<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1997
REGISTRATION NO. 333-36461
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HYPERION TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 4813 25-1669404
(Primary Standard Industrial Classification Code Number)
(I.R.S. Employer
(State or other Identification No.)
jurisdiction of ------------
incorporation or
organization)
MAIN AT WATER STREET
COUDERSPORT, PENNSYLVANIA 16915
(814) 274-9830
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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DANIEL R. MILLIARD, PRESIDENT
HYPERION TELECOMMUNICATIONS, INC.
MAIN AT WATER STREET
COUDERSPORT, PENNSYLVANIA 16915
(814) 274-9830
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------
PLEASE ADDRESS A COPY OF ALL COMMUNICATIONS TO:
CARL E. ROTHENBERGER, JR., ESQUIRE
BUCHANAN INGERSOLL
PROFESSIONAL CORPORATION
21ST FLOOR, 301 GRANT STREET
PITTSBURGH, PENNSYLVANIA 15219
(412) 562-8826
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, please check the following box. [_]
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
HYPERION TELECOMMUNICATIONS, INC.
CROSS REFERENCE SHEET PURSUANT TO RULE 404(a) AND ITEM 501 OF REGULATION S-K,
SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED TO BE
INCLUDED THEREIN IN ACCORDANCE WITH PART I OF FORM S-4.
<TABLE>
<CAPTION>
FORM S-4
ITEM NUMBER AND CAPTION LOCATION OR HEADING IN THE PROSPECTUS
---------------------------------------- -------------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.. Forepart of Registration Statement; Outside
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus..................... Inside Front and Outside Back Cover Pages
of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information........... Forepart of Prospectus; Prospectus Summary;
Risk Factors; Selected Consolidated
Financial Data
4. Terms of the Transaction................ Prospectus Summary; The Exchange Offer;
Description of Notes; Certain Federal
Income Tax Considerations; Risk Factors
5. Pro Forma Financial Information......... *
6. Material Contracts with Company Being
Acquired................................ *
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters...................... Plan of Distribution
8. Interests of Named Experts and Counsel.. *
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................. *
10. Information with Respect to S-3
Registrants............................. *
11. Incorporation of Certain Information by
Reference............................... *
12. Information with Respect to S-2 or S-3
Registrants............................. *
13. Incorporation of Certain Information by
Reference............................... *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM S-4
ITEM NUMBER AND CAPTION LOCATION OR HEADING IN THE PROSPECTUS
---------------------------------------- -------------------------------------------
<S> <C> <C>
14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants....... Prospectus Summary; Selected Consolidated
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Regulation
15. Information with Respect to S-3
Companies............................... *
16. Information with Respect to S-2 or S-3
Companies............................... *
17. Information with Respect to Companies
Other Than S-3 or S-2 Companies......... *
18. Information if Proxies, Consents or
Authorizations are to be Solicited...... *
19. Information if Proxies, Consents or
Authorizations are not to be Solicited
or in an Exchange Offer................. Management; Certain Relationships and
Transactions; The Exchange Offer
</TABLE>
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* Item is omitted because the answer is negative or the item is inapplicable.
<PAGE>
OFFER TO EXCHANGE
12 1/4% SERIES B SENIOR SECURED NOTES DUE 2004
FOR ANY AND ALL OUTSTANDING 12 1/4% SENIOR SECURED NOTES DUE 2004
OF
HYPERION TELECOMMUNICATIONS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON NOVEMBER 20, 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
$1,000 principal amount of 12 1/4% Series B Senior Secured Notes due 2004 of
the Registrant (the "New Notes") for each $1,000 principal amount of the
issued and outstanding 12 1/4% Senior Secured Notes due 2004 (the "Old Notes,"
and collectively with the New Notes, the "Notes"). Interest on the Notes is
payable semi-annually commencing March 1, 1998 with a final maturity date of
September 1, 2004. As of the date of this Prospectus, $250,000,000 aggregate
principal amount of the Old Notes is outstanding. The terms of the New Notes
and the Old Notes are substantially identical in all material respects, except
for certain transfer restrictions and registration rights; and except that
holders of Old Notes are entitled to receive Liquidated Damages (as defined)
if (a) the 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 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 interest rate will increase by an additional 0.25%
per annum at the beginning of each subsequent 90-day period up to a maximum
aggregate increase of 2.0% per annum until such Registration Defaults have
been cured, at which time the interest rate borne by the Old Notes will be
reduced to the original interest rate. See "Description of the Notes--
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.
----------------
THE DATE OF THIS PROSPECTUS IS OCTOBER 21, 1997
<PAGE>
The Exchange Offer is being made to satisfy certain obligations of the
Registrant under the Registration Rights Agreement, dated as of August 27,
1997, among the Registrant and the Initial Purchasers (the "Registration
Rights Agreement"). Upon consummation of the Exchange Offer, holders of Old
Notes that were not prohibited from participating in the Exchange Offer and
did not tender their Old Notes will not have any registration rights under the
Registration Rights Agreement with respect to such nontendered Old Notes and,
accordingly, such Old Notes will continue to be subject to the restrictions on
transfer contained in the legend thereon.
Based on interpretations by the staff of the Commission with respect to
similar transactions, including no action letters, the Registrant believes
that the New Notes issued pursuant to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by any
holder of such New Notes (other than any such holder which is an "affiliate"
of 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 Notes are acquired in the ordinary course of such
holder's business, such holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes and neither the
holder nor any other person is engaging in or intends to engage in a
distribution of the New Notes. Each broker-dealer that receives New Notes for
its own account in exchange for Old Notes must acknowledge that it will
deliver a prospectus in connection with any resale of its New Notes. A broker-
dealer who acquires Old Notes directly from the Registrant cannot exchange
such Old Notes 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 Notes received in exchange for the Old Notes acquired by the broker-dealer
as a result of market-making activities or other trading activities. The
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 Notes will evidence the same debt as the Old Notes and will be
entitled to the benefits of the Indenture (as defined). For a more complete
description of the terms of the New Notes, see "Description of the Notes."
There will be no cash proceeds to the Registrant from the Exchange Offer. The
New Notes will be senior obligations of Hyperion and secured by a first
priority pledge by Hyperion of (i) the Pledged Securities which represents
$83.4 million of the proceeds from the Offering (as defined) that were
deposited into an account that was pledged to secure the Notes (the "Escrow
Account") and was used to purchase a portfolio of Government Securities (as
defined) to provide for payment in full when due of the first six scheduled
interest payments on the Notes and (ii) all of the Capital Stock (as defined)
of Hyperion Tennessee (as defined), Hyperion Florida (as defined) and Hyperion
Vermont (as defined). In addition, the Company intends to pledge all of the
Capital Stock of Hyperion Kentucky (as defined) and Hyperion New York (as
defined) to secure the Company's obligations under the New Notes, which pledge
will not be made until: (i) consummation of the Rollups (as defined) or, in
the alternative, (ii) consent to such a pledge by the requisite Local Partners
(as defined). In the event that the Company does not pledge such Capital Stock
to secure the obligations under the New Notes on or before one year after the
date of the Indenture, the interest rate on the New Notes will automatically
increase by 0.25% per annum (the "Interest Rate Step-up"), until such time as
a first priority pledge of such Capital Stock is consummated. The New Notes
will rank pari passu in right of payment with all existing and future senior
Indebtedness (as defined) of the Company and will rank senior in right of
payment to future subordinated Indebtedness of the Company; however, because
the Company is a holding company that conducts substantially all of its
business through its Subsidiaries and Joint Ventures (as defined), the New
Notes will be effectively subordinated to all liabilities of such Subsidiaries
and Joint Ventures, including trade payables and Indebtedness incurred by such
Subsidiaries and Joint Ventures. At June 30, 1997, the aggregate principal
amount outstanding of such senior Indebtedness (excluding trade payables and
other accrued liabilities) was approximately $57.1 million. The indenture
pursuant to which the New Notes will be issued (the "Indenture") will limit
the ability
2
<PAGE>
of the Company, its Subsidiaries and Permitted Joint Ventures (as defined), to
incur additional Indebtedness. However, the Indenture will not limit the
ability of the Company's Restricted Joint Ventures (as defined) to incur
additional indebtedness. See "Description of the Notes--Incurrence of
Indebtedness and Issuance of Preferred Stock."
The Old Notes were originally issued and sold on August 27, 1997 in an
offering of $250,000,000 aggregate principal amount (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 Notes may not be reoffered, resold or
otherwise pledged, hypothecated or transferred in the United States unless so
registered or unless an exemption from the registration requirements of the
Securities Act and applicable state securities laws is available.
The Registrant has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer, and to
the best of the Registrant's information and belief, each person participating
in the Exchange Offer is acquiring the New Notes in its ordinary course of
business and has no arrangement or understanding with any person to participate
in the distribution of the New Notes to be received in the Exchange Offer. Any
person participating in the Exchange Offer who does not acquire the Exchange
Notes in the ordinary course of business: (i) cannot rely on the above
referenced no action letters; (ii) cannot tender its Old Notes 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 November 20, 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 Notes for the New Notes (the
"Exchange Date") will be the first business day following the Expiration Date
or as soon as practicable thereafter. Old Notes tendered pursuant to the
Exchange Offer may be withdrawn at any time prior to the Expiration Date;
otherwise such tenders are irrevocable.
Prior to this Exchange Offer, there has been no public market for the Notes.
The Old Notes have traded on the PORTAL Market. If a market for the New Notes
should develop, the New Notes could trade at a discount from their initial
offering price. The Company does not intend to apply for listing of the New
Notes on any securities exchange or in any automated quotation system. There
can be no assurance that an active trading market for the New Notes will
develop.
----------------
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
3
<PAGE>
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 NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES LAWS OF SUCH JURISDICTION.
4
<PAGE>
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.
5
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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"). 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.
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.
Changes in Network Ownership.
. 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%.
8
<PAGE>
. 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.
9
<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 "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 interest 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 Notes. See "Prospectus Summary--Summary Description of
Notes" and "Description of the Notes--Security--Pledge Agreement."
(i) Based upon gross property, plant and equipment of the Company and the
Operating Companies.
10
<PAGE>
THE EXCHANGE OFFER
Securities Offered.......... Up to $250,000,000 aggregate principal amount
of 12 1/4% Series B Senior Secured Notes due
2004 of the Company (the "New Notes," and
collectively with the Old Notes, the
"Notes"). The terms of the New Notes and the
Old Notes are substantially identical in all
material respects, except for certain
transfer restrictions, registration rights
and liquidated damages ("Liquidated Damages")
for Registration Defaults relating to the Old
Notes which will not apply to the New Notes.
See "Description of the Notes."
The Exchange Offer.......... The Registrant is offering to exchange $1,000
principal amount of New Notes for each $1,000
principal amount of Old Notes. See "The
Exchange Offer" for a description of the
procedures for tendering Old Notes. The
Exchange Offer satisfies the registration
obligations of the Registrant under the
Registration Rights Agreement. Upon
consummation of the Exchange Offer, holders
of Old Notes that were not prohibited from
participating in the Exchange Offer and did
not tender their Old Notes will not have any
registration rights under the Registration
Rights Agreement with respect to such
nontendered Old Notes and, accordingly, such
Old Notes will continue to be subject to the
restrictions on transfer contained in the
legend thereon.
Tenders, Expiration Date;
Withdrawal................. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on November 20, 1997, or
such later date and time to which it is
extended, provided that the Exchange Offer
shall not be extended beyond 30 business days
from the date of this Prospectus. Tender of
Old Notes pursuant to the Exchange Offer may
be withdrawn and retendered at any time prior
to the Expiration Date. Any Old Notes not
accepted for exchange for any reason will be
returned without expense to the tendering
holder as promptly as practicable after the
expiration or termination of the Exchange
Offer.
Federal Income Tax The Exchange Offer will not result in any
Considerations.............. income, gain or loss to the holders of Notes
or the Company for federal income tax
purposes. See "Certain Federal Income Tax
Considerations."
Use of Proceeds............. There will be no proceeds to the Company from
the exchange of New Notes for the Old Notes
pursuant to the Exchange Offer.
Exchange Agent.............. Bank of Montreal Trust Company, the Trustee
under the Indenture, is serving as exchange
agent (the "Exchange Agent") in connection
with the Exchange Offer.
11
<PAGE>
CONSEQUENCES OF EXCHANGING OR FAILURE TO EXCHANGE OLD NOTES PURSUANT TO THE
EXCHANGE OFFER
Generally, holders of Old Notes (other than any holder who is an "affiliate"
of the Registrant within the meaning of Rule 405 under the Securities Act) who
exchange their Old Notes for New Notes pursuant to the Exchange Offer may offer
their New Notes for resale, resell their New Notes, and otherwise transfer
their New Notes without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided such New Notes are acquired
in the ordinary course of the holder's business, such holders have no
arrangement with any person to participate in a distribution of such New Notes
and neither the holder nor any other person is engaging in or intends to engage
in a distribution of the New Notes. A broker-dealer who acquired Old Notes
directly from the Registrant cannot exchange such Old Notes in the Exchange
Offer. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes must acknowledge that it will deliver a prospectus in
connection with any resale of its New Notes. See "Plan of Distribution." To
comply with the securities laws of certain jurisdictions, it may be necessary
to qualify for sale or register the New Notes prior to offering or selling such
New Notes. The Company is required, under the Registration Rights Agreement, to
register the New Notes in any jurisdiction requested by the holders, subject to
certain limitations. Upon consummation of the Exchange Offer, holders that were
not prohibited from participating in the Exchange Offer and did not tender
their Old Notes will not have any registration rights under the Registration
Rights Agreement with respect to such nontendered Old Notes, and accordingly,
such Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, Old Notes may not be offered or
sold, unless registered under the Securities Act and applicable state
securities laws. See "The Exchange Offer--Consequences of Failure to Exchange."
12
<PAGE>
SUMMARY DESCRIPTION OF NOTES
<TABLE>
<S> <C>
Issuer........................... Hyperion Telecommunications, Inc.
Securities Offered............... Up to $250,000,000 principal amount of 12 1/4% Series B
Senior Secured Notes due 2004 of the Registrant (the
"New Notes," and collectively with the Old Notes, the
"Notes"). The terms of the New Notes and the Old Notes
are substantially identical in all material respects,
except for certain transfer restrictions, registration
rights and Liquidated Damages for Registration Defaults
relating to the Old Notes which will not apply to the
New Notes. See "Description of the Notes."
