 88% owned subsidiary of Adelphia Communications
Corporation ("Adelphia"), the seventh largest cable television company in the
United States which as of June 30, 1997, owned or managed cable television
systems that served approximately 1.9 million subscribers in 12 states. The
balance of the Company is currently owned by senior executives of the Company.
As of September 1, 1997, the Company's 22 networks were owned through (i)
partnerships or limited liability companies with Local Partners (the
"Operating Partnerships"), (ii) three wholly owned subsidiaries of the
Company, (iii) one corporation in which the Company is a minority shareholder
and (iv) one company in which the Company is the majority equityholder (the
entities described in clauses (ii), (iii) and (iv) are collectively referred
to as the "Operating Corporations," and the Operating Corporations and the
Operating Partnerships are collectively referred to 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.
55
<PAGE>
The following is an overview of the Company's networks and respective
ownership interests as of September 1, 1997.
<TABLE>
<CAPTION>
ACTUAL OR ACTUAL PRO FORMA
EXPECTED DATE HYPERION HYPERION
COMPANY NETWORKS OF OPERATION(A) INTEREST INTEREST(B) LOCAL PARTNER(S)
- ---------------- --------------- -------- ----------- ----------------------------
<S> <C> <C> <C> <C>
Northeast Cluster
Vermont.................... 11/94 100.0% 100.0%(h) (c)
Syracuse, NY............... 8/92 50.0 100.0(h) Time Warner/Advance(d)
Buffalo, NY................ 1/95 40.0 100.0(h) Tele-Communications, Inc.
Time Warner/Advance(c)
Albany, NY................. 2/95 50.0 -- Time Warner/Advance(d)
Binghamton, NY............. 3/95 20.0 -- Time Warner/Advance(d)
Mid-Atlantic Cluster
Charlottesville, VA........ 11/95 100.0 100.0 (c)
Scranton/Wilkes-Barre, PA.. 12/97 100.0 100.0 (c)
Harrisburg, PA............. 4/95 50.0 100.0 Lenfest Telephony
Philadelphia, PA........... 8/96 50.0 50.0 PECO Energy(e)
Allentown/Bethlehem/Easton/
Reading, PA ("ABER")...... 12/97 50.0 50.0 PECO Energy(e)
York, PA................... 5/97 50.0 50.0 Susquehanna Cable
Richmond, VA............... 9/93 37.0 37.0 Media One
Morristown, NJ............. 7/96 19.7 19.7 Tele-Communications, Inc.(f)
New Brunswick, NJ.......... 11/95 19.7 19.7 Tele-Communications, Inc.(f)
Mid-South Cluster
Lexington, KY.............. 6/97 50.0 100.0(h) Tele-Communications, Inc.(g)
Louisville, KY............. 3/95 50.0 100.0(h) Tele-Communications, Inc.(g)
Nashville, TN.............. 11/94 95.0 95.0(h) InterMedia Partners
Baton Rouge, LA............ 12/97 50.0 50.0 Entergy
Jackson, MS................ 12/97 50.0 50.0 Entergy
Little Rock, AR............ 12/97 50.0 50.0 Entergy
Other Networks
Wichita, KS................ 9/94 49.9 49.9 Gannett
Jacksonville, FL........... 9/92 20.0 20.0(h) Media One
Weighted Average Ownership
(i)........................ 56.8 66.4
</TABLE>
- --------
(a) Refers to the date on which (i) the network is connected to at least one
IXC POP, (ii) the network is capable of accepting traffic from IXCs and
end users, (iii) the Company's central office is fully functional and (iv)
the initial network SONET fiber ring has been completed.
(b) Gives effect to pending agreements which provide for the Company to
increase or decrease its ownership interests in its networks. The Company
is permitted to reenter the markets in which it has eliminated its
ownership interests and intends to reenter the Albany market by April
1998. As of the consummation of the TWEAN Agreement on September 12, 1997,
the Company's interests in the Buffalo and Syracuse networks increased to
60% and 100%, respectively, and the Company's interests in the Albany and
Binghamton networks were eliminated. See "Prospectus Summary--Recent
Developments."
(c) Adelphia or its affiliates lease fiber capacity to the Operating Companies
in these networks.
(d) The interests in the Albany, Binghamton and Syracuse networks are all
owned by one Operating Company.
(e) The interests in the Philadelphia and ABER networks are owned by one
Operating Company.
(f) 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.
(g) The interests in the Lexington and Louisville networks are owned by one
Operating Company.
(h) Represents a network that is owned by an Operating Company or a
subsidiary, all of the Capital Stock of which is or will be pledged by the
Company as security for the Senior Secured Notes.
(i) Based upon gross property, plant and equipment of the Company and the
Operating Companies.
56
<PAGE>
CLUSTER STATISTICS(A)
<TABLE>
<CAPTION>
THREE
FISCAL YEAR MONTHS
ENDED ENDED
MARCH 31, JUNE 30,
ROUTE FIBER BUILDINGS LEC-COS 1997 1997
CLUSTER MILES MILES CONNECTED ALLOCATED VGES(B) REVENUES REVENUES
- ------- ----- ------- --------- --------- ------- ----------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Northeast............... 1,128 54,156 366 14 132,288 $ 5,553 $1,527
Mid-Atlantic............ 1,248 59,885 457 59 170,304 2,227 1,194
Mid-South............... 506 24,283 436 17 64,488 1,264 426
Other Networks.......... 758 36,384 344 16 164,064 6,179 2,196
----- ------- ----- --- ------- ------- ------
Total................. 3,640 174,708 1,603 106 531,144 $15,223 $5,343
===== ======= ===== === ======= ======= ======
</TABLE>
- --------
(a) Non-financial information is as of June 30, 1997 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").
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.
[LOGO OF CHART APPEARS HERE]
57
<PAGE>
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 or supermajority 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, 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
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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 five 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 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.
Substantially all of the Fiber Lease Agreements are in their initial terms.
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.
The amount of the lease payments could be affected by the costs the Local
Partners incur for attachments to poles, or use of conduit, owned by incumbent
LECs or electric utilities. Various State PUCs and the FCC are reviewing
whether use of Local Partner facilities for telecommunications purposes (as
occurs when the Operating Companies lease fiber optic capacity from Local
Partners) should entitle incumbent LECs and electric utilities to raise pole
attachment or conduit occupancy fees. Such increased fees could result in an
increase in the amount of the lease payments made by the Operating Companies
to the Local Partners. In some cases, State PUCs attempt to directly regulate
the fiber lease contracts between the Operating Companies and their local
partners.
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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. In addition,
the Company has recently entered into master sales relationship agreements
with respect to three of its markets and is in discussions to expand its
relationship with !NTERPRISE to provide enhanced services pursuant to similar
such agreements in substantially all of the Company's markets.
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 in all of its operating
networks.
SALES AND MARKETING
The Company targets its network sales and marketing activities at business,
government and educational end users and resellers, including IXCs. The
Company services its customers through a dedicated sales force of over 70
highly trained professionals focused on selling the Company's portfolio of
service offerings. The Company intends to double the size of its current
direct sales force by the end of the year and increase the number of its
customer care professionals from 44 to approximately 70 as it increases the
breadth of its product offerings to satisfy the growing communications needs
of its customers. Further, by the end of 1997, the Company expects to initiate
direct marketing and sales of local communications services on an unbundled
loop basis to retail and small business customers in certain markets,
generally offering such services under either the Hyperion name or a co-
branded name that includes the name of the particular Local Partner. 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.
End Users
The Company targets end users which include small, medium and large
businesses as well as government and educational institutions. End users are
currently marketed through Company direct sales representatives in
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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. The Company believes it will be able to continue to
compete effectively for end users by offering superior reliability, product
diversity, service and custom solutions to end user needs at competitive
prices. 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.
Resellers
Resellers utilize the Operating Companies' services primarily as a local
component of their own service offerings to end users. The Company has
national supplier agreements with all of the major IXCs. The Company believes
it can effectively provide IXCs with a full complement of traditional access
services as well as switched services. Factors that increase the value of the
Company's networks to IXCs include reliability, state-of-the-art technology,
route diversity, ease of ordering and customer service. The Company also
generally prices the services of an Operating Company at a discount relative
to the incumbent LEC. In order to further complement the services provided to
the IXCs, the Company integrates its networks with IXC networks to enable the
IXC to (i) access service, billing and other data directly from the Company
and (ii) electronically send automated service requests to the Company. 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." In addition, the Company has entered into
the MCI Preferred Provider Agreement pursuant to which the Company is
designated MCI's preferred provider of new end user dedicated access circuits
and of end user dedicated access circuits resulting from conversions from the
incumbent LEC in the Company's markets. See "Prospectus Summary--Recent
Developments."
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.
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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. 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 the NOCC, which 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 1,603 building connections, eight switches or
remote switching modules and approximately 3,640 network route miles as of
June 30, 1997. 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
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optic cable, equipment and supplies for the construction and development of
its networks will continue to be readily available from Lucent, Fujitsu,
Tellabs 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 seven Lucent 5ESS Switches ("5ESSs") and six
Lucent remote switching modules, which deliver full switching functionality,
in thirteen of their current markets. The Company and the Operating Companies
plan to deploy 5ESSs or remote switching modules in all of its existing
networks during 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.
The following diagram is an illustration of an Operating Company fiber optic
transport network in a typical market.
[LOGO OF CHART APPEARS HERE]
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EMPLOYEES
As of June 30, 1997, the Operating Companies and the Company, respectively,
employed 181 and 142 full-time and part-time employees. 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 June 30, 1997, the Company's total telecommunications equipment in service
consists of fiber optic telecommunications equipment, fiber optic cable,
furniture and fixtures, leasehold improvements and construction in progress.
Such properties do not lend themselves to description by character and
location of principal units.
Substantially all of the fiber optic telecommunications equipment used in
the Company's networks is housed in multiple leased facilities in various
locations throughout the metropolitan areas served by the Company. The Company
believes that its properties and those of its Operating Companies are adequate
and suitable for their intended purpose.
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings except for
claims and lawsuits arising in the normal course of business. The Company does
not believe that these claims or lawsuits will have a material effect on the
Company's financial condition or results of operations.
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COMPETITION
The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. In each of the
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 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 is 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. Substantially all of the Company's markets
are served by one or more CLECs other than the Company. 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, recent
sweeping changes enacted by the Telecommunications Act facilitate entry by
such competitors into local exchange and exchange access markets, including
requirements that incumbent LECs make available interconnection and unbundled
network elements to any requesting telecommunications carrier at cost-based
rates, as well as requirements that LECs offer their services for resale. See
"Regulation--Telecommunications Act of 1996." Such requirements permit
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, or purchasing
unbundled network elements, rather than using services provided by the
Company.
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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 and international
services. Jurisdictionally, interstate services, which constitute the majority
of the Operating Companies' current services, are communications that
originate in one state and terminate in another. Intrastate services are
communications that originate and terminate in a single state. State
regulatory commissions exercise jurisdiction over intrastate services.
Additionally, municipalities and other local government agencies may regulate
limited aspects of the Company's business, such as use of rights-of-way. Many
of the regulations issued by these regulatory bodies may be subject to
judicial review, the result of which the Company is unable to predict. The
networks are also subject to numerous local regulations such as building codes
and licensing.
TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, the Telecommunications Act of 1996 was signed into law.
It is considered to be the most comprehensive reform of the nation's
telecommunications laws since the Communications Act of 1934. The
Telecommunications Act has and will continue to result in substantial changes
in the marketplace for voice, data and video services. These changes include
opening 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 an explicit subsidy mechanism for the
preservation of universal service. As a component of the need for explicit
subsidy mechanisms for universal service, the FCC was also directed to revise
and make explicit subsidies inherent in the current access charge system.
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 entity 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. Although the Operating Companies will be required to obtain
certification from the state regulatory commission in almost all cases, the
Telecommunications Act should limit 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." Delays in receiving regulatory approvals or the enactment of
new adverse regulation or regulatory requirements may have a materially
adverse effect upon the Operating Companies.
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Some state commissions are currently considering actions to preserve
universal service and promote the public interest. The actions may impose
conditions on the certificate issued to an 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 believes that state commissions have limited authority to impose such
requirements under the Telecommunications Act. The imposition of such
conditions by state commissions could increase the cost to the Operating
Companies of providing local exchange services, or could otherwise affect the
Operating Companies' flexibility to offer services.
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 non-rural 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. An incumbent LEC may not prohibit or place unreasonable restrictions
on the resale of its services. In addition, incumbent LECs must offer bundled
local exchange services to resellers at a wholesale rate that is less than the
retail rate charged to end users.
Access to Rights-of-Way. All LECs, CLECs and other utilities must provide
access to their poles, ducts, conduits and rights-of-way on a reasonable,
nondiscriminatory basis.
Unbundling of Network Elements. LECs must offer access to various unbundled
elements of their network. This requirement allows new entrants to purchase at
cost-based rates elements of an incumbent LEC's network that may be necessary
to provide service to customers not located in the new entrants' networks.
Dependence on RBOCs and incumbent LECs. While the Telecommunications Act
generally requires incumbent LECs, including RBOCs, to offer interconnection,
unbundled network elements and resold services to CLECs, LEC-CLEC
interconnection agreements may have short terms, requiring the CLEC to
continually renegotiate the agreements. LECs may not provide timely
provisioning or adequate service quality thereby impairing a CLEC's reputation
with customers who can easily switch back to the LEC. In addition, the prices
set in the agreements may be subject to significant rate increases if state
regulatory commissions establish prices designed to pass on to the CLECs part
of the cost of providing universal service.
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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, if these regulations are effective in promoting
number portability. The Number Portability Order sets interim criteria for
number portability cost recovery. The FCC deferred selecting a long term
number portability cost recovery scheme to a further rulemaking proceeding
which is not expected to be decided until later this year. 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 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 obligations of all telecommunications carriers, including
obligations of CLEC and LEC networks and LEC pricing of interconnection and
unbundled elements (the "Local Competition Orders"). The Local Competition
Orders adopted a national framework for interconnection but left to the
individual states the task of implementing the FCC's rules. The Local
Competition Orders also established rules implementing the Telecommunications
Act requirements that LECs negotiate interconnection agreements, and provide
guidelines for review of such agreements by state commissions.
On July 18, 1997, the U.S. Court of Appeals for the Eighth Circuit ("Eighth
Circuit") vacated certain portions of the Local Competition Orders, including
provisions establishing a pricing methodology, a procedure permitting new
entrants to "pick and choose" among various provisions of existing
interconnection agreements between LECs and their competitors, and certain
provisions relating to the purchase of unbundled access elements. The
Operating Companies have negotiated and obtained state commission approval of
a number of interconnection agreements with incumbent LECs prior to this
Eighth Circuit decision. The Eighth Circuit decision creates uncertainty about
individual state rules governing pricing, terms, and conditions of
interconnection decisions, and could make negotiating and enforcing such
agreements in the future more difficult and protracted. It could also require
renegotiation of relevant portions of existing interconnection agreements, or
subject them to additional court and regulatory proceedings. It remains to be
seen whether the Operating Companies can continue to obtain and maintain
interconnection agreements on terms acceptable to them in every state, though
most states have already adopted pricing rules, if not interim prices, which
are for the most part consistent with the FCC's related pricing provisions.
The FCC has petitioned the United States Supreme Court to review the Eighth
Circuit decision.
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. Ultimately the success of the
Telecommunications Act to bring the benefits of increased competition to
consumers will depend in large part upon state regulators' implementation of
the Telecommunications Act and the Local Competition Orders as well as
numerous rulemakings that should level the playing field between incumbent
LECs and new entrants such as the Company. For example 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
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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.
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 most of
the Operating Companies, which already have such access through their Local
Partners, but benefits other potential competitors to a 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 FCC's "video dialtone"
regulatory regime. With the telco/cable cross ownership prohibition removed,
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 LEC entry into the video
market may be a 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. This is referred to as
"in-region" interLATA service. (RBOCs are currently permitted to provide
interLATA long distance services to customers outside of their local service
areas. This is referred to as "out-of-region" long distance service.) Before
an RBOC can provide in-region interLATA service, 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
reasonably expected to lead to facilities-based competition in the residential
and business local exchange markets, the RBOC can request authority to provide
in-region 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 "--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, which
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 of CLECs to generate access revenues from the IXCs. To date Ameritech
has sought authority from the FCC to provide in-region interLATA service in
Michigan, and Southwestern Bell Telephone Company ("SWBT") has sought similar
authority in Oklahoma. The Department of Justice has opposed both requests. On
September 30, 1997, BellSouth filed a request with the FCC for in-region
interLATA service in South Carolina, and a similar request is expected for
Louisiana in the near future. More RBOC requests to provide in-region
interLATA service are expected to be filed with the FCC in the near future.
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Relaxation of Regulation
A long-term goal of the Telecommunications Act is to increase competition
for telecommunications services, thereby reducing the need for regulation of
these services. To this end, the Telecommunications Act requires the FCC to
streamline its regulation of incumbent LECs and permits the FCC to forbear
from regulating particular classes of telecommunications services or
providers. Since the Company is 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.
In an exercise of its "forbearance authority," the FCC has ruled that
following a transition period nondominant interexchange carriers will no
longer be able to file tariffs with the FCC concerning their interexchange
interstate long distance services (the "IXC Detariffing Order"). The IXC
Detariffing Order has been appealed to the U.S. Court of Appeals for the
District of Columbia. The IXC Detariffing Order has been stayed and the appeal
is still pending.
Pursuant to the forebearance provisions of the Telecommunications Act, in
March 1996, the Company filed a petition requesting that the FCC also forbear
from imposing tariff filing requirements on Interstate exchange access
services provided by carriers other than incumbent LECs. In June 1997, the FCC
granted this request, concluding that allowing providers of exchange access
service the option of tariffing or detariffing their services is in the public
interest. In granting Hyperion's petition, the FCC requested further comment
on whether to mandate the detariffing of exchange access services. This
proceeding is pending, and there can be no assurance how the FCC will rule on
this issue, or what effect any such ruling may have upon competition within
the telecommunications industry generally, or on the competitive position of
the Company specifically.
The Telecommunications Act eliminates the requirement that incumbent 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.
Universal Service and Access Charge Reform
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.
On May 8, 1997, the FCC issued an order to implement the provisions of the
Telecommunications Act relating to the preservation and advancement of
universal telephone service (the "Universal Service Order"). The Universal
Service Order affirmed the policy principles for universal telephone service
set forth in the Telecommunications Act, including quality service, affordable
rates, access to advanced services, access in rural and high-cost areas,
equitable and non-discriminatory contributions, specific and predictable
support mechanisms, and access to advanced telecommunications services for
schools, health care providers and libraries. The Universal Service Order
added "competitive neutrality" to the FCC's universal service principles by
providing that universal service support mechanisms and rules should not
unfairly advantage or disadvantage one provider over another, nor unfairly
favor or disfavor one technology over another. The Universal Service Order
also requires all telecommunications carriers providing interstate
telecommunications services, including the Company, to contribute to universal
service support. On August 4, 1997, the FCC released its Universal Service
Worksheet, which estimates a universal service contribution of 9% of total
interstate and international revenues. Although the actual contribution is
expected to be lower, the Company's actual contribution cannot be determined
until the FCC finalizes its universal service cost mechanisms. Also, the FCC's
existing system for subsidizing universal service remains in effect, and only
ILECs are likely to be eligible to receive such
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subsidies until such time as the FCC determines the new subsidy mechanism,
even though CLECs like Hyperion may be obligated to provide universal service.
In a related proceeding, on May 16, 1997, the FCC issued an order to
implement certain reforms to its access charge rules (the "Access Charge
Reform Order"). Access charges are charges imposed by LECs on long distance
providers for access to the local exchange network, and are designed to
compensate the LEC for its investment in the local network. The FCC regulates
interstate access and the states regulate intrastate access. The Access Charge
Reform Order will require incumbent LECs to substantially decrease over time
the prices they charge for switched and special access and change how access
charges are calculated. These changes are intended to reduce access charges
paid by interexchange carriers to LECs and shift certain usage-based charges
to flat-rated, monthly per-line charges. To the extent that these rules begin
to reduce access charges to reflect the forward-looking cost of providing
access, the Company's competitive advantage in providing customers with access
services might decrease. In addition, the FCC has determined that it will give
incumbent LECs pricing flexibility with respect to access charges. To the
extent such pricing flexibility is granted before substantial facilities-based
competition develops, such flexibility could be misused to the detriment of
new entrants, including the Company. Until the FCC adopts and releases rules
detailing the extent and timing of such pricing flexibility, the impact of
these rules on the Company cannot be determined.
Two aspects of the FCC's Access Charge Reform Order create potential
competitive benefits for alternative access providers, including the Company.
First, the abolition of the unitary rate structure option for local transport
may have an adverse effect on some interexchange carriers, making competitive
access services provided by the Company and others more attractive. Second,
the FCC ruled that incumbent LECs may no longer impose the transport
interconnection charge on competitive providers, such as the Company, that
interconnect with the incumbent LEC at the incumbent's end offices.
Both the Universal Service and Access Charge Reform Orders are subject to
petitions seeking reconsideration by the FCC and direct appeals to U.S. Courts
of Appeals. Until the time when any such petitions or appeals are decided,
there can be no assurance of how the Universal Service and/or Access Charge
Reform Orders will be implemented or enforced, or what effect the Orders will
have on competition within the telecommunications industry, generally, or on
the competitive position of the Company, specifically.
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.
Under the Telecommunications Act, the FCC has authority to forbear from
regulation (such as toll regulation) provided that such forbearance is
consistent with the public interest. In an exercise of its "forbearance
authority," the FCC has ruled that following a transition period, nondominant
interexchange carriers will no longer be able to file tariffs with the FCC
concerning their interstate long distance services (the "IXC Detariffing
Order"). The IXC Detariffing Order has been appealed to the U.S. Court of
Appeals for the District of Columbia and the provision requiring interexchange
carriers to withdraw their tariffs was stayed by that court on February 13,
1997. That appeal is still pending. On March 21, 1996, the Company filed a
petition requesting that the FCC forbear from imposing tariff filing
requirements on interstate exchange access services provided by carriers other
than LECs. In June 1997, the FCC granted this request, concluding that
allowing providers of exchange access service the option of tariffing or
detariffing their services is in the public interest. In granting Hyperion's
petition, the FCC requested further comment on whether to mandate the
detariffing of exchange access services. This proceeding is pending, and there
can be no assurance how the FCC will rule on this issue, or what effect any
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such ruling may have upon competition within the telecommunications industry
generally, or on the competitive position of the Company specifically.
The FCC has adopted rules requiring incumbent LECs to provide "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 collocation rates that are
being investigated by the FCC and State Commissions to determine whether they
are excessive. If the FCC or State Commissions 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 also 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.
Moreover, the FCC is currently engaged in a number of rulemakings in which it
is considering regulatory implications of various aspects of local exchange
competition. Any or all of the proceedings may negatively affect CLECs,
including the Company. Most recently, the FCC has determined to investigate
whether or not to mandate operational support systems reporting standards for
the LECs, whether to regulate billing and collection functions, and whether to
assert jurisdiction over reciprocal compensation for local calls made to ISPs.
Because the states are in the process of implementing rules consistent with
the Telecommunications Act and rules adopted by the FCC pursuant to the Act,
it is uncertain how burdensome or beneficial such rules 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 a
significant amount of access through its networks owned with 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 similar
waivers in markets served by the Operating Companies. 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. The
May 21, 1997 Order reforming the FCC's price cap formula affords LECs greater
flexibility in establishing rates and provides additional incentives to foster
efficiency. It is also anticipated that the prices incumbent LECs charge for
access services will be reduced as a result of the FCC's reform of the access
charge regime and the adoption of universal service rules. 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.
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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 or are otherwise authorized to
provide telecommunications services in Florida, Kansas, Kentucky, Louisiana,
Mississippi, New Jersey, New York, Pennsylvania, Tennessee, Vermont and
Virginia. The certificates or other authorizations in Florida, Kentucky,
Louisiana, Mississippi, New Jersey, New York, Tennessee, Vermont and Virginia
permit the Operating Companies to provide a full range of local
telecommunications services, including basic local exchange service. The
Operating Companies have interim authority to provide a full range of local
telecommunications services in Pennsylvania and applications for permanent
certificates are pending in that state. Applications for authority to provide
local telecommunications services are pending in Arkansas and Kansas. 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, 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 and quality requirements, unbundling
and universal service contributions. In addition, in virtually every state,
the Company's certificate or other authorization is subject to the outcome of
proceedings by the state commission that address regulation of LECs and CLECs,
competition, geographic build-out, mandatory detariffing, and service
requirements, and universal service issues.
Certain of the states where the Operating Companies operate have adopted
specific universal service funding obligations. For example, in Kentucky, the
Operating Company is required to put into escrow, pending the issuance of
final Kentucky universal service rules, an amount equal to six percent of
gross receipts from the provision of intrastate service in Kentucky once it
begins providing intraexchange service. In Pennsylvania, pending the issuance
of final rules, the Operating Company will be required to make a universal
service contribution based on an "assessment rate" derived from dividing the
Operating Company's gross intrastate operating revenues into the statewide
intrastate revenues generated by all other carriers. The Operating Company's
contribution to the Pennsylvania universal service fund will be phased in over
four years with 25 percent of the assessment rate collected in the first year
and equal increments added to the payment in the second, third and fourth
years. Vermont imposes a universal service fund surcharge to finance state
lifeline, relay and E-911 programs, and potentially affordable service in high
cost areas, and also imposes a gross revenues tax, like many other states. In
Kansas, the state regulatory commission has ordered telecommunications
companies to pay approximately 9% of their intrastate retail revenues to the
Kansas Universal Service Fund, beginning March 1, 1997. Proceedings to adopt
universal service funding obligation rules are pending or contemplated in the
other states in which the Operating Companies conduct business.
In addition to obtaining certification, an Operating Company must negotiate
terms of interconnection with the incumbent LEC before it can begin providing
switched services. Under the Telecommunications Act, the FCC has adopted
interconnection requirements, certain portions of which have been overturned
by the Eighth Circuit. See "--Telecommunications Act of 1996--Interconnection
with LEC Facilities." To date, a number of the Operating Companies have
negotiated interconnection agreements with one or more of the incumbent LECs.
Specifically, state commissions have approved interconnection agreements in
Kansas (Southwestern Bell), Kentucky (BellSouth; GTE), New Jersey (Bell
Atlantic), Tennessee (BellSouth), Vermont (NYNEX), and Virginia (Bell
Atlantic; Sprint-Centel). In addition, two interconnection agreements have
been approved by operation of law in Pennsylvania (Bell Atlantic; GTE).
Finally, Operating Companies in New York interconnect with NYNEX (BA),
pursuant to NYNEX tariffs on file with the New York Public Service Commission,
rather
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than through interconnection agreements. The Operating Companies have signed
an interconnection agreement in Arkansas (Southwestern Bell) and are
negotiating an interconnection agreement with NYNEX (BA) in New York.
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
sets prices on an individual case basis.
Several states have allowed incumbent LECs rate, special contract (selective
discounting) 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 as little as ten percent of the Company's
outstanding voting securities may have to obtain approval of certain state
public utility commissions before acquiring such an interest, because such
ownership might be deemed to constitute an indirect controlling interest in
the state Operating Company.
As the Company expands its operations into other states, it may become
subject to the jurisdiction of their respective public service commissions.
Several northeastern states have required NYNEX to comply with the
Telecommunications Act's requirements for in-region interLATA service as a
condition to approval of its merger with Bell Atlantic. Such requirements may
serve to expedite NYNEX-Bell Atlantic's entry into this market and may also
reduce the incentive these RBOCs now have to negotiate and renegotiate
interconnection agreements with the Operating Companies since the existence of
such agreements is a prerequisite to such entry.
LOCAL GOVERNMENT AUTHORIZATIONS
An Operating Company may be required to obtain from municipal authorities
street opening and construction permits, or operating franchises, 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 may be required to 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 fiber lease
payment revenues. 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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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............... 73 Chairman and Director
James P. Rigas.............. 39 Vice Chairman, Chief Executive Officer and
Director
Michael J. Rigas............ 43 Vice Chairman and Director
Timothy J. Rigas............ 41 Vice Chairman, Chief Financial Officer,
Treasurer and Director
Daniel R. Milliard.......... 50 President, Chief Operating Officer,
Secretary and Director
Charles R. Drenning......... 51 Senior Vice President, Engineering
Operations and Director
Paul D. Fajerski............ 48 Senior Vice President, Carrier Sales and
Director
Randolph S. Fowler.......... 46 Senior Vice President, Business Development
and Regulatory Affairs and Director
Pete J. Metros.............. 57 Director
James L. Gray............... 62 Director
</TABLE>
John J. Rigas is the Chairman of the Board of the Company. He also is the
founder, Chairman, Chief Executive Officer and President of Adelphia. Mr.
Rigas has owned and operated cable television systems since 1952. Among his
business and community service activities, Mr. Rigas is Chairman of the Board
of Directors of Citizens Bank Corp., Inc., Coudersport, Pennsylvania and a
member of the Board of Directors of the Charles Cole Memorial Hospital. He is
a director of the National Cable Television Association and a member of its
Pioneer Association and a past President of the Pennsylvania Cable Television
Association. He is also a member of the Board of Directors of C-SPAN and the
Cable Advertising Bureau, and is a Trustee of St. Bonaventure University. He
graduated from Rensselaer Polytechnic Institute with a B.S. in Management
Engineering in 1950.
John J. Rigas is the father of Michael J. Rigas, Timothy J. Rigas and James
P. Rigas, each of whom currently serves as a director and executive officer of
the Company.
James P. Rigas is Vice Chairman, 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.
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
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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, Carrier Sales
effective September 1997, 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.
Pete J. Metros became a director of Hyperion on April 1, 1997. Mr. Metros
has been President and a member of the Board of Directors of Rapistan Demag
Corporation, a subsidiary of Mannesmann AG, since December 1991. From August
1987 to December 1991, he was President of Rapistan Corp., the predecessor of
Rapistan Demag Corporation, and of Truck Products Corp., both of which were
major subsidiaries of Lear Siegler Holdings Corp. From 1980 to August 1987,
Mr. Metros was President of the Steam Turbine, Motor & Generator Division of
Dresser-Rand Company. From 1964 to 1980, he held various positions at the
General Electric Company, the last of which was Manager--Manufacturing for the
Large Gas Turbine Division. Mr. Metros is also on the Board of Directors of
Borroughs Corporation of Kalamazoo, Michigan. Mr. Metros has been director of
Adelphia Communications Corporation since 1986 and received a B.S. degree from
the Georgia Institute of Technology in 1962.
James L. Gray became a director of Hyperion on April 1, 1997. Mr. Gray has
been chairman & CEO of PRIMESTAR Partners since January, 1995. Mr. Gray has
more than 20 years of experience in the telecommunications, cable and
satellite industries. He joined Warner Cable in 1974, and advanced through
several division operating posts prior to being named president of Warner
Cable in 1986. In 1992, after the merger of Time Inc. and Warner
Communications, Mr. Gray was appointed vice chairman of Time Warner Cable
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where he served until his retirement in 1993. Mr. Gray has served on the board
of several telecommunications companies and associations, including the
National Cable Television Association, where he served as a director from 1987
to 1991. He also served as chairman of the executive committee and director of
C-SPAN and as a director of E! Entertainment Television, Cable in the
Classroom and the Walter Kaitz Foundation. Beginning in 1992, Mr. Gray began
serving on PRIMESTAR's board of directors. Mr. Gray received a bachelor's
degree from Kent State University in Kent, Ohio and a master's degree in
business administration (MBA) from the State University of New York at
Buffalo.
In addition to the above, Edward E. Babcock, Jr., an officer, Assistant
Secretary and Vice President, Finance of the Company, serves as Chief
Accounting Officer.
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, 1997 to the Company's President and the other
most highly compensated executive officers whose total annual salary and bonus
exceeds $100,000.