Maturity Date.................... The Notes will mature on September 1, 2004.
Interest......................... The Notes will bear interest at a rate of 12 1/4% per
annum, payable semi-annually, in cash on September 1
and March 1 each year, commencing March 1, 1998.
Interest on the New Notes will accrue from the most
recent date to which interest has been paid on the Old
Notes or, if no interest has been paid on the Old
Notes, from August 27, 1997.
Ranking.......................... The Notes will be senior obligations of Hyperion, and
secured by a first priority pledge of (i) the Pledged
Securities (as defined) and (ii) the Stock Collateral
(as defined). The Notes will rank pari passu in right
of payment with all existing and future senior
Indebtedness of the Company and senior in right of
payment to all future Subordinated Indebtedness of the
Company. However, the Notes will be effectively
subordinated to indebtedness and other liabilities of
the Company's Subsidiaries and Joint Ventures. At June
30, 1997, the aggregate principal amount outstanding of
such senior Indebtedness (excluding trade payables and
other accrued liabilities) of the Subsidiaries and
Joint Ventures was $57.1 million.
Security......................... The Notes will be secured by a first priority lien on
all of the Capital Stock of Hyperion of Tennessee, Inc.
("Hyperion Tennessee"), Hyperion of Florida, Inc.
("Hyperion Florida") and Hyperion of Vermont, Inc.
("Hyperion Vermont"). In addition, the Company intends
to pledge all of the Capital Stock of Hyperion of
Kentucky, Inc. ("Hyperion Kentucky") and Hyperion of
New York, Inc. ("Hyperion New York"), which pledge will
not be made until (A) the consummation of the purchase
by the Company from TCI in the case of Hyperion
Kentucky, and from TCI and TWEAN in the case of
Hyperion New York, of all of their respective
partnership interests in Hyperion Kentucky and Hyperion
New York (the "Rollups") or, in the alternative, (B)
consent to such a pledge by each of TCI and TWEAN. The
pledged Capital Stock of Hyperion Tennessee, Hyperion
Florida, Hyperion Vermont, Hyperion Kentucky and
Hyperion New York is referred to herein as the "Stock
Collateral." Although the Company has entered
into definitive agreements (which are subject to
customary closing
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
conditions, including regulatory approval) to
consummate each of the Rollups, there can be no
assurance that either of the Rollups will occur or, in
the alternative, that the requisite consents will
beobtained. See "--Recent Developments," "Risk
Factors--Impact of the Failure to Pledge Certain
Collateral" and "Description of the Notes--Security--
Pledge Agreement." In the event that the Company does
not consummate both of the Rollups or, in the
alternative, receive the requisite Local Partner
consents within one year of the date of the Indenture,
the interest rate on the Notes will automatically
increase by 0.25% per annum (the "Interest Rate Step-
up"), until such time as the pledge of such equity
interests is received by the Holders. See "Description
of the Notes--Security--Pledge Agreement."
In addition, $83.4 million of the net proceeds of the
Offering was used to purchase the Pledged Securities to
provide for payment in full when due of the first six
scheduled interest payments on the Notes. The Pledged
Securities were pledged as security for repayment of
principal and interest on the Notes under the Pledge
Agreement (as defined). See "Description of the Notes--
Security." The Pledged Securities are held by the
Escrow Agent (as defined) under the Pledge Agreement
pending disbursement. See "Description of the Notes--
Security."
Optional Redemption.............. The Notes may be redeemed at the option of the Company,
in whole or in part, on or after September 1, 2001, at
a premium declining to par in 2003 plus accrued and
unpaid interest, if any, through the redemption date.
In addition, on or prior to September 1, 2000, the
Company, at its option, may redeem up to 25% of the
aggregate principal amount of the Notes originally
issued at a redemption price of 112.25% of the
principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of
redemption, with the net proceeds of one or more
Qualified Equity Offerings (as defined); provided,
however, that, in either case, at least 75% in
aggregate principal amount of the 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.
Change of Control................ In the event of a Change of Control, the holders of the
Notes will have the right to require the Company to
purchase their 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. There
can be no assurance that the Company will have the
financial resources necessary to purchase the Notes
upon a Change of Control. See "Description of the
Notes--Offer to Purchase upon Change of Control."
Covenants........................ The Indenture, pursuant to which the Notes were issued,
contains covenants that, among other things, limit the
ability of the Company
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
and its Subsidiaries and Permitted Joint Ventures to
incur additional Indebtedness and issue preferred
stock, pay dividends or make other distributions,
repurchase Equity Interests (as defined) or
subordinated Indebtedness, engage in sale and leaseback
transactions, create certain liens, enter into certain
transactions with affiliates, sell assets of the
Company or its Subsidiaries, issue or sell Equity
Interests of the Company's subsidiaries or enter into
certain mergers and consolidations. See "Description of
the Notes."
</TABLE>
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> <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 Notes or
the Preferred Stock Offering. Interest expense and fees on a pro forma
basis, assuming the issuance of the 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 Preferred Stock 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 Preferred Stock
Offering, as if each such event occurred as of June 30, 1997.
(f) $83.4 million of the proceeds from the Offering 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 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>
- --------
(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 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 Notes that were not prohibited from participating in the
Exchange Offer and did not tender their Old Notes will not have any
registration rights under the Registration Rights Agreement with respect to
such nontendered Old Notes and, accordingly, such Old Notes will continue to
be subject to the restrictions on transfer contained in the legend thereon. In
general, the Old Notes may not be offered or sold, unless registered under the
Securities Act and applicable state securities laws, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not intend to register the
Old Notes under the Securities Act. Based on interpretations by the staff of
the Commission with respect to similar transactions, the Company believes that
the New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by any holder of such New Notes (other than
any such holder which is an "affiliate" of 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 Notes are acquired in the ordinary course of such holder's business, such
holder has no arrangement or understanding with any person to participate in
the distribution of such New Notes and neither the holder nor any other person
is engaging in or intends to engage in a distribution of the New Notes. A
broker-dealer who acquired Old Notes directly from the Registrant cannot
exchange such Old Notes in the Exchange Offer. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
its New Notes. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of the New Notes received
in exchange for the Old Notes acquired by the broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that it will make this Prospectus available to any broker-dealer for use in
connection with any such resale for a period of 365 days after the Exchange
Date or, if earlier, until all participating broker-dealers have so resold.
See "Plan of Distribution." The New Notes may not be offered or sold unless
they have been registered or qualified for sale under applicable state
securities laws or an exemption from registration or qualification is
available and is complied with. The Registrants are required, under the
Registration Rights Agreement, to register the New Notes in any jurisdiction
requested by the holders, subject to certain limitations.
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
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<PAGE>
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 a 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 make 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 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 13% Notes issued pursuant to the 13% Notes Indenture dated as
of April 15, 1996 (the "13% 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 13% Notes, commencing on March 1, 1998, semi-annual cash payments of $15.3
million on the 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. Because the Company currently
has, and anticipates that it will continue to have, a substantial consolidated
cash flow deficit, the Company's ability to repay its obligations on the 13%
Notes and the Notes at maturity will be dependent on developing one or more
sources of cash flow prior to the date on which such cash payment obligations
begin.
In order to develop necessary sources of cash flow, the Company may seek to
(i) refinance all or a portion of the 13% Notes and/or the Notes, (ii) sell
all or a portion of its interests in one or more of the Operating Companies,
(iii) negotiate with its 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 payments on and to repay the 13% Notes or the Notes, 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 that the
Company's portion of the cash generated by the operations of the Operating
Companies, if so distributed, would be sufficient to service the
19
<PAGE>
Company's obligations under the 13% Notes and the Notes, or (iv) the Company
will be able to locate and invest in companies that will be able to make
substantial cash contributions to the Company prior to the time such payments
are due.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, 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,
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 and (iv) the Company may be more leveraged than
certain of its competitors, which may be a competitive disadvantage.
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 the Offering and the Preferred Stock
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," "Summary--Recent Developments" and
"Business--Operating Agreements--Local Partner Agreements."
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
20
<PAGE>
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.
Impact of the Failure to Pledge Certain Collateral. The pledge by the
Company of the Capital Stock in Hyperion Kentucky and Hyperion New York will
not be made until either (A) the consummation of the purchase by the Company
from TCI in the case of Hyperion Kentucky, and from TCI and TWEAN in the case
of Hyperion New York, of all of their respective partnership interests in
Hyperion Kentucky and Hyperion New York (the "Rollups") or, in the
alternative, (B) consent to such a pledge by each of TCI and TWEAN. The
Company has entered into definitive agreements (which are subject to customary
closing conditions, including regulatory approval) to consummate each of the
Rollups, however there can be no assurance that either of the Rollups will
occur or, in the alternative, that the requisite Local Partner consents will
be obtained. See "Prospectus Summary--Recent Developments," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources--Recent Developments" and "Description of the
Notes--Security--Pledge Agreement." In the event that the Company is not able
to consummate the pledges of the common stock of either Hyperion New York or
Hyperion Kentucky, the holders of the Notes will receive significantly less
collateral to secure the Notes than would otherwise be the case. See
"Description of the Notes--Security--Pledge Agreement." In addition, the
Company will not be required to deposit funds in the Escrow Account in an
amount sufficient to pay the additional interest that would result in
connection with an Interest Rate Step-Up. Accordingly, there can be no
assurance that the Company will have the funds available to make the required
cash interest payments on the Notes in the event of such an Interest Rate
Step-Up.
Certain Factors Influencing Ability to Realize Collateral. The ability of
the Trustee under the Indenture to foreclose on any of the Stock Collateral
may require the prior approval of the FCC and certain state public utility
commissions. The Stock Collateral consists of all of the Capital Stock of the
following entities: Hyperion Tennessee, Hyperion Florida, Hyperion Vermont,
Hyperion Kentucky and Hyperion New York (collectively, the "Pledged Operating
Companies"). Certain of the Pledged Operating Companies have been, or will be,
certificated or are otherwise authorized to provide telecommunications
services in their respective states. These certificates or other
authorizations permit such Pledged Operating Companies to provide a full range
of local telecommunications services, including basic local exchange service.
Any enforcement action by the Company's creditors which involves a change of
control or ownership of the Pledged Operating Companies may require approval
by the FCC or the applicable state public utility commission. The process of
obtaining FCC or state approval may delay or possibly frustrate a realization
on the Stock Collateral. In addition, the approval requirements may
effectively limit the number of potential purchasers of the Pledged Operating
Companies and may therefore reduce the price obtained in the event of the
realization, which, depending on the circumstances at the time, might
materially reduce the recovery by the Company's secured creditors, including
the Holders of the Notes.
In addition, the pledge by the Company of the Capital Stock of each of
Hyperion of New York and Hyperion Kentucky, will be consummated after the date
of the Closing and may occur as much as one year after such date. After the
consummation of the pledges, and for a period that is from 90 days to one year
(depending on a court's determination of the status of the pledgee) from the
date of each such pledge, each such pledge may be subject to review under
relevant federal and state bankruptcy laws if a bankruptcy case or a lawsuit
is commenced by or on behalf of unpaid creditors of the Company within such
period of time. In such an event, a court may void either or both of such
pledges or take other actions detrimental to the holders of the Notes.
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
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<PAGE>
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 Notes, the 13% Notes and any other indebtedness, 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
Notes, the 13% Notes or 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.
Ranking. Although the Notes will be senior obligations of Hyperion and
secured by a first priority pledge of (i) the Pledged Securities and (ii) the
Stock Collateral, holders of indebtedness and other liabilities of the
Company's Subsidiaries and the Joint Ventures will have claims that are
effectively senior to the Notes. As of June 30, 1997, the aggregate principal
amount outstanding of such senior Indebtedness of the Company's Subsidiaries
and Joint Ventures (excluding trade payables and other accrued liabilities)
was approximately $57.1 million. The Indenture limits the ability of the
Company, its Subsidiaries and Permitted Joint Ventures to incur additional
Indebtedness. However, the Indenture does not limit the ability of the
Company's Restricted Joint Ventures to incur additional indebtedness. See
"Description of the Notes--Incurrence of Indebtedness and Issuance of
Preferred Stock."
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 interests 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 six 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.
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<PAGE>
The Indenture does not restrict, and the indenture with respect to the 13%
Notes (the "13% Notes Indenture") does not restrict, 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 its portion
of 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 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
23
<PAGE>
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.
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
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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 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
level of responsibility for management personnel, has increased as a result of
this expansion. The Company's ability to manage such growth effectively will
require it to continue to expand and improve its operational and financial
systems and to expand, train and manage its employee base. 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 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
customers 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 raise pole attachment or conduit occupancy fees. Such
increased fees could result in increased lease payments made by the Operating
Companies to the Local Partners and could have a significant impact on the
profitability of the Operating Companies.
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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.
Absence of a Public Market for Notes; Possible Volatility of Note
Price. Prior to the Exchange Offer, there has been no public market for the
Old Notes. Although the Initial Purchasers have informed the Company that they
currently intend to make a market in the Notes, they are not obligated to do
so and any such market making may be discontinued at any time without notice.