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
----------------
LONG-TERM
COMPENSATION
RESTRICTED
NAME AND PRINCIPAL POSITION(A) FISCAL YEAR SALARY BONUS STOCK AWARDS ALL OTHER COMPENSATION
- ------------------------------ ----------- -------- ------- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
Daniel R. Milliard(b)... 1997 $238,863 $75,000 $156,000(c) $5,340(d)
President, Chief 1996 207,474 -- -- 5,250(d)
Operating Officer
and Secretary 1995 187,412 -- -- 5,350(d)
Charles R. Drenning..... 1997 $167,712 $12,500 $-- $--
Senior Vice President 1996 139,982 25,000 -- --
1995 128,254 17,345 -- --
Paul D. Fajerski........ 1997 $167,712 $12,500 $-- $--
Senior Vice President 1996 139,982 25,000 -- --
1995 128,254 17,345 -- --
Randolph S. Fowler...... 1997 $167,712 $12,500 $-- $--
Senior Vice President 1996 139,982 25,000 -- --
1995 128,254 17,345 -- --
</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) During the periods presented, Daniel R. Milliard was not employed by the
Company, but was compensated by Adelphia for his services to the Company
pursuant to an employment agreement with Adelphia. During such periods,
the Company reimbursed Adelphia for Mr. Milliard's base salary, insurance
premium payments and other benefits paid by Adelphia. During March 1997,
the Company entered into an employment agreement with Mr. Milliard. See
"--Employment Contracts."
(c) Mr. Milliard was granted a restricted stock bonus award under the 1996
Plan for 104,000 shares of Class A Common Stock pursuant to his employment
agreement on March 4, 1997. The 104,000 shares are not subject to vesting,
will participate in any dividends, and had a value of approximately
$156,000 as of March 4, 1997.
(d) Fiscal 1997, 1996 and 1995 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 $4,590 during Fiscal 1997, $4,600 during Fiscal 1996, and
$4,500, during Fiscal 1995, 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 1997, 1996 and 1995.
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<PAGE>
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 up 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 on April 1, 1997, the Special
Nominating Committee expanded the number of seats on the Board of Directors by
two and filled the vacancies created thereby with independent persons who are
not employees of the Company or its subsidiaries. The new members of the board
are James L. Gray and Pete J. Metros.
DIRECTOR COMPENSATION
The directors do not currently receive any compensation for services
rendered to the Company in their capacities as directors.
LONG-TERM INCENTIVE COMPENSATION PLAN
The Company's 1996 Long-Term Incentive 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 1,750,000. 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
2,500,000 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. Any shares subject to the
Plan in excess of 1,000,000 shares will require the consent of the Management
Stockholders (as defined below) under the Plan. No stock options, stock
awards, stock appreciation rights or phantom stock units have been granted
under the Plan, except for 122,000 shares of Class A Common Stock issued to
Mr. Milliard pursuant to his employment agreement discussed below, of which
104,000 shares were issued on March 4, 1997 and 18,000 shares were issued on
April 1, 1997 as stock bonuses pursuant to such agreement.
EMPLOYMENT CONTRACTS
The Company and Mr. Milliard have entered into an employment agreement which
provides for his employment as President and Chief Operating Officer of the
Company. The agreement includes the following provisions: (i) 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) a stock bonus of 104,000 shares of Class A Common Stock, stock
options to purchase 25,000 shares of Class A Common Stock at fair market value
of the Class A Common Stock on the date of issuance of such options, such
options to be 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 25,000 shares of Class A Common
Stock with an exercise price equal to the fair market value of the Class A
Common Stock on the date of issuance of such options, such options to be
granted during fiscal 1997 and each of the next four fiscal years; provided,
that until an initial public offering of the Class A Common Stock is
completed, the Company shall grant stock bonuses in lieu of any stock options
required to be granted under the employment agreement, such stock bonuses to
be in an amount equal to 72% of the shares of Class A Common Stock that would
have been covered by said options, (iv) a cash bonus of $75,000, a portion of
which will be used to repay outstanding loans to Adelphia, and (v) certain
employee benefits. It is expected
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that all such stock options will 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 provides 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
the remaining base salary and options required to be granted under the initial
term of the agreement. The employment agreement also contains provisions with
respect to confidentiality, non-competition and non-solicitation of customers,
suppliers and employees. Mr. Milliard will continue to serve as a director,
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 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 1997
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."
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Class A Common Stock and Class B Common Stock as of September 1, 1997 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>
TOTAL
CLASS A CLASS B COMMON
COMMON COMMON STOCK
STOCK STOCK (%)
-------- ---------- ------
<S> <C> <C> <C>
Adelphia Communications Corporation (a)(b)....... (b) 8,900,020 87.93
Daniel R. Milliard............................... 122,000 0 1.21
Charles R. Drenning (c).......................... (b) 366,660 3.62
Paul D. Fajerski (c)............................. (b) 366,660 3.62
Randolph S. Fowler (c)........................... (b) 366,660 3.62
All executive officers and directors as a group
(eight persons)(a)............................... 122,000 10,000,000(d) 100.00
</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) 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.
(c) The business address of each such holder is DDI Plaza Two, 500 Thomas
Street, Suite 400, Bridgeville, PA 15017-2838. Includes with respect to
(i) Mr. Drenning, an aggregate of 80,000 shares of Class B Common Stock
held in trust for the benefit of Mr. Drenning's children for which his
spouse serves as co-trustee and as to which shares Mr. Drenning has
neither the power to dispose nor the power to vote; and (ii) Mr. Fajerski,
an aggregate of 80,000 shares held in trust for the benefit of Mr.
Fajerski's children for which his spouse serves as co-trustee and as to
which shares Mr. Fajerski has neither the power to dispose nor the power
to vote.
(d) Includes 8,900,020 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.
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<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company was founded in October 1991. From the Company's inception
through April 14, 1996, Adelphia, which owns 88% of the Company's outstanding
Common Stock, provided all the equity capital to the Company and also made
loans and advances totaling approximately $50.9 million. The Company repaid
$25 million of such indebtedness to Adelphia from the proceeds of the offering
of the Senior Notes and Class B Warrants (the "Class B Warrants") issued
pursuant to the Class B Warrant Agreement, between the Company and Bank of
Montreal Trust Company, as warrant agent, on April 15, 1996, on which date the
remaining $25.9 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 (the "Adelphia Note") 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 Class B 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. Milliard, Drenning, Fajerski and Fowler, all of whom are senior
executives of the Company, cumulatively hold approximately 12% of the
Company's outstanding Common Stock prior to this Offering. Messrs. Drenning,
Fajerski and Fowler are parties to a stockholder agreement, as amended
("Stockholder Agreement") with Adelphia and together hold approximately 11% of
the Company's Common Stock prior to this Offering. The Stockholder 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
Stockholder Agreement terminates automatically upon the date when the
Company's Common Stock is registered under the Securities Act or the
Securities Exchange Act of 1934, as amended (the "Exchange 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 Securities 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.
The Company and the Management Stockholders have entered into a registration
rights agreement, as amended, whereby the Company has agreed to provide the
Management Stockholders with one collective demand registration right relating
to the Common Stock owned by them or certain permitted transferees. Such
demand registration right may be exercised beginning six months after the
completion of the Company's initial public offering and terminated upon the
earlier of (i) the sale or disposition of all of such Common Stock or (ii) the
date on which all such shares of Common Stock become freely tradeable pursuant
to Rule 144.
The Company and Adelphia have entered into a registration rights agreement
whereby the Company has agreed to provide Adelphia and certain permitted
transferees 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
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<PAGE>
market value, and with certain piggyback registration rights in future public
offerings of the Common Stock. Adelphia's demand registration rights terminate
at such time as Adelphia ceases to hold at least $10 million in market value
of Common Stock.
The Company, Adelphia and the Management Stockholders have agreed generally,
effective until October 7, 1998, that upon or following the consummation of an
initial public offering of the Common Stock of the Company, (i) the
Shareholder Agreement and Loan Agreements will terminate, (ii) the Management
Stockholders will each repay the $1 million borrowed from the Company pursuant
to the Loan Agreements with the proceeds from such offering or from margin
loans secured by Common Stock owned by such Management Stockholders, and (iii)
the Company will pay to the Management Stockholders bonus payments in the
amount of interest accruing on the margin loans for certain periods following
such public offering and any additional amounts necessary to pay income taxes
applicable to such bonus payments.
During Fiscal 1995, 1996 and 1997, the Company incurred charges from
Adelphia of $0.5, $0.4 and $1.2 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 actual costs that would be incurred if the
Company were to secure such services on its own. During Fiscal 1995, 1996 and
1997, the Company paid Adelphia or certain of Adelphia's affiliates, fiber
lease payments of $0.3, $1.0 and $0.7 million, respectively.
During the year ended March 31, 1997, the Vermont Operating Company
purchased from Adelphia approximately 341 miles of SONET ring fiber backbone
presently used by the Vermont Operating Company for $6.5 million, Adelphia's
historical cost for such assets.
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<PAGE>
DESCRIPTION OF SECURITIES
DESCRIPTION OF PREFERRED STOCK
The following is a summary of certain terms of the New Preferred Stock
offered hereby. The New Preferred Stock, like the Old Preferred Stock, will be
issued pursuant to the Certificate of Designation of Voting Power, Designation
Preferences and Relative, Participating, Optional or Other Special Rights and
Qualifications, Limitations and Restrictions (the "Certificate of
Designation"). The terms of the New Preferred Stock are substantially
identical to the Old Preferred Stock in all material respects (including
dividend rate and maturity), except that (i) the New Preferred Stock will not
be subject to the restrictions on transfer (other than with respect to holders
that are broker-dealers, persons who participated in the distribution of the
Old Notes or affiliates) and (ii) the Registration Rights Agreement covenants
regarding registration and the related Liquidated Damages (other than those
that have accrued and were not paid) with respect to Registration Defaults
will have been deemed satisfied. The New Preferred Stock is subject to all
such terms, and holders of New Preferred Stock are referred to the Certificate
of Designation for a statement thereof. The following summary of the Preferred
Stock, the Certificate of Designation and the Registration Rights Agreement is
not intended to be complete and is subject to, and qualified in its entirety
by reference to, the Company's Certificate of Incorporation, the Certificate
of Designation and the Registration Rights Agreement, including the
definitions therein of certain terms used below. Copies of the proposed form
of Certificate of Designation and Registration Rights Agreement are available
as set forth under "--Additional Information." The definitions of certain
terms used in the following summary are set forth below under "--Certain
Definitions." As used in this Description of Securities, the term "Company"
refers to Hyperion Telecommunications Inc., excluding its Subsidiaries and
Joint Ventures and references to the Preferred Stock shall be deemed to
include the New Preferred Stock.
GENERAL
The Company is authorized to issue up to 5,000,000 shares of preferred stock
as designated by the Company's board of directors, of which 200,000 shares are
authorized, issued and outstanding as a result of the Offering and up to
180,000 shares will be designated and reserved for issuance to pay dividends
on the Preferred Stock if the Company elects to pay dividends on the Preferred
Stock in additional shares of Preferred Stock on or prior to October 15, 2002
in accordance with the terms thereof. All of such shares will be designated as
shares of Preferred Stock and will have a liquidation preference of $1,000 per
share (the "Liquidation Preference"). On October 15, 2007 (the "Mandatory
Redemption Date"), the Company will be required to redeem (subject to the
legal availability of funds therefor) all outstanding shares of Preferred
Stock at a price in cash equal to the Liquidation Preference thereof, plus
accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for any partial Dividend Period) and Liquidated Damages, if
any, to the date of redemption. Subject to certain conditions, the Preferred
Stock will be exchangeable for the Exchange Debentures at the option of the
Company on any Dividend Payment Date on or after the Issue Date. The Old
Preferred Stock is fully paid and non-assessable and the holders thereof do
not have any subscription or preemptive rights.
The Preferred Stock ranks junior in right of payment to all indebtedness and
other obligations of the Company. As of June 30, 1997, the Preferred Stock
would have been junior in right of payment to approximately $472.3 million of
total indebtedness of the Company as adjusted to give effect to the issuance
of the Senior Secured Notes (such amount at September 30, 1997 would increase
by approximately $6.8 million related to the Accreted Value (as defined) with
respect to the Senior Notes). In addition, the Company has the ability to
issue additional shares of Preferred Stock to pay dividends. The Certificate
of Designation provides that the Company may not, without the consent of the
holders of at least two-thirds of the then outstanding shares of Preferred
Stock, authorize, create (by way of reclassification or otherwise) or issue
any Senior Securities or any Obligation or security convertible or
exchangeable into or evidencing a right to purchase, shares of any class or
series of Senior Securities, except, the Company may issue Senior Securities
pursuant to the covenant entitled "--Incurrence of Indebtedness and Issuance
of Disqualified Stock or Preferred Stock." The Certificate of
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<PAGE>
Designation provides that the Company may not, without the consent of the
holders of at least a majority of the then outstanding shares of Preferred
Stock or New Preferred Stock, as applicable, authorize, create (by way of
reclassification or otherwise) or issue any Parity Securities or any
Obligation or security convertible or exchangeable into or evidencing a right
to purchase, shares of any class or series of Parity Securities, except, the
Company may issue: (i) shares of the New Preferred Stock as provided in the
Certificate of Designation, (ii) shares of Preferred Stock or New Preferred
Stock to pay dividends thereon in accordance with the terms of the Certificate
of Designation, and (iii) Parity Securities that may be issued in accordance
with the terms of the Certificate of Designation. See "--Ranking" and "--
Voting Rights."
In addition, substantially all of the Company's operations are conducted
through its Subsidiaries and the Joint Ventures and, therefore, the Company is
dependent upon the cash flow of its Subsidiaries and the Joint Ventures to
meet its obligations, including its obligations to pay cash dividends on and
to redeem the Preferred Stock. Any right of the Company to receive assets of
any of its Subsidiaries or the Joint Ventures will be effectively subordinated
to all indebtedness and other liabilities and commitments (including trade
payables and lease obligations) of such entities. As of June 30, 1997, as
adjusted to give effect to the issuance of the Senior Secured Notes, the
aggregate amount of Indebtedness of the Company, its Subsidiaries and Joint
Ventures (excluding trade payables and other accrued liabilities) that would
effectively rank senior in right of payment to the obligations of the Company
under the Preferred Stock would have been approximately $529.4 million (such
amount at September 30, 1997 would increase by approximately $6.8 million
related to the Accreted Value (as defined) with respect to the Senior Notes).
See "Risk Factors--Substantial Leverage."
The transfer agent for the Preferred Stock is American Stock Transfer &
Trust Company unless and until a successor is selected by the Company (the
"Transfer Agent").
RANKING
The Preferred Stock will, with respect to dividends and rights on the
liquidation, winding-up and dissolution of the Company, rank (i) senior to
each class of capital stock of the Company outstanding or established after
October 1, 1997 by the Board of Directors of the Company the terms of which do
not expressly provide that it ranks senior to, or on a parity with, the
Preferred Stock as to dividends and rights on the liquidation, winding-up and
dissolution of the Company (collectively referred to, together with the common
stock of the Company, as "Junior Securities"); (ii) subject to certain
conditions, on a parity with each other class of preferred stock established
after October 1, 1997 by the Board of Directors of the Company the terms of
which expressly provide that such class or series will rank on a parity with
the Preferred Stock as to dividends and rights on the liquidation, winding-up
and dissolution of the Company (collectively referred to as the "Parity
Securities"); and (iii) subject to certain conditions, junior to each class of
preferred stock established after October 1, 1997 by the Board of Directors of
the Company the terms of which expressly provide that such class or series
will rank senior to the Preferred Stock as to dividends and rights on
liquidation, winding-up and dissolution of the Company (collectively referred
to as the "Senior Securities"). The Company may not authorize any new class of
Senior Securities without the approval of the holders of at least two-thirds
of the Preferred Stock then outstanding, voting or consenting as a separate
class. In addition, the Company may not authorize or issue any Parity
Securities (other than additional Preferred Stock issued as dividends on the
Preferred Stock and the New Preferred Stock) without the approval of the
holders of at least a majority of the Preferred Stock then outstanding, voting
or consenting as a separate class if, after giving effect to the issuance of
such Parity Securities, the aggregate liquidation preference of outstanding
Parity Securities (other than the Preferred Stock) would exceed the sum of (x)
$25 million and (y) the aggregate amount of gross proceeds received after the
Issue Date and on or prior to the date of issuance of such Parity Securities
from the issuance of Qualified Junior Securities. For the purposes of the
immediately preceding sentence, gross proceeds from the issuance of Qualified
Junior Securities shall be deemed received by the Company and shall be
included for purposes of calculating the amount of Parity Securities that may
be issued only if and to the extent that such Qualified Junior Securities are
outstanding on the date of such issuance of Parity Securities.
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DIVIDENDS
The holders of shares of the Preferred Stock will be entitled to receive
when, as and if dividends are declared by the Board of Directors out of funds
of the Company legally available therefor, cumulative preferential dividends
from the issue date of the Preferred Stock accruing at the rate per annum
equal to 12 7/8% of the Liquidation Preference per share of Preferred Stock,
payable quarterly in arrears on each of January 15, April 15, July 15, and
October 15, or, if any such date is not a Business Day, on the next succeeding
Business Day (each, a "Dividend Payment Date"), to the holders of record as of
the next preceding January 1, April 1, July 1, and October 1, (each, a "Record
Date"). Dividends will be payable in cash, except that on each Dividend
Payment Date occurring on or prior October 15, 2002, dividends may be paid, at
the Company's option, by the issuance of additional shares of Preferred Stock
(including fractional shares) having an aggregate Liquidation Preference equal
to the amount of such dividends. The issuance of such additional shares of
Preferred Stock will constitute "payment" of the related dividend for all
purposes of the Certificate of Designation. The first dividend payment of
Preferred Stock will be payable on January 15, 1998. After October 15, 2002,
dividends are payable only in cash. Dividends payable on the Preferred Stock
will be computed on the basis of a 360-day year consisting of twelve 30-day
months and will be deemed to accrue on a daily basis. For a discussion of
certain federal income tax considerations relevant to the payment of dividends
on the Preferred Stock, see "Certain Federal Income Tax Considerations--
Distributions on Preferred Stock."
Dividends on the Preferred Stock will accrue whether or not the Company has
earnings or profits, whether or not there are funds legally available for the
payment of such dividends and whether or not dividends are declared. Dividends
will accumulate to the extent they are not paid on the Dividend Payment Date
for the period to which they relate. In the event that dividends on the
Preferred Stock are in arrears and unpaid for six or more quarterly dividend
periods (whether or not consecutive), holders of Preferred Stock will be
entitled to certain voting rights. See "--Voting Rights." The Certificate of
Designation provides that the Company will take all actions required or
permitted under the Delaware General Corporation Law (the "DGCL") to permit
the payment of dividends on the Preferred Stock, including, without
limitation, through the revaluation of its assets in accordance with the DGCL,
to make or keep funds legally available for the payment of dividends.
Dividends on account of arrears for any past Dividend Period and dividends
in connection with any optional redemption may be declared and paid at any
time, without reference to any regular Dividend Payment Date, to holders of
record of Preferred Stock on such date, not more than forty-five (45) days
prior to the payment thereof, as may be fixed by the Board of Directors of the
Company.
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of Preferred Stock
with respect to any dividend period unless all dividends for all preceding
dividend periods have been declared and paid, or declared and a sufficient sum
set apart for the payment of such dividend, upon all outstanding shares of
Preferred Stock. No full dividends may be declared or paid or funds set apart
for the payment of dividends on any Parity Securities for any period unless
full cumulative dividends shall have been or contemporaneously are declared
and paid (or are deemed declared and paid) in full or declared and, if payable
in cash, a sum in cash sufficient for such payment set apart for such payment
on the Preferred Stock. If full dividends are not so paid, the Preferred Stock
will share dividends pro rata with the Parity Securities. So long as any
Preferred Stock is outstanding and unless and until full cumulative dividends
have been paid (or are deemed paid) in full on the Preferred Stock: (i) no
dividend (other than a dividend payable solely in shares of additional Junior
Securities) shall be declared or paid upon, or any sum set apart for the
payment of dividends upon, any shares of Junior Securities; (ii) no other
distribution shall be declared or made upon, or any sum set apart for the
payment of any distribution upon, any shares of Junior Securities, other than
a distribution consisting solely of Junior Securities; (iii) no shares of
Parity Securities or Junior Securities or warrants, rights, calls or options
to purchase such Parity Securities or Junior Securities shall be purchased,
redeemed or otherwise acquired or retired for value (excluding an exchange for
shares of other Junior Securities) by the Company or any of its Subsidiaries;
and (iv) no monies shall be paid into or set apart or made available for a
sinking or other like fund for the purchase, redemption or other acquisition
or retirement for value of any shares of Parity Securities or Junior
Securities by the Company or any of its Subsidiaries. Holders of the
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Preferred Stock will not be entitled to any dividends, whether payable in
cash, property or stock, in excess of the full cumulative dividends as herein
described.
The Senior Indenture and the Senior Secured Indenture contain, and future
credit agreements or other agreements relating to Indebtedness to which the
Company becomes a party may contain, restrictions on the ability of the
Company to pay dividends on the Preferred Stock (other than solely in
additional shares of Preferred Stock). See "Risk Factors--Holding Company
Structure; Inability to Access Cash Flow."
VOTING RIGHTS; AMENDMENT
Holders of record of shares of the Preferred Stock will be entitled to one
vote per share on all matters to be voted on generally by stockholders. In
addition, the Certificate of Designation provides that upon (a) the
accumulation of accrued and unpaid dividends (and, if after October 15, 2002,
such dividends are not paid in cash) on the outstanding Preferred Stock in an
amount equal to six quarterly dividends (whether or not consecutive); (b) the
failure of the Company to satisfy any repurchase obligation (including,
without limitation, pursuant to any required Change of Control Offer) or
mandatory redemption obligation with respect to the Preferred Stock; (c) the
failure of the Company to comply with the provisions described below under the
caption "--Change of Control;" (d) the failure of the Company to comply with
any of the other covenants or agreements set forth in the Certificate of
Designation and the continuance of such failure for 30 consecutive days or
more after receipt of notice of such failure from the holders of at least 25%
of the Preferred Stock then outstanding; or (e) default under any mortgage,
indenture or instrument under which there may be issued, or by which there may
be secured or evidenced, any Indebtedness for money borrowed by the Company or
any of its Subsidiaries (or the payment of which is guaranteed by the Company
or any of its Subsidiaries) whether such Indebtedness or Guarantee now exists,
or is created after the Closing Date, which default (i) is caused by a failure
to pay principal of or premium, if any, or interest on such Indebtedness prior
to the expiration of the grace period provided in such Indebtedness on the
date of such default (a "Payment Default") or (ii) results in the acceleration
of such Indebtedness prior to its express maturity and, in each case, the
principal amount of any such Indebtedness, together with the principal amount
of any other such Indebtedness under which there has been a Payment Default or
the maturity of which has been so accelerated, aggregates $5.0 million or
more, at any time, in each case, after a 10-day period during which such
Payment Default shall not have been cured or such acceleration rescinded (each
of the events described in clauses (a), (b), (c), (d) and (e) being referred
to herein as a "Voting Rights Triggering Event"), then the holders of a
majority of the outstanding shares of Preferred Stock and New Preferred Stock,
voting as a separate single class, will be entitled to elect two members to
the Board of Directors of the Company and the number of members of the
Company's Board of Directors will be immediately and automatically increased
by two. Voting rights arising as a result of a Voting Rights Triggering Event
will continue until such time as all dividends in arrears on the Preferred
Stock are paid in full and all other Voting Rights Triggering Events have been
cured or waived, at which time the term of office of any such members of the
Board of Directors so elected shall terminate and such directors shall be
deemed to have resigned. The voting rights provided for in the Certificate of
Designation will be the holder's exclusive remedy at law or in equity.
In addition to the provisions described above in "--Ranking," the
Certificate of Designation also provides that the Company will not, without
the approval of the holders of at least two-thirds of the Preferred Stock then
outstanding amend, alter or repeal any of the provisions of the Company's
Certificate of Incorporation (including the Certificate of Designation) or the
bylaws of the Company so as to affect adversely the powers, preferences or
rights of the holders of the Preferred Stock or reduce the time for any notice
to which the holders of the Preferred Stock may be entitled. Subject to the
provisions described above under "--Ranking," the Certificate of Designation
provides that an amendment of the Company's Certificate of Incorporation to
authorize or create, or to increase the amount of Junior Securities, Parity
Securities or Senior Securities shall not be deemed to affect adversely the
powers, preferences or rights of the holders of the Preferred Stock.
Notwithstanding the foregoing, modifications and amendments to the
Certificate of Designation described below under "--Change of Control" and "--
Certain Covenants" may be made by the Company with the consent of the holders
of a majority of the Preferred Stock; provided that following the mailing of
any Offer to
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Purchase and until the Expiration Date of that Offer to Purchase no such
modification or amendment may without the consent of the holder of each
outstanding share of Preferred Stock affected thereby, modify any Offer to
Purchase for the Preferred Stock required under the covenant entitled "--
Change of Control" in a manner materially adverse to the holders of
outstanding Preferred Stock. In addition, holders of a majority of the
outstanding Preferred Stock may waive compliance by the Company with the
covenants described below under "--Certain Covenants" and may waive any past
default of the provisions of the Certificate of Designation described below
under "--Change of Control" and "--Certain Covenants," except a default
arising from failure to purchase any Preferred Stock tendered pursuant to an
Offer to Purchase.
EXCHANGE
The Company may, at its option, on any Dividend Payment Date, exchange, in
whole, but not in part, the then outstanding shares of Preferred Stock for
Exchange Debentures with a principal amount equal to the liquidation
preference of the Preferred Stock; provided that (i) on the date of such
exchange there are no accumulated and unpaid dividends and Liquidated Damages,
if any, on the Preferred Stock (including the dividend payable on such date)
or other contractual impediments to such exchange; (ii) there shall be legally
available funds sufficient therefor; (iii) immediately after giving effect to
such exchange, no Default or Event of Default (each as defined in the
Indenture) would exist under the Senior Indenture or the Senior Secured
Indenture or would be caused thereby; (iv) each of the Senior Indenture, the
Senior Secured Indenture and Exchange Indenture (as defined), as the case may
be, have been qualified under the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"), if such qualification is required at the time of
exchange; and (v) the Company shall have delivered a written opinion to the
Trustee (as defined herein) to the effect that all conditions to be satisfied
prior to such exchange have been satisfied.
Upon any exchange pursuant to the preceding paragraph, holders of
outstanding Preferred Stock will be entitled to receive, subject to the second
succeeding sentence of this paragraph, $1.00 principal amount of Exchange
Debentures for each $1.00 of the aggregate Liquidation Preference, plus
accumulated and unpaid dividends, of Preferred Stock held by them. The
Exchange Debentures will be issued in registered form, without coupons and
will contain terms substantially similar to the Company's outstanding Senior
Secured Notes and Senior Notes. The Exchange Debentures will be issued in
principal amounts of $1,000 and integral multiples thereof to the extent
possible, and will also be issuable in principal amounts less than $1,000 so
that each holder of Preferred Stock will receive certificates representing the
entire amount of Exchange Debentures to which such holder's shares of
Preferred Stock entitle such holder. Notice of the intention to exchange will
be sent by or on behalf of the Company not more than 60 days nor less than 30
days prior to the Exchange Date, by first class mail, postage prepaid, to each
holder of record of Preferred Stock at its registered address. In addition to
any information required by law or by the applicable rules of any exchange
upon which Preferred Stock may be listed or admitted to trading, such notice
will state: (i) the date of exchange (the "Exchange Date"); (ii) the place or
places where certificates for such shares are to be surrendered for exchange,
including any procedures applicable to exchanges to be accomplished through
book-entry transfers; and (iii) that dividends on the shares of Preferred
Stock to be exchanged will cease to accrue on the Exchange Date. If notice of
any exchange has been properly given, and if on or before the Exchange Date
the Exchange Debentures have been duly executed and authenticated and
deposited with the Transfer Agent, then on and after the close of business on
the Exchange Date, the shares of Preferred Stock to be exchanged will no
longer be deemed to be outstanding and may thereafter be issued in the same
manner as the other authorized but unissued preferred stock, but not as
Preferred Stock, and all rights of the holders thereof as stockholders of the
Company will cease, except the right of the holders to receive upon surrender
of their certificates the Exchange Debentures and all accrued interest, if
any, thereon.
REDEMPTION
Mandatory Redemption
On the Mandatory Redemption Date, the Company will be required to redeem
(subject to the legal availability of funds therefor) all outstanding shares
of Preferred Stock at a price in cash equal to the Liquidation
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Preference thereof, plus accumulated and unpaid dividends (including an amount
in cash equal to a prorated dividend for any partial Dividend Period) and
Liquidated Damages, if any, to the date of redemption. The Company will not be
required to make sinking fund payments with respect to the Preferred Stock.
The Certificate of Designation provides that the Company will take all actions
required or permitted under Delaware law to permit such redemption.
Optional Redemption
Except as set forth below, the Preferred Stock may not be redeemed at the
option of the Company prior to October 15, 2002. The Preferred Stock may be
redeemed, in whole or in part, at the option of the Company on or after
October 15, 2002, at the redemption prices specified below (expressed as
percentages of the Liquidation Preference thereof), in each case, together
with accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for any partial dividend period) and Liquidated Damages, if
any, to the date of redemption, upon not less than 30 nor more than 60 days'
prior written notice, if redeemed during the 12-month period commencing on
October 15 of each of the years set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002.............................. 106.438%
2003.............................. 104.292%
2004.............................. 102.146%
2005 and thereafter............... 100.000%
</TABLE>
Notwithstanding the foregoing, prior to October 15, 2000, the Company may,
at its option, use the net proceeds received by the Company to redeem shares
of Preferred Stock (whether initially issued or issued in lieu of cash
dividends) having an aggregate Liquidation Preference of up to 35% of the
initial aggregate Liquidation Preference of the Preferred Stock originally
issued in the Offering for cash at a redemption price equal to 112.875% of the
Liquidation Preference per share of the Preferred Stock, plus, without
duplication, accumulated and unpaid dividends and Liquidated Damages, if any,
to the date of redemption from (x) an Initial Public Offering of the Common
Stock of the Company or (y) a sale of the Capital Stock (other than
Disqualified Stock) of the Company to a Strategic Investor in a single
transaction or a series of related transactions for at least $25.0 million
(clauses (x) and (y) together, collectively referred to herein as "Qualified
Equity Offerings"); provided, that, in either case, after any such redemption,
shares of Preferred Stock having an aggregate Liquidation Preference of at
least 65% of the initial aggregate Liquidation Preference of the Preferred
Stock originally issued in the Offering remain outstanding; provided, further
that such redemption shall occur within 90 days of the closing of such
Qualified Equity Offering.
LIQUIDATION RIGHTS
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company or reduction or decrease in its capital stock resulting in a
distribution of assets to the holders of any class or series of the Company's
capital stock, each holder of shares of the Preferred Stock will be entitled
to payment out of the assets of the Company available for distribution of an
amount equal to the Liquidation Preference per share of Preferred Stock held
by such holder, plus accrued and unpaid dividends and Liquidated Damages, if
any, to the date fixed for liquidation, dissolution, winding-up or reduction
or decrease in capital stock, before any distribution is made on any Junior
Securities, including, without limitation, common stock of the Company. After
payment in full of the Liquidation Preference and all accrued dividends and
Liquidated Damages, if any, to which holders of Preferred Stock are entitled,
such holders will not be entitled to any further participation in any
distribution of assets of the Company. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the amounts payable
with respect to the Preferred Stock and all other Parity Securities are not
paid in full, the holders of the Preferred Stock and the Parity Securities
will share equally and ratably in any distribution of assets of the Company in
proportion to the full liquidation preference and accumulated and unpaid
dividends and Liquidated Damages to which each is entitled. However, neither
the voluntary sale, conveyance,
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exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Company nor the consolidation or merger of the Company with or into one or
more corporations will be deemed to be a voluntary or involuntary liquidation,
dissolution or winding-up of the Company or reduction or decrease in capital
stock, unless such sale, conveyance, exchange or transfer shall be in
connection with a liquidation, dissolution or winding-up of the business of
the Company or reduction or decrease in capital stock.