Accordingly, there can be no assurance as to the development or liquidity of
any market for the Notes. The Notes are eligible for trading in the PORTAL
market. The Company does not intend to apply for listing of the Notes on any
securities exchange or for quotation through the Nasdaq National Market. If a
market for the Notes were to develop, the Notes 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 non-
investment grade debt has been subject to disruptions that have caused
substantial volatility in the prices of securities similar to the Notes. There
can be no assurance that, if a market for the Notes 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 lines and revenues from designated
markets during 1997, and statements regarding the development of the Company's
business and markets, the estimates of market sizes and addressable markets
for the Company's services and products, the Company's anticipated capital
expenditures and future financing requirements and other statements contained
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 August 27, 1997, the Registrant issued $250,000,000 aggregate principal
amount of Old Notes to Bear, Stearns & Co. Inc., Chase Securities Inc., TD
Securities, CIBC Wood Gundy Securities Corp. and Scotia Capital Markets,
(collectively, the "Initial Purchasers"). 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 Notes, the Registrant entered into a Registration
Rights Agreement with the Initial Purchasers dated as of August 27, 1997 (the
"Registration Rights Agreement"), which requires the Registrant to cause the
Old Notes to be registered under the Securities Act or to file with the
Commission a registration statement under the Securities Act with respect to
an issue of new notes of the Registrant identical in all material respects to
the Old Notes, and use its best efforts to cause such registration statement
to become effective under the Securities Act and, upon the effectiveness of
that registration statement, to offer to the holders of the Old Notes the
opportunity to exchange their Old Notes for a like principal amount of New
Notes, which will be issued without a restrictive legend and may be reoffered
and resold by the holder without restrictions or limitations under the
Securities Act. A copy of the Registration Rights Agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
The Exchange Offer is being made pursuant to the Registration Rights Agreement
to satisfy 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 Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any holder of such New Notes (other than any such
holder which is an "affiliate" of 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
Notes are acquired in the ordinary course of such holder's business, such
holder has no arrangement or understanding with any person to participate in
the distribution of such New Notes and neither the holder nor any other person
is engaging in or intends to engage in a distribution of the New Notes. A
broker-dealer who acquired Old Notes directly from the Registrant cannot
exchange such Old Notes in the Exchange Offer. Any holder who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Notes cannot rely on such interpretation by the staff of the Commission and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives New Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution."
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 Registrants will accept any and all Old Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
Expiration Date (as defined herein). The Registrant will issue a principal
amount of New Notes in exchange for an equal principal amount of outstanding
Old Notes tendered and accepted in the Exchange Offer. Holders may tender some
or all of their Old Notes pursuant to the Exchange Offer. The date of
acceptance for exchange of the Old Notes for the New Notes (the "Exchange
Date") will be the first business day following the Expiration Date.
The terms of the New Notes and the Old Notes are substantially identical in
all material respects, except for certain transfer restrictions, registration
rights and Liquidated Damages for Registration Defaults relating to the Old
Notes which will not apply to the New Notes. See "Description of the Notes."
The New Notes will evidence the same debt as the Old Notes. The New Notes will
be issued under and entitled to the benefits of the Indenture pursuant to
which the Old Notes were issued.
As of the date of this Prospectus, $250,000,000 aggregate principal amount
of the Old Notes are outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders.
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<PAGE>
Holders of Old Notes do not have any appraisal or dissenters' rights under
state law or the Indenture 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 Notes which are not tendered and were not
prohibited from being tendered for exchange in the Exchange Offer will remain
outstanding and continue to accrue interest and to be subject to transfer
restrictions, but will not be entitled to any rights or benefits under the
Registration Rights Agreement.
Upon satisfaction or waiver of all the conditions to the Exchange Offer, on
the Exchange Date the Registrant will accept all Old Notes properly tendered
and not withdrawn and will issue New Notes in exchange therefor. For purposes
of the Exchange Offer, the Registrant shall be deemed to have accepted
properly tendered Old Notes 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 Notes from the Registrant.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly
executed Letter of Transmittal and all other required documents; provided,
however, that 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 Notes are not accepted for any reason set forth in the terms and
conditions of the Exchange Offer or if Old Notes are submitted for a greater
principal amount than the holder desires to exchange, such unaccepted or
nonexchanged Old Notes or substitute Old Notes evidencing the unaccepted
portion, as appropriate, will be returned without expense to the tendering
holder thereof as promptly as practicable after the expiration or termination
of the Exchange Offer.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. 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
November 20, 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 Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of
the Exchange Offer. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written
notice thereof. If the Exchange Offer is amended in a manner determined by 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 Notes of such amendment.
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
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<PAGE>
publish, advertise, or otherwise communicate any such public announcement,
other than by making a timely release to an appropriate news agency.
INTEREST ON THE NEW NOTES
New Notes will bear interest at the rate of 12 1/4% per annum, payable semi-
annually, in cash, on September 1 and March 1 of each year, commencing March
1, 1998. Interest on the New Notes will accrue from the most recent date to
which interest has been paid on the Old Notes or, if no such interest has been
paid on the Old Notes, from August 27, 1997.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Registrant will
not be required to exchange any New Notes for any Old Notes, and may terminate
or amend the Exchange Offer before the acceptance of any Old Notes for
exchange, if:
(a) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer
which seeks to restrain or prohibit the Exchange Offer or, in 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
Notes and return all tendered Old Notes to the tendering holders, (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders who tendered
such Old Notes to withdraw their tendered Old Notes, or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Old Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, 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 Notes 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 Registrant in accordance with the terms and subject to the
conditions set forth in this Prospectus and in the Letter of Transmittal.
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<PAGE>
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must (i) complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes (unless such tender is being effected pursuant to the procedure for
book-entry transfer described below) and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date,
or (ii) comply with the guaranteed delivery procedures described below.
Delivery of all documents must be made to the Exchange Agent at its address
set forth herein.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE REGISTRANTS.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering of
such owner's Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such owner's name or obtain a properly completed
bond power from the registered holder. The transfer of registered ownership
may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by any Eligible Institution (as defined) unless the
Old Notes tendered pursuant thereto are tendered (i) by a registered holder
who has not completed the box entitled "Special Payment Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Old Notes, with the
signature thereon guaranteed by an Eligible Institution. If the Letter of
Transmittal or any Old Notes or bond powers are signed by 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 the book-entry transfer
facility for the Old Notes, the Depository Trust Company ("DTC"), may make
book-entry delivery of Old Notes by causing DTC to transfer such Old Notes
into the Exchange Agent's account with respect to the Old Notes in accordance
with DTC's procedures for such transfer (which procedures may include those,
if applicable, under ATOP). Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at DTC, an
appropriate Letter of Transmittal with any required signature guarantee and
all other required documents must in each case be, 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.
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All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by 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 Notes not properly tendered or any Old Notes
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 Notes.
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 Notes 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 Notes, neither the
Registrant, the Exchange Agent nor any other person shall incur any liability
for failure to give such notification. Tenders of Old Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived. Any Old Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Registrant reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding subsequent
to the Expiration Date or, as set forth below under "Conditions," to terminate
the Exchange Offer and, to the extent permitted by applicable law, purchase
Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
By tendering, each holder will also represent to the Registrant (i) that the
New Notes acquired pursuant to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving such New Notes, whether or
not such person is the holder, (ii) that neither the holder nor any such
person has an arrangement or understanding with any person to participate in
the distribution of such New Notes and (iii) that neither the holder nor any
such other person is an "affiliate," as defined in Rule 405 under the
Securities Act, of 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 Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or (iii) who cannot complete the procedures for book-entry
transfer of Old Notes to the Exchange Agent's account with DTC prior to the
Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) On or prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice
of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the holder, the
certificate number(s) of such Old Notes (if possible) and the principal
amount of Old Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within five business trading days after
the Expiration Date, (i) the Letter of Transmittal (or facsimile
thereof) together with the certificate(s) representing the Old Notes
and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent, or (ii)
that book-entry transfer of such Old Notes into the Exchange Agent's
account at DTC will be effected and confirmation of such book-entry
transfer will be delivered to the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all
tendered Old Notes in proper form for transfer and all other documents
required by the Letter of Transmittal, or confirmation of book-entry
transfer of the Old Notes into the
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Exchange Agent's account at DTC, are received by the Exchange Agent
within five business trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer:
The holder tendering Old Notes exchanges, assigns and transfers the Old
Notes to the Registrant and irrevocably constitutes and appoints the Exchange
Agent as the holder's agent and attorney-in-fact to cause the Old Notes to be
assigned, transferred and exchanged. The holder represents and warrants to the
Registrant and the Exchange Agent that (i) it has full power and authority to
tender, exchange, assign and transfer the Old Notes and to acquire the New
Notes in exchange for the Old Notes, (ii) when the Old Notes are accepted for
exchange, the Registrant will acquire good and unencumbered title to the Old
Notes, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim, (iii) it will, upon request, execute and
deliver any additional documents deemed by the Registrant to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Old
Notes and (iv) acceptance of any tendered Old Notes by the Registrant and the
issuance of New Notes 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 Notes 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 Notes.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
facsimile transmission or letter indicating notice of withdrawal must be
received by the Exchange Agent at its address set forth herein prior to 5:00
p.m., New York City time, on the Expiration Date. Any such notice of
withdrawal must (i) specify the name of the person having tendered the Old
Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be
withdrawn (including the certificate number or numbers and principal amount of
such Old Notes), (iii) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Old Notes
are to be registered, if different from that of the Depositor. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer, any
notice of withdrawal must specify the name and number of the account at DTC to
be credited with the withdrawn Old Notes or otherwise comply with DTC's
procedures. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Registrant, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect
32
<PAGE>
thereto unless the Old Notes so withdrawn are validly retendered. Any Old
Notes which have been tendered but which are not accepted for payment will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described above under "Procedures for Tendering" at any
time prior to the Expiration Date.
UNTENDERED OLD NOTES
Holders of Old Notes whose Old Notes are not tendered or are tendered but
not accepted in the Exchange Offer will continue to hold such Old Notes and
will be entitled to all the rights and preferences and subject to the
limitations applicable thereto under the Indenture. Following consummation of
the Exchange Offer, the holders of Old Notes will continue to be subject to
the existing restrictions upon transfer thereof and 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 Notes held by
them. To the extent that Old Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Old Notes
could be adversely affected.
EXCHANGE AGENT
Bank of Montreal Trust Company, the Trustee under the Indenture, has been
appointed as Exchange Agent of the Exchange Offer. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
By Registered or Certified Mail, By Facsimile:
by hand or by Overnight Courier Bank of Montreal Trust Company
Bank of Montreal Trust Company Attention: Corporate Trust Department
Wall Street Plaza (212) 701-7684
88 Pine Street Confirm by Telephone:
19th Floor (212) 701-7653
New York, NY 10005
Attention: Corporate Trust Department
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, however, will
pay the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith
and will pay the reasonable fees and expenses of holders in delivering their
Old Notes to the Exchange Agent.
The cash expenses 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
and Trustee, accounting and legal fees and printing costs, among others.
The Registrant will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however,
certificates representing New Notes or Old Notes for principal amounts not
33
<PAGE>
tendered or accepted for exchange are to be delivered to, or are to be issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax
is imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes that were not
prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Old Notes and, accordingly, such
Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, the Old Notes may not be offered
or sold, unless registered under the Securities Act and applicable state
securities laws, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The
Registrant does not intend to register the Old Notes under the Securities Act.
Based on interpretations by the staff of the Commission with respect to
similar transactions, the Registrant believes that the New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by any holder of such New Notes
(other than any such holder which is an "affiliate" of 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 Notes are acquired in the ordinary course of such
holder's business, such holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes and neither the
holder nor any other person is engaging in or intends to engage in a
distribution of the New Notes. If any holder has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, the holder (i) could not rely on the
applicable interpretations of the staff of the Commission and (ii) must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale transaction. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
its New Notes. See "Plan of Distribution." The New Notes may not be offered or
sold unless they have been registered or qualified for sale under applicable
state securities laws or an exemption from registration or qualification is
available and is complied with. The Registrant is required, under the
Registration Rights Agreement, to register the New Notes in any jurisdiction
requested by the holders, subject to certain limitations.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
Upon consummation of the Exchange Offer, holders of the Old Notes that were
not prohibited from participating in the Exchange Offer and did not tender
their Old Notes will not have any registration rights under the Registration
Rights Agreement with respect to such nontendered Old Notes and, accordingly,
such Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. However, in the event the Company fails to
consummate the Exchange Offer or a holder of Old Notes 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 Notes will have
certain rights to have such Old Notes 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 Notes to be received in the Exchange Offer,
and to the best of the Registrant's information and belief, each
34
<PAGE>
person participating in the Exchange Offer is acquiring the New Notes in its
ordinary course of business and has no arrangement or understanding with any
person to participate in the distribution of the New Notes to be received in
the Exchange Offer. In this regard, the 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 Notes to be acquired in the registered Exchange Offer (i)
may not rely on the staff position enunciated in Morgan Stanley and Co. Inc.
(avail. June 5, 1991) and Exxon Capital Holding Corp. (avail. May 13, 1988) or
similar letters and (ii) must comply with registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes
as reflected in the Registrant's accounting records on the Exchange Date.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Registrant. The expenses of the Exchange Offer will be expensed over the term
of the New Notes.
35
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the original private placement offering
on August 27, 1997 (the "Offering"), after deducting the discount to the
Initial Purchasers and offering expenses, were $243.3 million, $83.4 million
of which was placed in the Escrow Account for the purchase of the Pledged
Securities to provide for payment in full when due of the first six scheduled
interest payments on the Notes.
The Company has used or intends to use the remaining 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 pursuant to the TCI Agreement and the TWEAN Agreement,
which will require aggregate funds of approximately $26 million, and (iii)
working capital 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.
36
<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 Preferred Stock Offering. 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 re-
stricted 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 A senior exchangeable redeemable preferred
stock due 2007, $.01 par value, 380,000 shares au-
thorized, and 200,000 shares outstanding, as ad-
justed
(aggregate liquidation preference $200,000,000).... $ -- $194,500
Series B senior exchangeable redeemable preferred
stock due 2007, $.01 par value, 380,000 shares au-
thorized and none outstanding...................... -- --
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 out-
standing (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 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
Preferred Stock Offering and $243.3 million in net proceeds from the
Offering.
(b) $83.4 million of the proceeds from the Offering 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 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."
37
<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 Notes or
the Preferred Stock Offering. Interest expense and fees on a pro forma
basis, assuming the issuance of the 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 Preferred Stock 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.
38
<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,
39
<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 13% 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 13% 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.
40
<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 13% 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 13% 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 13% 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 13% 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.
41
<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 13% 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
42
<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
43
<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
FISCAL FISCAL FISCAL JUNE 30,
------- ------- -------- --------------------
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
FISCAL FISCAL FISCAL JUNE 30,
------- ------- -------- --------------------
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
44
<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 13% 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 13% 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
13% Notes. Interest on the Adelphia Note is payable quarterly in cash, through
the issuance
45
<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, the
Preferred Stock Offering, the remaining proceeds from the 13% 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 13% 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
46
<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 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 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.
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
47
<PAGE>
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.
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.
48
<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
49
<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 "--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.
50
<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.
51
<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.
52
<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.
53
<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.
54
<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 "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 Notes. See "Prospectus Summary--Summary
Description of Notes" and "Description of the Notes--Security--Pledge
Agreement."