The Certificate of Designation does not contain any provision requiring
funds to be set aside to protect the Liquidation Preference of the Preferred
Stock, although such Liquidation Preference will be substantially in excess of
the par value of the shares of the Preferred Stock, and there can be no
assurance that, upon any such voluntary or involuntary liquidation,
dissolution or winding-up of the Company that there will be funds available in
amount sufficient to pay such Liquidation Preference in full, in part or at
all.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
make an offer (the "Change of Control Offer") to each holder of shares of
Preferred Stock to repurchase all or any part (but not, in the case of any
holder requiring the Company to purchase less than all of the shares of
Preferred Stock held by such holder, any fractional shares) of such holder's
Preferred Stock at an offer price in cash equal to 101% of the aggregate
Liquidation Preference thereof plus, without duplication, accumulated and
unpaid dividends and Liquidated Damages, if any, thereon to the date of
purchase (the "Change of Control Payment").
The Change of Control Offer must be commenced within 30 days following a
Change of Control, must remain open for at least 30 and not more than 40 days
(unless otherwise required by applicable law) and must comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Preferred Stock as a
result of a Change of Control.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Certificate of Designation are applicable.
Except as described above with respect to a Change of Control, the Certificate
of Designation does not contain provisions that permit the holders of the
Preferred Stock to require that the Company repurchase or redeem the Preferred
Stock in the event of a takeover, recapitalization or similar transaction.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of Preferred Stock to require the Company to repurchase such Preferred
Stock as a result of a sale, lease, transfer, conveyance or other disposition
of less than all of the assets of the Company to another Person may be
uncertain.
The Company will not be required to make a Change of Control Offer to the
holders of Preferred Stock upon a Change of Control if a third party makes the
Change of Control Offer described above in the manner, at the times and
otherwise in compliance with the requirements set forth in the Certificate of
Designation, and purchases all shares of Preferred Stock validly tendered and
not withdrawn under such Change of Control Offer.
Certain of the Company's indebtedness (including the Senior Notes and the
Senior Secured Notes) contains prohibitions with respect to certain events
that would constitute a Change of Control. In addition, the exercise by the
Holders of Senior Secured Notes or the Senior Notes of their right to require
the Company to repurchase the Senior Secured Notes or the Senior Notes, as the
case may be, could under certain circumstances cause a default under other
indebtedness of the Company, its Subsidiaries or Joint Ventures, even if the
Change of Control itself does not, due to the financial effect of such
repurchases on the Company. Finally, the Company's ability to pay cash to the
Holders of Senior Secured Notes, Senior Notes, and/or the Preferred Stock upon
a repurchase may be limited by the Company's then existing financial
resources.
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The Company does not currently have adequate financial resources to effect a
repurchase of the Senior Notes or the Preferred Stock upon a Change of Control
and there can be no assurance that the Company will have such resources in the
future. See "Risk Factors--Inability to Purchase Preferred Stock or Exchange
Debentures Upon a Change of Control."
CERTAIN COVENANTS
The sole remedy to holders of Preferred Stock in the event of a breach of
any of the covenants contained in the Certificate of Designation, including
the mandatory redemption provisions thereof, will be the voting rights arising
from a Voting Rights Triggering Event, and such breach by the Company will not
cause any action taken by the Company to be invalid or unauthorized under its
charter documents.
Incurrence of Indebtedness and Issuance of Disqualified Stock or Preferred
Stock
The Certificate of Designation provides that (i) the Company will not, and
will not permit any of its Subsidiaries or Joint Ventures to directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable for the payment of (collectively, "incur" and,
correlatively, "incurred" and "incurrence") any Indebtedness (including,
without limitation, Acquired Indebtedness) and that the Company will not issue
any Disqualified Stock and will not permit any of its Subsidiaries or Joint
Ventures to issue any shares of Preferred Stock; provided that the Company may
incur Indebtedness (including Acquired Indebtedness) or issue shares of
Disqualified Stock if the Company's Consolidated Leverage Ratio as of the last
day of the Company's most recently ended fiscal quarter for which internal
financial statements are available immediately preceding the date on which
such Indebtedness is incurred, or such Disqualified Stock is issued, as the
case may be, would have been (a) greater than zero and less than 5.5 to 1.0,
if such incurrence or issuance is on or prior to March 31, 1999, and (b)
greater than zero and less than 5.0 to 1.0, if such incurrence or issuance is
after March 31, 1999, determined on a pro forma basis (including pro forma
application of the net proceeds therefrom) as if such Indebtedness had been
incurred, or such Disqualified Stock had been issued, as the case may be, at
the beginning of such fiscal quarter.
The foregoing limitation will not apply to:
(a) the incurrence of Indebtedness by the Company, any Subsidiary (other
than a General Partner Subsidiary) or any Permitted Joint Venture pursuant
to Credit Agreement(s); provided that the aggregate principal amount of
such Credit Agreement(s) at any one time outstanding under this clause (i)
does not exceed $50.0 million for the Company, all of its Subsidiaries
(other than a General Partner Subsidiary) and all of its Permitted Joint
Ventures combined;
(b) the incurrence of Vendor Debt by the Company, any Subsidiary (other
than a General Partner Subsidiary) or any Permitted Joint Venture; provided
that the aggregate principal amount of such Vendor Debt does not exceed 80%
of the purchase price or cost of the construction, acquisition or
improvement of the applicable Telecommunications Related Assets financed
therewith (or 100% of the total cost of the Telecommunications Related
Assets financed therewith if such Vendor Debt was extended for the purchase
of tangible physical assets and was so financed by the vendor thereof or an
affiliate of such vendor);
(c) Refinancing Indebtedness;
(d) the incurrence of Indebtedness by the Company not to exceed, at any
one time outstanding, 2.0 times the sum of (i) the net cash proceeds
received by the Company from the issuance and sale of its Capital Stock
(other than Disqualified Stock) plus (ii) the fair market value at the time
of issuance of Equity Interests (other than Disqualified Stock) issued in
connection with any acquisition of a Telecommunications Related Business,
in each case to a Person other than a Subsidiary or a Joint Venture of the
Company; provided that such Indebtedness does not mature prior to the
Mandatory Redemption Date of the Preferred Stock and has a Weighted Average
Life to Maturity longer than the Preferred Stock or the New Preferred
Stock;
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(e) the incurrence by the Company of Indebtedness (in addition to
Indebtedness permitted by any other clause of this paragraph) in an
aggregate principal amount (or accreted value, as applicable) at any time
outstanding not to exceed $10.0 million;
(f) the incurrence by any Restricted Joint Venture of Non-Recourse Debt;
provided that if any Non-Recourse Debt of a Restricted Joint Venture ceases
to be Non-Recourse Debt, such event shall be deemed to constitute an
incurrence of Indebtedness as of the date such Indebtedness ceases to be
Non-Recourse Debt;
(g) the guarantee of Indebtedness by a General Partner Subsidiary in
connection with the incurrence of Indebtedness by the Restricted Joint
Venture of which such General Partner Subsidiary is a general partner;
(h) the issuance by the Company of the Exchange Debentures in accordance
with the terms of the Certificate of Designation; and
(i) the incurrence by any Subsidiary (other than a General Partner
Subsidiary) or any Permitted Joint Venture of Indebtedness (including,
without limitation, Acquired Debt) so long as all of the net proceeds of
such incurrence are used by such Subsidiary or Permitted Joint Venture, as
the case may be, directly in connection with the design, construction,
development or acquisition of a Telecommunications Service Market, provided
that, as of the last day of the Company's most recent fiscal quarter for
which internal financial statements are available immediately preceding the
date on which such Indebtedness is incurred, either: (a) the aggregate
principal amount of all Indebtedness of such Subsidiary or such Permitted
Joint Venture does not exceed 1.75 times the Invested Equity Capital of
such Subsidiary or such Permitted Joint Venture; or (b) the Consolidated
Leverage Ratio of such Subsidiary or such Permitted Joint Venture would not
have been greater than 3.5 to 1.0, in each case determined on a pro forma
basis (including pro forma application of the net proceeds therefrom) as if
such Indebtedness had been incurred at the beginning of such fiscal
quarter, and provided, further, that any Indebtedness incurred by any such
Subsidiary or any Permitted Joint Venture (other than Related Networks)
pursuant to this paragraph shall be non-recourse with respect to the
Company or any other Subsidiary or any other Joint Venture.
For purposes of this covenant, the Certificate of Designation provides that,
in the event that the Company proposes to incur Indebtedness pursuant to
clause (iv) above, the Company shall, simultaneously with the incurrence of
such Indebtedness, deliver to the Trustee a resolution of the Board of
Directors set forth in an Officers' Certificate stating that the sale or sales
of Capital Stock forming the basis for the incurrence of such Indebtedness (i)
constitutes a long term investment in the Company and (ii) has not been made
for the purpose of circumventing this covenant. The Certificate of Designation
also provides that, in the event that the Company rescinds, reverses or
unwinds such sale of Capital Stock or otherwise returns or refunds all or any
portion of the net cash proceeds of such sale of Capital Stock (whether by
dividend, distribution or otherwise) within 270 days of the date of the
incurrence of such Indebtedness, such Indebtedness will be deemed to be
incurred on the date of, and immediately after giving effect to, such
rescission, reversal, unwinding, return or refund.
For purposes of this covenant, in the event that a Restricted Joint Venture
becomes a Permitted Joint Venture or otherwise ceases to be a Restricted Joint
Venture, all of the then outstanding Indebtedness of such entity shall be
deemed to have been incurred as of the date that such Restricted Joint Venture
becomes a Permitted Joint Venture or otherwise ceases to be a Restricted Joint
Venture.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness, Disqualified Stock or Preferred Stock meets the
criteria of more than one of the categories described in clauses (a) through
(i) above or is entitled to be incurred pursuant to the first paragraph of
this covenant, the Company shall, in its sole discretion, classify such item
in any manner that complies with this covenant and such item will be treated
as having been incurred pursuant to only one of such clauses or pursuant to
the first paragraph herein. Accrual of interest or dividends, the accretion of
accreted value or liquidation preference and the payment of interest or
dividends in the form or additional Indebtedness or Preferred Stock will not
be deemed to be an incurrence of Indebtedness for purposes of this covenant.
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Dividend and Other Payment Restrictions Affecting Subsidiaries
The Certificate of Designation provides that the Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Subsidiary to:
(i)(a) pay dividends or make any other distributions to the Company or
any of its Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay
any indebtedness owed to the Company or any of its Subsidiaries,
(ii) make loans or advances to the Company or any of its Subsidiaries,
(iii) transfer any of its properties or assets to the Company or any of
its Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of:
(a) Existing Indebtedness as in effect on the Issue Date;
(b) any Credit Agreement creating or evidencing Indebtedness permitted by
the Indenture and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof;
(c) the Certificate of Designation, the Preferred Stock, the New
Preferred Stock or the Exchange Debentures;
(d) applicable law;
(e) by reason of customary non-assignment provisions in leases entered
into in the ordinary course of business and consistent with past practices;
(f) purchase money obligations or Vendor Debt for property acquired in
the ordinary course of business that impose restrictions of the nature
described in clause (iii) above on the property so acquired;
(g) Indebtedness incurred pursuant to clause (i) under the "--Incurrence
of Indebtedness and Issuance of Disqualified Stock or Preferred Stock"
covenant; provided that such encumbrance or restriction only relates to the
Subsidiary or Permitted Joint Venture incurring such Indebtedness; and
(h) Refinancing Indebtedness; provided that such encumbrances or
restrictions are no more restrictive than those contained in the
documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
Merger, Consolidation or Sale of Assets
The Certificate of Designation provides that the Company may not, without
the affirmative vote of the holders of a majority of the issued and
outstanding Preferred Stock, voting or consenting as a separate class,
consolidate or merge with or into (whether or not the Company is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company
is the surviving corporation or the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
Preferred Stock shall be converted into or exchanged for and shall become
shares of Capital Stock of such successor, transferee or resulting Person,
having in respect of such successor, transferee or resulting Person the same
powers, preferences and relative participating, optional or other special
rights and the qualifications, limitations or restrictions thereon, that the
Preferred Stock had immediately prior to such transaction; (iii) immediately
after such transaction no Voting Rights Triggering Event exists; and (iv)
except in the case of a merger of the Company with or into a Wholly Owned
Subsidiary of the Company, the Company or the entity or Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made (A) will have
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Consolidated Net Worth immediately after the transaction equal to or greater
than the Consolidated Net Worth of the Company immediately preceding the
transaction and (B) will, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of
the applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the first paragraph of the covenant
entitled "--Incurrence of Indebtedness and Issuance of Disqualified Stock or
Preferred Stock" covenant contained herein.
Reports
The Certificate of Designation provides that, whether or not required by the
rules and regulations of the Commission, so long as any Preferred Stock, New
Preferred Stock or Exchange Debentures are outstanding, the Company will
furnish to the holders of Preferred Stock, New Preferred Stock or Exchange
Debentures, as applicable, (i) all quarterly and annual financial information
that would be required to be contained in a filing with the Commission on
Forms 10-Q and 10-K if the Company were required to file such Forms, including
a "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants; (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if the
Company were required to file such reports; and (iii) on a quarterly basis,
certain financial information and operating data with respect to each
Subsidiary and Joint Venture engaged in a Telecommunications Business, in the
form specified by Schedule A of the Certificate of Designation. In addition,
whether or not required by the rules and regulations of the Commission, the
Company will file a copy of all such information and reports with the
Commission for public availability (unless the Commission will not accept such
a filing) and make such information available to securities analysts and
prospective investors upon request. In addition, the Company has agreed that,
for so long as any Preferred Stock, New Preferred Stock or Exchange
Debentures, as the case may be, remain outstanding, it will furnish to the
holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Certificate of
Designation and Registration Rights Agreement without charge by writing to
Hyperion Telecommunications, Inc., Main at Water Street, P.O. Box 472,
Coudersport, Pennsylvania 16915, Attention: Vice President, Finance.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Certificate of
Designation. Reference is made to the Certificate of Designation for a full
disclosure of all such terms, as well as any other capitalized terms used
herein for which no definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise. For
purposes of the Indenture, beneficial ownership of 10% or more of the Voting
Stock of a Person shall be deemed to be control; provided that no Local
Partner will be deemed an affiliate of a Subsidiary or a Joint Venture solely
as a result of such Local Partner's ownership of more than 10% of the Voting
Stock of such Subsidiary or Joint Venture.
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"Annualized Pro Forma EBITDA" means with respect to any Person, such
Person's Pro Forma EBITDA for the latest fiscal quarter for which internal
financial statements are then available multiplied by four.
"Beneficial Owner" means a beneficial owner as defined in Rules 13d-3 and
13d-5 under the Exchange Act (or any successor rules), including the provision
of such Rules that a Person shall be deemed to have beneficial ownership of
all securities that such Person has a right to acquire within 60 days;
provided that a Person will not be deemed a beneficial owner of, or to own
beneficially, any securities if such beneficial ownership (1) arises solely as
a result of a revocable proxy delivered in response to a proxy or consent
solicitation made pursuant to, and in accordance with, the Exchange Act and
(2) is not also then reportable on Schedule 13D or Schedule 13G (or any
successor schedule) under the Exchange Act.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of one year or less from the date of
acquisition, bankers' acceptances with maturities not exceeding one year and
overnight bank deposits, in each case with any U.S. commercial bank having
capital and surplus in excess of $500 million and a Keefe Bank Watch Rating of
"B" or better, (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clauses (ii) and
(iii) above entered into with any financial institution meeting the
qualifications specified in clause (iii) above and (v) commercial paper having
the highest rating obtainable from Moody's Investors Service, Inc. or Standard
& Poor's Corporation and in each case maturing within six months after the
date of acquisition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Subsidiaries taken
as a whole to any "person" (as such term is used in Section 13(d)(3) of the
Exchange Act) other than the Principals or their Affiliates, (ii) the adoption
of a plan relating to the liquidation or dissolution of the Company, (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person", other than the
Principals and their Affiliates, becomes the "beneficial owner" (as such term
is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or
indirectly, of more than 50% of the voting power of the Capital Stock of the
Company or (iv) the first day on which a majority of the members of the Board
of Directors of the Company are not Continuing Directors. For purposes of this
definition, any transfer of an Equity Interest of an entity that was formed
for the purpose of acquiring voting power of Capital Stock of the Company will
be deemed to be a transfer of such portion of such voting power of Capital
Stock as corresponds to the portion of the equity of such entity that has been
so transferred.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding
up of such Person, to shares of Capital Stock of any other class of such
Person.
"Consolidated Interest Expense" means, for any Person, for any period, the
aggregate of the following for such Person for such period determined on a
consolidated basis in accordance with GAAP: (a) the amount of interest in
respect of Indebtedness (including amortization of original issue discount,
amortization of debt
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issuance costs, and non-cash interest payments on any Indebtedness and the
interest portion of any deferred payment obligation) and (b) the interest
component of rentals in respect of any Capital Lease Obligation paid, in each
case whether accrued or scheduled to be paid or accrued by such Person during
such period to the extent such amounts were deducted in computing Consolidated
Net Income, determined on a consolidated basis in accordance with GAAP. For
purposes of this definition, interest on a Capital Lease Obligation shall be
deemed to accrue at an interest rate reasonably determined by such Person to
be the rate of interest implicit in such Capital Lease Obligation in
accordance with GAAP consistently applied.
"Consolidated Leverage Ratio" means, for any Person, as of any date, the
ratio of (i) the sum of the aggregate outstanding amount of all Indebtedness
of a Person and its Subsidiaries (other than any Indebtedness of a General
Partner Subsidiary to the extent that such Indebtedness has been incurred in
connection with such General Partner Subsidiary's partnership interest in the
Restricted Joint Venture of which such General Partner Subsidiary is a general
partner) determined on a consolidated basis in accordance with GAAP to (ii)
Annualized Pro Forma EBITDA.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary
or that is accounted for by the equity method of accounting shall be included
only to the extent of the amount of dividends or distributions actually paid
in cash to the referent Person or a Wholly Owned Subsidiary thereof, (ii) the
Net Income of any" subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its stockholders, (iii) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded and (iv) the
cumulative effect of a change in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the date of the
Indenture in the book value of any asset owned by such Person or a
consolidated Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments) and (z) all unamortized debt discount and
expense and unamortized deferred charges as of such date, all of the foregoing
determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election.
"Credit Agreement" means, with respect to any Person, any agreement entered
into by and among such Person and one or more commercial banks or financial
institutions, providing for senior term or revolving credit borrowings of a
type similar to credit agreements typically entered into by commercial banks
and financial institutions, including any related notes, Guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as such credit agreement and related agreements may be amended,
extended, refinanced, renewed, restated, replaced or refunded from time to
time.
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"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the Holder thereof, in whole or in part, on or
prior to the date that is 91 days after the Mandatory Redemption Date of
Preferred Stock; provided that any Capital Stock which would not constitute
Disqualified Stock but for provisions thereof giving Holders thereof the right
to require the Company to repurchase or redeem such Capital Stock upon the
occurrence of a Change of Control occurring prior to the Mandatory Redemption
date of Preferred Stock shall not constitute Disqualified Stock if the change
in control provisions applicable to such Capital Stock are no more favorable
to the holders of such Capital Stock than the provisions applicable to the
Preferred Stock contained in the covenant described under "Change of Control"
and such Capital Stock specifically provides that the Company will not
repurchase or redeem any such stock pursuant to such provisions prior to the
Company's repurchase of such Preferred Stock as are required to be repurchased
pursuant to the covenant described under "Change of Control;" and provided,
further, that the Preferred Stock or New Preferred Stock shall not be, and
shall not be deemed to be, Disqualified Stock.
"EBITDA " means, for any Person, for any period, an amount equal to (A) the
sum of (i) Consolidated Net Income for such period plus (ii) the provision for
taxes for such period based on income or profits to the extent such income or
profits were included in computing Consolidated Net Income and any provision
for taxes utilized in computing net loss under clause hereof plus (iii)
Consolidated Interest Expense for such period, plus (iv) depreciation for such
period on a consolidated basis plus (v) amortization of intangibles for such
period on a consolidated basis, plus (vi) any other non-cash items reducing
Consolidated Net Income for such period minus (B) all non-cash items
increasing Consolidated Net Income for such period, all for such Person and
its Subsidiaries determined in accordance with GAAP consistently applied.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or any
successor act), and the rules and regulations thereunder.
"Exchange Offer" means the exchange offer of the New Preferred Stock for the
Preferred Stock or the New Debentures for the Exchange Debentures, as
applicable, pursuant to the Registration Rights Agreement.
"Existing Indebtedness" means the Senior Notes, the Senior Secured Notes and
any other Indebtedness of the Company and its Subsidiaries in existence on the
Issue Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"General Partner Subsidiary" means a direct or indirect Wholly Owned
Subsidiary of the Company that (i) is a general partner or stockholder of a
Restricted Joint Venture and (ii) (a) is not engaged in any trade or business
other than the holding, voting, disposing of or taking any action with respect
to its Equity Interest in such Restricted Joint Venture, (b) has no material
assets other than its Equity Interest in such Restricted Joint Venture, (c)
has no material liabilities other than liabilities arising (A) as a result of
the guarantee by such General Partner Subsidiary's guarantee of Indebtedness
incurred by the Restricted Joint Venture of which such General Partner
Subsidiary is a general partner or (B) by operation of law; provided that, for
purposes of this definition, Hyperion Telecommunications of Virginia, Inc.
shall be deemed to be General Partner Subsidiaries for all purposes so long as
Hyperion Telecommunications of Virginia, Inc. does not engage in any
operations or business that is materially different from the operations or
business engaged in by such company on the Issue Date.
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"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Indebtedness" means, with respect to any Person, (a) any liability of any
Person, whether or not contingent (i) for borrowed money, or under any
reimbursement obligation relating to a letter of credit, bankers' acceptance
or note purchase facility; or (ii) evidenced by a bond, note, debenture or
similar instrument (including a purchase money obligation); or (iii) for the
payment of money relating to a lease that is required to be classified as a
Capitalized Lease Obligation in accordance with GAAP; or (iv) for Disqualified
Stock; or (v) for preferred stock of any Subsidiary (other than preferred
stock held by the Company or any of its Subsidiaries); (b) any liability of
others described in the preceding clause (a) that the Person has guaranteed,
that is recourse to such Person or that is otherwise its legal liability; and
(c) any amendment, supplement, modification, deferral, renewal, extension or
refunding of any liability of the types referred to in clauses (a) and (b)
above.
"Initial Public Offering" means an initial underwritten public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act of 1933, as amended.
"Invested Equity Capital" means, with respect to any Company's Subsidiaries
or Joint Ventures as of any date, the sum of (i) the total dollar amount
contributed in cash plus the value of all property contributed (valued at the
lower of fair market value of such property at the time of contribution,
determined in good faith by the Company's Board of Directors, or the book
value of such property at the time of contribution on the books of the Person
making such contribution) to such Subsidiary or Joint Venture, as the case may
be, since the date of its formation in the form of common equity plus, without
duplication, (ii) the total dollar amount contributed in cash plus the value
of all property contributed (valued at the lower of fair market value of such
property at the time of contribution, determined in good faith by the
Company's Board of Directors, or the book value of such property at the time
of contribution on the books of the Person making such contribution) to such
Subsidiary or Joint Venture, as the case may be, since the date of its
formation by Local Partners (and their Affiliates) in consideration of the
issuance of preferred equity on a basis that is substantially proportionate to
their common equity interests plus, without duplication, (iii) the total
dollar amount contributed in cash plus the value of all property contributed
(valued at the lower of fair market value of such property at the time of
contribution, determined in good faith by the Company's Board of Directors, or
the book value of such property at the time of contribution on the books of
the Person making such contribution) to such Subsidiary or Joint Venture since
the date of its formation by the Company in consideration of the issuance of
preferred equity less (iv) the fair market value of all dividends and other
distributions (in respect of any Equity Interest and in whatever form and
however designated) made by such Subsidiary or Joint Venture, as the case may
be, since the date of its formation to the holders of its common equity (and
their Affiliates); provided that in no event shall the aggregate amount of
such dividends and other distributions made by such Subsidiary or Joint
Venture, as the case may be, to any such Person (or its Affiliates) reduce the
Invested Equity Capital of such Subsidiary or Joint Venture, as the case may
be, by more than the total contributions (per clauses (i) through (iii) above)
to such Subsidiary or Joint Venture, as the case may be, by such Person (and
its Affiliates).
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), capital contributions,
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities
by the Company for consideration consisting solely of common equity securities
of the Company shall not be deemed to be an Investment. If the Company or any
Subsidiary of the Company sells or otherwise disposes of any Equity Interests
of any direct or indirect Subsidiary of the Company such that, after giving
effect to any such sale or disposition, such Person is no longer a Subsidiary
of the Company, the Company shall be deemed to have made an Investment on the
date of any such sale or disposition equal to the fair market value of the
Equity Interests of such Subsidiary not sold or disposed of.
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"Issue Date" means the date of initial issuance of the Preferred Stock.
"Joint Venture" means a corporation, partnership or other entity engaged in
one or more Telecommunications Businesses (i) in which the Company or its
Subsidiaries owns, directly or indirectly, an Equity Interest with the balance
of the Equity Interest thereof being held by one or more Local Partners and
(ii) that is managed and operated by the Company or any of its Subsidiaries.
"Joint Venture Investment" means Investments in Joint Ventures.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Local Partner" means, with respect to any Joint Venture, (i) the Joint
Venture partners set forth on Schedule B to the Senior Indenture, and (ii) any
other Person; provided that such other Person (a) is a major cable company or
utility that has a substantial presence within the specific market of such
Joint Venture, which presence shall be evidenced, (i) in the case of a cable
company, by such company having a market share consisting of at least 50% of
the total number of cable subscribers in such market and (2) in the case of a
utility company, by such company having at least 75% of the total customer
base of such market or (b) is a Wholly Owned Subsidiary of a major cable
company or utility that (1) meets the criteria set forth in the immediately
preceding clause (a) or (2) has all of its initial capital contributions under
the agreement governing the Joint Venture fully and unconditionally
guaranteed, until such time as all such contributions have been made, by one
or more Persons who meet the criteria set forth in the immediately preceding
clause (a).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or
loss, together with any related provision for taxes on such gain or loss,
realized in connection with (a) any Asset Sale (including, without limitation,
dispositions pursuant to Sale and Leaseback Transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries
and (n) any extraordinary or nonrecurring gain or loss, together with any
related provision for taxes on such extraordinary or nonrecurring gain or
loss.
"New Preferred Stock" means the Series B Preferred Stock authorized by the
Certificate of Designation that may be issued pursuant to the Exchange Offer
pursuant to the Registration Rights Agreement.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Subsidiaries nor any of its Permitted Joint Ventures (a)
provides credit support of any kind (including any undertaking, agreement or
instrument that would constitute Indebtedness), (b) is directly or indirectly
liable (as a guarantor, co-obligor or otherwise) or (c) constitutes the
lender; (ii) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against a Restricted Joint
Venture) would permit (upon notice, lapse of time, the occurrence, or failure
to occur, of any other condition or event or any combination thereof) any
holder of any other Indebtedness of the Company, any of its Subsidiaries or
any of its Permitted Joint Ventures to declare a default on such other
Indebtedness or cause or permit the payment thereof to be accelerated prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company, any of its Subsidiaries or any of its Permitted Joint Ventures;
provided that the recourse (if any) of a holder of such Indebtedness to the
General Partner Subsidiary of a Restricted Joint Venture in which such General
Partner Subsidiary is a general partner as a result of being a general partner
of such Restricted Joint Venture will not be considered credit support or
direct or indirect liability of such General Partner Subsidiary for purposes
of clauses (i)(a), (ii)(b) and (iii) above.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
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"Permitted Joint Venture" means any Joint Venture in which the Company has,
directly or indirectly, a 45% or greater Equity Interest.
"Preferred Stock" for any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding up of such Person, to shares
of Capital Stock of any other class of such Person.
"Principals" means John J. Rigas and members of his immediate family, any of
their respective spouses, estates, lineal descendants, heirs, executors,
personal representatives, administrators, trusts for any of their benefit and
charitable foundations to which shares of the Company's Capital Stock
beneficially owned by any of the foregoing have been transferred.
"Pro Forma EBITDA" means, for any Person, for any period, the EBITDA of such
Person as determined on a consolidated basis in accordance with GAAP
consistently applied, after giving effect to the following: (i) if, during or
after such period, such Person or any of its Subsidiaries shall have made any
Asset Sale, Pro Forma EBITDA for such Person and its Subsidiaries for such
period shall be reduced by an amount equal to the Pro Forma EBITDA (if
positive) directly attributable to the assets which are the subject of such
Asset Sale for the period or increased by an amount equal to the Pro Forma
EBITDA (if negative) directly attributable thereto for such period and (ii)
if, during or after such period, such Person or any of its Subsidiaries
completes an acquisition of any Person or business which immediately after
such acquisition is a Subsidiary of such Person or a Subsidiary of such
Person, Pro Forma EBITDA shall be computed so as to give pro forma effect to
such Asset Sale or the acquisition of such Person or business, as the case may
be, as if such acquisition had been completed as of the beginning of such
period, and (iii) if, during or after such period, such Person or any of its
Subsidiaries incurs any Indebtedness (including without limitation, any
Acquired Indebtedness) or issues any Disqualified Stock, Pro Forma EBITDA
shall be computed so as to give pro forma effect (including pro forma
application of the proceeds therefrom) thereto as if such Indebtedness or
Disqualified Stock had been incurred as of the beginning of such period.
"Qualified Junior Securities" means Junior Securities that do not constitute
Disqualified Stock.
"Qualified Subsidiary" means any Subsidiary of the Company in which a Local
Partner or Local Partners own at least 5% but less than 50% of the Equity
Interests of such Subsidiary; provided that such Subsidiary remains a
Subsidiary of the Company at all times for purposes of the Certificate of
Designation.
"Refinancing Indebtedness" means any Indebtedness of the Company, any of its
Subsidiaries or any of its Permitted Joint Ventures issued in exchange for, or
the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund other Indebtedness of the Company, any of its Subsidiaries
or any of its Permitted Joint Ventures; provided that: (i) the principal
amount (or accreted value, if applicable) of such Refinancing Indebtedness
does not exceed the principal amount (or accreted value, if applicable) of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith);
(ii) such Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to
or greater than the Weighted Average Life to Maturity of, the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; and (iii)
such Indebtedness is incurred either by the Company, the Subsidiary or the
Permitted Joint Venture who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Related Networks" means any group of Qualified Subsidiaries or Permitted
Joint Ventures in which the same Local Partner owns, or the same group of
Local Partners own, all the Equity Interests of each such Qualified Subsidiary
or Permitted Joint Venture that comprise such Related Network that are not
owned by the Company.
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"Restricted Joint Venture" means any Joint Venture that is not a Permitted
Joint Venture, but only if such Joint Venture: (a) has no Indebtedness other
than Non-Recourse Debt; (b) is not a party to any agreement, contract,
arrangement or understanding with the Company, any of its Subsidiaries or any
of its Permitted Joint Ventures unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company,
such Subsidiary or such Permitted Joint Venture than those that might be
obtained at the time from Persons who are not Affiliates of the Company; and
(c) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company, any of its Subsidiaries or any of
its Permitted Joint Ventures. If, at any time, a Restricted Joint Venture
fails to meet the requirements of a Restricted Joint Venture by becoming a
Permitted Joint Venture or otherwise, it shall thereafter cease to be a
Restricted Joint Venture for purposes of the Certificate of Designation and
(i) all of the then outstanding Indebtedness of such entity shall be deemed to
be incurred as of the date on which such entity becomes a Permitted Joint
Venture or otherwise ceases to be a Restricted Joint Venture for purposes of
the covenant entitled "--Incurrence of Indebtedness and Issuance of
Disqualified Stock and Preferred Stock" (and if such Indebtedness is not
permitted to be incurred as of such date under such covenant, the Company
shall be in default of such covenant).
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Stated Maturity" means with respect to any debt security, the date
specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable.
"Strategic Investor" means a corporation, partnership or other entity
engaged in one or more Telecommunications Businesses that has, or 80% or more
of the voting power of the Capital Stock of which is owned by a Person that
has, an equity market capitalization, at the time (i) of its initial
Investment in the Company or (ii) it purchases an Equity Interest in a
Subsidiary or Joint Venture of the Company, as the case may be, in excess of
$2.0 billion.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity (other than a partnership) of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the election
of directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person (or a combination thereof) and (ii) any
partnership of which more than 50% of the partnership's capital accounts,
distribution rights or general or limited partnership interests are owned or
controlled, directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person or a combination thereof.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) creating, developing or
marketing communications related network equipment, software and other devices
for use in a telecommunications business or (iii) evaluating, participating or
pursuing any other activity or opportunity that is primarily related to those
identified in (i) or (ii) above; provided that the determination of what
constitutes a Telecommunications Business shall be made in good faith by the
Board of Directors of the Company.
"Telecommunications Related Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended
for use in connection with a Telecommunications Business.
"Telecommunications Service Market" means a network built by the Company to
service a market.
"Vendor Debt" means any purchase money Indebtedness of the Company or any
Subsidiary incurred in connection with the acquisition of Telecommunications
Related Assets.
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"Voting Stock" of any person means Capital Stock of such person which
ordinarily has voting power for the election of directors (or persons
performing similar functions) of such person, whether at all times or only so
long as no senior class of securities has voting power by reason of any
contingency.
"Weighted Average Life to Maturity " means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests (other than
directors' qualifying shares) of which shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or a
combination thereof.
BOOK-ENTRY, DELIVERY AND FORM
The New Preferred Stock will initially be issued in the form of one or more
registered notes in global form (the "New Global Note," and together with the
global notes representing the Old Preferred Stock, the "Global Security") or
in certificated form. The New Global Note will be deposited on the Exchange
Date with, or on behalf of, the Depositary and registered in the name of the
Global Note Holder. See "Exchange Offer."
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchaser), banks and trust companies, clearing
corporations and certain other organizations. Access to the Depositary's
system is also available to other entities such as banks, brokers, dealers and
trust companies (collectively, the "Indirect Participants" or the
"Depositary's Indirect Participants") that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Persons who are not Participants may beneficially own securities held by or on
behalf of the Depositary only through the Depositary's Participants or the
Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Security, the Depositary will credit
the accounts of Participants designated by the Initial Purchaser with the
appropriate number of shares of the Global Security and (ii) ownership of the
Preferred Stock evidenced by the Global Security will be shown on, and the
transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to the interests of the
Depositary's Participants), the Depositary's Participants and the Depositary's
Indirect Participants. Prospective purchasers are advised that the laws of
some states require that certain persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer
Preferred Stock evidenced by the Global Security will be limited to such
extent. For certain other restrictions on the transferability of the Preferred
Stock see "Notice to Investors."
So long as the Global Security holder is the registered owner of any
Preferred Stock the Global Security Holder will be considered the sole holder
under the Certificate of Designation of any Preferred Stock evidenced by the
Global Security. Beneficial Owners of Preferred Stock evidenced by the Global
Security will not be considered the owners or holders thereof under the
Certificate of Designation for any purpose. Neither the Company nor the
Transfer Agent will have any responsibility or liability for any aspect of the
records of the Depositary or for maintaining, supervising or reviewing any
records of the Depositary relating to the Preferred Stock.
Payments in respect of dividends and redemption payments and Liquidated
Damages, if any, on any Preferred Stock registered in the name of the Global
Security holder on the applicable record date will be
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payable by the Company to or at the direction of the Global Security holder in
its capacity as the registered holder under the Certificate of Designation.
Under the terms of the Certificate of Designation, the Company and the
Transfer Agent may treat the persons in whose names Preferred Stock, including
the Global Security, are registered as the owners thereof for the purpose of
receiving such payments. Consequently, neither the Company nor the Transfer
Agent has or will have any responsibility or liability for the payment of such
amounts to beneficial owners of Preferred Stock. The Company believes,
however, that it is currently the policy of the Depositary to immediately
credit the accounts of the relevant Participants with such payments, in
amounts proportionate to their respective holdings of beneficial interests in
the relevant security as shown on the records of the Depositary. Payments by
the Depositary's Participants and the Depositary's Indirect Participants to
the Beneficial Owners of Preferred Stock will be governed by standing
instructions and customary practice and will be the responsibility of the
Depositary's Participants or the Depositary's Indirect Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in
the Global Security may, upon request to the Transfer Agent, exchange such
beneficial interest for Preferred Stock in the form of Certificated
Securities. Upon any such issuance, the Transfer Agent is required to register
such Certificated Securities in the name of, and cause the same to be
delivered to, such person or persons (or the nominee of any thereof). All such
certificated Preferred Stock would be subject to the legend requirements
described herein under "Notice to Investors." In addition, if (i) the Company
notifies the Transfer Agent in writing that the Depositary is no longer
willing or able to act as a depositary and the Company is unable to locate a
qualified successor within 90 days or (ii) the Company, at its option,
notifies the Transfer Agent in writing that it elects to cause the issuance of
Preferred Stock in the form of Certificated Securities under the Certificate
of Designation, then, upon surrender by the Global Security Holder of its
Global Security, Preferred Stock in such form will be issued to each person
that the Global Security Holder and the Depositary identify as being the
Beneficial Owner of the related Preferred Stock.
Neither the Company nor the Transfer Agent will be liable for any delay by
the Global Security Holder or the Depositary in identifying the Beneficial
Owners of Preferred Stock and the Company and the Transfer Agent may
conclusively rely on, and will be protected in relying on, instructions from
the Global Security Holder or the Depositary for all purposes.
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DESCRIPTION OF THE EXCHANGE DEBENTURES
The 12 7/8% Senior Subordinated Debentures due 2007 (the "Exchange
Debentures") will be issued pursuant to an Indenture (the "Indenture") between
the Company and a trustee to be selected by the Company (the "Trustee"). The
terms of the Exchange Debentures include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act. The
Exchange Debentures are subject to all such terms, and holders of Exchange
Debentures are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of certain provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below. Copies of the proposed form of Indenture and Registration Rights
Agreement are available as set forth below under "--Additional Information."
The definitions of certain terms used in the following summary are set forth
below under "--Certain Definitions." As used in this Description of the
Exchange Debentures, the term "Company" refers to Hyperion Telecommunications,
Inc., excluding its Subsidiaries and Joint Ventures.
GENERAL
The Exchange Debentures will be general unsecured obligations of the Company
and will mature on October 15, 2007. The Exchange Debentures will bear
interest at the rate of 12 7/8% per annum, payable semi-annually on April 15
and October 15 of each year to the holders of record on the day immediately
preceding April 1 and October 1. Interest payable on or prior to October 15,
2002 may be paid in the form of additional Exchange Debentures valued at the
principal amount thereof. Interest payable after October 15, 2002 will be
required to be paid in cash. Interest on the Exchange Debentures will accrue
from the most recent date to which interest has been paid or, if no interest
has been paid, from the date of issuance of the Exchange Debentures. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. The Exchange Debentures will be payable both as to principal, premium,
if any, interest and Liquidated Damages, if any, at the office or agency of
the Company maintained for such purpose within the City and State of New York
or, at the option of the Company, payment of interest and Liquidated Damages
may be made by check mailed to the holders of the Exchange Debentures at their
respective addresses set forth in the register of holders of the Exchange
Debentures. Until otherwise designated by the Company, the Company's office or
agency in New York will be the office of the Trustee maintained for such
purpose. The Exchange Debentures will be issued in registered form, without
coupons, and in denominations of $1,000 and integral multiples thereof.
The Exchange Debentures will be subordinated in right of payment to all
current and future Senior Debt. As of June 30, 1997, the Company had Senior
Debt of approximately $472.3 million as adjusted to give effect to the
issuance of the Senior Secured Notes (such amount at September 30, 1997 would
increase by approximately $6.8 million related to the Accreted Value (as
defined) with respect to the Senior Notes). The Indenture will permit the
incurrence of additional Senior Debt in the future.
Substantially all of the Company's operations are conducted through its
Subsidiaries and Joint Ventures and, therefore, the Company is dependent upon
the cash flow of its Subsidiaries and Joint Ventures to meet its obligations,
including its obligations under the Exchange Debentures. The Exchange
Debentures will be effectively subordinated to all indebtedness and other
liabilities and commitments (including trade payables and lease obligations)
of the Company's Subsidiaries and Joint Ventures. Any right of the Company to
receive assets of any of its Subsidiaries or Joint Ventures upon liquidation
or reorganization (and the consequent right of the holders of the Exchange
Debentures to participate in those assets) will be effectively subordinated to
the claims of that Subsidiary's creditors or that Joint Venture's creditors,
as the case may be, except to the extent that the Company is itself recognized
as a creditor of such Subsidiary or Joint Venture, as the case may be, in
which case the claims of the Company would still be subordinate to any
security in the assets of such Subsidiary or Joint Venture, as the case may
be, and any indebtedness of such Subsidiary or Joint Venture, as the case may
be, senior to that held by the Company. As of June 30, 1997, the Exchange
Debentures would have been effectively subordinated to debt (including trade
payables and other accrued liabilities) of the Company's Subsidiaries and
Joint Ventures of approximately $57.1 million. See "Risk Factors--Substantial
Leverage."
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SUBORDINATION
The payment of principal of, premium, if any, and interest on the Exchange
Debentures will be subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full of all Senior Debt, whether
outstanding on the date of the Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full of all Obligations due in respect of such Senior Debt
(including interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt) before the holders of Exchange
Debentures will be entitled to receive any payment with respect to the
Exchange Debentures and until all Obligations with respect to Senior Debt are
paid in full, any distribution to which the holders of Exchange Debentures
would be entitled shall be made to the holders of Senior Debt (except that
holders of Exchange Debentures may receive Permitted Junior Securities and
payments made from the trust described under "--Legal Defeasance and Covenant
Defeasance").
The Company also may not make any payment upon or in respect of the Exchange
Debentures (except in Permitted Junior Securities or from the trust described
under "--Legal Defeasance and Covenant Defeasance") if (i) a default in the
payment of the principal of, premium or Liquidated Damages, if any, or
interest on Designated Senior Debt occurs and is continuing beyond any
applicable period of grace or (ii) any other default occurs and is continuing
with respect to Designated Senior Debt that permits holders of the Designated
Senior Debt as to which such default relates to accelerate its maturity and
the Trustee receives a notice of such default (a "Payment Blockage Notice")
from the Company or the holders of any Designated Senior Debt. Payments on the
Exchange Debentures may and shall be resumed (a) in the case of a payment
default, upon the date on which such default is cured or waived and (b) in
case of a nonpayment default, the earlier of the date on which such nonpayment
default is cured or waived or 179 days after the date on which the applicable
Payment Blockage Notice is received, unless the maturity of any Designated
Senior Debt has been accelerated. No new period of payment blockage may be
commenced unless and until (i) 360 days have elapsed since the effectiveness
of the immediately prior Payment Blockage Notice and (ii) all scheduled
payments of principal, premium or Liquidated Damages, if any, and interest on
the Exchange Debentures that have come due have been paid in full in cash. No
more than one Payment Blockage Notice to the Trustee may be given in any 360
day period.
The Indenture will further require that the Company promptly notify holders
of Senior Debt if payment of the Exchange Debentures is accelerated because of
an Event of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, holders of Exchange Debentures may recover less
ratably than creditors of the Company who are holders of Senior Debt. The
principal amount of Senior Debt outstanding at June 30, 1997 as adjusted for
the issuance of the Senior Secured Notes (such amount at September 30, 1997
would increase by approximately $6.8 million related to the Accreted Value (as
defined) with respect to the Senior Notes), was approximately $472.3 million
(excluding trade payables and other accrued liabilities). The Indenture will
limit, subject to certain restrictions, the amount of additional Indebtedness,
including Senior Debt, that the Company, its Subsidiaries and the Joint
Ventures can incur. See "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock."
OPTIONAL REDEMPTION
The Exchange Debentures will not be redeemable at the Company's option prior
to October 15, 2002. Thereafter, the Exchange Debentures will be subject to
redemption at the option of the Company, in whole or in part, upon not less
than 30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the applicable redemption
date, if redeemed during the twelve-month period beginning on October 15 of
the years indicated below:
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<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ------------
<S> <C>
2002............................ 106.438%
2003............................ 104.292%
2004............................ 102.146%
2005 and thereafter............. 100.000%
</TABLE>
Notwithstanding the foregoing, prior to October 15, 2000, the Company may,
at its option, use the net cash proceeds received by the Company from a
Qualified Equity Offering to repurchase Exchange Debentures having an
aggregate principal amount of up to 35% of the initial aggregate Liquidation
Preference of the Preferred Stock originally issued in the Offering plus,
without duplication, accumulated and unpaid dividends and Liquidated Damages,
if any to the date of redemption for cash at a redemption price equal to
112.875% of the principal amount thereof, plus accrued and unpaid interest to
the date of redemption; provided, that after any such redemption the aggregate
principal amount of the Exchange Debentures outstanding is equal to at least
65% of the initial aggregate Liquidation Preference of the Preferred Stock
originally issued in the Offering; provided, further that such redemption
shall occur within 90 days of the closing of such Qualified Equity Offering.
MANDATORY REDEMPTION
Except as set forth under "--Certain Covenants--Asset Sales" and "--Offer to
Purchase Upon Change of Control," the Company will not be required to make
mandatory redemption or sinking fund payments with respect to the Exchange
Debentures.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
make an offer (the "Change of Control Offer") to each holder of Exchange
Debentures to repurchase all or any part (equal to $1,000 or an integral
multiple thereof) of such holder's Exchange Debentures at a purchase price
equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest and Liquidated Damages, if any, thereon, to the date of
purchase (the "Change of Control Payment"). The Change of Control Offer must
be commenced within 30 days following a Change of Control, must remain open
for at least 30 and not more than 40 days (unless required by applicable law)
and must comply with the requirements of Rule 14e-1 under the Exchange Act and
any other applicable securities laws and regulations.
Except as described above with respect to a Change of Control, the Indenture
will not contain provisions that permit the holders of the Exchange Debentures
to require that the Company repurchase or redeem the Exchange Debentures in
the event of a takeover, recapitalization or similar transaction.
Due to the leveraged structure of the Company and subordination of the
Exchange Debentures to Senior Debt of the Company and the effective
subordination of the Exchange Debentures to Indebtedness of the Company's
Subsidiaries, the Company may not have sufficient funds available to purchase
the Exchange Debentures tendered in response to a Change of Control Offer. In
addition, the Senior Notes and the Senior Secured Notes contain prohibitions
or restrictions on the Company's ability to effect a Change of Control Payment
and any future credit agreements or other agreements may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Company is prohibited from purchasing Exchange Debentures, the
Company could seek the consent of the lenders of its Senior Debt to the
purchase of Exchange Debentures or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such a consent
or repay such borrowings, the Company will remain prohibited from purchasing
Exchange Debentures. In such case, the Company's failure to purchase tendered
Exchange Debentures would constitute an Event of Default under the Indenture
which would, in turn, constitute as an event of default under the Senior
Indenture and the Senior Secured Indenture. In such circumstances, the
subordination provisions in the Indenture would likely restrict payments to
the holders of Exchange Debentures. See "Risk Factors."
Certain of the Company's other indebtedness (including the Senior Notes and
the Senior Secured Notes) contains prohibitions with respect to certain events
that would constitute a Change of Control. In addition, the exercise by the
Holders of Senior Secured Notes or the Senior Notes of their right to require
the Company to
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repurchase the Senior Notes or the Senior Secured Notes, as the case may be
could under certain circumstances cause a default under other indebtedness of
the Company, its Subsidiaries or Joint Ventures, even if the Change of Control
itself does not, due to the financial effect of such repurchases on the
Company. Finally, the Company's ability to pay cash to the Holders of Senior
Secured Notes, Senior Notes and/or the Exchange Debentures upon a repurchase
may be limited by the Company's then existing financial resources.
The Company does not currently have adequate financial resources to effect a
repurchase of the Senior Notes or the Exchange Debentures upon a Change of
Control and there can be no assurance that the Company will have such
resources in the future. See "Risk Factors--Inability to Purchase Preferred
Stock or Exchange Debentures Upon a Change of Control."
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the Company's assets. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of Exchange Debentures to require the Company to repurchase such
Exchange Debentures as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company to another
Person may be uncertain.
SELECTION OF EXCHANGE DEBENTURES FOR REDEMPTION OR OFFERS TO PURCHASE
If less than all of the Exchange Debentures are to be redeemed or to be
purchased pursuant to any purchase offer required under the Indenture at any
time, selection of Exchange Debentures for redemption or purchase will be made
by the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Exchange Debentures are listed, or,
if the Exchange Debentures are not so listed, on a pro rata basis, by lot or
by such method as the Trustee shall deem fair and appropriate, provided that
no Exchange Debentures with a principal amount of $1,000 or less shall be
redeemed or purchased in part. A new Exchange Debenture in principal amount
equal to the unredeemed or unpurchased portion will be issued in the name of
the holder thereof upon cancellation of the original Exchange Debenture. On
and after the redemption or purchase date, interest will cease to accrue on
the Exchange Debentures or portions of them called for redemption or purchase.
NOTICE OF REDEMPTION
Notice of redemption shall be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each holder of Exchange
Debentures to be redeemed at its registered address. If any Exchange Debenture
is to be redeemed in part only, the notice of redemption that relates to such
Exchange Debenture shall state the portion of the principal amount to be
redeemed.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants, which
will only have effect on the date (if any) of the issuance of the Exchange
Debentures:
Restricted Payments
The Indenture will provide that (1) the Company will not, and will not
permit any of its Subsidiaries or Joint Ventures to, directly or indirectly:
(a) declare or pay any dividend or make any other payment or distribution on
account of the Company's Equity Interests (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company or dividends or distributions payable to the Company or any Wholly
Owned Subsidiary); (b) purchase, redeem or otherwise acquire or retire for
value any Equity Interests of the Company or any direct or indirect parent of
the Company (other than Equity Interests owned by the Company or any Wholly
Owned Subsidiary of the Company); or (c) purchase, redeem or otherwise acquire
or retire for value, prior to a scheduled mandatory sinking fund payment date
or maturity date, any Indebtedness of the Company which ranks subordinated in
right to payment to the Exchange Debentures and (ii) the Company will not, and
will not permit any of its Subsidiaries or Permitted Joint Ventures to, make
any Investment other
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than a Permitted Investment (all such payments and other actions set forth in
clauses (i) and (ii) above being collectively referred to as "Restricted
Payments") unless, at the time of and after giving effect to such Restricted
Payment:
(x) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(y) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments (including, without limitation, all Restricted
Payments referred to in clauses (a) and (b)(1) below but excluding those
made under clauses (b)(2) and (c) below) made by the Company and its
Subsidiaries after the date of the Indenture is less than the sum of: (1)
the excess of (A) Cumulative Pro Forma EBITDA over (B) 2.0 times Cumulative
Interest Expense plus (2) the aggregate net cash proceeds received by the
Company (other than from a Subsidiary or Joint Venture) (A) as capital
contributions to the Company, (B) from the issuance and sale of Equity
Interests, other than Disqualified Stock, and (C) from the issuance and
sale of Indebtedness that is convertible into Capital Stock (other than
Disqualified Stock), to the extent such Indebtedness is actually converted
into such Capital Stock (clauses (A), (B) and (C) collectively referred to
as "Equity Issuances"), in each case including the net cash proceeds
received from the issuance and sale of the Preferred Stock, other than any
such net cash proceeds from Equity Issuances that were used as set forth in
clause (b) or (c) below; and
(z) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the first
paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance
of Disqualified or Preferred Stock."
The foregoing provisions will not prohibit the following Restricted
Payments:
(a) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture;
(b) so long as no Default or Event of Default shall have occurred and be
continuing, Restricted Joint Venture Investments, which at the time any
such Restricted Joint Venture Investment was made, did not cause the
aggregate amount of all Restricted Joint Venture Investments then
outstanding under this clause (b) to exceed (1) $20.0 million plus (2) the
net cash proceeds from Equity Issuances not used as set forth in clause (y)
above and clause (c) below; or
(c) so long as no Default or Event of Default shall have occurred and be
continuing, the making of any Investment in a Telecommunications Business
out of the net cash proceeds from Equity Issuances not used as set forth in
clauses (y) and (b)(2) above.
For purposes of this covenant, in the event that a Restricted Joint Venture
becomes a Permitted Joint Venture or otherwise ceases to be a Restricted Joint
Venture, all of the then outstanding Investments made by such entity since the
date of the Indenture, shall be deemed to have been made as of the date that
such Restricted Joint Venture becomes a Permitted Joint Venture or otherwise
ceases to be a Restricted Joint Venture; provided that if a Restricted Joint
Venture ceases to be a Restricted Joint Venture as a result of (i) the loss of
its Local Partner or (ii) the loss of management control of such Restricted
Joint Venture, then the provisions of this paragraph shall not be applied to
such entity.
The amount of all Restricted Payments, other than cash, shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of such
Restricted Payment of the asset(s) proposed to be transferred by the Company
or such Subsidiary, as the case may be, pursuant to such Restricted Payment.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which
calculations may be based upon the Company's latest available financial
statements.
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Asset Sales
The Indenture will provide that the Company will not, and will not permit
any Subsidiary to, directly or indirectly, whether in a single transaction or
a series of related transactions occurring within any twelve-month period,
make any Asset Sale, unless:
(i) the Company or the Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair
market value (as determined in good faith by the Board of Directors) for
the shares or assets sold or otherwise disposed of; and
(ii) at least 85% of such consideration consists of cash, provided that
(A) an amount equal to the fair market value (as determined in good faith
by the Board of Directors) of:
(1) Telecommunications Related Assets received by the Company or any
Subsidiary from the transferee that will be used by the Company or such
Subsidiary in the operation of a Telecommunications Business;
(2) the Voting Stock of any Person engaged in a Telecommunications
Business received by the Company or any Subsidiary; provided that on
the date such Voting Stock is received, such Investment in Voting Stock
constitutes a Permitted Joint Venture Investment; and
(3) the publicly tradeable Voting Stock of any person engaged in the
Telecommunications Business received by the Company or any Subsidiary
as consideration for a sale of an Equity Interest in any Restricted
Joint Venture,
will, for the purposes of this covenant, be deemed to be cash which was
applied in accordance with the first sentence of the penultimate paragraph
of this covenant; and
(B) in the event that any of Hyperion Telecommunications of Pennsylvania,
Inc., Hyperion Telecommunications of Tennessee, Inc. or Hyperion
Telecommunications of New York, Inc. sell their respective partnership
interests in the partnerships to which each is a partner to the respective
partnerships in the manner specified by the applicable Local Partner
Agreement, (1) the principal amount of any seller note issued to the
Company or any of its Wholly Owned Subsidiaries in connection with the sale
of such partnership interest shall be deemed to be cash for purposes of
this covenant and (2) the payments of principal pursuant to such seller
note shall be deemed to be Net Cash Proceeds (for purposes of the
penultimate paragraph of this covenant) as and when such payments are
received.
For purposes of this covenant, the first $1.0 million of Net Cash Proceeds
received from Asset Sales in any fiscal year shall not be subject to the
restrictions contained in this covenant.
The Indenture will provide that, in determining the fair market value with
respect to any Asset Sale or series of related Asset Sales involving aggregate
consideration in excess of $10.0 million, the Board of Directors of the
Company must obtain an opinion as to the fairness to the holders of the
Exchange Debentures of such Asset Sales from a financial point of view issued
by a nationally recognized investment banking firm with total assets in excess
of $1.0 billion; provided that no such opinion shall be required if such Asset
Sale is in accordance with the terms of any Local Partnership Agreement to
which the Company or any of its Subsidiaries is a party on the date of the
Indenture.
The Indenture will also provide that the Company may apply the Net Cash
Proceeds from such Asset Sale (A) permanently reduce the amounts permitted to
be borrowed by the Company under the terms of any of its Senior Debt
(including the Senior Notes and the Senior Secured Notes) or (B) to an
investment in Telecommunications Related Assets in a Telecommunications
Service Market within 180 days after any Asset Sale; provided that if the
Company determines to make such investment in a New Telecommunications Service
Market, the Company will (y) within 180 days of such Asset Sale, deliver to
the Trustee a resolution adopted by a majority of the Board of Directors set
forth in an Officer's Certificate certifying that the Company intends to
utilize the Net Cash Proceeds of such Asset Sale to invest in a specific new
Telecommunications Service Market
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and (z) complete such investment within 360 days of such Asset Sale. The
Company will be deemed to have completed its investment for purposes of the
preceding clause (z), so long as the Company has (i) a business plan that sets
forth the Company's investment plans for the applicable Telecommunications
Service Market and (ii) issued all material purchase orders to the appropriate
parties that are necessary to complete such business plan. Any Net Cash
Proceeds from an Asset Sale that are not invested as provided in the preceding
sentence shall constitute Excess Proceeds. When the cumulative amount of
Excess Proceeds (as defined below under "Certain Covenants--Asset Sales")
exceeds $2.5 million, the Company will to the extent, but only to the extent
permitted by the terms of the Senior Debt (including the Senior Notes and the
Senior Secured Notes) make an offer to all holders of Exchange Debentures and
Pari Passu Notes (an "Excess Proceeds Offer"), to purchase the maximum
principal amount of Exchange Debentures and Pari Passu Notes that may be
purchased out of such Excess Proceeds, at an offer price in cash in an amount
equal to 100% of the outstanding principal amount (or accreted value) of the
Exchange Debentures and 100% of the outstanding principal amount of the Pari
Passu Notes, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon, to the date fixed for the closing of such offer, in accordance with
the procedures specified in the Indenture. To the extent that the aggregate
principal amount thereof, plus accrued and unpaid interest to the date of
repurchase of the Exchange Debentures tendered pursuant to an Asset Sale Offer
is less than the Excess Proceeds, the Company may use such remaining Excess
Proceeds for any purpose not prohibited by the Indenture. If the aggregate
principal amount thereof, plus accrued and unpaid interest to the date of
repurchase of Exchange Debentures surrendered by holders thereof exceeds the
amount of Excess Proceeds, the Company shall select the Exchange Debentures to
be purchased on a pro rata basis. Upon completion of such offer, the amount of
Excess Proceeds shall be reset at zero. Pending application of the Net Cash
Proceeds as set forth above from Asset Sales, all such Net Cash Proceeds will
be placed in escrow for the benefit of the holders of the Exchange Debentures.
The Company will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent
such laws and regulations are applicable in connection with the repurchase of
the Exchange Debentures as a result of an Asset Sale.
Notwithstanding the foregoing, the Company will not, and will not permit any
Subsidiary to, directly or indirectly, make any Asset Sale of any Equity
Interests of any Subsidiary (at least 80% of the voting power of the Capital
Stock of which is owned by the Company) except pursuant to an Asset Sale of
all of the Equity Interests of such Subsidiary; provided that any sale of any
Equity Interest of any such Subsidiary to a Strategic Equity Investor shall be
deemed not to be an Asset Sale for purposes of this covenant, so long as such
sale of such Equity Interests does not result in such Subsidiary ceasing to be
a Subsidiary of the Company.
Incurrence of Indebtedness and Issuance of Disqualified Stock or Preferred
Stock
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries or Joint Ventures to, directly or indirectly, create,
incur, issue, assume, guaranty or otherwise become directly or indirectly
liable, contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including, without limitation, Acquired Indebtedness) and that
the Company will not issue any Disqualified Stock and will not permit any of
its Subsidiaries or Joint Ventures to issue any shares of Preferred Stock;
provided that the Company may incur Indebtedness (including Acquired
Indebtedness) or issue shares of Disqualified Stock if the Company's
Consolidated Leverage Ratio as of the last day of the Company's most recently
ended fiscal quarter for which internal financial statements are available
immediately preceding the date on which such Indebtedness is incurred, or such
Disqualified Stock is issued, as the case may be, would have been (a) greater
than zero and less than 5.5 to 1.0, if such incurrence or issuance is on or
prior to March 31, 1999, and (b) greater than zero and less than 5.0 to 1.0,
if such incurrence or issuance is after March 31, 1999, determined on a pro
forma basis (including pro forma application of the net proceeds therefrom) as
if such Indebtedness had been incurred, or such Disqualified Stock had been
issued, as the case may be, at the beginning of such fiscal quarter.
The foregoing provisions will not apply to:
(i) the incurrence of Indebtedness by the Company, any Subsidiary (other
than a General Partner Subsidiary) or any Permitted Joint Venture pursuant
to Credit Agreement(s), provided that the aggregate
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principal amount of such Credit Agreement(s) at any one time outstanding
under this clause (i) does not exceed $50.0 million for the Company, all of
its Subsidiaries (other than a General Partner Subsidiary) and all of its
Permitted Joint Ventures combined;
(ii) the incurrence of Vendor Debt by the Company, any Subsidiary (other
than a General Partner Subsidiary) or any Permitted Joint Venture, provided
that the aggregate principal amount of such Vendor Debt does not exceed 80%
of the purchase price or cost of the construction, acquisition or
improvement of the applicable Telecommunications Related Assets financed
therewith (or 100% of the total cost of the Telecommunications Related
Assets financed therewith if such Vendor Debt was extended for the purchase
of tangible physical assets and was so financed by the vendor thereof or an
affiliate of such vendor);
(iii) Refinancing Indebtedness;
(iv) the incurrence of Indebtedness by the Company not to exceed, at any
one time outstanding, 2.0 times the sum of (i) the net cash proceeds
received by the Company from the issuance and sale of its Capital Stock
(other than Disqualified Stock) plus (ii) the fair market value at the time
of issuance of Equity Interests (other than Disqualified Stock) issued in
connection with any acquisition of a Telecommunications Related Business,
in each case to a Person other than a Subsidiary or a Joint Venture of the
Company; provided that such Indebtedness does not mature prior to the
Stated Maturity of the Debentures and has a Weighted Average Life to
Maturity longer than the Exchange Debentures;
(v) the incurrence by the Company of Indebtedness (in addition to
Indebtedness permitted by any other clause of this paragraph) in an
aggregate principal amount (or accreted value, as applicable) at any time
outstanding not to exceed $10.0 million;
(vi) the incurrence by any Restricted Joint Venture of Non-Recourse Debt,
provided that if any Non-Recourse Debt of a Restricted Joint Venture ceases
to be Non-Recourse Debt, such event shall be deemed to constitute an
incurrence of Indebtedness as of the date such Indebtedness ceases to be
Non-Recourse Debt;
(vii) the guarantee of Indebtedness by a General Partner Subsidiary in
connection with the incurrence of Indebtedness by the Restricted Joint
Venture of which such General Partner Subsidiary is a general partner; and
(viii) the incurrence by any Subsidiary (other than a General Partner
Subsidiary) or any Permitted Joint Venture of Indebtedness (including,
without limitation, Acquired Debt) so long as all of the net proceeds of
such incurrence are used by such Subsidiary or Permitted Joint Venture, as
the case may be, directly in connection with the design, construction,
development or acquisition of a Telecommunications Service Market, provided
that, as of the last day of the Company's most recent fiscal quarter for
which internal financial statements are available immediately preceding the
date on which such Indebtedness is incurred, either: (a) the aggregate
principal amount of all Indebtedness of such Subsidiary or such Permitted
Joint Venture does not exceed 1.75 times the Invested Equity Capital of
such Subsidiary or such Permitted Joint Venture; or (b) the Consolidated
Leverage Ratio of such Subsidiary or such Permitted Joint Venture would not
have been greater than 3.5 to 1.0, in each case determined on a pro forma
basis (including pro forma application of the net proceeds therefrom) as if
such Indebtedness had been incurred at the beginning of such fiscal
quarter, and provided, further that any Indebtedness incurred by any such
Subsidiary or any Permitted Joint Venture (other than Related Networks)
pursuant to this paragraph shall be non-recourse with respect to the
Company or any other Subsidiary or any other Joint Venture.