(i) Based upon gross property, plant and equipment of the Company and the
Operating Companies.
55
<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
[LOGO OF CHART APPEARS HERE]
56
<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
57
<PAGE>
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
[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
77
<PAGE>
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 13% 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 13% 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 13% 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
80
<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.
81
<PAGE>
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 13% Notes, pursuant to the 13% Note 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 13% 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 13% 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 Notes, and will rank senior in right of payment to all
future subordinated Indebtedness of the Company. The 13% Notes are effectively
subordinated to all liabilities of the Subsidiaries and the Joint Ventures.
The 13% Notes maybe 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 13% Note 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 13% 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 13% Note Indenture) thereof, with the
proceeds of an Initial Public Offering (as defined in the 13% Note Indenture)
or of certain sales of the Capital Stock (as defined in the 13% Note
Indenture) to a Strategic Investor (as defined in the 13% Note Indenture). In
the event of a Change of Control (as defined in the 13% Note Indenture), the
holders of the 13% Notes will have the right to require the Company to
purchase the 13% 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 Indenture contains a change of control repurchase requirement which is
similar to that of the 13% Note Indenture. See "Description of the Notes--
Change of Control." The 13% Note 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 13% Note
Indenture contains provisions that allow for the modification and amendment of
the covenants contained in the 13% Note Indenture by a vote of holders owning
a majority in aggregate principal amount of 13% Notes. In addition, the
holders of a majority in aggregate principal amount of the 13% Notes, on
behalf of all holders of 13% Notes, may waive compliance by the Company with
certain provisions of the 13% Note Indenture.
The consummation of the Offering of the Notes is conditioned upon the
successful completion of the Consent Solicitation, which seeks to obtain
consent for the incurrence of the indebtedness evidenced by the Notes and
certain terms of the Notes from the holders of the 13% Notes.
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 13%
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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<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The New Notes, like the Old Notes, will be issued pursuant to the Indenture,
dated August 27, 1997 (the "Indenture"), among the Company and Bank of
Montreal Trust Company, as trustee (the "Trustee"). The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The
terms of the New Notes are substantially identical to the Old Notes in all
material respects (including interest rate and maturity), except that (i) the
New Notes will not be subject to the restrictions on transfer (other than with
respect to holders that are broker-dealers, persons who participated in the
distribution of the Old Notes or affiliates) and (ii) the Registration Rights
Agreement covenants regarding registration and the related Liquidated Damages
(other than those that have accrued and were not paid) with respect to
Registration Defaults will have been deemed satisfied. The New Notes are
subject to all such terms, and holders of New Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of certain provisions of the Indenture, the Registration Rights
Agreement (as defined), the Pledge Agreement (as defined) and the Escrow and
Disbursement Agreement (as defined) does not purport to be complete and is
qualified in its entirety by reference to the Indenture, the Registration
Rights Agreement, the Pledge Agreement and the Escrow and Disbursement
Agreement, respectively, including the definitions therein of certain terms
used below. A copy of each of the Indenture, the Registration Rights
Agreement, the Pledge Agreement and the Escrow and Disbursement Agreement is
available as set forth under "--Additional Information." As used in this
section, the term "Company" refers only to Hyperion Telecommunications, Inc.
and not to its subsidiaries.
As of the date of this Prospectus, $250,000,000 principal amount of the Old
Notes was outstanding.
RANKING
The Notes will be senior secured obligations of the Company. The Notes will
rank senior in right of payment to all subordinated Indebtedness of the
Company. The Notes will rank pari passu in right of payment with all senior
borrowings, including, without limitation, the 13% Notes. The Notes will be
secured by a first priority pledge of (i) the Pledged Securities and (ii) all
of the Capital Stock of Hyperion Tennessee, Hyperion Florida and Hyperion
Vermont. In addition, the Company intends to pledge all of the Capital Stock
of Hyperion Kentucky and Hyperion New York to secure the Company's obligations
under the Notes, which pledge will not be made until: (i) consummation of the
Rollups or, in the alternative, (ii) consent to such a pledge by the requisite
Local Partners. In the event that the Company does not pledge such Capital
Stock to secure the obligations under the Notes on or before one year after
the date of the Indenture, the interest rate on the Notes will automatically
increase by 0.25% per annum until such time as a first priority pledge of such
Capital Stock is consummated. See "--Security."
The Company will be the sole obligor with respect to the Notes. However, the
operations of the Company are conducted through its Subsidiaries and Joint
Ventures and, therefore, the Company is dependent upon the operations and cash
flow of its Subsidiaries and Joint Ventures to meet its obligations, including
its obligations under the Notes. The Notes will be effectively subordinated to
all Indebtedness and other liabilities and commitments (including, without
limitation, 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 and Joint Ventures upon such Subsidiary's or Joint
Venture's liquidation or reorganization (and the consequent right of the
Holders of the Notes to participate in those assets) will be effectively
subordinated to the claims of that Subsidiary's or Joint Venture's creditors
except to the extent that the Company is itself recognized as a creditor of
such Subsidiary or Joint Venture, in which case the claims of the Company
would still be subordinate to the claims of such creditors who hold any
security in the assets of such Subsidiary or Joint Venture and to the claims
of such creditors who hold Indebtedness of such Subsidiary or Joint Venture
senior to that held by the Company. As of June 30, 1997, on a pro forma basis
after giving effect to the Offering and the application of the proceeds
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<PAGE>
therefrom, the Company would have had approximately $472.3 million of
Indebtedness outstanding and the Company's Subsidiaries and Joint Ventures
would have had approximately $57.1 million of Indebtedness (excluding trade
payables and other accrued liabilities) outstanding. See "Risk Factors--
Holding Company Structure."
PRINCIPAL, MATURITY AND INTEREST
The Notes will be senior secured obligations of the Company, limited in
aggregate principal amount to $250.0 million and will mature on September 1,
2004. Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest on the Notes will accrue at a rate of 12 1/4% per
annum and will be payable semi-annually in cash on September 1 and March 1,
commencing March 1, 1998, to holders of record on the immediately preceding
August 15 and February 15. Interest on the Notes will be computed on the basis
of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the Notes will be payable at the
office or agency of the Company maintained for such purpose within the City
and State of New York or, at the option of the Company, payment of interest
may be made by check mailed to the Holders of the Notes at their respective
addresses set forth in the register of Holders of Notes; provided that all
payments with respect to Notes, the Holders of which have given wire transfer
instructions to the Company, will be required to be made by wire transfer of
same day funds to the accounts specified by the Holders thereof. Until
otherwise designated by the Company, the Company's office or agency in New
York will be the office of the Trustee maintained for such purpose. The Notes
will be issued in denominations of $1,000 and integral multiples thereof.
SECURITY
Pledge Agreement
The Notes will be secured by a first priority pledge of the Capital Stock of
the Stock Collateral.
The Company entered into a pledge agreement (the "Pledge Agreement")
providing for the pledge by the Company to the Trustee, as collateral agent
for the Holders of the Notes (in such capacity, the "Collateral Agent"), all
of the Stock Collateral. The pledge of the Capital Stock of each of Hyperion
Kentucky and Hyperion New York is subject to (A) the consummation of the
Rollups or, in the alternative, (B) consent to such a pledge by each of TCI
and TWEAN. Upon the earlier of the (i) consummation of the Rollups or (ii) the
receipt by the Company of the requisite consents from each of TCI and TWEAN,
but in no event later than one year after the date of the Indenture, the
Indenture and the Pledge Agreement will require the Company to grant and
perfect a security interest in all of the common stock of Hyperion New York
and Hyperion Kentucky for the benefit of the holders of the Notes. Although
the Company has entered into definitive agreements (which are subject to
customary closing conditions, including regulatory approval) to consummate
each of the Rollups, there can be no assurance that either of the Rollups will
occur or, in the alternative, that the requisite Local Partner consents will
be obtained. See "Risk Factors--Impact of the Failure to Pledge Certain
Collateral and "--Factors Affecting Ability to Realize on Collateral." In the
event that the Company does not fulfill these conditions on or before one year
after the date of the Indenture, the interest rate on the Notes will
automatically increase by 0.25% per annum (the "Interest Rate Step-up"), until
such time as the pledge of such equity interests is received by the Holders
The Company's pledge will secure the payment and performance when due of all
of the Obligations of the Company under the Indenture and the Notes as
provided in the Pledge Agreement.
So long as no Event of Default shall have occurred and be continuing, the
Company will be entitled to receive all cash dividends, interest and other
payments made upon or with respect to the Stock Collateral pledged by it and
to exercise any voting and other consensual rights pertaining to the Stock
Collateral pledged by it. Upon the occurrence and during the continuance of an
Event of Default, (a) all rights of the Company to exercise such voting or
other consensual rights shall cease, and all such rights shall become vested
in the Collateral Agent,
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which, to the extent permitted by law, shall have the sole right to exercise
such voting and other consensual rights and (b) all rights of the Company to
receive all cash dividends, interest and other payments made upon or with
respect to the Stock Collateral will cease and such cash dividends, interest
and other payments will be paid to the Collateral Agent, and (c) the
Collateral Agent may sell the Stock Collateral or any part thereof in
accordance with the terms of the Pledge Agreement. All funds distributed under
the Pledge Agreement and received by the Collateral Agent for the benefit of
the Holders of the Notes will be distributed by the Collateral Agent in
accordance with the provisions of the Indenture and the Pledge Agreement.
Under the terms of the Pledge Agreement, the Collateral Agent will determine
the circumstances and manner in which the Stock Collateral shall be disposed
of, including, but not limited to, the determination of whether to release all
or any portion of the Stock Collateral from the Liens created by the Pledge
Agreement and whether to foreclose on the Stock Collateral following a Default
or an Event of Default on the Notes. Moreover, upon the full and final payment
and performance of all Obligations of the Company under the Indenture and the
Notes, the Pledge Agreement shall terminate and the Stock Collateral shall be
released.
Escrow and Disbursement Agreement
The Company's obligations under the Notes were secured pursuant to the
Escrow and Disbursement Agreement by a pledge of a portion of the proceeds
from the Offering which were deposited in the Escrow Account. On or prior to
the Closing, the initial amount deposited in the Escrow Account was precisely
determined in order to provide an amount of Pledged Securities sufficient to
enable to the Company to make the first six interest payments with respect to
the Notes. The initial amount deposited in the Escrow Account was $83.4
million (the "Cash Collateral") and will be required to be invested in U.S.
Government Obligations. The Escrow and Disbursement Agreement will provide for
the grant by the Company to the Trustee of a security interest in the Cash
Collateral for the benefit of the holders of the Notes. Such security interest
will secure the payment and performance when due of the Obligations of the
Company under the Indenture with respect to the Notes and under such Notes, as
provided in the Escrow and Disbursement Agreement. The Liens created by the
Escrow and Disbursement Agreement will be first priority security interests in
the Cash Collateral. The ability of holders to realize upon any such funds or
securities may be subject to certain bankruptcy law limitations in the event
of a bankruptcy of the Company.
The Cash Collateral will be disbursed from the Escrow Account only to pay
interest on the Notes and, upon certain repurchases or redemptions of the
Notes, to pay principal of and premium, if any, thereon. Pending such
disbursements, all funds contained in the Escrow Account will be invested in
Pledged Securities. Upon the occurrence and continuance of an Event of
Default, the Escrow and Disbursement Agreement will permit the foreclosure by
the Trustee upon the net proceeds of the Escrow Account. Under the terms of
the Indenture, the proceeds of the Escrow Account shall be applied, first, to
amounts owing to the Trustee in respect of fees and expenses of the Trustee
and second, to the Obligations under the Notes and the Indenture.
OPTIONAL REDEMPTION
The Notes will not be redeemable prior to September 1, 2001, except as
discussed below under "--Mandatory Redemption." Thereafter, the Notes will be
subject to redemption at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued
and unpaid interest thereon to the applicable redemption date, if redeemed
during the twelve-month period beginning on September 1 of the years indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2001................................................................. 106.125%
2002................................................................. 103.063%
2003 and thereafter.................................................. 100.000%
</TABLE>
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Notwithstanding the foregoing, the Company, on or prior to September 1,
2000, may redeem up to a maximum of 25% of the aggregate principal amount of
the Notes then outstanding at a redemption price of 112.25% of the principal
amount thereof, with the net proceeds from either (i) an Initial Public
Offering of the common stock of the Company or (ii) a sale of the Capital
Stock (other than Disqualified Stock) of the Company to a Strategic Investor
in a single transaction or a series of related transactions for at least $25.0
million (clauses (i) and (ii) together, collectively referred to herein as
"Qualified Equity Offerings"); provided that, in either case, at least 75% in
aggregate principal amount of the Notes remain outstanding immediately after
the occurrence of such redemption; and provided, further, that such redemption
shall occur within 90 days of the date of the closing of such Qualified Equity
Offering.
MANDATORY REDEMPTION
Except as set forth under "--Offer to Purchase upon Change of Control," and
"--Certain Covenants--Asset Sales," the Company is not required to make
mandatory redemption or sinking fund payments with respect to the Notes.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
make an offer (the "Change of Control Offer") to each Holder of Notes to
repurchase all or any part (equal to $1,000 or an integral multiple thereof)
of such Holder's Notes at a purchase price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest to the date of
repurchase, in accordance with the procedures set forth in the Indenture.
Within ten days following any Change of Control, the Company will mail a
notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Notes pursuant to
the procedures required by the Indenture and described in such notice. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of the
Notes as a result of a Change of Control.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Subsidiaries, taken
as a whole to any "person" (as such term is used in Section 13(d)(3) of the
Exchange Act) other than the Principals or their Affiliates, (ii) the adoption
of a plan relating to the liquidation or dissolution of the Company, (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person," other than the
Principals and their Affiliates, becomes the "beneficial owner" (as such term
is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or
indirectly, of more than 50% of the voting power of the Capital Stock of the
Company, (iv) the consummation of the first transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" becomes the "beneficial owner", directly or indirectly, of more of
the voting power of the Capital Stock of the Company than is at the time
"beneficially owned" by the Principals and their Affiliates in the aggregate
or (v) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors. For purposes of this
definition, any transfer of an Equity Interest of an entity that was formed
for the purpose of acquiring voting power of Capital Stock of the Company will
be deemed to be a transfer of such portion of such voting power of Capital
Stock as corresponds to the portion of the equity of such entity that has been
so transferred.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the Company's or the Company's assets. Although there is a
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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 Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company to another
person may be uncertain.