For purposes of this covenant, the Indenture will provide that, in the event
that the Company proposes to incur Indebtedness pursuant to clause (iv) above,
the Company shall, simultaneously with the incurrence of such Indebtedness,
deliver to the Trustee a resolution of the Board of Directors set forth in an
Officers' Certificate stating that the sale or sales of Capital Stock forming
the basis for the incurrence of such Indebtedness (i) constitutes a long term
investment in the Company and (ii) has not been made for the purpose of
circumventing
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this covenant. The Indenture will also provide that, in event that the Company
rescinds, reverses or unwinds such sale of Capital Stock or otherwise returns
or refunds all or any portion of the net cash proceeds of such sale of Capital
Stock (whether by dividend, distribution or otherwise) within 270 days of the
date of the incurrence of such Indebtedness, such Indebtedness will be deemed
to be incurred on the date of, and immediately after giving effect to, such
rescission, reversal, unwinding, return or refund.
For purposes of this covenant, in the event that a Restricted Joint Venture
becomes a Permitted Joint Venture or otherwise ceases to be a Restricted Joint
Venture, all of the then outstanding Indebtedness of such entity shall be
deemed to have been incurred as of the date that such Restricted Joint Venture
becomes a Permitted Joint Venture or otherwise ceases to be a Restricted Joint
Venture.
No Senior Subordinated Debt
The Indenture will provide that the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Exchange Debentures.
Limitation on Guarantees of Subordinated Debt
The Company shall not permit any Subsidiary, directly or indirectly, to
assume, guarantee or in any other manner become liable with respect to any
Indebtedness of the Company that is expressly by its terms subordinate or
junior in right of payment to any other Indebtedness of the Company unless
such Subsidiary shall make effective provision for guaranteeing the Exchange
Debentures (x) with respect to Indebtedness that ranks pari passu with the
Exchange Debentures, to the same extent as such Indebtedness is to be
guaranteed by such Subsidiary or (y) with respect to Indebtedness that is
subordinate in right of payment to the Exchange Debentures, to a greater
extent than such other Indebtedness is to be guaranteed by such Subsidiary.
Liens
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries or Permitted Joint Ventures to, directly or
indirectly, create, incur, assume or suffer to exist any Lien on any asset now
owned or hereafter acquired, or any income or profits therefrom or assign or
convey any right to receive income therefrom, except Permitted Liens.
Limitations on Sale and Leaseback Transactions
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, enter into any Sale and Leaseback Transaction;
provided that the Company or any Subsidiary (other than a General Partner
Subsidiary) may enter into a Sale and Leaseback Transaction if (i) the Company
or other entity could have incurred the Indebtedness relating to such Sale and
Leaseback Transaction pursuant to the "--Incurrence of Indebtedness and
Issuance of Preferred Stock" and "--Liens" covenants to incur secured
Indebtedness in an amount equal to the Attributable Debt with respect to such
transaction, (ii) the net proceeds of such Sale and Leaseback Transaction are
at least equal to the fair market value of such property as determined in good
faith by the Board of Directors of the Company and (iii) such proceeds are
applied in accordance with the "--Asset Sales" covenant.
Dividends and Other Payment Restrictions Affecting Subsidiaries
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to:
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(i)(a) pay dividends or make any other distributions to the Company or
any of its Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay
any indebtedness owed to the Company or any of its Subsidiaries,
(ii) make loans or advances to the Company or any of its Subsidiaries,
(iii) grant liens or grant security interests on its asset in favor of
the holders of the Exchange Debentures or guarantee the payment of the
Exchange Debentures; or
(iv) transfer any of its properties or assets to the Company or any of
its Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of:
(a) Existing Indebtedness as in effect on the date of the Indenture;
(b) any Credit Agreement creating or evidencing Indebtedness permitted by
the Indenture and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof;
(c) the Indenture and the Exchange Debentures;
(d) applicable law;
(e) by reason of customary non-assignment provisions in leases entered
into in the ordinary course of business and consistent with past practices;
(f) purchase money obligations or Vendor Debt for property acquired in
the ordinary course of business that impose restrictions of the nature
described in clause (iv) above on the property so acquired;
(g) Indebtedness incurred pursuant to clause (viii) of the "--Incurrence
of Indebtedness and Issuance of Disqualified Stock or Preferred Stock"
covenant, provided that such encumbrance or restriction only relates to the
Subsidiary or Permitted Joint Venture incurring such Indebtedness; and
(h) Refinancing Indebtedness, provided that such encumbrances or
restrictions are no more restrictive than those contained in the
documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
Merger, Consolidation or Sale of Assets
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company
is the surviving corporation or the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company) or the entity or Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made assumes all the obligations of the Company under the Exchange Debentures
and the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a merger of
the Company with or into a Wholly Owned Subsidiary of the Company, the Company
or the entity or Person formed by or surviving any such consolidation or
merger (if other than the Company), or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made (A) will
have Consolidated Net Worth immediately after the transaction, equal to or
greater than the Consolidated Net Worth of the Company immediately preceding
the transaction and (B) will, at the time of such transaction and after giving
pro forma effect thereto as if such transaction had occurred at the beginning
of the applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness
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pursuant to the first paragraph of the "--Incurrence of Indebtedness and
Issuance of Disqualified Stock or Preferred Stock" covenant contained herein.
Transactions with Affiliates
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless
(i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Subsidiary, other than those that would have
been obtained in a comparable transaction by the Company or such Subsidiary
with an unrelated Person; and
(ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $1.0 million, a resolution adopted by
a majority of the disinterested members of the Board of Directors and a
majority of the Independent Directors of the Company set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies
with clause (i) above; and (b) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration
in excess of $10.0 million, an opinion as to the fairness to the holders of
the Exchange Debentures of such Affiliate Transaction from a financial
point of view issued by a nationally recognized consulting firm, business
valuation firm or investment banking firm;
provided that: (i) all agreements and arrangements with Affiliates, including
without limitation the Local Partner Agreements the Fiber Lease Agreements,
the Management Agreements, network monitoring agreements and transactions in
connection therewith or pursuant thereto existing on the date of the Senior
Indenture and through the current term thereof; (ii) all arrangements and
transactions with Adelphia, including existing intercompany Indebtedness,
overhead charges made in the ordinary course of business, fiber lease
arrangements and similar services existing on the date of the Senior Indenture
and through the current term thereof; (iii) all employment arrangements
approved by the Board of Directors; (iv) all Restricted Payments made pursuant
to the covenant entitled "--Restricted Payments"; (v) transactions between or
among the Company and/or its Wholly Owned Subsidiaries; (vi) transactions
between a General Partner Subsidiary and the Restricted Joint Venture of which
such General Partner Subsidiary is a general partner; and (vii) management and
network monitoring agreements between the Company and any of its Joint
Ventures, shall not be deemed Affiliate Transactions.
Loans to Subsidiaries and Joint Ventures
The Indenture will provide that all loans to Subsidiaries or Joint Ventures
made by the Company from time to time after the date of the Indenture will be
evidenced by Intercompany Notes in favor of the Company. The Indenture will
also provide that all loans by the Company to any Subsidiary or Joint Venture
outstanding on the date of the Indenture will be evidenced by an unsecured
Intercompany Note. The Indenture will prohibit loans by Subsidiaries to other
Subsidiaries and will prohibit loans by Subsidiaries to Joint Ventures in
which such Subsidiary does not have an Equity Interest, except that such loans
may be (i) incurred and maintained between and among the Company, its
Subsidiaries and Permitted Joint Ventures in connection with the incurrence of
Indebtedness pursuant to clause (i) of the covenant entitled "--Incurrence of
Indebtedness and Issuance of Disqualified Stock or Preferred Stock" or (ii)
incurred and maintained between and among Related Networks in connection with
the incurrence of Indebtedness by such Related Networks pursuant to the
proviso in the last paragraph of the covenant entitled "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
Limitation on Status as Investment Company
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, conduct its business in a fashion that would cause
it to be required to register as an "investment company" (as that term
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is defined in the Investment Company Act of 1940, as amended) or otherwise
become subject to regulation under the Investment Company Act of 1940.
Payments for Consent
The Indenture will provide that neither the Company nor any of its
Subsidiaries shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any holder of
any Exchange Debentures for or as inducement to any consent, waiver or
amendment of any terms or provisions or the Exchange Debentures unless such
consideration is offered to be paid or agreed to be paid to all holders of the
Exchange Debentures which so consent, waive or agree to amend in the time
frame set forth in solicitation documents relating to such consent, waiver or
agreement.
Business Activities
The Company will not, and will not permit any Subsidiary to, engage in any
business other than the Telecommunications Business and such business
activities as are incidental or related thereto.
Reports
The Indenture will provide that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Exchange Debentures are outstanding, the Company will furnish to
the holders of Exchange Debentures (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants; (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company were required to file such reports;
and (iii) on a quarterly basis, certain financial information and operating
data with respect to each Subsidiary and Joint Venture engaged in a
Telecommunications Business, in the form specified by Schedule E of the
Indenture. In addition, whether or not required by the rules and regulations
of the Commission, the Company will file a copy of all such information and
reports with the Commission for public availability (unless the Commission
will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company has agreed that, for so long as any Exchange Debentures remain
outstanding, it will furnish to the holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default:
(i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Exchange Debentures;
(ii) a default in the payment when due of principal of or premium, if
any, on the Exchange Debentures when the same becomes due and payable at
maturity, upon redemption (including, without limitation, in connection
with an offer to purchase) or otherwise;
(iii) failure by the Company to comply with the provisions described
under the captions "--Change of Control," "--Asset Sales,"--Restricted
Payments," or "--Merger, Consolidation or Sale of Assets";
(iv) failure by the Company to comply with the provisions described under
the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock
or Disqualified Stock," provided that for purposes of the penultimate
paragraph of such covenant, in the event that the Company fails to comply
with such covenant because indebtedness is deemed to be incurred by a
Restricted Joint Venture solely as a result of such Restricted Joint
Venture ceasing to be a Restricted Joint Venture as a result of (i) the
loss of a Local Partner
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or (ii) the loss of management control of such Restricted Joint Venture,
such failure shall continue for 90 days;
(v) failure by the company to observe or perform any other covenant,
representation, warranty or other agreement in the Indenture or the
Exchange Debentures for 30 days after notice to the Company by the Trustee
or the Holders of at least 25% in principal amount of the Exchange
Debentures then outstanding;
(vi) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries
(or the payment of which is guaranteed by the Company or any of its
Subsidiaries) whether such Indebtedness or guarantee now exists, or is
created after the date of the Indenture, which default (a) is caused by a
failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b)
results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more;
(vii) failure by the Company or any of its Subsidiaries to pay final
judgments aggregating in excess of $5.0 million, which judgments are not
paid within, discharged by or stayed for a period of 60 days;
(viii) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries or any of its Joint Ventures
that would, if it were a Subsidiary, constitute a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the then outstanding Exchange
Debentures may declare all the Exchange Debentures to be due and payable
immediately (an "Acceleration") provided, that, no such Acceleration shall be
permitted until a date which is at least 92 days after all of the Senior Notes
have been repaid in full. Notwithstanding the foregoing, in the case of an
Event of Default arising from certain events of bankruptcy or insolvency, with
respect to the Company, any Significant Subsidiary or any group of
Subsidiaries that, taken together, would constitute a Significant Subsidiary,
all outstanding Exchange Debentures will become due and payable without
further action or notice; provided, that no such Acceleration shall be
permitted until a date which is at least 92 days after all of the Senior Notes
and the Senior Secured Notes have been paid in full. If each of the Senior
Indenture and the Senior Secured Indenture is modified or amended such that
the immediate acceleration of the Exchange Debentures upon the occurrence and
during the continuation of an Event of Default would not cause the Preferred
Stock to be classified as "Disqualified Stock" under each such indenture,
then, within 30 days after such modification of amendment of each such
indenture, the Company shall, and shall cause the Trustee to, amend the
Indenture and the Exchange Debentures to delete the proviso to each of the two
immediately preceding sentences. Holders of the Exchange Debentures may not
enforce the Indenture or the Exchange Debentures except as provided in the
Indenture. Subject to certain limitations, holders of a majority in principal
amount of the then outstanding Exchange Debentures may direct the Trustee in
its exercise of any trust or power. The Trustee may withhold from holders of
the Exchange Debentures notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Exchange Debentures
pursuant to the optional redemption provisions of the Indenture, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the Exchange Debentures. If an Event
of Default occurs prior to October 15, 2002 by reason of any willful action
(or inaction) taken (or not taken) by or on behalf of the Company with the
intention of avoiding the prohibition on redemption of the Exchange
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Debentures prior to October 15, 2002, then the premium specified in the
Indenture shall also become immediately due and payable to the extent
permitted by law upon the acceleration of the Exchange Debentures.
The holders of a majority in aggregate principal amount of the Exchange
Debentures then outstanding by notice to the Trustee may on behalf of the
holders of all of the Exchange Debentures waive any existing Default or Event
of Default and its consequences under the Indenture except a continuing
Default or Event of Default in the payment of interest on, or the principal
of, the Exchange Debentures.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Exchange Debentures or the Indenture or for any claim based on, in respect of,
or by reason of, such obligations or their creation. Each holder of Exchange
Debentures by accepting an Exchange Debenture waives and releases all such
liability. The waiver and release are part of the consideration for issuance
of the Exchange Debentures. Such waiver may not be effective to waive
liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Exchange Debentures
("Legal Defeasance") except for:
(i) the rights of holders of outstanding Exchange Debentures to receive
payments in respect of the principal of, premium, if any, and interest on
such Exchange Debentures when such payments are due from the trust referred
to below;
(ii) the Company's obligations with respect to the Exchange Debentures
concerning issuing temporary Exchange Debentures, registration of Exchange
Debentures, mutilated, destroyed, lost or stolen Exchange Debentures and
the maintenance of an office or agency for payment and money for security
payments held in trust;
(iii) the rights, powers, trusts, duties and immunities of the Trustee,
and the Company's obligations in connection therewith; and
(iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Exchange Debentures. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Exchange Debentures.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(i) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the holders of the Exchange Debentures, cash in U.S.
dollars, non-callable Government Securities, or a combination thereof, in
such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal of,
premium, if any, and interest on the outstanding Exchange Debentures on the
stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Exchange Debentures are being
defeased to maturity or to a particular redemption date;
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(ii) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received
from, or there has been published by, the Internal Revenue Service a ruling
or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the holders of
the outstanding Exchange Debentures will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the holders of the
outstanding Exchange Debentures will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date
of deposit;
(v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which the Company, or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(vii) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the holders of Exchange Debentures over the other creditors of
the Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and
(viii) the Company must deliver to the Trustee an Officers' Certificate
and an opinion of counsel, each stating that all conditions precedent
provided for relating to the Legal Defeasance or the Covenant Defeasance
have been complied with.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Exchange Debentures in accordance with the
Indenture. The Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or
exchange any Exchange Debenture selected for redemption. Also, the Company is
not required to transfer or exchange any Exchange Debenture for a period of 15
days before a selection of Exchange Debentures to be redeemed.
The registered holder of an Exchange Debenture will be treated as the owner
of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next three succeeding paragraphs, the Indenture or
the Exchange Debentures may be amended or supplemented with the consent of the
holders of at least a majority in aggregate outstanding principal amount of
the Exchange Debentures (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Exchange
Debentures), and any existing default or compliance with any provision of the
Indenture or the Exchange Debentures may be waived with the consent of
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the holders of a majority in principal amount of the then outstanding Exchange
Debentures (including consents obtained in connection with a tender offer or
exchange offer for Exchange Debentures).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Exchange Debentures held by a non-consenting holder):
(i) reduce the principal amount of Exchange Debentures whose holders must
consent to an amendment, supplement or waiver;
(ii) reduce the principal of or change the fixed maturity of any Exchange
Debenture or alter the provisions with respect to the redemption of the
Exchange Debentures (other than provisions relating to the covenants
described above under the caption "--Offer to Purchase Upon Change of
Control" and "--Asset Sales");
(iii) reduce the rate of or change the time for payment of interest on
any Exchange Debenture;
(iv) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the Exchange Debentures (except a
rescission of acceleration of the Exchange Debentures by the holders of at
least a majority in aggregate principal amount of the Exchange Debentures
and a waiver of the payment default that resulted from such acceleration);
(v) make any Exchange Debenture payable in money other than that stated
in the Exchange Debentures;
(vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of holders of Exchange Debentures to
receive payments of principal of or premium, if any, or interest on the
Exchange Debentures;
(vii) waive a redemption payment with respect to any Exchange Debenture
(other than a payment required by the covenants described above under the
captions "Offer to Purchase upon Change of Control" or "Certain Covenants--
Asset Sales"); and
(viii) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of Exchange
Debentures, the Company and the Trustee may amend or supplement the Indenture
or the Exchange Debentures to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Exchange Debentures in addition to or in place of
certificated Exchange Debentures, to provide for the assumption of the
Company's obligations to holders of Exchange Debentures in the case of a
merger or consolidation, to make any change that would provide any
additional rights or benefits to the holders of Exchange Debentures or that
does not adversely affect the legal rights under the Indenture of any such
holder, or to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The holders of a majority in principal amount of the then outstanding
Exchange Debentures will have the right to direct the time, method and place
of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. The Indenture provides that in case an
Event of Default shall occur (which shall not be cured), the Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Exchange Debentures, unless such
holder shall have offered to the Trustee security and indemnity satisfactory
to it against any loss, liability or expense.
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ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Certificate of
Designation, the Indenture or the Registration Rights Agreement without charge
by writing to the Company at Hyperion Telecommunications, Inc., Main at Water
Street, Coudersport, Pennsylvania 16915; Attention: Vice President, Finance.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise. For
purposes of the Indenture, beneficial ownership of 10% or more of the Voting
Stock of a Person shall be deemed to be control; provided, that no Local
Partner will be deemed an affiliate of a Subsidiary or a Joint Venture solely
as a result of such Local Partner's ownership of more than 10% of the Voting
Stock of such Subsidiary or Joint Venture.
"Annualized Pro Forma EBITDA" means with respect to any Person, such
Person's Pro Forma EBITDA for the latest fiscal quarter for which internal
financial statements are then available multiplied by four.
"Asset Sale" means
(i) the sale, lease, conveyance, disposition or other transfer of any
assets (including, without limitation, by way of a Sale and Leaseback
Transaction) other than (a) sales of inventory in the ordinary course of
business consistent with past practices and (b) issuances and sales by the
Company of its Equity Interests (provided that the sale, lease, conveyance,
disposition or other transfer of all or substantially all of the assets of
the Company and its Subsidiaries taken as a whole will be governed by the
provisions of the Indenture described above under the caption "--Change of
Control" and/or the provisions described above under the caption "--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset
Sale covenant),
and
(ii) the issuance or sale by the Company or any of its Subsidiaries of
Equity Interests of any of the Company's Subsidiaries or Joint Ventures, in
the case of either clause (i) or (ii), whether in a single transaction or a
series of related transactions (a) that have a fair market value in excess
of $1.0 million or (b) for net proceeds in excess of $1.0 million.
Notwithstanding the foregoing: (x) a transfer of assets by the Company to a
Wholly Owned Subsidiary or by a Subsidiary to the Company or to another Wholly
Owned Subsidiary, (y) an issuance of Equity Interests by a Subsidiary to the
Company or to a Wholly Owned Subsidiary and (z) a Restricted Payment that is
permitted by the covenant described above under the caption "--Restricted
Payments" will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with
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GAAP) of the obligation of the lessee for net rental payments during the
remaining term of the lease included in
such sale and leaseback transaction (including any period for which such lease
has been extended or may, at the option of the lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of one year or less from the date of
acquisition, bankers' acceptances with maturities not exceeding one year and
overnight bank deposits, in each case with any U.S. commercial bank having
capital and surplus in excess of $500 million and a Keefe Bank Watch Rating of
"B" or better, (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clauses (ii) and
(iii) above entered into with any financial institution meeting the
qualifications specified in clause (iii) above and (v) commercial paper having
the highest rating obtainable from Moody's Investors Service, Inc. or Standard
& Poor's Corporation and in each case maturing within six months after the
date of acquisition.
"Consolidated Interest Expense" means, for any Person, for any period, the
aggregate of the following for such Person for such period determined on a
consolidated basis in accordance with GAAP: (i) the amount of interest in
respect of Indebtedness (including amortization of original issue discount,
amortization of debt issuance costs, and non-cash interest payments on any
Indebtedness and the interest portion of any deferred payment obligation) and
(ii) the interest component of rentals in respect of any Capital Lease
Obligation paid, in each case whether accrued or scheduled to be paid or
accrued by such Person during such period to the extent such amounts were
deducted in computing Consolidated Net Income, determined on a consolidated
basis in accordance with GAAP. For purposes of this definition, interest on a
Capital Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by such Person to be the rate of interest implicit in
such Capital Lease Obligation in accordance with GAAP consistently applied.
"Consolidated Leverage Ratio" means, for any Person, as of any date, the
ratio of (i) the sum of the aggregate outstanding amount of all Indebtedness
of a Person and its Subsidiaries (other than any Indebtedness of a General
Partner Subsidiary to the extent that such Indebtedness has been incurred in
connection with such General Partner Subsidiary's partnership interest in the
Restricted Joint Venture of which such General Partner Subsidiary is a general
partner) determined on a consolidated basis in accordance with GAAP to (ii)
Annualized Pro Forma EBITDA.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary
or that is accounted for by the equity method of accounting shall be included
only to the extent of the amount of dividends or distributions actually paid
in cash to the referent Person or a Wholly Owned Subsidiary thereof, (ii) the
Net Income of any subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its stockholders, (iii) the Net
Income of any Person acquired in a pooling of
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interests transaction for any period prior to the date of such acquisition
shall be excluded and (iv) the cumulative effect of a change in accounting
principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the date of the
Indenture in the book value of any asset owned by such Person or a
consolidated Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments) and (z) all unamortized debt discount and
expense and unamortized deferred charges as of such date, all of the foregoing
determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Agreement" means, with respect to any Person, any agreement entered
into by and among such Person and one or more commercial banks or financial
institutions, providing for senior term or revolving credit borrowings of a
type similar to credit agreements typically entered into by commercial banks
and financial institutions, including any related notes, Guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as such credit agreement and related agreements may be amended,
extended, refinanced, renewed, restated, replaced or refunded from time to
time.
"Cumulative Interest Expense" means the aggregate amount of Consolidated
Interest Expense of the Company paid or accrued by the Company from and after
the first day of the first fiscal quarter beginning after the date of the
Indenture to the end of the fiscal quarter immediately preceding a proposed
Restricted Payment, determined on a consolidated basis in accordance with
GAAP.
"Cumulative Pro Forma EBITDA" means the cumulative EBITDA of the Company
from and after the first day of the first fiscal quarter beginning after the
date of the Indenture to the end of the fiscal quarter immediately preceding
the date of a proposed Restricted Payment, or, if such cumulative EBITDA for
such period is negative, minus the amount by which such cumulative EBITDA is
less than zero.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) a Credit Agreement, (ii) the Senior Notes
(iii) the Senior Secured Notes and (iv) any other Senior Debt permitted under
the Indenture the principal amount of which is $20 million or more and that
has been designated by the Company as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock to the extent that, and only to
the extent that, by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the Holder thereof,
in whole or in part, on or prior to the date that is 91 days after the final
maturity date of the Exchange Debentures; provided that any Capital Stock
which would not constitute Disqualified Stock but for provisions thereof
giving Holders thereof the right to require the Company to repurchase or
redeem such Capital Stock upon the occurrence of a Change of Control occurring
prior to the final maturity date of the Exchange Debentures shall not
constitute Disqualified Stock if the change
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in control provisions applicable to such Capital Stock are no more favorable
to the holders of such Capital Stock than the provisions applicable to the
Preferred Stock contained in the covenant described under "Change of Control"
and such Capital Stock specifically provides that the Company will not
repurchase or redeem any such stock pursuant to such provisions prior to the
Company's repurchase of such Preferred Stock as are required to be repurchased
pursuant to the covenant described under "Change of Control;" and provided,
further, that the Preferred Stock and New Preferred Stock shall not be, and
shall not be deemed to be, Disqualified Stock.
"EBITDA " means, for any Person, for any period, an amount equal to (A) the
sum of (i) Consolidated Net Income for such period plus (ii) the provision for
taxes for such period based on income or profits to the extent such income or
profits were included in computing Consolidated Net Income and any provision
for taxes utilized in computing net loss under clause (i) hereof plus (iii)
Consolidated Interest Expense for such period, plus (iv) depreciation for such
period on a consolidated basis plus (v) amortization of intangibles for such
period on a consolidated basis, plus (vi) any other non-cash items reducing
Consolidated Net Income for such period minus (B) all non-cash items
increasing Consolidated Net Income for such period, all for such Person and
its Subsidiaries determined in accordance with GAAP consistently applied.
"Enhanced Services Provider" means (i) !NTERPRISE, a wholly owned subsidiary
of US West, (ii) any nationally recognized Person which provides enhanced
telecommunications services, including but not limited to frame relay,
Asynchronous Transfer Mode data transport, business video conferencing,
private line data interconnect service and LAN connection and monitoring
services, or (iii) any Person that has at least 500 existing enhanced data
services installations in the United States.
"Enhanced Services Venture" means any entity in which any Qualified
Subsidiary or Permitted Joint Venture owns at least 50% of the Equity
Interest, provided that the remainder of the Equity Interest is owned by an
Enhanced Services Provider.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or any
successor act), and the rules and regulations thereunder.
"Exchange Offer" means the exchange offer of the New Preferred Stock for the
Preferred Stock or the New Debentures for the Exchange Debentures, as
applicable, pursuant to the Registration Rights Agreement.
"Existing Indebtedness" means (i) the Senior Notes, (ii) the Senior Secured
Notes and (iii) any other Indebtedness of the Company and its Subsidiaries (a)
in existence on October 9, 1997 or (b) incurred by the Company, its
Subsidiaries and its Joint Ventures after October 9, 1997 and on or prior to
the Issue Date in accordance with the Certificate of Designations.
"Existing Networks" means the telecommunications networks operated by all
Joint Ventures, the Company and its Subsidiaries, including all networks under
construction, on the date of the Indenture.
"Fiber Lease Agreements" means the agreements relating to fiber leases as
set forth on Schedule A to the Indenture.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"General Partner Subsidiary" means a direct or indirect Wholly Owned
Subsidiary of the Company that (i) is a general partner or stockholder of a
Restricted Joint Venture and (ii) (a) is not engaged in any trade or
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business other than the holding, voting, disposing of or taking any action
with respect to its Equity Interest in such Restricted Joint Venture, (b) has
no material assets other than its Equity Interest in such Restricted Joint
Venture, (c) has no material liabilities other than liabilities arising (A) as
a result of the guarantee by such General Partner Subsidiary's guarantee of
Indebtedness incurred by the Restricted Joint Venture of which such General
Partner Subsidiary is a general partner or (B) by operation of law; provided
that, for purposes of this definition, Hyperion Telecommunications of
Virginia, Inc. shall be deemed to be General Partner Subsidiaries for all
purposes in the Indenture so long as Hyperion Telecommunications of Virginia,
Inc. does not engage in any operations or business that is materially
different from the operations or business engaged in by such company on the
date of the Issue Date.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Indebtedness" means, with respect to any Person, (a) any liability of any
Person, whether or not contingent (i) for borrowed money, or under any
reimbursement obligation relating to a letter of credit, bankers' acceptance
or note purchase facility; or (ii) evidenced by a bond, note, debenture or
similar instrument (including a purchase money obligation); or (iii) for the
payment of money relating to a lease that is required to be classified as a
Capitalized Lease Obligation in accordance with GAAP; or (iv) for Disqualified
Stock; or (v) for preferred stock of any Subsidiary (other than preferred
stock held by the Company or any of its Subsidiaries); (b) any liability of
others described in the preceding clause (a) that the Person has guaranteed,
that is recourse to such Person or that is otherwise its legal liability; and
(c) any amendment, supplement, modification, deferral, renewal, extension or
refunding of any liability of the types referred to in clauses (a) and (b)
above.
"Initial Public Offering" means an initial underwritten public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act of 1933, as amended.
"Intercompany Notes" means the intercompany notes issued by Subsidiaries and
Joint Ventures of the Company in favor of the Company or its Subsidiaries to
evidence loans by the Company to such Subsidiary or Joint Venture, in each
case, in the form attached as an annex to the Indenture.
"Invested Equity Capital" means, with respect to any Company's Subsidiaries
or Joint Ventures as of any date, the sum of (i) the total dollar amount
contributed in cash plus the value of all property contributed (valued at the
lower of fair market value of such property at the time of contribution,
determined in good faith by the Company's Board of Directors, or the book
value of such property at the time of contribution on the books of the Person
making such contribution) to such Subsidiary or Joint Venture, as the case may
be, since the date of its formation in the form of common equity plus, without
duplication, (ii) the total dollar amount contributed in cash plus the value
of all property contributed (valued at the lower of fair market value of such
property at the time of contribution, determined in good faith by the
Company's Board of Directors, or the book value of such property at the time
of contribution on the books of the Person making such contribution) to such
Subsidiary or Joint Venture, as the case may be, since the date of its
formation by Local Partners (and their Affiliates) in consideration of the
issuance of preferred equity on a basis that is substantially proportionate to
their common equity interests plus, without duplication, (iii) the total
dollar amount contributed in cash plus the value of all property contributed
(valued at the lower of fair market value of such property at the time of
contribution, determined in good faith by the Company's Board of Directors, or
the book value of such property at the time of contribution on the books of
the Person making such contribution) to such Subsidiary or Joint Venture since
the date of its formation by the Company in consideration of the issuance of
preferred equity less (iv) the fair market value of all dividends and other
distributions (in respect of any Equity Interest and in whatever form and
however designated) made by such Subsidiary or Joint Venture, as the case may
be, since the date of its formation to the holders of its common equity (and
their Affiliates) provided that in no event shall the aggregate amount of such
dividends and other distributions made by such Subsidiary or Joint Venture, as
the case may be, to any such Person (or its Affiliates) reduce the Invested
Equity Capital of such Subsidiary or Joint Venture, as the case may
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be, by more than the total contributions (per clauses (i) through (iii) above)
to such Subsidiary or Joint Venture, as the case may be, by such Person (and
its Affiliates).
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), capital contributions,
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities
by the Company for consideration consisting solely of common equity securities
of the Company shall not be deemed to be an Investment. If the Company or any
Subsidiary of the Company sells or otherwise disposes of any Equity Interests
of any direct or indirect Subsidiary of the Company such that, after giving
effect to any such sale or disposition, such Person is no longer a Subsidiary
of the Company, the Company shall be deemed to have made an Investment on the
date of any such sale or disposition equal to the fair market value of the
Equity Interests of such Subsidiary not sold or disposed of.
"Issue Date" means the date on which the Exchange Debentures are originally
issued under the Indenture.
"Joint Venture" means a corporation, partnership or other entity engaged in
one or more Telecommunications Businesses (i) in which the Company or its
Subsidiaries owns, directly or indirectly, an Equity Interest with the balance
of the Equity Interest thereof being held by one or more Local Partners and
(ii) that is managed and operated by the Company or any of its Subsidiaries.
"Joint Venture Investment" means Investments in Joint Ventures.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Local Partner" means, with respect to any Joint Venture, (i) the Joint
Venture partners set forth on Schedule B to the Indenture, and (ii) any other
Person, provided that such other Person (a) is a major cable company or
utility that has a substantial presence within the specific market of such
Joint Venture, which presence shall be evidenced, (1) in the case of a cable
company, by such company having a market share consisting of at least 50% of
the total number of cable subscribers in such market and (2) in the case of a
utility company, by such company having at least 75% of the total customer
base of such market or (b) is a Wholly Owned Subsidiary of a major cable
company or utility that (1) meets the criteria set forth in the immediately
preceding clause (a) or (2) has all of its initial capital contributions under
the agreement governing the Joint Venture fully and unconditionally
guaranteed, until such time as all such contributions have been made, by one
or more Persons who meet the criteria set forth in the immediately preceding
clause (a).
"Local Partner Agreements" means the joint venture agreements with Local
Partners, as set forth on a schedule to the Indenture.
"Management Agreements" means the agreements governing the management of the
networks, as set forth on a schedule to the Indenture.
"Net Cash Proceeds" means the aggregate cash proceeds received by the
Company or any of its Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale and principal payments
on indebtedness received in any Asset Sale, as and when received), net of the
direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation
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expenses incurred as a result thereof, taxes paid or payable as a result
thereof (after taking into account any available tax credits or deductions and
any tax sharing arrangements) and any reserve for adjustment in respect of the
sale price of such asset or assets established in accordance with GAAP.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or
loss, together with any related provision for taxes on such gain or loss,
realized in connection with (a) any Asset Sale (including, without limitation,
dispositions pursuant to Sale and Leaseback Transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries
and (ii) any extraordinary or nonrecurring gain or loss, together with any
related provision for taxes on such extraordinary or nonrecurring gain or
loss.
"New Exchange Debentures" means the new issue of debentures of the Company
issued pursuant to the Exchange Offer pursuant to the Registration Rights
Agreement.
"New Telecommunications Service Market" means a Telecommunications Service
Market in an area that is not within ten miles of any of the Company's
Existing Networks.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Subsidiaries nor any of its Permitted Joint Ventures (a)
provides credit support of any kind (including any undertaking, agreement or
instrument that would constitute Indebtedness), (b) is directly or indirectly
liable (as a guarantor, co-obligor or otherwise) or (c) constitutes the
lender; (ii) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against a Restricted Joint
Venture) would permit (upon notice, lapse of time, the occurrence, or failure
to occur, of any other condition or event or any combination thereof) any
holder of any other Indebtedness of the Company, any of its Subsidiaries or
any of its Permitted Joint Ventures to declare a default on such other
Indebtedness or cause or permit the payment thereof to be accelerated prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company, any of its Subsidiaries or any of its Permitted Joint Ventures;
provided that the recourse (if any) of a holder of such Indebtedness to the
General Partner Subsidiary of a Restricted Joint Venture in which such General
Partner Subsidiary is a general partner as a result of being a general partner
of such Restricted Joint Venture will not be considered credit support or
direct or indirect liability of such General Partner Subsidiary for purposes
of clauses (i)(a), (ii)(b) and (iii) above.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Pari Passu Notes" means any notes issued by the Company which, by their
terms and the terms of any indenture governing such notes, have an obligation
to be repurchased by the Company upon the occurrence of an Asset Sale.
"Permitted Indebtedness" means all Indebtedness permitted to be incurred by
the Company and/or its Subsidiaries or Joint Ventures pursuant to the covenant
entitled "--Incurrence of Indebtedness and Issuance of Disqualified Stock or
Preferred Stock."
"Permitted Investments" means
(a) any Investment in a Wholly Owned Subsidiary of the Company that is
engaged, either directly or indirectly through a Qualified Subsidiary or
Joint Venture, in the Telecommunications Business;
(b) any Investment in a Qualified Subsidiary of the Company that is
directly engaged in the Telecommunications Business;
(c) any Investment in Cash Equivalents;
(d) any Investment in a Person that is not a Subsidiary of the Company,
if as a result of such Investment (i)(A) such Person becomes a Qualified
Subsidiary or Wholly Owned Subsidiary of the Company or (B)
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such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Qualified Subsidiary and (ii)(A) such Wholly Owned
Subsidiary, either directly or indirectly through a Qualified Subsidiary or
a Joint Venture, is engaged in the Telecommunications Business or (B) such
Qualified Subsidiary is directly engaged in the Telecommunications
Business;
(e) any Permitted Joint Venture Investment;
(f) any Investment made as a result of the receipt of non-cash
consideration (whether or not such non-cash consideration is deemed to be
cash for the purposes of such covenant) from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "--Certain Covenants--Asset Sales"; or
(g) any Investment in an Enhanced Services Venture.
"Permitted Joint Venture" means any Joint Venture in which the Company has,
directly or indirectly, a 45% or greater Equity Interest.
"Permitted Joint Venture Investment" means any Joint Venture Investment by
the Company or a Wholly Owned Subsidiary of the Company if, after such Joint
Venture Investment, the Company has, directly or indirectly, a 45% or greater
Equity Interest in such Joint Venture.
"Permitted Junior Securities" means Equity Interests in the Company or debt
securities that are subordinated to all Senior Debt (and any debt securities
issued in exchange for Senior Debt) to substantially the same extent as, or to
a greater extent than, the Exchange Debentures are subordinated to Senior Debt
pursuant to Article 10 of the Indenture.
"Permitted Liens" means
(i) Liens on the property of the Company, any Subsidiary or any Permitted
Joint Venture securing Obligations under Indebtedness that may be incurred
pursuant to clause (i) of the covenant entitled""--Incurrence of
Indebtedness and Issuance of Disqualified Stock or Preferred Stock;
(ii) Liens in favor of the Company;
(iii) Liens on property of a Person existing at the time such Person is
merged into or consolidated with the Company, any Subsidiary or any
Permitted Joint Venture; provided that such Liens were in existence prior
to the contemplation of such merger or consolidation and do not extend to
any assets other than those of the Person merged into or consolidated with
the Company;
(iv) Liens on property existing at the time of acquisition thereof by the
Company, any Subsidiary or any Permitted Joint Venture, provided that such
Liens were in existence prior to the contemplation of such acquisition;
(v) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(vi) Liens existing on the date of the Indenture;
(vii) Liens on property of Subsidiaries and Permitted Joint Ventures
securing Obligations under Indebtedness incurred pursuant to clause (viii)
of the covenant entitled "--Incurrence of Indebtedness and Issuance of
Preferred Stock," but only to the extent that (a) in the case of
Subsidiaries and Permitted Joint Ventures that are incurring Indebtedness
other than Related Network Debt, such Liens secure only such Indebtedness
incurred by such Subsidiary or such Joint Venture; and (b) in the case of
Subsidiaries and Joint Ventures that are incurring Related Network Debt,
such Liens secure only such Related Network Debt;
(viii) Liens securing Obligations under the Exchange Debentures, the
Senior Notes, the Senior Secured Notes, the Senior Indenture, the Senior
Secured Indenture and the Indenture;
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(ix) Liens securing Obligations under Vendor Debt pursuant to clause (ii)
of the covenant entitled "Incurrence of Indebtedness and Issuance of
Preferred Stock," provided that the principal amount of such Vendor Debt
secured by such Lien does not exceed 100% of the purchase price or cost of
acquisition, construction or improvement of the Telecommunications Related
Assets subject to such Liens;
(x) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(xi) Liens incurred in the ordinary course of business of the Company,
any Subsidiary or any Permitted Joint Venture with respect to obligations
that do not exceed $5.0 million at any one time outstanding and that (a)
are not incurred in connection with the borrowing of money or the obtaining
of advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value
of the property or materially impair the use thereof in the operation of
business by the Company, such Subsidiary or such Permitted Joint Venture;
and
(xii) Liens securing Refinancing Indebtedness, but only if, and to the
extent, that such Liens that are incurred in connection with such
Refinancing Indebtedness do not encumber any assets or properties (or
interests therein) other than those assets or properties (or interests
therein) subject to Liens pursuant to the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Preferred Stock" for any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding up of such Person, to shares
of Capital Stock of any other class of such Person.
"Principals" means John J. Rigas and members of his immediate family, any of
their respective spouses, estates, lineal descendants, heirs, executors,
personal representatives, administrators, trusts for any of their benefit and
charitable foundations to which shares of the Company's Capital Stock
beneficially owned by any of the foregoing have been transferred.
"Pro Forma EBITDA" means, for any Person, for any period, the EBITDA of such
Person as determined on a consolidated basis in accordance with GAAP
consistently applied, after giving effect to the following: (i) if, during or
after such period, such Person or any of its Subsidiaries shall have made any
Asset Sale, Pro Forma EBITDA for such Person and its Subsidiaries for such
period shall be reduced by an amount equal to the Pro Forma EBITDA (if
positive) directly attributable to the assets which are the subject of such
Asset Sale for the period or increased by an amount equal to the Pro Forma
EBITDA (if negative) directly attributable thereto for such period and (ii)
if, during or after such period, such Person or any of its Subsidiaries
completes an acquisition of any Person or business which immediately after
such acquisition is a Subsidiary of such Person or a Subsidiary of such
Person, Pro Forma EBITDA shall be computed so as to give pro forma effect to
such Asset Sale or the acquisition of such Person or business, as the case may
be, as if such acquisition had been completed as of the beginning of such
period, and (iii) if, during or after such period, such Person or any of its
Subsidiaries incurs any Indebtedness (including without limitation, any
Acquired Indebtedness) or issues any Disqualified Stock, Pro Forma EBITDA
shall be computed so as to give pro forma effect (including pro forma
application of the proceeds therefrom) thereto as if such Indebtedness or
Disqualified Stock had been incurred as of the beginning of such period.
"Qualified Subsidiary" means any Subsidiary of the Company in which a Local
Partner or Local Partners own at least 5% but less than 50% of the Equity
Interests of such Subsidiary; provided that such Subsidiary remains a
Subsidiary of the Company at all times for purposes of the Indenture.
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"Refinancing Indebtedness" means any Indebtedness of the Company, any of its
Subsidiaries or any of its Permitted Joint Ventures issued in exchange for, or
the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund other Indebtedness of the Company, any of its Subsidiaries
or any of its Permitted Joint Ventures; provided that: (i) the principal
amount (or accreted value, if applicable) of such Refinancing Indebtedness
does not exceed the principal amount (or accreted value, if applicable) of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith);
(ii) such Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to
or greater than the Weighted Average Life to Maturity of, the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Senior Notes, such
Refinancing Indebtedness has a final maturity date later than the final
maturity date of the Exchange Debentures, and is subordinated in right of
payment to the Exchange Debentures on terms at least as favorable to the
holders of Exchange Debentures as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iv) to the extent that the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded was secured by Liens, any
Liens being incurred in connection with such Refinancing Indebtedness do not
encumber any assets or properties (or interests therein) other than those
assets or properties (or interests therein) subject to Liens pursuant to the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (v) such Indebtedness is incurred either
by the Company, the Subsidiary or the Permitted Joint Venture who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Related Network Debt" means any Credit Agreement entered into by and among
the Qualified Subsidiaries and/or Permitted Joint Ventures that comprise a
Related Network.
"Related Networks" means any group of Qualified Subsidiaries or Permitted
Joint Ventures in which the same Local Partner owns, or the same group of
Local Partners own, all the Equity Interests of each such Qualified Subsidiary
or Permitted Joint Venture that comprise such Related Network that are not
owned by the Company.
"Required Capital Contribution" means any capital contribution made by
Hyperion Telecommunications, Inc. of Florida, pursuant to that certain
partnership agreement, relating to TCG South Florida, dated November 1, 1993.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Joint Venture" means any Joint Venture that is not a Permitted
Joint Venture, but only if such Joint Venture: (a) has no Indebtedness other
than Non-Recourse Debt; (b) is not a party to any agreement, contract,
arrangement or understanding with the Company, any of its Subsidiaries or any
of its Permitted Joint Ventures unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company,
such Subsidiary or such Permitted Joint Venture than those that might be
obtained at the time from Persons who are not Affiliates of the Company; and
(c) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company, any of its Subsidiaries or any of
its Permitted Joint Ventures. If, at any time, a Restricted Joint Venture
fails to meet the requirements of a Restricted Joint Venture by becoming a
Permitted Joint Venture or otherwise, it shall thereafter cease to be a
Restricted Joint Venture for purposes of the Indenture and (i) all of the then
outstanding Indebtedness of such entity shall be deemed to be incurred as of
the date on which such entity becomes a Permitted Joint Venture or otherwise
ceases to be a Restricted Joint Venture for purposes of the covenant entitled
"--Incurrence of Indebtedness and Issuance of Disqualified Stock or Preferred
Stock" (and if such Indebtedness is not permitted to be incurred as of such
date under such covenant, the Company shall be in default of such covenant)
and (ii) all of the then outstanding Investments made by such entity since the
date of the Indenture, shall be deemed to have been made as of the date that
such Restricted Joint Venture becomes a Permitted Joint Venture or otherwise
ceases to be a Restricted Joint Venture for purposes of the covenant entitled
"--Restricted Payments" (and if such Investments
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are not permitted to be made as of such date under such covenant, the Company
shall be in default of such covenant), provided that if a Restricted Joint
Venture ceases to be a Restricted Joint Venture as a result of (i) the loss of
its Local Partner or (ii) the loss of management control of such Restricted
Joint Venture, than the provisions of the covenant entitled "--Restricted
Payments" shall not be applied to such entity.
"Restricted Joint Venture Investment" means any Joint Venture Investment by
a General Partner Subsidiary if, after such Joint Venture Investment, such
Joint Venture is a Restricted Joint Venture.
"Sale and Leaseback Transaction" of any Person means an arrangement with any
lender or investor or to which such lender or investor is a party providing
for the leasing by such Person of any property or asset of such Person which
has been or is being sold or transferred by such Person more than 365 days
after the acquisition thereof or the completion of construction or
commencement of operation thereof to such lender or investor or to any Person
to whom funds have been or are to be advanced by lender or investor on the
security of such property or asset. The stated maturity of such arrangement
shall be the date of the last payment of rent or any other amount due under
such arrangement prior to the first date on which such arrangement may be
terminated by the lessee without payment of a penalty.
"Senior Debt" means any Indebtedness permitted to be incurred by the Company
under the terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is subordinated in right
of payment to the Exchange Debentures. Notwithstanding anything to the
contrary in the foregoing, Senior Debt will not include (i) any liability for
federal, state, local or other taxes owed or owing by the Company, (ii) any
Indebtedness of the Company to any of its Subsidiaries or other Affiliates,
(iii) any trade payables or (iv) any Indebtedness that is incurred in
violation of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Stated Maturity" means with respect to any debt security, the date
specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable.
"Strategic Investor" means a corporation, partnership or other entity
engaged in one or more Telecommunications Businesses that has, 80% or more of
the voting power of the Capital Stock of which is owned by a Person that has,
an equity market capitalization, at the time (i) of its initial Investment in
the Company or (ii) it purchases an Equity Interest in a Subsidiary or Joint
Venture of the Company, as the case may be, in excess of $2.0 billion.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity (other than a partnership) of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the election
of directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person (or a combination thereof) and (ii) any
partnership of which more than 50% of the partnership's capital accounts,
distribution rights or general or limited partnership interests are owned or
controlled, directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person or a combination thereof.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) creating, developing or
marketing communications related network equipment, software and other devices
for use in a telecommunications business or (iii) evaluating, participating or
pursuing any other activity or opportunity that is primarily related to those
identified in (i) or (ii) above; provided that the determination of what
constitutes a Telecommunications Business shall be made in good faith by the
Board of Directors of the Company.
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"Telecommunications Related Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended
for use in connection with a Telecommunications Business.
"Telecommunications Service Market" means a network built by the Company to
service a market.
"Vendor Debt" means any purchase money Indebtedness of the Company or any
Subsidiary incurred in connection with the acquisition of Telecommunications
Related Assets which purchase money Indebtedness was extended by the vendor of
such Telecommunications Related Assets or an affiliate thereof.
"Voting Stock" of any person means Capital Stock of such person which
ordinarily has voting power for the election of directors (or persons
performing similar functions) of such person, whether at all times or only so
long as no senior class of securities has voting power by reason of any
contingency.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly-Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests (other than
directors' qualifying shares) of which shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or a
combination thereof.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company and the Initial Purchaser entered into the Registration Rights
Agreement on or prior to the Closing Date. Pursuant to the Registration Rights
Agreement, the Company agreed to file with the Commission the Exchange Offer
Registration Statement on the appropriate form under the Securities Act with
respect to the New Preferred Stock, or if the Preferred Stock has been
exchanged for Exchange Debentures, the New Exchange Debentures. Upon the
effectiveness of the Exchange Offer Registration Statement, the Company will
offer to the holders of Transfer Restricted Securities pursuant to the
Exchange Offer who are able to make certain representations the opportunity to
exchange their Transfer Restricted Securities for New Preferred Stock or New
Exchange Debentures, as the case may be. If (i) the Company is not required to
file the Exchange Offer Registration Statement or permitted to consummate the
Exchange Offer because the Exchange Offer is not permitted by applicable law
or Commission policy or (ii) any holder of Transfer Restricted Securities
notifies the Company prior to the 20th day following consummation of the
Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the New
Preferred Stock or New Exchange Debentures acquired by it in the Exchange
Offer to the public without delivering a prospectus and the prospectus
contained in the Exchange Offer Registration Statement is not appropriate or
available for such resales or (C) that it is a broker-dealer and owns
Preferred Stock or Exchange Debentures acquired directly from the Company or
an affiliate of the Company, the Company will file with the Commission a Shelf
Registration Statement to cover resales of the Preferred Stock or Exchange
Debentures by the holders thereof who satisfy certain conditions relating to
the provision of information in connection with the Shelf Registration
Statement. The Company will use its best efforts to cause the applicable
registration statement to be declared effective as promptly as possible by the
Commission. For purposes of the foregoing, "Transfer Restricted Securities"
means each share of Preferred Stock or Exchange Debenture until (i) the date
on which such Preferred Stock or Exchange Debenture has been exchanged by a
person other than a broker-dealer for New Preferred Stock or New Exchange
Debentures in the Exchange Offer, (ii) following the exchange by a broker-
dealer in the Exchange Offer of Preferred Stock or Exchange Debentures for New
Preferred Stock or New Exchange Debentures the date on which such New
Preferred Stock or New Exchange Debentures are sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a copy
of the prospectus contained in the Exchange Offer Registration Statement,
(iii) the date on which such Preferred Stock or Exchange Debenture has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf
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Registration Statement or (iv) the date on which such Preferred Stock or
Exchange Debenture is distributed to the public pursuant to Rule 144 under the
Act.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to 30
days after the Closing Date, (ii) the Company will use its best efforts to
have the Exchange Offer Registration Statement declared effective by the
Commission on or prior to 120 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to issue
on or prior to 30 business days after the date on which the Exchange Offer
Registration Statement was declared effective by the Commission, shares of New
Preferred Stock or New Exchange Debentures, as the case may be, in exchange
for all Preferred Stock or Exchange Debentures tendered prior thereto in the
Exchange Offer and (iv) if obligated to file the Shelf Registration Statement,
the Company will use its best efforts to file the Shelf Registration Statement
with the Commission on or prior to 30 days after such filing obligation arises
(and in any event within 90 days after the Closing Date) and to cause the
Shelf Registration to be declared effective by the Commission on or prior to
60 days after such obligation arises (and in any event within 120 days after
the Closing Date). If (a) the Company fails to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of such Registration Statements is not
declared effective by the Commission on or prior to the date specified for
such effectiveness (the "Effectiveness Target Date"), or (c) the Company fails
to consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement
is declared effective but thereafter ceases to be effective or usable in
connection with resales of Transfer Restricted Securities during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above is a "Registration Default"), then the per annum
rate of the dividends will increase by an additional 0.25% for each 90-day
period that such Registration Default continues; provided, that such rate
shall in no event exceed 1.0% per annum. At such time as such event is no
longer in effect, the dividend rate on the Preferred Stock shall be the rate
stated on the cover page hereof, and no further additional dividends will
accrue. In the event Exchange Debentures are issued, additional interest will
accrue on the Exchange Debentures in an identical manner as the additional
dividends on the Preferred Stock. All accrued Liquidated Damages will be paid
by the Company on each Damages Payment Date to the Global Security Holder
through the issuance of additional shares of Preferred Stock, in the event
that the Preferred Stock is outstanding or in additional Exchange Debentures,
in the event that the Exchange Debentures are outstanding. Following the cure
of all Registration Defaults, the accrual of Liquidated Damages will cease.
Holders of Exchange Debentures will be required to make certain
representations to the Company (as described in the Registration Rights
Agreement) in order to participate in the Exchange Offer and will be required
to deliver information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within
the time periods set forth in the Registration Rights Agreement in order to
have their Preferred Stock or Exchange Debentures included in the Shelf
Registration Statement and benefit from the provisions regarding Liquidated
Damages set forth above.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
13% SENIOR DISCOUNT NOTES DUE 2003
In April 1996, the Company issued $329.0 million in aggregate principal
amount at maturity of Senior Notes, pursuant to the Senior Indenture, dated as
of April 15, 1996, by and among the Company and Bank of Montreal Trust
Company, as trustee, all of which remain outstanding. The Senior Notes, which
were issued at a substantial discount from their final principal amount at
maturity, will not begin to require payments of cash interest until October
15, 2001, at which time cash interest will be payable on April 15 and October
15 of each year at a rate of 13.0% per annum.
The Senior Notes are senior obligations of the Company, rank pari passu in
right of payment with all existing and future senior Indebtedness of the
Company, including the Exchange Debentures, if any, and will rank senior in
right of payment to all future subordinated Indebtedness of the Company. The
Senior Notes are effectively subordinated to all liabilities of the
Subsidiaries and the Joint Ventures.
The Senior Notes may be redeemed at the option of the Company, in whole or
in part, at any time on or after April 15, 2001 at the redemption prices set
forth in the Senior Indenture plus accrued and unpaid interest, if any, to the
date of redemption. In addition, at the option of the Company, up to 25% in
aggregate principal amount at maturity of Senior Notes may be redeemed by the
Company at any time prior to April 15, 1999 at a redemption price of 113.0% of
the Accreted Value (as defined in the Senior Indenture) thereof, with the
proceeds of an Initial Public Offering (as defined in the Senior Indenture) or
of certain sales of the Capital Stock (as defined in the Senior Indenture) to
a Strategic Investor (as defined in the Senior Indenture). In the event of a
Change of Control (as defined in the Senior Indenture), the holders of the
Senior Notes will have the right to require the Company to purchase the Senior
Notes, at a price equal to 101% of the Accreted Value thereof, or, in the case
of any such purchase on or after April 15, 2001, at 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase.
The Certificate of Designation contains a change of control repurchase
requirement which is similar to that of the Senior Note Indenture. See
"Description of Securities--Change of Control." The Senior Indenture also
contains certain covenants that, among other things, limit the ability of the
Company, its Subsidiaries and certain Joint Ventures to incur additional
indebtedness, issue stock of Subsidiaries, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness,
engage in sale and leaseback transactions, create certain liens, enter into
certain transactions with affiliates, sell assets of the Company, Subsidiaries
and certain Joint Ventures, and enter into certain mergers and consolidations.
The Senior Indenture contains provisions that allow for the modification and
amendment of the covenants contained in the Senior Indenture by a vote of
holders owning a majority in aggregate principal amount of Senior Notes. In
addition, the holders of a majority in aggregate principal amount of the
Senior Notes, on behalf of all holders of Senior Notes, may waive compliance
by the Company with certain provisions of the Senior Indenture.
12 1/4% SENIOR SECURED NOTES DUE 2004
In August 1997, the Company issued $250.0 million in aggregate principal
amount of Senior Secured Notes, pursuant to the Senior Secured Indenture,
dated as of August 27, 1997, by and among the Company and Bank of Montreal
Trust Company, as trustee, all of which remain outstanding. The Senior Secured
Notes will not begin to require payments of cash interest until March 1, 1998,
at which time cash interest will be payable on September 1 and March 1 of each
year at a rate of 12 1/4% per annum.
The Senior Secured Notes are senior obligations of the Company, rank pari
passu in right of payment with all existing and future senior Indebtedness of
the Company, including the Senior Notes, and will rank senior in right of
payment to all future subordinated Indebtedness of the Company. The Senior
Secured Notes are effectively subordinated to all liabilities of the
Subsidiaries and the Joint Ventures. Hyperion secured the Senior Secured Notes
through the pledge of U.S. government securities and the common stock of
certain of its wholly-
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owned subsidiaries. Of the net proceeds from the Senior Secured Notes
offering, approximately $83.4 million was placed in an escrow account to
provide for payment in full when due of the first six scheduled interest
payments on the Senior Secured Notes.
The Senior Secured Notes may be redeemed at the option of the Company, in
whole or in part, at any time on or after September 1, 2001 at the redemption
prices set forth in the Senior Secured Indenture plus accrued and unpaid
interest, if any, to the date of redemption. In addition, at the option of the
Company, up to 25% in aggregate principal amount at maturity of Senior Secured
Notes may be redeemed by the Company at any time prior to September 1, 2000 at
a redemption price of 112.25% of the principal amount thereof plus accrued and
unpaid interest and Liquidated Damages (as defined in the Senior Secured
Indenture), if any, to the date of redemption, with the net proceeds of (i)
one or more Qualified Equity Offerings; provided, however, that, in either
case, at least 75% in aggregate principal amount of the Senior Secured Notes
remain outstanding following such redemption and, provided, further, that such
redemption shall occur within 90 days of the date of the closing of such
Qualified Equity Offerings. In the event of a Change of Control, the holders
of the Senior Secured Notes will have the right to require the Company to
purchase the Senior Secured Notes, at a price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase.
The Senior Secured Indenture contains a change of control repurchase
requirement which is similar to that of the Certificate of Designation. See
"Description of Securities--Change of Control." The Senior Secured Indenture
also contains certain covenants that, among other things, limit the ability of
the Company, its Subsidiaries and certain Joint Ventures to incur additional
indebtedness, issue stock of Subsidiaries, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness,
engage in sale and leaseback transactions, create certain liens, enter into
certain transactions with affiliates, sell assets of the Company, Subsidiaries
and certain Joint Ventures, and enter into certain mergers and consolidations.
The Senior Secured Indenture contains provisions that allow for the
modification and amendment of the covenants contained in the Senior Secured
Indenture by a vote of holders owning a majority in aggregate principal amount
of Senior Secured Notes. In addition, the holders of a majority in aggregate
principal amount of the Senior Secured Notes, on behalf of all holders of
Senior Secured Notes, may waive compliance by the Company with certain
provisions of the Senior Secured Indenture.
ADELPHIA NOTE
As of April 15, 1996, approximately $25.9 million was owed to Adelphia
pursuant to the Adelphia Note, which is an unsecured subordinated note due
April 16, 2003 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 subordinate notes, or in any combination
thereof, at the option of the Company. Interest accrued on the Adelphia Note
was $5.9 million as of June 30, 1997.
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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 with the Commission and are
incorporated herein by reference.
Hyperion's authorized capital stock consists 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.
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 exercise of the Warrants
issued in 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 is 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
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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.
CLASS B WARRANTS
The Class B Warrants were issued pursuant to the Class B Warrant Agreement
between the Company and Bank of Montreal Trust Company, as warrant agent (the
"Class B Warrant Agent") on April 15, 1996 as part of a private placement by
the Company of 329,000 units consisting of $329.0 million aggregate principle
amount at maturity of Senior Notes and Class B Warrants to purchase an
aggregate of 613,427 shares of common stock of the Company. The following
summary of certain provisions of the Class B Warrant Agreement and the Class B
Warrants does not purport to be complete and is qualified in its entirety by
reference to the Class B Warrant Agreement and the Class B 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.
Each Warrant, when exercised, will entitle the holder thereof to purchase
1.8645 shares of Class B Common Stock (the "Class B Warrant Shares") at the
exercise price of $0.01 per share. The exercise price and the number of Class
B Warrant Shares issuable on exercise of a Class B Warrant are both subject to
adjustment in certain cases referred to below. The Class B 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 Class
B Warrants, Class B Warrant Shares and any other securities issued or issuable
with respect thereto. Unless exercised, the Class B 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 Class B
Warrants. If the Company fails to give such notice, the Class B 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 Class B Warrants, the Company agreed
to file Class B Warrant shelf registration statements under the Securities Act
(i) covering the Warrants, on or prior to October 1, 1996, and (ii) covering
the Class B Warrant Shares, on or prior to January 1, 1997, and to use its
best efforts to cause such Class B 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 Class B Warrant shelf
registration statement covering the Class B Warrants and the Class B Warrant
Shares on September 25, 1996 (the "Class B Warrant Shelf Registration
Statement") and the Class B Warrant Shelf Registration Statement was declared
effective by the Commission on December 30, 1996. The Company has agreed to
keep the Class B Warrant Shelf Registration Statements with respect to the
Class B Warrants and the Class B 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 Class B Warrant Registration Rights Agreement, it will
be required to pay liquidated damages to holders of the Class B Warrants or
Class B Warrant Shares under certain circumstances.
DIVIDEND RESTRICTIONS
The terms of the Senior Indenture, the Senior Secured Indenture, the
Indenture and the Certificate of Designation 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 Class B
Warrants is Bank of Montreal Trust Company, New York, New York.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain Federal income tax
considerations relevant to the receipt, ownership and disposition of the New
Preferred Stock to the initial Holders of the New Preferred Stock and any
Exchange Debentures resulting from the exchange thereof, but does not purport
to be a complete analysis of all the potential tax effects thereof. This
summary only addresses the tax consequences to a person that acquires New
Preferred Stock in the Exchange Offer and that is not excluded by this
summary. This summary is based on the Internal Revenue Code of 1986, as
amended to the date hereof (the "Code"), administrative pronouncements,
judicial decisions and existing and proposed Treasury Regulations, changes to
any of which subsequent to the date of this Registration Statement may affect
the tax consequences described herein. Such changes may be applied
retroactively in a manner that could cause the tax consequences to vary
substantially from the consequences described below. The authorities on which
this summary is based are subject to various interpretations, and it is
therefore possible that the federal income tax treatment of the purchase,
ownership and disposition of the New Preferred Stock or Exchange Debentures
may differ from the treatment described below. In this connection, it should
be noted that as used in the discussion below, the term "earnings and profits"
refers to Hyperion's current and accumulated earnings and profits as
determined under the Code. There is no assurance that Hyperion will have
earnings and profits for any particular taxable year. This summary addresses
only holders of Preferred Stock and the Exchange Debentures who hold the same
as capital assets within the meaning of Section 1221 of the Code. It does not
discuss all of the tax consequences that may be relevant to a Holder in light
of its particular circumstances or to Holders subject to special rules, such
as certain financial institutions, insurance companies, dealers in securities,
holders that are, for Federal income tax purposes, non-resident alien
individuals or foreign corporations, and persons holding the Preferred Stock
or the Exchange Debentures as part of a "straddle," "hedge" or "conversion
transaction." Holders should consult their tax advisors with regard to the
application of the Federal income tax laws to their particular situations as
well as any tax consequences arising under the laws of any state, local or
foreign taxing jurisdiction.
PREFERRED STOCK
EXCHANGE OFFER
The exchange of Old Preferred Stock for New Preferred Stock pursuant to the
Exchange Offer should not be a taxable exchange for Federal income tax
purposes. As a result, there should be no Federal income tax consequences to
Holders exchanging Old Preferred Stock for New Preferred Stock pursuant to the
Exchange Offer. A Holder should have the same adjusted basis and holding
period in the New Preferred Stock as it had in the Old Preferred Stock
immediately before the Exchange Offer.