SELECTION AND NOTICE
If fewer than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of Notes to be redeemed at
its registered address. If any Note is to be redeemed in part only, the notice
of redemption that relates to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest ceases to accrue on Notes or such portions of them called for
redemption, as the case may be.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that (i) the Company will not, and will not permit
any of its Subsidiaries or Joint Ventures to, directly or indirectly: (a)
declare or pay any dividend or make any other payment or distribution on
account of the Company's Equity Interests (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company or dividends or distributions payable to the Company or any Wholly
Owned Subsidiary); (b) purchase, redeem or otherwise acquire or retire for
value any Equity Interests of the Company or any direct or indirect parent of
the Company (other than Equity Interests owned by the Company or any Wholly
Owned Subsidiary of the Company); or (c) purchase, redeem or otherwise acquire
or retire for value, prior to a scheduled mandatory sinking fund payment date
or maturity date, any Indebtedness of the Company which ranks subordinate in
right to payment to the Notes and (ii) the Company will not, and will not
permit any of its Subsidiaries or Permitted Joint Ventures to, make any
Investment other than a Permitted Investment (all such payments and other
actions set forth in clauses (i) and (ii) above being collectively referred to
as "Restricted Payments") unless, at the time of and after giving effect to
such Restricted Payment:
(x) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(y) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments (including, without limitation, all Restricted
Payments referred to in clauses (a), (b) and (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"), other than any such net cash proceeds from Equity
Issuances that were used as set forth in clause (b) and (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 Preferred Stock."
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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.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
Subsidiary to, directly or indirectly, whether in a single transaction or a
series of related transactions occurring within any twelve-month period, make
any Asset Sale, unless:
(i) the Company or the Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair
market value (as determined in good faith by the Board of Directors) for
the shares or assets sold or otherwise disposed of; and
(ii) at least 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
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(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 (other than Asset Sales of Stock Collateral) in any
fiscal year shall not be subject to the restrictions contained in this
covenant.
The Indenture provides that, in determining the fair market value with
respect to any Asset Sale or series of related Asset Sales involving aggregate
consideration in excess of $10.0 million, the Board of Directors of the
Company must obtain an opinion as to the fairness to the Holders of the Notes
of such Asset Sales from a financial point of view issued by a nationally
recognized investment banking firm with total assets in excess of $1.0
billion; provided that no such opinion shall be required if such Asset Sale is
in accordance with the terms of any Local Partner Agreement to which the
Company or any of its Subsidiaries is a party on the date of the Indenture.
The Indenture also provides that the Company may apply the Net Cash Proceeds
from such Asset Sale to an investment in Telecommunications Related Assets in
a Telecommunications Service Market within 180 days after any Asset Sale;
provided that if the Company determines to make such investment in a New
Telecommunications Service Market, the Company will be deemed to have complied
with the first clause of this sentence if, the Company (y) within 180 days of
such Asset Sale, delivers to the Trustee a resolution adopted by a majority of
the Board of Directors set forth in an Officer's Certificate certifying that
the Company intends to utilize the Net Cash Proceeds of such Asset Sale to
invest in a specific New Telecommunications Service Market and (z) completes
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. A first priority security interest
securing the Company's obligations under the Notes will be granted in all
Telecommunications Related Assets acquired in whole or in part with the
proceeds of any Asset Sale of Stock Collateral and the Company will take or
cause to be taken all actions necessary to cause such first priority security
interest to be granted concurrently with the acquisition of such
Telecommunications Related Assets. Any Net Cash Proceeds from an Asset Sale
that are not invested as provided in the preceding sentence shall constitute
Excess Proceeds. When the aggregate amount of Excess Proceeds exceeds $2.5
million, the Company shall commence an offer to purchase (an "Asset Sale
Offer") the maximum principal amount of Notes and 13% Notes (on a pro rata
basis based upon the relative aggregate principal amount of 13% Notes (or,
prior to April 15, 2001, the aggregate Accreted Value of 13% Notes) and Notes
then outstanding) that may be purchased out of the Excess Proceeds, at an
offer price in cash equal to 100% of aggregate principal amount thereof, plus
accrued and unpaid interest to the date of repurchase (or, in the case of
repurchases of 13% Notes prior to April 15, 2001, at a purchase price equal to
100% of the Accreted Value thereof as of the date of repurchase) in accordance
with the procedures set forth in the Indenture, provided, that, in the event
of an Asset Sale Offer as a result (in whole or in part) of an Asset Sale of
Stock Collateral, the Company shall, purchase (i) first, all Notes tendered
pursuant to such Asset Sale Offer in an aggregate principal amount equal to
the portion of such Excess Proceeds resulting from such Asset Sale of Stock
Collateral and (ii) second, all Notes and 13% Notes on a pro rata basis (in
the same manner as described above) in an aggregate principal amount (or, with
respect to 13% Notes prior to April 15, 2001, an aggregate Accreted Value)
equal to the Excess Proceeds not used to purchase Notes pursuant to clause (i)
of this proviso. To the extent that the aggregate principal amount of Notes,
plus accrued and unpaid interest to the date of repurchase (or in the case of
repurchases of 13% Notes prior to April 15, 2001, the Accreted Value thereof
as of the date of repurchase), of the Notes and the 13% Notes tendered
pursuant to an
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Asset Sale Offer is less than the Excess Proceeds, the Company may use such
remaining Excess Proceeds for any purpose not prohibited by the Indenture. If
the aggregate principal amount thereof, plus accrued and unpaid interest to
the date of repurchase, (or in the case of repurchases of 13% Notes prior to
April 15, 2001, the Accreted Value thereof as of the date of repurchase) of
Notes and the 13% Notes surrendered by holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro
rata basis. Upon completion of such offer and the 13% Notes, 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 Notes. The Company
will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes and
the 13% Notes as a result of an Asset Sale.
Notwithstanding the foregoing, the Company will not, and will not permit any
Subsidiary to, directly or indirectly, make any Asset Sale of any Equity
Interests of any Subsidiary (at least 80% of the voting power of the Capital
Stock of which is owned by the Company) except pursuant to an Asset Sale of
all of the Equity Interests of such Subsidiary; provided that any sale of any
Equity Interest of any such Subsidiary to a Strategic Investor shall be deemed
not to be an Asset Sale for purposes of this covenant, so long as such sale of
such Equity Interests does not result in such Subsidiary ceasing to be a
Subsidiary of the Company.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries or Joint Ventures to, directly or indirectly, create, incur,
issue, assume, guaranty or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including, without limitation, Acquired Indebtedness) and that
the Company will not issue any Disqualified Stock and will not permit any of
its Subsidiaries or Joint Ventures to issue any shares of Preferred Stock;
provided that the Company may incur Indebtedness (including, without
limitation, 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 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 total cost of the 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 (a) the net cash proceeds received by the
Company after the date of the Indenture from the issuance
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and sale of its Capital Stock (other than Disqualified Stock) plus (b) the
fair market value at the time of issuance of Equity Interests (other than
Disqualified Stock) issued after the date of the Indenture 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 (y) does not mature prior to the Stated
Maturity of the Notes and has a Weighted Average Life to Maturity longer
than the Notes and (z) is subordinated to the Notes;
(v) the incurrence by the Company of Indebtedness (in addition to
Indebtedness permitted by any other clause of this paragraph) in an
aggregate principal amount (or accreted value, as applicable) at any time
outstanding not to exceed $10.0 million;
(vi) the incurrence by any Restricted Joint Venture of Non-Recourse Debt,
provided that if any Non-Recourse Debt of a Restricted Joint Venture ceases
to be Non-Recourse Debt, such event shall be deemed to constitute an
incurrence of Indebtedness as of the date such Indebtedness ceases to be
Non-Recourse Debt;
(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 provides that, in the event
that the Company proposes to incur Indebtedness pursuant to clause (iv) above,
the Company shall, simultaneously with the incurrence of such Indebtedness,
deliver to the Trustee a resolution of the Board of Directors set forth in an
Officers' Certificate stating that the sale or sales of Capital Stock forming
the basis for the incurrence of such Indebtedness (i) constitutes a long term
investment in the Company and (ii) has not been made for the purpose of
circumventing this covenant. The Indenture will also provide 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.
Liens
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries or Permitted Joint Ventures to, directly or indirectly,
create, incur, assume or suffer to exist any Lien on any asset now owned
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or hereafter acquired, or any income or profits therefrom or assign or convey
any right to receive income therefrom, except Permitted Liens.
Limitations on Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, enter into any Sale and Leaseback Transaction; provided
that the Company or any Subsidiary (other than a General Partner Subsidiary)
may enter into a Sale and Leaseback Transaction if (i) the Company or other
entity could have incurred the Indebtedness relating to such Sale and
Leaseback Transaction pursuant to the "--Incurrence of Indebtedness and
Issuance of Preferred Stock" and "--Liens" covenants to incur secured
Indebtedness in an amount equal to the Attributable Debt with respect to such
transaction, (ii) the net proceeds of such Sale and Leaseback Transaction are
at least equal to the fair market value of such property as determined in good
faith by the Board of Directors of the Company and (iii) such proceeds are
applied in accordance with the "--Asset Sales" covenant.
Dividends and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to:
(i)(a) pay dividends or make any other distributions to the Company or
any of its Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay
any Indebtedness owed to the Company or any of its Subsidiaries,
(ii) make loans or advances to the Company or any of its Subsidiaries,
(iii) grant liens or grant security interests on its assets in favor of
the Holders of the Notes or guarantee the payment of the Notes; or
(iv) transfer any of its properties or assets to the Company or any of
its Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of:
(a) Existing Indebtedness as in effect on the date of the Indenture;
provided that any such encumbrances and restrictions existing in the 13%
Notes will be amended as of the date of the Indenture to permit the
activities described in (i)-(iv) above with respect to Holders of the
Notes;
(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 Notes;
(d) applicable law;
(e) by reason of customary non-assignment provisions in leases entered
into in the ordinary course of business and consistent with past practices;
(f) purchase money obligations or Vendor Debt for property acquired in
the ordinary course of business that impose restrictions of the nature
described in clause (iv) above on the property so acquired;
(g) Indebtedness incurred pursuant to clause (viii) under the "--
Incurrence of Indebtedness and Issuance of Preferred Stock" covenant,
provided that such encumbrance or restriction only relates to the
Subsidiary or Permitted Joint Venture incurring such Indebtedness; and
(h) Refinancing Indebtedness, provided that such encumbrances or
restrictions are no more restrictive than those contained in the
documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
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Merger, Consolidation or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Notes and the Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee; (iii)
immediately after such transaction no Default or Event of Default exists; and
(iv) except in the case of a merger of the Company with or into a Wholly Owned
Subsidiary of the Company, the Company or the entity or Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made (A) will have Consolidated Net Worth immediately after
the transaction equal to or greater than the Consolidated Net Worth of the
Company immediately preceding the transaction and (B) will, at the time of
such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the first paragraph of the covenant entitled "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless
(i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Subsidiary, other than those that would have
been obtained in a comparable transaction by the Company or such Subsidiary
with an unrelated Person; and
(ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $1.0 million, a resolution adopted by
a majority of the disinterested members of the Board of Directors and a
majority of the Independent Directors of the Company set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies
with clause (i) above; and (b) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration
in excess of $10.0 million, an opinion as to the fairness to the Holders of
Notes of such Affiliate Transaction from a financial point of view issued
by a nationally recognized consulting firm, business valuation firm or
investment banking firm
provided that (i) all agreements and arrangements with Affiliates, including
without limitation the Local Partner Agreements, the Fiber Lease Agreements,
the Management Agreements, network monitoring agreements and transactions in
connection therewith or pursuant thereto existing on the date of the Senior
Discount Note 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
Discount Note 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" hereof; (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
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(vii) management and network monitoring agreements between the Company and any
of its Joint Ventures, shall not be deemed Affiliate Transactions.
Loans to Subsidiaries and Joint Ventures
The Indenture provides that all loans to Subsidiaries or Joint Ventures made
by the Company from time to time after the date of the Indenture will be
evidenced by Intercompany Notes in favor of the Company. The Indenture 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 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 last proviso of
paragraph (viii) of the covenant entitled "--Incurrence of Indebtedness and
Issuance of Preferred Stock." A form of Intercompany Note will be attached as
an annex to the Indenture.
Limitation on Status as Investment Company
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, conduct its business in a fashion that would cause it to
be required to register as an "investment company" (as that term is defined in
the Investment Company Act of 1940, as amended) or otherwise become subject to
regulation under the Investment Company Act of 1940.
Payments for Consent
The Indenture provides that neither the Company nor any of its Subsidiaries
shall, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any holder of any Notes for
or as inducement to any consent, waiver or amendment of any terms or
provisions or the Notes unless such consideration is offered to be paid or
agreed to be paid to all holders of the Notes which so consent, waive or agree
to amend in the time frame set forth in solicitation documents relating to
such consent, waiver or agreement.
Business Activities
The Company will not, and will not permit any Subsidiary to, (a) engage in
any business other than the Telecommunications Business and such business
activities as are incidental or related thereto.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company shall furnish to the Holders of
Notes (i) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC 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 SEC 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 a
schedule to the Indenture. In addition, whether or not required by the rules
and regulations of the SEC the Company shall file a copy of all such
information and reports with the SEC for public availability (unless the SEC
will not accept such a filing) and make such information available to
securities analysts and prospective
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investors upon request. In addition, for so long as any Notes remain
outstanding, the Indenture will require the Company to furnish to all Holders
and to securities analysts and prospective investors, promptly upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default:
(i) a default in payment when due of interest on, or Liquidated Damages
with respect to, the Notes and such default continues for a period of 30
days;
(ii) a default in the payment when due of principal of or premium, if
any, on the Notes 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 "--Asset Sales," "--Restricted Payments," "--Offer to
Purchase Upon Change of Control" or "--Merger, Consolidation or Sale of
Assets";
(iv) failure by the Company to comply with the provisions described under
the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock";
provided that for purposes of the last paragraph such provision only, in
the event that the Company fails to comply with such paragraph because
Indebtedness is deemed to be incurred by a Restricted Joint Venture solely
as a result of such Restricted Joint Venture ceasing to be a Restricted
Joint Venture as a result of (i) the loss of a Local Partner or (ii) the
loss of management control of such Restricted Joint Venture, such failure
continues 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 Notes
for 30 days after notice to the Company by the Trustee or the Holders of at
least 25% in principal amount of the Notes 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 Significant Subsidiaries, or
by any group of Subsidiaries that, taken as a whole, would constitute a
Significant Subsidiary, 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) any breach or default by the Company in the performance of any
covenant set forth in the Collateral Agreements which breach or default
continues for 30 days, or any repudiation by the Company of its obligations
under any of the Collateral Agreements or the unenforceability of any of
the Collateral Agreements, for any reason; and
(ix) 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.