DIVIDENDS ON PREFERRED STOCK
Cash dividends paid on the Preferred Stock will be taxable as ordinary
income to the extent of Hyperion's earnings and profits. To the extent that
the amount of cash distributions paid on the Exchangeable Preferred Stock
exceeds Hyperion's earnings and profits, such distributions will be treated
first as a return of capital and will be applied against and reduce the
adjusted tax basis of the Preferred Stock in the hands of the shareholder. Any
remaining amount after the Holder's basis has been reduced to zero will be
taxable as capital gain and will be long-term capital gain if the Holder's
holding period for the Preferred Stock exceeds one year.
For purposes of the remainder of this discussion, the term "dividend" refers
to a distribution taxable as ordinary income as described above unless the
context indicates otherwise. Dividends received by corporate shareholders will
be eligible for a dividends-received deduction under section 243 of the Code,
subject to the limitations contained in sections 246 and 246A of the Code.
Section 1059 of the Code requires a corporate shareholder to reduce its
basis (but not below zero) in the Preferred Stock by the "nontaxed portion" or
any "extraordinary dividend" if the holder has not held its
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Preferred Stock for more than two years as of the date the amount or payment
of such dividend is agreed to, announced or declared. Generally, the nontaxed
portion of an extraordinary dividend is the amount excluded from income under
section 243 of the Code (relating to the dividends-received deduction). An
"extraordinary dividend" on the Preferred Stock would include a dividend that
(i) equals or exceeds 5% of the holder's adjusted tax basis in the Preferred
Stock, treating all dividends having ex-dividend dates within an 85-day period
as one dividend, or (ii) exceeds 20% of the holder's adjusted tax basis in the
Preferred Stock, treating all dividends having ex-dividend dates within a 365-
day period as one dividend. In determining whether a dividend paid is an
extraordinary dividend, a Holder may elect to use the fair market value of the
Preferred Stock rather than its basis for purposes of applying the 5% (or 20%)
limitation, if the shareholder is able to establish to the satisfaction of the
Secretary of the Treasury such fair market value as of the day before the ex-
dividend date. An "extraordinary dividend" would also include any amount
treated as a dividend in the case of a redemption of the Preferred Stock that
is non-pro rata as to all shareholders, without regard to the period the
Holder held the stock. If any part of the nontaxed portion of an extraordinary
dividend has not been applied to reduce basis as a result of the limitation on
reducing basis below zero, the amount thereof will be treated as gain from the
sale or exchange of stock in the year in which the extraordinary dividend is
received.
The extraordinary dividend rules do not apply with respect to "qualified
preferred dividends." A "qualified preferred dividend" is any fixed dividend
payable with respect to preferred stock which (i) provides for fixed preferred
dividends payable no less often than annually and (ii) is not in arrears as to
dividends when acquired, provided the actual rate of return, as determined
under section 1059(e)(3) of the Code, on such stock does not exceed 15%. Where
a qualified preferred dividend exceeds the 5% (or 20%) threshold for
extraordinary dividend status described above, (i) the extraordinary dividend
rules will not apply if the taxpayer holds the stock for more than five years,
and (ii) if the taxpayer disposes of the stock before it has been held for
more than five years, the aggregate reduction in basis cannot exceed the
excess of the qualified preferred dividends paid on such stock during the
period held by the taxpayer over the qualified preferred dividends which would
have been paid during such period on the basis of the stated rate of return,
as determined under section 1059(e)(3) of the Code. The length of time that a
taxpayer is deemed to have held stock for purposes for section 1059 of the
Code is determined under principles similar to those contained in section
246(c) of the Code discussed above.
CORPORATE STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE POSSIBLE APPLICATION OF SECTION 1059 TO THE OWNERSHIP AND
DISPOSITION OF THEIR PREFERRED STOCK.
REDEMPTION PREMIUM
If the redemption price of the Preferred Stock to be paid by Hyperion on the
Mandatory Redemption or Optional Redemption of the Preferred Stock exceeds, by
more than a de minimis amount, its issue price, all or a portion of such
excess may, pursuant to section 305(c) of the Code, be viewed as constructive
distributions (and thus as dividends depending upon the presence of earnings
and profits) over the term during which the Preferred Stock cannot be called
for redemption under an economic accrual method similar to the method
described under the fourth paragraph under "Original Issue Discount." In such
event, Holders of Preferred Stock could be required to treat such excess as
constructive distributions of property includable in income on a periodic
basis in advance of receiving cash attributable to such income. The issue
price of the Preferred Stock issued for money is the price at which a
substantial amount of such stock is sold. A redemption premium will generally
be considered de minimis as long as it is less than the redemption price of
the Preferred Stock multiplied by 1/4 of 1% multiplied by the number of years
until the issuer must redeem the preferred stock.
For purposes of determining whether such constructive distribution treatment
applies, the Mandatory Redemption and the Optional Redemption are tested
separately. Constructive distribution treatment is required if either (or
both) of these tests is satisfied. Because the issue price of the Old
Preferred Stock at original issuance was equal to the Mandatory Redemption
Price, no redemption premium will arise as a result of the Mandatory
Redemption feature with respect to such stock.
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Pursuant to recently issued regulations (the "Section 305(c) Regulations"),
such economic accrual will arise due to the Optional Redemption only if, based
on all of the facts and circumstances as of the date the Preferred Stock is
issued, redemption pursuant to the Optional Redemption were more likely than
not to occur. Even if redemption were more likely than not to occur, however,
constructive distribution treatment would not result if the redemption premium
were solely in the nature of a penalty for premature redemption. For this
purpose, a penalty for premature redemption is a premium paid as a result of
changes in economic or market conditions over which neither the issuer nor the
Holder has control, such as changes in prevailing dividend rates. The Section
305(c) Regulations provide a safe harbor pursuant to which constructive
distribution treatment will not result from an issuer call right if the issuer
and the Holder are unrelated, there are no arrangements that effectively
require the issuer to redeem the stock and exercise of the option to redeem
would not reduce the yield of the stock. Although Hyperion believes that the
Optional Redemption would not be treated as more likely than not to be
exercised under these rules, that the redemption premium is in the nature of a
penalty for premature redemption or that the safe harbor would apply, this
determination cannot be made with certainty at this time. Thus, no assurance
can be given as to the treatment of the redemption premium with respect to the
Preferred Stock under the Section 305(c) Regulations.
Shares of Preferred Stock that are subject to the Section 305(c) Regulations
concerning redemption premiums generally will have different tax
characteristics than shares of Preferred Stock that are not subject to the
Section 305(c) Regulations and might trade separately, which might adversely
affect the liquidity of such shares.
REDEMPTION, SALE AND EXCHANGE OF PREFERRED STOCK
A redemption of Preferred Stock for cash (whether pursuant to the Mandatory
Redemption or the Optional Redemption), a sale of Preferred Stock or an
exchange of shares of Preferred Stock for Exchange Debentures will be a
taxable event.
A redemption of Preferred Stock for cash will be treated as a dividend to
the extent of Hyperion's current or accumulated earnings and profits, unless
the redemption (i) results in a "complete termination" of the shareholder's
stock interest in Hyperion under section 302(b)(3) of the Code, (ii) is
"substantially disproportionate" with respect to the shareholder under section
302(b)(2) of the Code or (iii) is "not essentially equivalent to a dividend"
with respect to the shareholder under section 302(b)(1) of the Code. In
determining whether any of these tests has been met, the shareholder must take
into account not only stock he actually owns, but also stock he constructively
owns within the meaning of section 318 of the Code. A distribution to a
shareholder is "not essentially equivalent to a dividend" if it results in a
"meaningful reduction" in the shareholder's stock interest in Hyperion. If, as
a result of a redemption for cash of the Preferred Stock, a shareholder of
Hyperion whose relative stock interest in Hyperion is minimal and who
exercises no control over corporate affairs suffers a reduction in his
proportionate interest in Hyperion (including any ownership of common stock
and any shares constructively owned), that shareholder should generally be
regarded as having suffered a meaningful reduction in his interest in
Hyperion. Satisfaction of the "complete termination" and "substantially
disproportionate" exceptions is dependent upon compliance with the respective
objective tests set forth in section 302(b)(3) and 302(b)(2) of the Code.
If the redemption is not treated as a distribution taxable as a dividend, or
if Preferred Stock is sold, the redemption or sale of the Preferred Stock for
cash would result in taxable gain or loss equal to the difference between the
amount of cash received and the shareholder's adjusted tax basis in the
Preferred Stock redeemed or sold. Such gain or loss would be capital gain or
loss and would be long-term capital gain or loss if the holding period for the
Preferred Stock exceeded one year.
An exchange of Preferred Stock for Exchange Debentures at the option of
Hyperion will be subject to the same general rules as a redemption for cash,
including the rules for treating the redemption as a dividend or as a sale or
exchange. If the exchange of Preferred Stock for Exchange Debentures is
treated as a dividend, the amount of the dividend would be the "issue price"
of the Exchange Debentures (to the extent of Hyperion's
138
<PAGE>
current or accumulated earnings and profits) determined in the manner
described below for purposes of computing original issue discount (if any) on
the Exchange Debentures. If the exchange of Preferred Stock is not treated as
a dividend, the exchanging shareholder would recognize gain or loss equal to
the difference between the issue price of Exchange Debentures and the
shareholder's adjusted tax basis in the Preferred Stock. If neither the
Preferred Stock nor the Exchange Debentures are regularly traded on an
established securities market, gain realized on the exchange of Preferred
Stock for Exchange Debentures may qualify for installment-sale treatment.
If the amount received in a redemption of Preferred Stock is treated as a
distribution which may be taxable as a dividend as opposed to consideration
received in a sale or exchange, the amount of the distribution will be
measured by the amount of cash or the issue price (or, alternatively, fair
market value) of the Exchange Debentures, as the case may be, received by the
Holder. The Holder's adjusted tax basis in the redeemed Preferred Stock will
be transferred to any remaining stockholdings in Hyperion. If the shareholder
does not retain any stock ownership in Hyperion, it is unclear whether the
shareholder will be permitted to transfer such basis to any Exchange
Debentures received in the redemption or will lose such basis entirely. Under
section 1059 of the Code, the term "extraordinary dividend" includes any
redemption of stock that is treated as a dividend and that is non-pro rata as
to all stockholders, including shares of common stock, irrespective of the
holding period. Consequently, to the extent an exchange of Preferred Stock for
debentures or cash constitutes a distribution taxable as a dividend, it may
constitute an "extraordinary dividend" to a corporate shareholder and be
subject to the rules described above. See "--Dividends on Preferred Stock."
ORIGINAL ISSUE DISCOUNT
If the shares of Preferred Stock are exchanged for Exchange Debentures at a
time when the stated redemption price at maturity of such Exchange Debentures
exceeds their issue price by an amount equal to or greater than 0.25% of the
stated redemption price at maturity multiplied by the number of complete years
to maturity, the Exchange Debentures will be treated as having original issue
discount ("OID") equal to the entire amount of such excess. If the Exchange
Debentures are traded on an established securities market within the meaning
of section 1273(b)(3) of the Code, the issue price of the Exchange Debentures
will be their fair market value as of the issue date. Similarly, if the
Preferred Stock, but not the Exchange Debentures issued and exchanged
therefor, is traded on an established securities market within the meaning of
section 1273(b)(3) of the Code at the time of the exchange, then the issue
price of each Exchange Debenture should be the fair market value of the
Preferred Stock at the time of the exchange. If neither the Preferred Stock
nor the Exchange Debentures are traded on an established securities market,
and absent any "potentially abusive situation," the issue price of the
Exchange Debentures will be their stated principal amount or, in the event the
Exchange Debentures do not bear "adequate stated interest" within the meaning
of section 1274 of the Code, their "imputed principal amount" as determined
under section 1274 of the Code using the applicable federal rate (the "AFR")
in effect as of the date of the exchange.
Hyperion is allowed to exchange the Preferred Stock for Exchange Debentures.
Because the determination of the issue price of the Exchange Debentures
depends on several factors as described above, it is possible that Exchange
Debentures issued at different times will have different issue prices. To the
extent the Exchange Debentures have different issue prices, they may have
different tax characteristics from each other (for example, the amount of OID
on such Exchange Debentures may vary), and may trade separately, which may
adversely affect the liquidity of such Exchange Debentures.
The "stated redemption price at maturity" of the Exchange Debentures will
equal the total of all payments under the Exchange Debentures, other than
payments of "qualified stated interest." "Qualified stated interest" generally
is stated interest that is unconditionally payable in cash or other property
(other than Exchange Debentures) at least annually at a single fixed rate.
Therefore, if the Exchange Debentures are issued when the Company has the
option to pay interest thereon for certain periods in additional Exchange
Debentures, the interest on the Exchange Debentures will not be qualified
stated interest. Accordingly, the sum of all interest payable pursuant to the
stated interest rate on the Exchange Debentures over the entire term will be
treated as
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<PAGE>
OID and includible in gross income by the holders under a constant-yield
method, and the receipt of stated interest on the Exchange Debentures will not
be taxable to the holders for federal income tax purposes.
An additional Exchange Debenture (a "PIK Debenture") issued in payment of
interest with respect to an initially issued Exchange Debenture (an "Initial
Debenture") will not be considered a payment made on the Initial Debenture and
will be aggregated with the Initial Debenture for purposes of computing and
accruing OID on the Initial Debenture. As between the Initial Debenture and
the PIK Debenture, the Company will allocate the adjusted issue price of the
Initial Debenture between the Initial Debenture and the PIK Debenture in
proportion to their respective principal amounts. That is, upon the issuance
of a PIK Debenture with respect to an Initial Debenture, the Company intends
to treat the Initial Debenture and the PIK Debenture derived from the Initial
Debenture as initially having the same adjusted issue price and inherent
amount of OID per dollar of principal amount. The Initial Debenture and the
PIK Debenture derived therefrom will be treated as having the same yield to
maturity. Similar treatment will be applied when PIK Debentures are issued on
PIK Debentures.
If the Exchange Debentures are not issued with OID, because they are issued
at a time when the Company does not have the option to pay interest thereon in
additional Exchange Debentures and the redemption price of the Exchange
Debentures does not exceed their issue price by more than a de minimis amount,
stated interest will be includible in income by a holder in accordance with
such holder's method of accounting.
If the Exchange Debentures are issued with OID and Hyperion were found to
have had an intention to call the Exchange Debentures before maturity, any
gain realized on a sale, exchange or redemption of Exchange Debentures prior
to maturity would be considered ordinary income to the extent of any
unamortized OID for the period remaining to the stated maturity of the
Exchange Debentures. Hyperion cannot predict whether it would have an
intention to call the Exchange Debentures before their maturity at the time,
if ever, it issues the Exchange Debentures.
TAXATION OF STATED INTEREST AND ORIGINAL ISSUE DISCOUNT ON EXCHANGE DEBENTURES
Each holder of an Exchange Debenture with OID will be required to include in
gross income an amount equal to the sum of the "daily portions" of the OID for
all days during the taxable year on which such holder holds the Exchange
Debenture. The daily portions of OID required to be included in a holder's
gross income in a taxable year will be determined under a constant-yield
method by allocating to each day during the taxable year on which the holder
holds the Exchange Debenture on pro rata portion of the OID thereon which is
attributable to the "accrual period" in which such day is included. The amount
of the OID attributable to each accrual period will be the product of the
"adjusted issue price" of the Exchange Debenture at the beginning of such
accrual period multiplied by the "yield to maturity" of the Exchange Debenture
(properly adjusted for the length of the accrual period). The adjusted issue
price of an Exchange Debenture at the beginning of an accrual period is the
original issue price of the Exchange Debenture increased by the aggregate
amount of OID that has accrued in all prior accrual periods and reduced by any
cash payments previously made on the Exchange Debenture--other than qualified
stated interest payments (which will apply only if the Exchange Debentures are
issued after October 15, 2002). The "yield to maturity" is the discount rate
that, when used in computing the present value of all principal and interest
payments to be made under the Exchange Debenture, produces an amount equal to
the issue price of the Exchange Debenture. An "accrual period" may be of any
length and may vary in length over the term of the debt instrument, provided
that each accrual period is no longer than one year and each scheduled payment
of principal or interest occurs on either the final day or the first day of an
accrual period.
If the Exchange Debentures are issued after October 15, 2002, when the
Company does not have the option to pay interest thereon in additional
Exchange Debentures, stated interest will be includible in gross income by a
holder in accordance with such holder's usual method of accounting. In all
other cases, all interest on the Exchange Debentures will be taxed as OID
under the rule discussed above, and payments of stated interest will not be
taxable to the holders.
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<PAGE>
BOND PREMIUM ON EXCHANGE DEBENTURES
If the shares of Preferred Stock are exchanged for Exchange Debentures at a
time when the issue price of such Exchange Debentures exceeds the amount
payable at the maturity date (or earlier redemption date, if appropriate) of
the Exchange Debentures, such excess will be deductible, subject to certain
limitations with respect to individuals, by the Holder of such Exchange
Debentures as amortizable bond premium over the term of the Exchange
Debentures (taking into account earlier call dates, as appropriate), under a
yield-to-maturity formula, but only if an election by the taxpayer under the
section 171 of the Code is in effect or is made. To the extent the excess is
deducted as amortizable bond premium, the Holder's adjusted tax basis in the
Exchange Debentures will be reduced. An election under section 171 of the Code
is available only if the Exchange Debentures are held as capital assets. Such
election is binding once made and applies to all debt obligations owned or
subsequently acquired by the taxpayer. Under the Code, the amortizable bond
premium will be treated as an offset to interest income on the Exchange
Debentures rather than as a separate deduction item unless otherwise provided
in future regulations.
REDEMPTION OR SALE OF EXCHANGE DEBENTURES
Generally, any redemption or sale of Exchange Debentures by a Holder would
result in taxable gain or loss equal to the difference between the amount of
cash received (except to the extent that cash received is attributable to
accrued interest) and the Holder's tax basis in the Exchange Debentures. The
tax basis of a Holder who received an Exchange Debenture in exchange for
Preferred Stock will generally be equal to the issue price of the Exchange
Debenture on the date the Exchange Debenture is issued (or, in the case of an
Exchange Debenture received as to which the holder thereof was entitled to
installment-sale-treatment, the adjusted tax basis of the Preferred Stock
exchanged) plus any OID on the Exchange Debenture included in the Holder's
income prior to sale or redemption of the Exchange Debenture, reduced by any
amortizable bond premium applied against the Holder's income prior to sale or
redemption of the Exchange Debenture and by payments other than payments of
qualified stated interest. Such gain or loss would be capital gain or loss and
would be long-term capital gain or loss if the holding period exceeded one
year. However, if Hyperion were found to have an intention at the time the
Exchange Debentures were issued to call them before maturity, the gain would
be ordinary income to the extent of any unamortized OID.
HIGH YIELD DISCOUNT OBLIGATIONS
Sections 163(e) and 163(i) of the Code provide rules that affect the tax
treatment of certain high-yield discount obligations ("HYDOs"). The Exchange
Debentures may constitute HYDOs if their yield-to-maturity exceeds by more
than five percentage points the applicable federal rate (the "AFR") for
instruments with a similar maturity in effect for the calendar month in which
the Exchange Debentures are issued. If the Exchange Debentures are HYDOs, the
Company may not deduct any OID that accrues with respect to the Exchange
Debentures until it pays such amount in cash.
In addition, to the extent that the Exchange Debentures' yield-to-maturity
exceeds the relevant AFR by more than six percentage points, then (i) a
portion of such interest corresponding to the yield in excess of six
percentage points above the AFR will not be deductible by Hyperion at any time
and (ii) a corporate holder may be entitled to treat the portion of the
interest that is not deductible by Hyperion as a dividend, which may then
qualify for the dividends-received deduction provided by Section 243 of the
Code (subject to applicable limitations). In such event, corporate holders of
Exchange Debentures should consult with their tax advisors as to the
applicability of the dividends-received deduction. It is not possible to
determine at the present time whether an Exchange Debenture will be treated as
a HYDO.
BACKUP WITHHOLDING
Under section 3406 of the Code and applicable Treasury regulations, a Holder
of Preferred Stock or Exchange Debentures may be subject to backup withholding
at the rate of 31% with respect to "reportable
141
<PAGE>
payments," which include dividends or interest paid on, or the proceeds of a
sale, exchange or redemption of, Preferred Stock or Exchange Debentures, as
the case may be. The payor will be required to deduct and withhold the
prescribed amounts if (i) the payee fails to furnish a taxpayer identification
number ("TIN") to the payor in the manner required by the Code and applicable
Treasury regulations, (ii) the Internal Revenue Service notifies the payor
that the TIN furnished by the payee is incorrect, (iii) there has been a
"notified payee underreporting" described in section 3406(c) of the Code, or
(iv) there has been a failure of the payee to certify under penalty of perjury
that the payee is not subject to withholding under section 3406(a)(1)(C) of
the Code. If any one of the events listed above occurs, Hyperion will be
required to withhold an amount equal to 31% from any dividend payment made
with respect to Preferred Stock, any payment of interest or principal pursuant
to the terms of the Exchange Debentures or any payment of proceeds of a
redemption of Preferred Stock or Exchange Debentures, as the case may be, to a
Holder. Amounts paid as backup withholding do not constitute an additional tax
and will be credited against the holder's federal income tax liabilities, so
long as the required information is provided to the Internal Revenue Service.
The Company will furnish annually to the IRS and to record holders of the
Preferred Stock (other than with respect to certain exempt holders)
information relating to dividends paid during the calendar year.
The Company will furnish annually to the IRS and to record holders of the
Exchange Debentures (other than with respect to certain exempt holders)
information relating to the stated interest and the OID, if any, accruing
during the calendar year. Such information will be based on the amount of OID
that would have accrued to a holder who acquired the Exchange Debentures on
original issue.
SUBSEQUENT PURCHASERS
The foregoing does not discuss special rules which may affect the treatment
of purchasers that acquire the Preferred Stock or the Exchange Debentures
other than through purchasing the Preferred Stock at the time of original
issuance at the issue price, including those provisions of the Code relating
to the treatment of "market discount." For example, the market discount
provisions of the Code may require a subsequent purchaser of an Exchange
Debenture at a market discount to treat all or a portion of any gain
recognized upon sale or other disposition of the Exchange Debenture as
ordinary income and to defer a portion of any interest expense that would
otherwise be deductible on any indebtedness incurred or maintained to purchase
or carry such Exchange Debenture until the holder disposes of the Exchange
Debenture in a taxable transaction.
As a further example, a holder of an Exchange Debenture issued with OID who
purchases such Exchange Debenture for an amount that is greater than its
adjusted issue price but equal to or less than the sum of all payments payable
on the Exchange Debenture after the purchase date (other than payments, if
any, of qualified stated interest) will be considered to have purchased such
Exchange Debenture at an "acquisition premium." Under the acquisition premium
rules, the amount of OID which such holder must include in income with respect
to such Exchange Debenture for any taxable year will be reduced by the portion
of such acquisition premium properly allocable to such year.
EACH PROSPECTIVE HOLDER OF PREFERRED STOCK OR EXCHANGE DEBENTURES SHOULD
CONSULT HIS OWN TAX ADVISOR TO DETERMINE THE FEDERAL, STATE, LOCAL AND ANY
OTHER TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
PREFERRED STOCK OR EXCHANGE DEBENTURES, INCLUDING THE APPLICABILITY AND EFFECT
OF ANY FEDERAL, STATE, LOCAL OR FOREIGN INCOME TAX LAWS AND ANY RECENT OR
PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Preferred Stock for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of the New Preferred Stock. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Preferred Stock
received in exchange for Old Preferred Stock acquired as a result of market-
making activities or other trading activities. The Company has agreed that it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale for a period of 365 days after the Expiration Date or
until all participating broker-dealers have so resold.
The Company will not receive any proceeds from any sale of New Preferred
Stock by broker-dealers. New Preferred Stock received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Preferred Stock or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concession from any such broker-dealer and/or the purchasers of any New
Preferred Stock. Any broker-dealer that resells New Preferred Stock that was
received by it for its own account pursuant to the Exchange Offer and any
broker-dealer that participates in a distribution of New Preferred Stock may
be deemed to be an "underwriter" within the meaning of the Securities Act, and
any profit on any resale of New Preferred Stock and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that
by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
The Company has not entered into any arrangement or understanding with any
person to distribute the New Preferred Stock to be received in the Exchange
Offer, and to the best of the Company's information and belief, each person
participating in the Exchange Offer is acquiring the New Preferred Stock in
its ordinary course of business and has no arrangement or understanding with
any person to participate in the distribution of the New Preferred Stock to be
received in the Exchange Offer.
LEGAL MATTERS
The validity of the New Preferred Stock will be passed upon on behalf of the
Company by Buchanan Ingersoll Professional Corporation, Pittsburgh,
Pennsylvania.
EXPERTS
The consolidated financial statements of the Company as of March 31, 1996
and 1997 and for each of the three years in the period ended March 31, 1997
included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
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<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets, March 31, 1996 and 1997, and unaudited
June 30, 1997............................................................ F-3
Consolidated Statements of Operations, Years Ended March 31, 1995, 1996
and 1997, and unaudited three months ended June 30, 1996 and 1997........ F-4
Consolidated Statements of Stockholders' Equity (Deficiency), Years Ended
March 31, 1995, 1996 and 1997, and unaudited three months ended
June 30, 1997............................................................ F-5
Consolidated Statements of Cash Flows, Years Ended March 31, 1995, 1996
and 1997, and unaudited three months ended June 30, 1996 and 1997........ 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, 1996 and 1997 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, 1997. 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, 1996 and 1997 and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
June 13, 1997
F-2
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
----------------- -----------
1996 1997 1997
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
- -------
Current assets:
Cash and cash equivalents..................... $ -- $ 59,814 $ 21,308
Other current assets.......................... 282 768 1,158
------- -------- --------
Total current assets........................ 282 60,582 22,466
Investments..................................... 21,087 44,685 60,152
Property, plant and equipment--net.............. 12,561 53,921 71,633
Other assets--net............................... 1,045 15,376 15,619
Deferred income taxes--net...................... 294 37 37
------- -------- --------
Total....................................... $35,269 $174,601 $169,907
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY):
- ------------------------------------
Current liabilities:
Accounts payable.............................. $ 2,529 $ 2,342 $ 2,451
Due to affiliates--net........................ 8,707 6,081 6,930
Other current liabilities..................... 501 757 1,768
------- -------- --------
Total current liabilities................... 11,737 9,180 11,149
13% Senior Discount Notes due 2003.............. -- 187,173 193,900
Note payable--Adelphia.......................... 50,855 25,855 25,855
Other debt...................................... -- 2,647 2,496
------- -------- --------
Total liabilities........................... 62,592 224,855 233,400
------- -------- --------
Commitments and contingencies (Note 7)
Stockholders' equity (deficiency):
Class A Common Stock, $0.01 par value,
300,000,000 shares authorized and 0, 104,000
and 122,000 shares outstanding, respectively. -- 1 1
Class B Common Stock, $0.01 par value,
150,000,000 shares
authorized and 10,000,000 shares outstanding. 100 100 100
Additional paid in capital.................... -- 155 182
Class B Common Stock Warrants................. -- 11,087 11,087
Loans to Stockholders......................... -- (3,000) (3,000)
Accumulated deficit........................... (27,423) (58,597) (71,863)
------- -------- --------
Total stockholders' equity (deficiency)..... (27,323) (50,254) (63,493)
------- -------- --------
Total....................................... $35,269 $174,601 $169,907
======= ======== ========
</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,
--------------------------- -----------------
1995 1996 1997 1996 1997
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues...................... $ 1,729 $ 3,322 $ 5,088 $ 1,102 $ 1,520
------- -------- -------- ------- --------
Operating expenses:
Network operations.......... 1,382 2,690 3,432 859 1,180
Selling, general and
administrative.............. 2,524 3,084 6,780 1,027 2,380
Depreciation and
amortization................ 463 1,184 3,945 695 1,372
------- -------- -------- ------- --------
Total..................... 4,369 6,958 14,157 2,581 4,932
------- -------- -------- ------- --------
Operating loss................ (2,640) (3,636) (9,069) (1,479) (3,412)
Other income (expense):
Gain on sale of investment.. -- -- 8,405 8,405 --
Interest income............. 39 199 5,976 1,433 763
Interest expense and fees... (3,321) (6,088) (28,377) (6,169) (8,077)
------- -------- -------- ------- --------
(Loss) income before income
taxes and equity in net loss
of joint ventures ........... (5,922) (9,525) (23,065) 2,190 (10,726)
Income tax benefit (expense).. 29 197 (259) (3) --
------- -------- -------- ------- --------
(Loss) income before equity in
net loss of
joint ventures .............. (5,893) (9,328) (23,324) 2,187 (10,726)
Equity in net loss of joint
ventures...................... (1,799) (4,292) (7,223) (1,636) (2,540)
------- -------- -------- ------- --------
Net (loss) income............. $(7,692) $(13,620) $(30,547) $ 551 $(13,266)
======= ======== ======== ======= ========
Net (loss) income per weighted
average share of
common stock................. $ (0.77) $ (1.36) $ (2.88) $ 0.05 $ (1.24)
======= ======== ======== ======= ========
Weighted average shares of
common stock outstanding..... 10,000 10,000 10,591 10,525 10,735
======= ======== ======== ======= ========
</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 ADDITIONAL COMMON STOCKHOLDERS'
COMMON COMMON PAID-IN STOCK LOANS TO ACCUMULATED EQUITY
STOCK STOCK CAPITAL WARRANTS STOCKHOLDERS DEFICIT (DEFICIENCY)
------- ------- ---------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994 $-- $100 $-- $ -- $ -- $ (6,111) $ (6,011)
Net loss.............. -- -- -- -- -- (7,692) (7,692)
---- ---- ---- ------- ------- -------- --------
Balance, March 31, 1995 -- 100 -- -- -- (13,803) (13,703)
Net loss.............. -- -- -- -- -- (13,620) (13,620)
---- ---- ---- ------- ------- -------- --------
Balance, March 31, 1996. -- 100 -- -- -- (27,423) (27,323)
Proceeds from issuance
of Class B Common
Stock warrants ...... -- -- -- 11,087 -- -- 11,087
Loans to stockholders
..................... -- -- -- -- (3,000) -- (3,000)
Excess of purchase
price of acquired
assets
over related party
predecessor owner's
carrying value....... -- -- -- -- -- (627) (627)
Issuance of Class A
Common Stock bonus .. 1 -- 155 -- -- -- 156
Net loss ............. -- -- -- -- -- (30,547) (30,547)
---- ---- ---- ------- ------- -------- --------
Balance, March 31, 1997
....................... 1 100 155 11,087 (3,000) (58,597) (50,254)
Issuance of Class A
Common Stock bonus
(unaudited).......... -- -- 27 -- -- -- 27
Net loss (unaudited).. -- -- -- -- -- (13,266) (13,266)
---- ---- ---- ------- ------- -------- --------
Balance, June 30, 1997
(unaudited)............ $1 $100 $182 $11,087 $(3,000) $(71,863) $(63,493)
==== ==== ==== ======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
---------------------------- ------------------
1995 1996 1997 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net (loss) income.......... $ (7,692) $(13,620) $(30,547) $ 551 $(13,266)
Adjustments to reconcile
net (loss) income to net
cash used in operating
activities:
Depreciation............. 397 1,061 2,604 335 1,054
Amortization............. 66 123 1,341 360 318
Equity in net loss of
joint ventures.......... 1,799 4,292 7,223 1,636 2,540
Non-cash interest
expense................. 3,321 6,088 23,467 4,915 6,727
Deferred income taxes.... (37) (206) 257 -- --
Gain on sale of
investment.............. -- -- (8,405) (8,405) --
Issuance of Class A
Common Stock bonus...... -- -- 156 -- 27
Changes in operating
assets and liabilities,
net of effects of
acquisition:
Other assets--net...... (550) (227) (624) (22) (951)
Accounts payable and
other current
liabilities........... 566 1,656 (295) (2,027) 1,144
-------- -------- -------- -------- --------
Net cash used in operating
activities.................. (2,130) (833) (4,823) (2,657) (2,407)
-------- -------- -------- -------- --------
Cash flows from investing
activities:
Net cash used for
acquisition.............. -- -- (5,040) -- --
Expenditures for property,
plant
and equipment............ (2,850) (6,084) (24,627) (1,818) (18,766)
Investment in fiber asset
and senior secured note.. -- -- (20,000) -- --
Proceeds from sale of
investment............... -- -- 11,618 11,618 --
Investments in joint
ventures................. (7,526) (12,815) (34,769) (4,750) (18,031)
-------- -------- -------- -------- --------
Net cash (used in) provided
by investing activities..... (10,376) (18,899) (72,818) 5,050 (36,797)
-------- -------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from Senior
Discount Notes........... -- -- 163,705 163,705 --
Proceeds from issuance of
Class B Common Stock
warrants................. -- -- 11,087 11,087 --
Costs associated with debt
financing................ -- -- (6,555) (6,221) --
Loans to stockholders..... -- -- (3,000) (3,000) --
Borrowings on (repayment
of) Note payable--
Adelphia................. 12,252 9,226 (25,000) (25,000) --
Repayment of debt......... -- -- -- -- (151)
Advances from (to)
affiliates............... 254 10,506 (2,782) (10,822) 849
-------- -------- -------- -------- --------
Net cash provided by
financing activities........ 12,506 19,732 137,455 129,749 698
-------- -------- -------- -------- --------
Net increase (decrease) in
cash and cash equivalents... -- -- 59,814 132,142 (38,506)
Cash and cash equivalents,
beginning of period......... -- -- -- -- 59,814
-------- -------- -------- -------- --------
Cash and cash equivalents,
end of period............... $ -- $ -- $ 59,814 $132,142 $ 21,308
======== ======== ======== ======== ========
</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, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 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 and majority owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company was formed in 1991 and is an 88%
owned subsidiary of Adelphia Communications Corporation ("Adelphia"). The
remaining 12% 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 ownership interest. The
Company's efforts have been directed primarily toward becoming an owner and
manager of competitive local exchange carrier ("CLEC") business
telecommunications services in selected mid-sized cities. The Company
generally partners with a local cable television or utility company, whose
fiber facilities are located in the market areas, to build competitive access
fiber optic networks. The Company then operates the networks for a management
fee. Each network provides local special access, carrier-to-carrier, and
point-to-point telecommunications services to major businesses and government
customers. The Company's revenues are derived from a combination of direct
business telecommunication services provided by its subsidiaries and
management fees from its unconsolidated joint ventures.