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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 Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute
a Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Holders of the Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
September 1, 2001 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to September 1, 2001, then the
premium specified in the Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a
Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"), including, the provisions of the Indenture pursuant to which the
Notes are secured by the Collateral, except for:
(i) the rights of Holders of outstanding Notes to receive payments in
respect of the principal of, premium, if any, and interest on such Notes
when such payments are due from the trust referred to below;
(ii) the Company's obligations with respect to the Notes that concern
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost
or stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
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(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 Notes. In the event Covenant Defeasance
occurs, certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(i) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable
U.S. 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 Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Company must
specify whether the Notes are being defeased to maturity or to a particular
redemption date;
(ii) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received
from, or there has been published by, the Internal Revenue Service a ruling
or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the Holders of
the outstanding Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Legal Defeasance had
not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Covenant Defeasance
had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date
of deposit;
(v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(vii) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of Notes over the other creditors of the Company
with the intent of defeating, hindering, delaying or defrauding creditors
of the Company or others; and
(ix) the Company must deliver to the Trustee an Officers' Certificate and
an opinion of counsel, each stating that all conditions precedent relating
to the Legal Defeasance or the Covenant Defeasance have been complied with.
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TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture, the
Notes and/or the Collateral Agreements may be amended or supplemented with the
consent of the Holders of at least a majority in aggregate outstanding
principal amount of the Notes (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Notes), and any existing default or compliance with any provision of the
Indenture, the Notes or the Collateral Agreements may be waived with the
consent of the Holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents obtained in
connection with a tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder):
(i) reduce the principal amount of Notes whose Holders must consent to an
amendment, supplement or waiver;
(ii) reduce the principal of or change the fixed maturity of any Note or
alter the provisions with respect to the redemption of the Notes (other
than provisions relating to the covenants described above under the caption
"--Offer to Purchase Upon Change of Control" and "--Asset Sales");
(iii) reduce the rate of or change the time for payment of interest on
any Note;
(iv) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in
aggregate principal amount of the Notes and a waiver of the payment default
that resulted from such acceleration);
(v) make any Note payable in money other than that stated in the Notes;
(vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive
payments of principal of or premium, if any, or interest on the Notes;
(vii) waive a redemption payment with respect to any Note (other than a
payment required by the covenants described above under the captions "--
Offer to Purchase upon Change of Control" or "--Certain Covenants--Asset
Sales");
(viii) make any change in the provisions relating to Collateral or the
Collateral Agreements that would adversely affect the holders of the Notes;
or
(ix) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture, the Notes
or the Collateral Agreements to cure any ambiguity, defect or inconsistency,
to provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders
of Notes in the case of a merger or consolidation, to make any change that
would provide any additional rights or benefits to the Holders of Notes or
that does not
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adversely affect the legal rights under the Indenture of any such Holder or
the Collateral Agreements, 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 Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture will provide 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 Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture, the
Registration Rights Agreement or the Collateral Agreements without charge by
writing to Hyperion Telecommunications, Inc., Main at Water Street, P.O. Box
472, Coudersport, Pennsylvania 16915; Attention: Chief Financial Officer.
BOOK-ENTRY, DELIVERY AND FORM
The New Notes will initially be issued in the form of one or more registered
notes in global form (the "New Global Note," and together with the global
notes representing the Old Notes, the "Global Note") 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."
DTC has advised the Company that DTC is a limited-purpose trust company that
was created to hold securities for its participating organizations
(collectively, the "Participants") and to facilitate the clearance and
settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of its Participants. The
Participants include securities brokers and dealers (including the Initial
Purchaser), banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies (collectively, the "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 DTC only through the
Participants or the Indirect Participants. The ownership interests and
transfer of ownership interests of each actual purchaser of each security held
by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchaser with portions of the
principal amount of the Global Notes and (ii) ownership of such interests in
the Global Notes will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Notes). Holders
are advised that the laws of some states require that certain persons take
physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a Global Note to
such persons will be limited to such extent. Because DTC can act only on
behalf of
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Participants, which in turn act on behalf of Indirect Participants and certain
banks, the ability of a person having beneficial interests in a Global Note to
pledge such interests to persons or entities that do not participate in the
DTC system, or otherwise take actions in respect of such interests, may be
affected by the lack of a physical certificate evidencing such interests.
Payments in respect of the principal of and premium and Liquidated Damages,
if any, and interest on a Global Note registered in the name of DTC or its
nominee will be payable by the Trustee to DTC in its capacity as the
registered Holder under the Indenture. Under the terms of the Indenture, the
Company and the Trustee will treat the persons in whose names the Notes,
including the Global Notes, are registered as the owners thereof for the
purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, neither the Company, the Trustee nor any agent of
the Company or the Trustee has or will have any responsibility or liability
for (i) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Notes, or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect Participant's
records relating to the beneficial ownership interests in the Global Notes or
(ii) any other matter relating to the actions and practices of DTC or any of
its Participants or Indirect Participants. DTC has advised the Company that
its current practice, upon receipt of any payment in respect of securities
such as the Notes (including principal and interest), is to credit the
accounts of the relevant Participants with the payment on the payment date, in
amounts proportionate to their respective holdings in the principal amount of
beneficial interests in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, the Trustee
or the Company. Neither the Company nor the Trustee will be liable for any
delay by DTC or any of its Participants in identifying the beneficial owners
of the Notes, and the Company and the Trustee may conclusively rely on and
will be protected in relying on instructions from DTC or its nominee for all
purposes.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive Notes in registered
certificated form if (i) DTC (a) notifies the Company that it is unwilling or
unable to continue as depositary for the Global Note and the Company thereupon
fails to appoint a successor depositary or (b) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the
Notes in certificated form or (iii) there shall have occurred and be
continuing an Event of Default or any event which after notice or lapse of
time or both would be an Event of Default with respect to the Notes. In
addition, beneficial interests in a Global Note may be exchanged for
certificated Notes upon request but only upon at least 20 days prior written
notice given to the Trustee by or on behalf of DTC in accordance with its
customary procedures. In all cases, certificated Notes delivered in exchange
for any Global Note or beneficial interests therein will be registered in the
names, and issued in any approved denominations, requested by or on behalf of
the depositary (in accordance with its customary procedures) and will bear the
applicable restrictive legend unless the Company determines otherwise in
compliance with applicable law.
EXCHANGE OF CERTIFICATED NOTES FOR BOOK ENTRY NOTES
Notes issued in certificated form may not be exchanged for beneficial
interests in any Global Note unless the transferor first delivers to the
Trustee a written certificate (in the form provided in the Indenture) to the
effect that such transfer will comply with the appropriate transfer
restrictions applicable to such Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes, and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
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SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, and interest) be made
by wire transfer of immediately available same day funds to the accounts
specified by the Global Note Holder. With respect to Certificated Securities,
the Company will make all payments of principal, premium, if any, and interest
by wire transfer of immediately available funds to the accounts specified by
the Holders thereof or, if no such account is specified, by mailing a check to
each such Holder's registered address. Secondary trading in long-term notes
and debentures of corporate issuers is generally settled in clearing-house or
next-day funds. In contrast, the Notes represented by the Global Note are
expected to be eligible to trade in the PORTAL Market and to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in the Certificated Securities will also be settled in
immediately available funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company and the Initial Purchasers entered into the Registration Rights
Agreement on or prior to the Closing Date. Pursuant to the Registration Rights
Agreement, the Company will agree to file with the Commission the Exchange
Offer Registration Statement on the appropriate form under the Securities Act
with respect to the Series B Notes. 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 Series B Notes. If (i) the Company is not required
to file the Exchange Offer Registration Statement or permitted to consummate
the Exchange Offer because the Exchange Offer is not permitted by applicable
law or Commission policy or (ii) any Holder of Transfer Restricted Securities
notifies the Company within the specified time period that (A) it is
prohibited by law or Commission policy from participating in the Exchange
Offer or (B) that it may not resell Series B Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales or (C) that it is a broker-dealer
and owns Notes acquired directly from the Company or an affiliate of the
Company, the Company will file with the Commission a Shelf Registration
Statement to cover resales of the Notes by the Holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. The Company will use its best efforts to
cause the applicable registration statement to be declared effective as
promptly as possible by the Commission. For purposes of the foregoing,
"Transfer Restricted Securities" means each Note until (i) the date on which
such Note has been exchanged by a person other than a broker-dealer for a
Series B Note in the Exchange Offer, (ii) following the exchange by a broker-
dealer in the Exchange Offer of a Note for a Series B Note, the date on which
such Series B Note is sold to a purchaser who receives from such broker-dealer
on or prior to the date of such sale a copy of the prospectus contained in the
Exchange Offer Registration Statement, (iii) the date on which such Note has
been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iv) the date on which
such Note 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 days after the date on which the Exchange Offer Registration
Statement was declared effective by the Commission, Series B Notes in exchange
for all Notes 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
Statement to be declared effective by the Commission on or prior to 30 days
after such obligation arises. If (a) the Company fails to file any of the
Registration Statements required by the Registration Rights Agreement on or
before the date specified
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for such filing, (b) any of such Registration Statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company fails to
Consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement
is declared effective but thereafter ceases to be effective or usable in
connection with resales of Transfer Restricted Securities during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a "Registration Default"), then the Company will
pay Liquidated Damages to each Holder of Transfer Restricted Securities, with
respect to the first 90-day period immediately following the occurrence of
such Registration Default at a rate of 0.5% per annum, determined daily, on
the principal amount of the Notes as of the immediately preceding interest
payment date. Such interest rate will increase by an additional 0.25% per
annum at the beginning of each subsequent 90-day period up to a maximum
aggregate increase of 2.0% per annum until all Registration Defaults have been
cured, at which time the interest rate borne by the Notes will be reduced to
the original interest rate. All accrued Liquidated Damages will be paid by the
Company on each Damages Payment Date to the Global Note Holder by wire
transfer of immediately available funds or by federal funds check and to
Holders of Certificated Securities by mailing checks to their registered
addresses.
Holders of Notes 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 Notes included in
the Shelf Registration Statement and benefit from the provisions set forth
above.
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 fiscal quarter with respect to which a
calculation of the Company's Consolidated Leverage Ratio is being made under
the Indenture 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
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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 "--Offer to
Purchase Upon Change of Control" and/or the provisions described above
under the caption "--Merger, Consolidation or Sale of Assets" and not by
the provisions of the Asset Sale covenant), and
(ii) the issuance or sale by the Company or any of its Subsidiaries of
Equity Interests of any of the Company's Subsidiaries or Joint Ventures, in
the case of either clause (i) or (ii), whether in a single transaction or a
series of related transactions (a) that have a fair market value in excess
of $1.0 million or (b) for net proceeds in excess of $1.0 million.
Notwithstanding the foregoing: (x) a transfer of assets by the Company to a
Wholly Owned Subsidiary or by a Subsidiary to the Company or to another Wholly
Owned Subsidiary, (y) an issuance of Equity Interests by a Subsidiary to the
Company or to a Wholly Owned Subsidiary and (z) a Restricted Payment that is
permitted by the covenant described above under the caption "--Restricted
Payments" will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Collateral" means all amounts held in the Escrow Account that are
pledged to the Escrow Agent under the terms of the Escrow and Disbursement
Agreement.
"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.
"Closing Date" means the date on which the Notes are originally issued under
the Indenture.
"Collateral Agent" means Bank of Montreal Trust Company, as Collateral Agent
under the Pledge Agreement or any successor thereto appointed pursuant to such
Agreement.
"Collateral Agreements" mean the Escrow and Disbursement Agreement and the
Pledge Agreement.
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"Consolidated Interest Expense" means, for any Person, for any period, the
aggregate of the following for such Person for such period determined on a
consolidated basis in accordance with GAAP: (a) the amount of interest in
respect of Indebtedness (including amortization of original issue discount,
amortization of debt issuance costs, and non-cash interest payments on any
Indebtedness and the interest portion of any deferred payment obligation) and
(b) the interest component of rentals in respect of any Capital Lease
Obligation paid, in each case whether accrued or scheduled to be paid or
accrued by such Person during such period to the extent such amounts were
deducted in computing Consolidated Net Income, determined on a consolidated
basis in accordance with GAAP. For purposes of this definition, interest on a
Capital Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by such Person to be the rate of interest implicit in
such Capital Lease Obligation in accordance with GAAP consistently applied.
"Consolidated Leverage Ratio" means, for any Person, as of any date, the
ratio of (i) the sum of the aggregate outstanding amount of all Indebtedness
of a Person and its Subsidiaries (other than any Indebtedness of a General
Partner Subsidiary to the extent that such Indebtedness has been incurred in
connection with such General Partner Subsidiary's partnership interest in the
Restricted Joint Venture of which such General Partner Subsidiary is a general
partner) determined on a consolidated basis in accordance with GAAP to (ii)
Annualized Pro Forma EBITDA.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary
or that is accounted for by the equity method of accounting shall be included
only to the extent of the amount of dividends or distributions actually paid
in cash to the referent Person or a Wholly Owned Subsidiary thereof, (ii) the
Net Income of any Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its stockholders, (iii) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded and (iv) the
cumulative effect of a change in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the date of the
Indenture in the book value of any asset owned by such Person or a
consolidated Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments) and (z) all unamortized debt discount and
expense and unamortized deferred charges as of such date, all of the foregoing
determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Agreement" means, with respect to any Person, any agreement entered
into by and among such Person and one or more commercial banks or financial
institutions, providing for senior term or revolving credit borrowings of a
type similar to credit agreements typically entered into by commercial banks
and financial institutions, including any related notes, Guarantees,
collateral documents, instruments and agreements executed
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in connection therewith, as such credit agreement and related agreements may
be amended, extended, refinanced, renewed, restated, replaced or refunded from
time to time.