Joint ventures in which the Company does not have a majority interest are
accounted for under the equity method of accounting.
Cash and cash equivalents
Cash and cash equivalents 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 and switching equipment....................... 5-10 years
Other............................................................ 3-10 years
</TABLE>
Revenue Recognition
The Company recognizes revenues related to management and network monitoring
of the joint ventures in the month that the related services are provided. The
Company recognizes revenue from telecommunications services in the month the
related service is provided. Revenues on billings to customers for services in
advance of providing such services are deferred and recognized when earned.
F-7
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1)THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Net Loss Per Weighted Average Share of Common Stock
The computation of net loss per weighted average share of common stock is
based upon the weighted average number of common shares and warrants
outstanding during the year. All references in the accompanying consolidated
financial statements to the number of shares of common stock have been
retroactively restated to reflect the stock split (See Note 6).
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.
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, included in other assets, 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. Deferred debt financing costs, included in other
assets, are amortized over the term of the related debt. The unamortized
amounts at March 31, 1996 and 1997 were $0 and $6,033, respectively. Also
included in other assets at March 31, 1997 is a Senior Secured Note (See Note
3).
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 customers and
geographic areas.
The Company's financial instruments include cash and cash equivalents, Note
payable--Adelphia, Senior Secured Note, and Senior Discount Notes. The
carrying values of the Note payable--Adelphia and the Senior Secured Note
approximated their fair values at March 31, 1996 and 1997. The carrying value
of the Senior Discount Notes exceeded fair value by approximately $5,400 at
March 31, 1997. The fair values of the Note payable--Adelphia and the Senior
Secured Note were estimated based upon the terms in comparison with other
similar instruments. The fair value of the Senior Discount Notes was based
upon quoted market prices.
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
F-8
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1)THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" has been issued and is effective for periods ending after December 15,
1997, with early application not permitted. The general requirements of SFAS
No. 128 are designed to simplify the computation of earnings per share. The
new statement requires a calculation of basic and diluted earnings per share.
The adoption of SFAS No. 128 is not expected to have any effect on the
Company's calculation of earnings per share.
SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information," have
been issued and are effective for fiscal years beginning after December 15,
1997. SFAS No. 130 defines comprehensive income and outlines certain reporting
and disclosure requirements related to comprehensive income. SFAS No. 131
requires certain disclosures about business segments of an enterprise, if
applicable. The adoption of SFAS No. 130 and SFAS No. 131 is not expected to
have any effect on the Company's financial statements or disclosures.
Unaudited Interim Information
In the opinion of management, the accompanying unaudited interim financial
information as of June 30, 1997 and for the three months ended June 30, 1996
and 1997 contains all adjustments, consisting of only normal recurring
accruals necessary for a fair presentation of the data as of such date and for
such periods. This information does not include all footnotes which would be
required for complete financial statements prepared in accordance with
generally accepted accounting principles. The results of operations for the
three months ended June 30, 1997 are not necessarily indicative of the results
to be expected for the year ending March 31, 1998.
Reclassification
For the fiscal years ended March 31, 1995, 1996, and 1997, certain amounts
have been reclassified to conform with the June 30, 1997 presentation.
(2)PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------- JUNE 30,
1996 1997 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Telecommunications networks..................... $ 6,312 $12,236 $13,475
Network monitoring and switching equipment...... 5,267 19,301 20,442
Fiber asset under construction (Note 3)......... -- 11,500 11,500
Construction in process......................... 2,245 14,978 31,334
Other........................................... 388 1,131 1,151
------- ------- -------
14,212 59,146 77,902
Less accumulated depreciation................... (1,651) (5,225) (6,269)
------- ------- -------
Total......................................... $12,561 $53,921 $71,633
======= ======= =======
</TABLE>
(3)INVESTMENT IN FIBER ASSET AND SENIOR SECURED NOTE
On February 20, 1997, the Company entered into several agreements regarding
the leasing of dark fiber in New York state in furtherance of its strategy to
interconnect its networks in the northeastern United States.
F-9
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(3)INVESTMENT IN FIBER ASSET AND SENIOR SECURED NOTE, CONTINUED
Pursuant to these agreements and in consideration of a payment of $20,000, the
Company received a $20,000 Senior Secured note bearing interest at 22 1/2%
(subject to reduction upon early repayment of principal) due February 2002
(subject to early redemption options), from Telergy, Inc. ("Telergy") and a
fully prepaid lease from a Telergy affiliate for an initial lease term of 25
years (with two additional ten-year extensions) for 24 strands of dark fiber
installed or to be installed in a New York fiber optic telecommunications
backbone network. The Company has included $11,500 and $8,500 in Property,
Plant and Equipment and Other Assets, respectively, as the allocation of the
$20,000 payment between the fiber asset and the Senior Secured Note. The
allocation reflects the Company's estimate of the relative fair values of the
assets acquired.
(4)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 loss of its joint
ventures. Dividends or other distributions are recorded as a reduction of the
Company's investment. Investments in joint ventures accounted for using the
equity method reflect the Company's equity in their underlying net assets.
The Company's nonconsolidated investments are as follows:
<TABLE>
<CAPTION>
MARCH 31,
OWNERSHIP ----------------- JUNE 30,
PERCENTAGE 1996 1997 1997
---------- ------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Continental Fiber Technologies
(Jacksonville)..................... 20.0% $ 4,701 $ 7,330 $ 7,979
Multimedia Hyperion
Telecommunications (Wichita)....... 49.9% 2,620 3,306 3,306
Louisville Lightwave............... 50.0%(1) 996 4,683 8,644
NewChannels Hyperion
Telecommunications (Albany)........ 50.0%(2) 999 924 924
NewChannels Hyperion
Telecommunications (Binghamton).... 20.0%(2) 504 504 504
NHT Partnership (Buffalo).......... 40.0%(2) 2,457 4,717 5,300
NewChannels Hyperion
Telecommunications (Syracuse)...... 50.0%(2) 3,140 4,215 5,161
Hyperion of Harrisburg............. 50.0% 1,600 5,246 8,576
Hyperion of Tennessee (Nashville).. 25.0%(3) 1,345 -- --
Alternet of Virginia (Richmond).... 37.0% 3,406 7,018 7,212
New Jersey Fiber Technologies (New
Brunswick)......................... 19.7% 956 3,340 4,582
TCG of South Florida............... 15.7%(4) 4,679 -- --
PECO-Hyperion (Philadelphia) ...... 50.0% -- 10,750 15,000
Lexington Lightwave ............... 50.0% -- 2,311 4,261
Hyperion of York................... 50.0% -- 1,402 2,000
Other ............................. Various 497 949 1,277
------- -------- --------
27,900 56,695 74,726
Cumulative equity in net losses.... (6,813) (12,010) (14,574)
------- -------- --------
Total Investments.................. $21,087 $ 44,685 $ 60,152
======= ======== ========
</TABLE>
- --------
(1) The Company increased its ownership in this partnership on May 8, 1996
from 20% to 50%.
(2) As discussed in Note 12, the Company has entered into agreements, subject
to normal closing conditions and receipt of regulatory approval, to
exchange its interests in these networks.
(3) As discussed below, the Company increased its ownership in this
partnership on August 1, 1996 to 95%, and accordingly, has consolidated
this investment effective August 1, 1996.
(4) As discussed below, the Company sold its interest in TCG of South Florida
on May 16, 1996.
F-10
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(4)INVESTMENTS, CONTINUED
Summarized unaudited combined financial information for the Company's
investments being accounted for using the equity method of accounting,
excluding TCG of South Florida and Hyperion of Tennessee as of and for the
periods presented, is as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------- JUNE 30,
1996 1997 1997
-------- -------- --------
<S> <C> <C> <C>
Current assets.................................... $ 3,262 $ 5,684 $ 8,278
Non-current assets................................ 74,055 154,950 181,986
Current liabilities............................... 6,043 6,797 8,604
Non-current liabilities........................... 17,718 48,069 55,214
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
----------------------------- --------------------
1995 1996 1997 1996 1997
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 2,818 $ 6,497 $ 12,357 $ 2,651 $ 4,252
Net loss................ (3,454) (8,414) (17,052) (3,572) (6,259)
</TABLE>
On May 16, 1996, the Company sold its 15.7% interest in TCG of South Florida
for approximately $11,618 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
fiscal year ended March 31, 1997.
On August 1, 1996, the Company purchased additional general and limited
partnership interests in Hyperion of Tennessee for approximately $5,000, which
increased the Company's ownership of Hyperion of Tennessee to 95%. The
following unaudited financial information of the Company assumes that this
acquisition had occurred on April 1, 1995:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1996 1997
--------------------
<S> <C> <C>
Revenues................................................ $ 3,963 $ 5,303
Net loss................................................ 15,239 31,002
Net loss per weighted average share of common stock..... $ 1.52 $ 2.93
</TABLE>
(5)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 (the "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, 1995 and
1996. The total amount of interest converted to note principal through April
15, 1996 was $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
F-11
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(5)FINANCING ARRANGEMENTS, CONTINUED
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. Interest accrued through June 30, 1997 on the amount
outstanding to Adelphia totaled $5,923 and is included in due to affiliates--
net.
13% Senior Discount Notes and Class B Common Stock Warrants
On April 15, 1996, the Company issued $329,000 of 13% Senior Discount Notes
due April 15, 2003 and 329,000 warrants to purchase an aggregate of 613,427
shares of its Class B Common Stock. Proceeds to the Company, net of discounts,
commissions, and other transaction costs were approximately $168,600. Such net
proceeds were used to pay $25,000 of the Note payable--Adelphia discussed
above, to make loans of $3,000 to certain key Company officers (see Note 6)
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 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 Notes is not payable in cash, but
is added to principal. Thereafter, interest is payable semi-annually
commencing October 15, 2001. The 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 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
Notes at 106.5% which declines to par in 2002, plus accrued interest.
The holders of the Notes may put the Notes to the Company at any time at a
price of 101% of accreted principle upon the occurrence of a Change of Control
(as defined in the Indenture). In addition, the Company will be required to
offer to purchase 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 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 Notes. The above exchange was consummated within
the time periods stipulated in the agreement.
The Class B Common Stock Warrants are exercisable at $.01 per share, 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 filed a shelf registration statement under the
Securities Act covering the Warrant Shares.
F-12
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(5)FINANCING ARRANGEMENTS, CONTINUED
If the 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.
Other debt consists primarily of capital leases entered into in connection
with the acquisition of fiber leases for use in the telecommunications
networks. The interest rate on such debt ranges from 11.25% to 15.0%.
Maturities of debt for the five years after March 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................................... $489
1999............................................................... 554
2000............................................................... 529
2001............................................................... 382
2002............................................................... 324
</TABLE>
(6)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.
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 sale of the Notes and Class B Common Stock Warrants
discussed in Note 5. 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 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. 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, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(6)STOCKHOLDERS' EQUITY, CONTINUED
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.
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 split, the par value reduction and the other
actions taken by the Board of Directors on March 19 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 1,750,000. Such number is to
increase each year by 1% of outstanding shares of all classes of the Company's
Common Stock, up to a maximum of 2,500,000 shares. Options, awards and units
may be granted under the 1996 Plan to directors, officers, employees and
consultants. The 1996 Plan provides that incentive stock options must be
granted with an exercise price of not less than the fair market value of the
underlying Common Stock on the date of grant. Options outstanding under the
Plan may be exercised by paying the exercise price per share through various
alternative settlement methods. On March 4, 1997 and April 1, 1997, the
company issued 104,000 and 18,000 shares, respectively, of Class A Common
Stock to Daniel R. Milliard pursuant to his employment agreement with the
Company. No other stock options, stock awards, stock appreciation rights or
phantom stock units have been granted under the Plan.
(7)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 $478, $1,210 and $1,103 for the years ended March 31, 1995, 1996
and 1997, respectively.
The minimum future lease obligations under the noncancelable operating
leases as of March 31, 1997 are approximately:
<TABLE>
<CAPTION>
PERIOD ENDING MARCH 31,
-----------------------
<S> <C>
1998.................................................................... $553
1999.................................................................... 524
2000.................................................................... 507
2001.................................................................... 521
2002.................................................................... 462
Thereafter.............................................................. 113
</TABLE>
F-14
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(7)COMMITMENTS AND CONTINGENCIES, CONTINUED
Certain investors in two of the joint ventures have the right after a
specified period of time to sell their interest to the Company. Under one
agreement, the sales price represents the investor's aggregate capital
contribution less distributions plus interest accrued at the prime rate. The
Company's obligation under this commitment at June 30, 1997 was approximately
$3,729. The sales price under the second agreement is equal to the fair market
value of such investor's interest.
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 Company has entered into an employment agreement with the President of
the Company, the terms of which expire on March 31, 2001, unless extended by
the Company for additional one year periods. The employment agreement provides
for base salary, benefits, stock options or stock grants and cash and stock
bonuses payable if specified management goals are attained as established
annually by the Board of Directors. In addition, the employment agreement
contains noncompetition and nondisclosure provisions.
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.
The Telecommunications Act establishes procedures for LEC and Bell
Operating Company ("BOC") entry into new markets, including long distance
and cable television service.
By allowing the BOCs 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.
F-15
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(7)COMMITMENTS AND CONTINGENCIES, CONTINUED
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 sets interim criteria for number portability cost
recovery. The FCC deferred selecting a long term number portability cost
recovery scheme to a further rulemaking proceeding which is expected to be
decided later in 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 obligations of all telecommunications carriers, including
obligations of CLEC and incumbent LEC networks and incumbent LEC pricing of
interconnection and 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 is occurring
at the state level, it is uncertain how these new requirements will affect
the Company. 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. On May 8,
1997, the FCC issued an order to implement the provisions of the
Telecommunications Act relating to the preservation and advancement of
universal telephone service (the "Universal Service Order"). The Universal
Service Order requires all telecommunications carriers providing interstate
telecommunications services, including the Company, to contribute to
universal service support. Such contributions will be assessed based on
interstate and international end-user telecommunications revenues.
Universal service support will be distributed to all carriers designated as
"eligible carriers" by state commissions. This could be advantageous to the
Company or it could be beneficial to the Company's competitors depending on
the geographic areas for which subsidies are available.
In a related proceeding, on May 16, 1997, the FCC issued an order to
implement certain reforms to its access charge rules (the "Access Charge
Reform Order"). To the extent that the Access Charge Reform Order requires
incumbent LECs to impose lower, cost-based access charges on Interexchange
or Long Distance Carriers ("IXCs"), the Company's potential margins in
providing customers with access services may decrease.
F-16
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(8)RELATED PARTY TRANSACTIONS
The following table summarizes the Company's transactions with related
parties:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, JUNE 30,
-------------------- -------------
1995 1996 1997 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Management fees........................ $1,045 $1,950 $2,600 $ 679 $ 614
Network monitoring fees................ 217 446 604 119 216
Special access fees.................... 189 651 540 180 170
------ ------ ------ ------ ------
Total.................................. $1,451 $3,047 $3,744 $ 978 $1,000
====== ====== ====== ====== ======
EXPENSES:
Interest expense and fees.............. $3,321 $6,088 $4,731 $1,254 $1,259
Allocated corporate costs.............. 511 417 1,199 80 326
Fiber leases........................... 303 1,022 738 282 16
------ ------ ------ ------ ------
Total.................................. $4,135 $7,527 $6,668 $1,616 $1,601
====== ====== ====== ====== ======
</TABLE>
Management fees from related parties represent fees received by the Company
from its unconsolidated joint ventures for the performance of financial,
legal, regulatory, network design, construction 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 income charged on certain affiliate receivable balances with joint
ventures was $65, $199, $230, $13, and $110 for the years ended March 31,
1995, 1996, and 1997, and the three months ended June 30, 1996 and 1997,
respectively.
Interest expense and fees relate to the Note payable--Adelphia (See Note 5).
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 that would be incurred if the Company
was to secure such services on its own.
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.
During the year ended March 31, 1997, the Company purchased from Adelphia
for approximately $6,485, Adelphia's historic cost to acquire the assets,
certain fiber that had previously been leased from Adelphia. Because the
entities involved in the transaction are under the common control of Adelphia,
the excess of the purchase price of the assets over the predecessor owner's
net book value was charged to accumulated deficit.
F-17
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(9)INCOME TAXES
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 net operating loss carryforwards and the valuation
allowance are adjusted for the effects of filing a consolidated income tax
return, similar to provisions of the Internal Revenue Code. At March 31, 1997,
the Company had net operating loss carryforwards for federal income tax
purposes of $30,478 expiring through 2012.
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.
The Company's net deferred tax asset is comprised of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Differences between book and tax basis of intangible
assets................................................ $ 119 $ 197
Net operating loss carryforwards....................... 9,302 11,539
Investment in Partnerships............................. 1,401 2,793
Other.................................................. 134 50
-------- --------
Total................................................. 10,956 14,579
Valuation allowance.................................... (10,459) (12,356)
-------- --------
Total................................................. 497 2,223
-------- --------
DEFERRED TAX LIABILITIES:
Differences between book and tax basis of property,
plant and equipment................................... 203 2,186
-------- --------
Net deferred tax asset.................................. $ 294 $ 37
======== ========
</TABLE>
The net change in the valuation allowance for the years ended March 31,
1996 and 1997 was an increase of $5,164 and $1,897, respectively.
Income tax benefit (expense) for the years ended March 31, 1995, 1996 and
1997 is as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1995 1996 1997
---- ---- -----
<S> <C> <C> <C>
Current..................................................... $(8) $ (9) $ (2)
Deferred.................................................... 37 206 (257)
--- ---- -----
Total....................................................... $29 $197 $(259)
=== ==== =====
</TABLE>
F-18
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(9)INCOME TAXES, CONTINUED
A reconciliation of the statutory federal income tax rate and the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate....................... 35.0% 35.0% 35.0%
Change in valuation allowance........................... (39.0) (34.6) (34.6)
State taxes, net of federal benefit and other........... 4.4 1.0 (1.2)
----- ----- -----
Income tax benefit (expense)............................ 0.4% 1.4% (0.8)%
===== ===== =====
</TABLE>
(10) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables summarize the financial results of the Company for each
of the quarters in the years ended March 31, 1996 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1995 1995 1995 1996
-------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues......................... $ 686 $ 612 $ 1,198 $ 826
------- ------- ------- -------
Operating expenses:
Network operations.............. 628 613 637 812
Selling, general and
administrative................... 831 534 1,010 709
Depreciation and amortization... 250 278 333 323
------- ------- ------- -------
Total.......................... 1,709 1,425 1,980 1,844
------- ------- ------- -------
Operating loss................... (1,023) (813) (782) (1,018)
Other income (expense):
Interest income................. 16 10 -- 173
Interest expense and fees....... (1,328) (1,372) (1,478) (1,910)
------- ------- ------- -------
Loss before income taxes and eq-
uity in net loss
of joint ventures............... (2,335) (2,175) (2,260) (2,755)
Income tax benefit (expense)..... 19 59 (20) 139
------- ------- ------- -------
Loss before equity in net loss of
joint ventures.................. (2,316) (2,116) (2,280) (2,616)
Equity in net loss of joint ven-
tures........................... (797) (845) (1,509) (1,141)
------- ------- ------- -------
Net loss......................... $(3,113) $(2,961) $(3,789) $(3,757)
======= ======= ======= =======
Net loss per weighted average
share of common stock........... $ (0.31) $ (0.30) $ (0.38) $ (0.38)
======= ======= ======= =======
Weighted average shares of common
stock
outstanding (in thousands)...... 10,000 10,000 10,000 10,000
======= ======= ======= =======
</TABLE>
F-19
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(10) QUARTERLY FINANCIAL DATA (UNAUDITED), CONTINUED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1996 1997
-------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues......................... $ 1,102 $ 1,175 $ 1,334 $ 1,477
------- ------- -------- --------
Operating expenses:
Network operations.............. 859 728 752 1,093
Selling, general and
administrative................... 1,027 1,164 2,545 2,044
Depreciation and amortization... 695 886 1,002 1,362
------- ------- -------- --------
Total.......................... 2,581 2,778 4,299 4,499
------- ------- -------- --------
Operating loss................... (1,479) (1,603) (2,965) (3,022)
Other income (expense):
Gain on sale of investment...... 8,405 -- -- --
Interest income................. 1,433 1,696 1,190 1,657
Interest expense and fees....... (6,169) (7,108) (7,482) (7,618)
------- ------- -------- --------
Income (loss) before income taxes
and equity in net loss
of joint ventures............... 2,190 (7,015) (9,257) (8,983)
Income tax (expense) benefit..... (3) 120 63 (437)
------- ------- -------- --------
Income (loss) before equity in
net loss of joint ventures...... 2,187 (6,895) (9,194) (9,420)
Equity in net loss of joint ven-
tures........................... (1,636) (1,362) (2,145) (2,080)
------- ------- -------- --------
Net income (loss)................ $ 551 $(8,257) $(11,339) $(11,500)
======= ======= ======== ========
Net income (loss) per weighted
average share
of common stock................. $ 0.05 $ (0.78) $ (1.07) $ (1.08)
======= ======= ======== ========
Weighted average shares of common
stock
outstanding (in thousands)...... 10,525 10,613 10,613 10,613
======= ======= ======== ========
</TABLE>
(11) SUBSEQUENT EVENTS (THROUGH DATE OF INDEPENDENT AUDITORS' REPORT):
On June 13, 1997, the Company entered into agreements with MCImetro Access
Transmission Services, Inc. (together with its affiliate, MCI Communications,
"MCI"). Pursuant to this agreement the Company is designated MCI's preferred
provider for new end user dedicated access circuits and of conversions of end
user dedicated access circuits as a result of conversions from the incumbent
LEC in the Company's markets. Hyperion also has certain rights of first
refusal to provide MCI with certain telecommunications services. Under this
arrangement, the Company issued a warrant to purchase 281,040 shares of Class
A Common Stock to MCI representing 2 1/2% of the Common Stock of the Company
on a fully diluted basis. MCI can receive additional warrants to purchase up
to an additional 6% of the shares of the Company's Class A Common Stock, on a
fully diluted basis, at fair value, if MCI meets certain purchase volume
thresholds over the term of the agreement.
F-20
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(12) EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT:
On August 4, 1997, the Company entered into an agreement with Lenfest
Telephony to increase the Company's interest in Hyperion of Harrisburg to 100%
in exchange for 225,115 shares of the Company's Class A Common Stock.
On August 11, 1997, the Company entered into agreements with subsidiaries of
Tele-Communications, Inc. to (i) increase the Company's interest in Louisville
Lightwave and Lexington Lightwave to 100% and (ii) increase the Company's
interest in NHT Partnership (Buffalo) to 100%.
Both of these transactions are subject to normal closing conditions and
receipt of regulatory approvals.
On August 27, 1997, the Company issued $250,000 aggregate principal amount
of 12 1/4% Senior Secured Notes due September 1, 2004 (the "Secured Notes") in
a private placement. Interest is payable semi-annually commencing March 1,
1998. The Secured Notes are secured by a first priority pledge of (i) the
Pledged Securities (as defined in the Indenture) and (ii) the Stock Collateral
(as defined in the Indenture). On or prior to September 1, 2000, the Company
may redeem up to 25% of the aggregate principal amount of the Secured Notes at
112.25% of principal with the net proceeds of one or more Qualified Equity
Offerings (as defined in the Indenture). Commencing September 1, 2001, the
Company may redeem the Secured Notes in whole or in part at 106.125% of
principal declining annually to par on September 1, 2003. Holders of the
Secured Notes have the right to require the Company to redeem their Secured
Notes at 101% of principal upon a Change of Control (as defined in the
Indenture). The Indenture stipulates, among other things, limitations on
additional borrowings, payment of dividends or distributions, repurchase of
equity interests, transactions with affiliates and the sale of assets. The
Indenture also provides for payment to the Secured Notes holders of liquidated
damages of up to 2% per annum of the Secured Notes principal if the Company
does not file a registration statement or cause such registration statement to
become effective within a prescribed time period with respect to an offer to
exchange the Secured Notes for a new issue of debt securities registered under
the Securities Act, with terms substantially the same as those of the Secured
Notes. The new issue of debt securities is expected to be recorded at the same
carrying value as the Secured Notes and, accordingly, no gain or loss is
expected to be recognized. Of the $243,300 net proceeds, after payment of
transaction costs, approximately $83,400 was placed in escrow for the purchase
of the Pledged Securities to provide for payment of the first six scheduled
interest payments on the Secured Notes. The Company intends to use the
remainder of the net proceeds to fund (i) capital expenditures, (ii) the
acquisition of additional ownership interests in certain of its joint ventures
and (iii) working capital.
On May 8, 1997, the Company entered into agreements with Time Warner
Entertainment Advance/Newhouse and Advance/Newhouse Partnership (collectively,
"TWEAN") to exchange interests in four New York CLEC networks. On September
12, 1997, the Company consummated the agreements and thereby (i) increased its
ownership interests in the Buffalo and Syracuse networks to 60% and 100%,
respectively, and (ii) eliminated its ownership interests in the Albany and
Binghamton networks.
On October 9, 1997, the Company issued $200,000 aggregate liquidation
preference of 12 7/8% Senior Exchangeable Redeemable Preferred Stock due 2007
(the "Preferred Stock") in a private placement. The Company is required to
redeem all of the Preferred Stock on October 15, 2007 at 100% of the
liquidation preference of the Preferred Stock then outstanding. Dividends are
payable quarterly, commencing January 15, 1998, at 12 7/8% of the liquidation
preference of outstanding Preferred Stock. Through October 15, 2002, dividends
are payable in cash or additional shares of Preferred Stock at the Company's
option. Subsequent to
F-21
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
October 15, 2002, dividends are payable in cash. Prior to October 15, 2000,
subject to certain conditions, the Company may redeem up to 35% of the
aggregate liquidation preference of the originally issued Preferred Stock at
112.875% of the liquidation preference thereof with the net proceeds of one or
more Qualified Equity Offerings (as defined). Commencing October 15, 2002, the
Company may redeem the Preferred Stock in whole or in part at 106.438% of the
liquidation preference thereof declining annually to par on October 15, 2005.
Holders of the Preferred Stock have the right to require the Company to redeem
their Preferred Stock at 101% of the liquidation preference thereof upon a
Change of Control (as defined). The Certificate of Designation stipulates,
among other things, limitations on additional borrowings, payment of dividends
or distributions, transactions with affiliates and the sale of assets. A
related Registration Rights Agreement provides for payment to the Preferred
Stock holders of liquidated damages of up to 1% per annum of the Preferred
Stock liquidation preference if the Company does not file a registration
statement or cause such registration statement to become effective within a
prescribed time period with respect to an offer to exchange the Preferred
Stock for a new issue of securities registered under the Securities Act, with
terms substantially the same as those of the Preferred Stock. The new issue of
securities is expected to be recorded at the same carrying value as the
Preferred Stock and, accordingly, no gain or loss is expected to be
recognized. The Company intends to use the net proceeds of approximately
$194,500 to fund the acquisition of increased ownership interests in certain
of its networks, for capital expenditures, including the construction and
expansion of new and existing networks, and for general corporate and working
capital purposes. Pending such uses, the net proceeds will be invested in
cash, short-term investments and other cash equivalents.
The Company may, at its option, on any dividend payment date, exchange in
whole, but not in part, the then outstanding shares of Preferred Stock for 12
7/8% Senior Subordinated Debentures due October 15, 2007 (the "Exchange
Debentures"). Interest, redemption and registration rights provisions of the
Exchange Debentures are consistent with the provisions of the Preferred Stock.
F-22
<PAGE>
ANNEX 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.
Access Line Equivalents--The number of access lines represented by a trunk
line, estimated for purposes of this Prospectus as six access lines per trunk
line.
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.
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.
A-2
<PAGE>
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.
LSO--Local Serving Office of the incumbent LEC.
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
A-3
<PAGE>
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.
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.
A-4
<PAGE>
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.
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>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE ACCOMPANYING
LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE REGISTRANT. NEI-
THER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICA-
TION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE REGISTRANT SINCE THE
DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING
LETTER OF TRANSMITTAL CONSTITUTES AN OFFER OR SOLICITATION BY ANYONE IN ANY JU-
RISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Available Information..................................................... 3
Prospectus Summary........................................................ 4
The Exchange Offer........................................................ 10
Summary Description of Exchangeable Preferred Stock and Exchange
Debentures .............................................................. 12
Risk Factors.............................................................. 18
The Exchange Offer........................................................ 28
Use of Proceeds........................................................... 37
Capitalization............................................................ 38
Selected Consolidated Financial Data...................................... 39
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 40
Business.................................................................. 50
Competition............................................................... 65
Regulation................................................................ 66
Management................................................................ 75
Security Ownership of Certain Beneficial Owners and Management............ 80
Certain Relationships and Transactions.................................... 81
Description of Securities................................................. 83
Description of Exchange Debentures........................................ 103
Description of Certain Indebtedness....................................... 132
Description of Capital Stock.............................................. 134
Certain Federal Income Tax Considerations................................. 136
Plan of Distribution...................................................... 143
Legal Matters............................................................. 143
Experts................................................................... 143
Index to Consolidated Financial Statements................................ F-1
</TABLE>
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$200,000,000
LOGO
[LOGO OF HYPERION TYELECOMMUNICATIONS, INC.]
12 7/8% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED STOCK
DUE 2007, SERIES B
--------------------------
PROSPECTUS
--------------------------
NOVEMBER 6, 1997
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