"Cumulative Interest Expense" means the aggregate amount of Consolidated
Interest Expense of the Company paid or accrued by the Company from and after
the first day of the first fiscal quarter beginning after the date of the
Indenture to the end of the fiscal quarter immediately preceding a proposed
Restricted Payment, determined on a consolidated basis in accordance with
GAAP.
"Cumulative Pro Forma EBITDA" means the cumulative EBITDA of the Company
from and after the first day of the first fiscal quarter beginning after the
date of the Indenture to the end of the fiscal quarter immediately preceding
the date of a proposed Restricted Payment, or, if such cumulative EBITDA for
such period is negative, minus the amount by which such cumulative EBITDA is
less than zero.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the Holder thereof, in whole or in part, on or prior to the
date that is 91 days after the date on which the Notes mature; provided,
however, 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 of the Notes shall not
constitute Disqualified Stock if the change of control provisions applicable
to such Capital Stock are no more favorable to the holders of such Capital
Stock than the provisions applicable to the Notes contained in the covenant
described under "--Offer to Purchase Upon a 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 Notes as are required to be repurchased pursuant to the
covenant described under "--Offer to Purchase Upon Change of Control."
"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 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
Interests, provided that the remainder of the Equity Interests are 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).
"Escrow Account" means an escrow account for the deposit of approximately
$83.5 million of the net proceeds from the sale of the Notes under the Escrow
and Disbursement Agreement.
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"Escrow Agent" means the Bank of Montreal Trust Company, as Escrow Agent
under the Escrow and Disbursement Agreement, or any successor thereto
appointed pursuant to such Agreement.
"Escrow and Disbursement Agreement" means the Escrow and Disbursement
Agreement, dated as of the date of the Indenture, by and among the Escrow
Agent, the Trustee and the Company, governing the disbursement of funds from
the Escrow Account, as amended.
"Existing Indebtedness" means any Indebtedness of the Company's Subsidiaries
in existence on the date of the Indenture.
"Existing Networks" means the telecommunications networks operated by the
Company, its Subsidiaries and Joint Ventures, including, but not limited to,
all networks under construction, on the date of the Indenture.
"Fiber Lease Agreements" means the agreements relating to fiber leases as
set forth on a schedule 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 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 (1) as a result of
the guarantee by such General Partner Subsidiary of Indebtedness incurred by
the Restricted Joint Venture of which such General Partner Subsidiary is a
general partner or (2) by operation of law; provided that, for purposes of
this definition, Hyperion Telecommunications of Virginia, Inc. shall be deemed
to be a General Partner Subsidiary 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 companies on the date hereof.
"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.
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"Invested Equity Capital" means, with respect to any of the 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.
"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 a schedule 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
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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 expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements) and any reserve for adjustment in
respect of the sale price of such asset or assets established in accordance
with GAAP.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or
loss, together with any related provision for taxes on such gain or loss,
realized in connection with (a) any Asset Sale (including, without limitation,
dispositions pursuant to Sale and Leaseback Transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries
and (ii) any extraordinary or nonrecurring gain or loss, together with any
related provision for taxes on such extraordinary or nonrecurring gain or
loss.
"New Telecommunications Service Market" means a Telecommunications Service
Market in an area that is not within ten miles of any of the Company's
Existing Networks.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Subsidiaries nor any of its Permitted Joint Ventures (a)
provides credit support of any kind (including any undertaking, agreement or
instrument that would constitute Indebtedness), (b) is directly or indirectly
liable (as a guarantor, co-obligor or otherwise) or (c) constitutes the
lender; and (ii) no default with respect to which (including any rights that
the holders thereof may have to take enforcement action against a Restricted
Joint Venture) would permit (upon notice, lapse of time, the occurrence, or
failure to occur, of any other condition or event or any combination thereof)
any holder of any other Indebtedness of the Company, any of its Subsidiaries
or any of its Permitted Joint Ventures to declare a default on such other
Indebtedness or cause or permit the payment thereof to be accelerated prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company, any of its Subsidiaries or any of its Permitted Joint Ventures;
provided that the recourse (if any) of a holder of such Indebtedness to the
General Partner Subsidiary of a Restricted Joint Venture in which such General
Partner Subsidiary is a general partner as a result of being a general partner
of such Restricted Joint Venture will not be considered credit support or
direct or indirect liability of such General Partner Subsidiary for purposes
of clauses (i)(a), (ii)(b) and (iii) above.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Investments" means
(a) any Investment in a Wholly Owned Subsidiary of the Company that is
engaged, either directly or indirectly through a Qualified Subsidiary or
Joint Venture, in the Telecommunications Business;
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(b) any Investment in a Qualified Subsidiary of the Company that is
directly engaged in the Telecommunications Business;
(c) any Investment in Cash Equivalents;
(d) any Investment in a Person that is not a Subsidiary of the Company,
if as a result of such Investment (i)(A) such Person becomes a Qualified
Subsidiary or Wholly Owned Subsidiary of the Company or (B) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Qualified Subsidiary and (ii)(A) such Wholly Owned Subsidiary, either
directly or indirectly through a Qualified Subsidiary or a Joint Venture,
is engaged in the Telecommunications Business or (B) such Qualified
Subsidiary is directly engaged in the Telecommunications Business;
(e) any Permitted Joint Venture Investment;
(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 such Joint Venture is a Permitted Joint Venture.
"Permitted Liens" means
(i) Liens on the property of the Company, any Subsidiary or any Permitted
Joint Venture securing Obligations under Indebtedness that may be incurred
pursuant to clause (i) of the covenant entitled "--Incurrence of
Indebtedness and Issuance of Preferred Stock;"
(ii) Liens in favor of the Company;
(iii) Liens on property of a Person existing at the time such Person is
merged into or consolidated with the Company, any Subsidiary or any
Permitted Joint Venture; provided that such Liens were in existence prior
to the contemplation of such merger or consolidation and do not extend to
any assets other than those of the Person merged into or consolidated with
the Company;
(iv) Liens on property existing at the time of acquisition thereof by the
Company, any Subsidiary or any Permitted Joint Venture, provided that such
Liens were in existence prior to the contemplation of such acquisition;
(v) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(vi) Liens existing on the date of the Indenture;
(vii) Liens on property of Subsidiaries and Permitted Joint Ventures
securing Obligations under Indebtedness incurred pursuant to the proviso in
the last paragraph of the covenant entitled "--Incurrence of Indebtedness
and Issuance of Preferred Stock," but only to the extent that (a) in the
case of Subsidiaries and Permitted Joint Ventures that are incurring
Indebtedness other than Related Network Debt, such Liens secure only such
Indebtedness incurred by such Subsidiary or such Joint Venture; and (b) in
the case of Subsidiaries and Joint Ventures that are incurring Related
Network Debt, such Liens secure only such Related Network Debt;
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(viii) Liens securing Obligations under the Notes and the Indenture;
(ix) Liens securing Obligations under Vendor Debt pursuant to clause (ii)
of the covenant entitled "--Incurrence of Indebtedness and Issuance of
Preferred Stock," provided that the principal amount of such Vendor Debt
secured by such Lien does not exceed 100% of the purchase price or cost of
acquisition, construction or improvement of the Telecommunications Related
Assets subject to such Liens;
(x) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(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;
(xii) Liens granted in favor of the Holders; and
(xiii) 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.
"Pledged Securities" means the securities purchased by the Company with a
portion of the proceeds from the sale of the Notes, which shall consist of
U.S. Government Obligations.
"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, Pro Forma EBITDA shall be
computed so as to give pro forma effect to such Asset Sale or the acquisition
of such Person or business, as the case maybe, 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 EBIDTA 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.
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"Qualified Subsidiary" means any Subsidiary 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 under the Indenture.
"Refinancing Indebtedness" means any Indebtedness of the Company, any of its
Subsidiaries or any of its Permitted Joint Ventures issued in exchange for, or
the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund other Indebtedness of the Company, any of its Subsidiaries
or any of its Permitted Joint Ventures; provided that: (i) the principal
amount (or accreted value, if applicable) of such Refinancing Indebtedness
does not exceed the principal amount (or accreted value, if applicable) of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith);
(ii) such Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to
or greater than the Weighted Average Life to Maturity of, the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Notes, such Refinancing
Indebtedness has a final maturity date later than the final maturity date of
the Notes, and is subordinated in right of payment to the Notes on terms at
least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iv) to the extent that the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded was secured by
Liens, any Liens being incurred in connection with such Refinancing
Indebtedness are at least as favorable to the Holders of Notes as those
contained in 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 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.
"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.
"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 form Persons who are not Affiliates of the Company; and
(c) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company, any of its Subsidiaries or any of
its Permitted Joint Ventures. If, at any time, a Restricted Joint Venture
fails to meet the requirements of a Restricted Joint Venture by becoming a
Permitted Joint Venture or otherwise, it shall thereafter cease to be a
Restricted Joint Venture for purposes of the Indenture and (i) all of the then
outstanding Indebtedness of such entity shall be deemed to be incurred as of
the date on which such entity becomes a Permitted Joint Venture or otherwise
ceases to be a Restricted Joint Venture for purposes of the covenant entitled
"--Incurrence of Indebtedness and Issuance of Preferred Stock" (and if such
Indebtedness is not permitted to be incurred as of such date under such
covenant, the Company shall be in default of such covenant) and (ii) of the
then outstanding Investments made by such entity since the date of the
Indenture shall be deemed to have been made as of the date that such
Restricted Joint Venture becomes a Permitted Joint Venture or otherwise ceases
to be a Restricted Joint Venture for purposes of the covenant entitled "--
Restricted Payments" (and if such Investments are not permitted to be made as
of such date under such covenant, the Company shall be in default of such
covenant); provided that if a
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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 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 such 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.
"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.
"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.
"U.S. Government Obligations" means direct, fixed rate obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged, which are
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not callable and which mature (or may be put to the issuer by the holder at no
less than par) no later than the maturity date of the Notes.
"Vendor Debt" means any purchase money Indebtedness of the Company, any
Subsidiary (other than a General Partner Subsidiary) or any Permitted Joint
Venture incurred in connection with the acquisition of Telecommunications
Related Assets.
"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 of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or a
combination thereof.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain federal income tax
considerations relevant to the exchange of the Old Notes for the New Notes,
but does not purport to be a complete analysis of all potential tax effects.
The discussion is based upon the United States Internal Revenue Code of 1986,
as amended, (the "Code"), Treasury Regulations, Internal Revenue Service
("IRS") rulings and pronouncements and judicial decisions now in effect, all
of which are subject to change at any time by legislative, judicial or
administrative action. Any such changes may be applied retroactively in a
manner that could adversely affect a holder of the New Notes. The following
discussion assumes that holders hold the Old Notes and the New Notes as
capital assets within the meaning of Section 1221 of the Code.
The Company has not sought and will not seek any rulings from the IRS with
respect to the positions of the Company discussed below. There can be no
assurance that the IRS will not take a different position concerning the tax
consequences of the exchange of the Old Notes for the New Notes or that any
such position would not be sustained.
The tax treatment of a holder may vary depending on his or its particular
situation or status. This summary does not address the tax consequences to
taxpayers who are subject to special rules such as insurance companies, tax-
exempt organizations, financial institutions, broker-dealers, foreign entities
and individuals, persons holding Old Notes or New Notes as a part of a hedging
or conversion transaction or a straddle and holders whose "functional
currency" is not the U.S. dollar, or aspects of federal income taxation that
may be relevant to a prospective investor based upon such investor's
particular tax situation. In addition, the description does not consider the
effect of any applicable foreign, state, local or other tax laws.
EACH HOLDER SHOULD CONSULT HIS OR ITS OWN TAX ADVISER AS TO THE PARTICULAR
TAX CONSEQUENCES TO HIM OR IT OF EXCHANGING OLD NOTES FOR NEW NOTES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE
The exchange of the New Notes for Old Notes will not constitute a
recognition event for federal income tax purposes. Consequently, no gain or
loss will be recognized by holders upon receipt of the New Notes. For purposes
of determining gain or loss upon the subsequent exchange of New Notes, a
holder's basis in the New Notes will be the same as a holder's basis in the
Old Notes exchanged therefor. Holders will be considered to have held the New
Notes from the time of their original acquisition of the Old Notes. As used
herein, the term "Senior Note" refers to both an Old Note and a New Note
received in exchange therefor.
INTEREST ON THE NEW NOTES
A holder of a New Note will be required to report as income for federal
income tax purposes interest earned on a New Note in accordance with the
holder's method of tax accounting. A holder of a New Note using the accrual
method of accounting for tax purposes is, as a general rule, required to
include interest in ordinary income as such interest accrues. A cash basis
holder must include interest in income when cash payments are received by (or
made available to) such holder.
MARKET DISCOUNT
If a holder acquired an Old Note at a market discount (i.e., at a price less
than the stated redemption price at maturity of the Old Note), the Old Note is
subject to the market discount rules of the Code unless the market discount is
de minimis. Market discount is de minimis if it is less than one quarter of
one percent of the principal amount of the Old Note multiplied by the number
of complete years to maturity after the holder acquired the Old Note. If the
holder exchanges an Old Note that has more than de minimis market discount for
a New Note, the New Note also will be subject to the market discount rules of
the Code. New Notes purchased by a subsequent purchaser also will be subject
to the market discount rules if the New Notes are purchased with more than a
de minimis amount of market discount. Notes that have more than de minimis
market discount are herein referred to as "Market Discount Notes."
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Any gain recognized on the maturity or disposition of a Market Discount Note
will be treated as ordinary income to the extent that such gain does not
exceed the accrued market discount on the Market Discount Note. Alternatively,
a holder may elect to include market discount in income currently over the
life of the Market Discount Note. Such an election shall apply to all debt
instruments with market discount acquired by the holder on or after the first
day of the first taxable year to which the election applies. This election may
not be revoked without the consent of the IRS.
Market discount will accrue on a straight-line basis unless the holder
elects to accrue market discount on a constant yield to maturity basis. Such
an election shall apply only to the Market Discount Note with respect to which
it is made and may not be revoked without the consent of the IRS. A holder who
does not elect to include market discount in income currently generally will
be required to defer deductions for interest on borrowings allocable to a
Market Discount Note in an amount not exceeding the accrued market discount on
the Market Discount Note until the maturity or disposition of the Market
Discount Note.
AMORTIZABLE BOND PREMIUM
A holder that purchased an Old Note for an amount in excess of its principal
amount may elect to treat such excess as "amortizable bond premium," in which
case the amount required to be included in the holder's income each year with
respect to interest on the Old Note will be reduced by the amount of
amortizable bond premium allocable (based on the yield to maturity of the Old
Note) to such year. If a holder made an election to amortize bond premium with
respect to an Old Note and exchanges the Old Note for a New Note pursuant to
the Exchange Offer, the election will apply to the New Note. A holder who
exchanges an Old Note for which an election has not been made for a New Note,
and a subsequent purchaser of a New Note, may also elect to amortize bond
premium if the holder acquired the Note for an amount in excess of its
principal amount. Any election to amortize bond premium shall apply to all
bonds (other than bonds the interest on which is excludable from gross income)
held by the holder at the beginning of the first taxable year to which the
election applies or thereafter acquired by the holder, and is irrevocable
without the consent of the IRS.
DISPOSITION OF THE NOTES
Subject to the market discount rules discussed above, a holder of Notes will
recognize gain or loss upon the sale, redemption, retirement or other
disposition of such securities equal to the difference between (i) the amount
of cash and the fair market value of the property received (except to the
extent attributable to the payment of accrued interest) and (ii) the holder's
adjusted tax basis in the securities. Gain or loss recognized will be capital
gain or loss provided the Notes are held as capital assets by the holder, and
will be long-term capital gain or loss if the holder has held such securities
(or is treated as having held such securities) for more than one year.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Holders of the Notes may be subject to backup withholding at a rate of 31%
with respect to interest paid on the Notes unless such holder (a) is a
corporation or comes within certain other exempt categories and, when
required, demonstrates this fact or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with the requirements of the backup
withholding rules.
The Company will report to the holders of the Notes and the IRS the amount
of any "reportable payment" for each calendar year and amount of tax withheld,
if any, with respect to payments on the Notes.
EACH HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES TO IT OF THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF THE NOTES
(INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN, AND OTHER
TAX LAWS).
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of the New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes
acquired as a result of market-making activities or other trading activities.
The Company has agreed that it will make this Prospectus available to any
broker-dealer for use in connection with any such resale for a period of 365
days after the Expiration Date or until all participating broker-dealers have
so resold.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concession from any
such broker-dealer and/or the purchasers of any New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant
to the Exchange Offer and any broker-dealer that participates in a
distribution of New Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act, and any profit on any resale of New Notes and
any commissions or concessions received by any such persons may be deemed to
be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer, and
to the best of the Company's information and belief, each person participating
in the Exchange Offer is acquiring the New Notes in its ordinary course of
business and has no arrangement or understanding with any person to
participate in the distribution of the New Notes to be received in the
Exchange Offer.
LEGAL MATTERS
The validity of the New Notes will be passed upon on behalf of the Company
by Buchanan Ingersoll Professional Corporation, Pittsburgh, Pennsylvania.
EXPERTS
The 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.
116
<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>
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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 IMPLI-
CATION 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 ACCOMPANY-
ING LETTER OF TRANSMITTAL CONSTITUTES AN OFFER OR SOLICITATION BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO
OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Prospectus Summary........................................................ 5
The Exchange Offer........................................................ 11
Summary Description of Notes ............................................. 13
Risk Factors.............................................................. 18
The Exchange Offer........................................................ 27
Use of Proceeds........................................................... 36
Capitalization............................................................ 37
Selected Consolidated Financial Data...................................... 38
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 39
Business.................................................................. 49
Competition............................................................... 64
Regulation................................................................ 65
Management................................................................ 74
Security Ownership of Certain Beneficial Owners and Management............ 79
Certain Relationships and Transactions.................................... 80
Description of Certain Indebtedness....................................... 82
Description of the Notes.................................................. 83
Certain Federal Income Tax Considerations................................. 114
Plan of Distribution...................................................... 116
Legal Matters............................................................. 116
Experts................................................................... 116
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$250,000,000
LOGO
[LOGO OF HYPERION TYELECOMMUNICATIONS, INC.]
12 1/4% SENIOR SECURED NOTES
DUE 2004, SERIES B
-------------------------
PROSPECTUS
-------------------------
OCTOBER 21, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides in general that
a corporation may indemnify its directors, officers, employees or agents
against expenditures (including judgments, fines, amounts paid in settlement
and attorneys' fees) made by them in connection with certain lawsuits to which
they may be made parties by reason of their being directors, officers,
employees or agents and shall so indemnify such persons against expenses
(including attorneys' fees) if they have been successful on the merits or
otherwise. The bylaws of Hyperion provide for indemnification of the officers
and directors of Adelphia to the full extent permissible under Delaware law.
Hyperion's Certificate of Incorporation also provides, pursuant to Section
102(b)(7) of the Delaware General Corporation Law, that directors of Hyperion
shall not be personally liable to Hyperion, respectively, or its stockholders
for monetary damages for breach of fiduciary duty as a director for acts or
omissions, provided that directors shall nonetheless be liable for breaches of
the duty of loyalty, bad faith, intentional misconduct, knowing violations of
law, unlawful distributions to stockholders, or transactions from which a
director derived an improper personal benefit.
ITEM 21. EXHIBITS
(a) The following is a complete list of Exhibits filed as part of this
Registration Statement, which are incorporated herein:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 Purchase Agreement effective as of May 13, 1996 between Teleport
Communications Group Inc. and Hyperion Telecommunications of
Florida, Inc. (Incorporated herein by reference is Exhibit 2.1 to
Registration Statement No. 333-06957 on Form S-4.)
3.1 Certificate of Incorporation of Registrant, together with all
amendments thereto. (Incorporated herein by reference is Exhibit
3.1 to Registration Statement No. 333-12619 on Form S-1.)
3.2 Bylaws of Registrant. (Incorporated herein by reference is Exhibit
3.2 to Registration Statement No. 333-12619 on Form S-1.)
4.1 Indenture, dated as of April 15, 1996, between the Registrant and
Bank of Montreal Trust Company. (Incorporated herein by reference
is Exhibit 4.1 to Registration Statement No. 333-06957 on Form S-
4.)
4.2 First Supplemental Indenture, dated as of September 11, 1996,
between, the Registrant and Bank of Montreal Trust Company.
(Incorporated herein by reference is Exhibit 4.2 to Registration
Statement No. 333-12619 on Form S-4.)
4.3 Form of 13% Senior Discount Note. (Incorporated herein by
reference is Exhibit 4.3 to Registration Statement No. 333-12619
on Form S-4.)
4.4 Registration Rights Agreement dated as of April 15, 1996, between
the Registrant and the Initial Purchasers. (Incorporated herein by
reference is Exhibit 4.3 to Registration Statement No. 333-06957
on Form S-4.)
4.5 Subordinated Note dated April 15, 1996 by the Company in favor of
Adelphia. (Incorporated herein by reference is Exhibit 4.3 to
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996 (File No. 0-21605).)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.6 Form of Class A Common Stock Certificate. (Incorporated herein by
reference is Exhibit 4.1 to Registrant's Registration Statement on
Form 8-A, dated October 23, 1996.)
4.7 Indenture, dated as of August 27, 1997, with respect to the
Registrant's 12 1/4% Senior Secured Notes due 2004, between the
Registrant and the Bank of Montreal Trust Company. (Incorporated
herein by reference is Exhibit 4.01 to Form 8-K dated August 27,
1997 (File No. 0-21605).)
4.8 Form of 12 1/4% Senior Secured Note due 2004 (contained in Exhibit
4.7)
4.9 Pledge Agreement between the Registrant and the Bank of Montreal
Trust Company as Collateral Agent, dated as of August 27, 1997.
(Incorporated herein by reference is Exhibit 4.03 to Form 8-K
dated August 27, 1997 (File No. 0-21605).)
4.10 Registration Rights Agreement between the Registrant and the
Initial Purchasers, dated August 27, 1997, regarding the 12 1/4%
Senior Secured Notes due 2004. (Incorporated herein by reference
is Exhibit 4.04 to Form 8-K dated August 27, 1997 (File No. 0-
21605).)
4.11 Pledge, Escrow and Disbursement Agreement, between the Registrant
and the Bank of Montreal Trust Company, dated as of August 27,
1997. (Incorporated herein by reference is Exhibit 4.05 to Form 8-
K dated August 27, 1997 (File No. 0-21605).)
4.12 Second Supplemental Indenture, dated as of August 27, 1997,
between the Registrant and the Bank of Montreal Trust Company,
regarding the Registrant's 13% Senior Discount Notes due 2003.
(Incorporated herein by reference is Exhibit 4.06 to Form 8-K
dated August 27, 1997 (File No. 0-21605).)
5.1* Opinion of Buchanan Ingersoll Professional Corporation
10.1 Purchase Agreement dated as of April 10, 1996 between the
Registrant and Bear, Stearns & Co. Inc., Chase Securities Inc. and
NationsBanc Capital Markets, Inc. (collectively, the "Initial
Purchasers"). (Incorporated herein by reference is Exhibit 1.1 to
Registration Statement No. 333-06957 on Form S-4.)
10.2 Employment Agreement between the Registrant and Charles R.
Drenning. (Incorporated herein by reference is Exhibit 10.1 to
Registration Statement No. 333-06957 on Form S-4.)
10.3 Employment Agreement between the Registrant and Paul D. Fajerski.
(Incorporated herein by reference is Exhibit 10.2 to Registration
Statement No. 333-06957 on Form S-4.)
10.4 Employment Agreement between the Registrant and Randolph S.
Fowler. (Incorporated herein by reference is Exhibit 10.3 to
Registration Statement No. 333-06957 on Form S-4.)
10.5 Pre-Incorporation and Shareholder Restrictive Agreement between
Adelphia, Paul D. Fajerski, Charles R. Drenning and Randolph S.
Fowler. (Incorporated herein by reference is Exhibit 10.5 to
Registration Statement No. 333-06957 on Form S-4.)
10.6 Term Loan Note dated May 10, 1996 between Charles R. Drenning in
favor of Registrant in the amount of $1,000,000. (Incorporated
herein by reference is Exhibit 10.6 to Registration Statement No.
333-06957 on Form S-4.)
10.7 Term Loan Note dated May 10, 1996 between Paul D. Fajerski in
favor of Registrant in the amount of $1,000,000. (Incorporated
herein by reference is Exhibit 10.7 to Registration Statement No.
333-06957 on Form S-4.)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.8 Term Loan Note dated May 10, 1996 between Randolph S. Fowler in
favor of Registrant in the amount of $1,000,000. (Incorporated
herein by reference is Exhibit 10.8 to Registration Statement No.
333-06957 on Form S-4.)
10.9 Term Loan and Stock Pledge Agreement dated May 10, 1996 between
the Registrant and Charles R. Drenning. (Incorporated herein by
reference is Exhibit 10.9 to Registration Statement No. 333-06957
on Form S-4.)
10.10 Term Loan and Stock Pledge Agreement dated May 10, 1996 between
the Registrant and Paul D. Fajerski. (Incorporated herein by
reference is Exhibit 10.10 to Registration Statement No. 333-06957
on Form S-4.)
10.11 Term Loan and Stock Pledge Agreement dated May 10, 1996 between
the Registrant and Randolph S. Fowler. (Incorporated herein by
reference is Exhibit 10.11 to Registration Statement No. 333-06957
on Form S-4.)
10.12 Letter Agreement dated March 19, 1996 between the Registrant,
Charles R. Drenning, Paul D. Fajerski, Randolph S. Fowler and
Adelphia. (Incorporated herein by reference is Exhibit 10.12 to
Registration Statement No. 333-06957 on Form S-4.)
10.13 Warrant Agreement dated as of April 15, 1996, by and among
Hyperion Telecommunications, Inc. and Bank of Montreal Trust
Company. (Incorporated herein by reference is Exhibit 10.13 to
Registration Statement No. 333-06957 on Form S-4.)
10.14 Warrant Registration Rights Agreement dated as of April 15, 1996,
by and among Hyperion Telecommunications, Inc. and the Initial
Purchasers. (Incorporated herein by reference is Exhibit 10.14 to
Registration Statement No. 333-06957 on Form S-4.)
10.15 Form of Management Agreement. (Incorporated herein by reference is
Exhibit 10.15 to Registration Statement No. 333-06957 on Form S-
4.)
10.16 Employment Agreement between Hyperion Telecommunications, Inc. and
Daniel R. Milliard dated as of March 4, 1997. (Incorporated herein
by reference is Exhibit 10.03 to Current Report on Form 8-K of
Adelphia Communications Corporation dated May 1, 1997 (File Number
0-16014).)
10.17 1996 Long-Term Incentive Compensation Plan. (Incorporated herein
by reference is Exhibit 10.17 to Registration Statement No. 333-
13663 on Form S-1.)
10.18 Registration Rights Agreement among Charles R. Drenning, Paul D.
Fajerski, Randolph S. Fowler, Adelphia Communications Corporation
and the Company. (Incorporated herein by reference is Exhibit
10.18 to Registration Statement No. 333-13663 on Form S-1.)
10.19 Registration Rights Agreement between Adelphia Communications
Corporation and the Company. (Incorporated herein by reference is
Exhibit 10.19 to Registration Statement No. 333-13663 on Form S-
1.)
10.20 Extension Agreement dated as of January 8, 1997, among Hyperion
Telecommunications, Inc., Adelphia Communications Corporation,
Charles R. Drenning, Paul D. Fajerski, Randolph S. Fowler, and six
Trusts named therein. (Incorporated herein by reference is Exhibit
10.04 to Current Report on Form 8-K of Adelphia Communications
Corporation dated May 1, 1997 (File Number 0-16014).)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.21 Purchase Agreement among the Registrant, Bear Stearns & Co. Inc.,
Chase Securities Inc., TD Securities (USA) Inc., CIBC Wood Gundy
Securities Corp., and Scotia Capital Markets (the "Initial
Purchasers") dated August 21, 1997. (Incorporated herein by
reference is Exhibit 10.01 to Form 8-K dated August 27, 1997 (File
No. 0-21605).)
12.1** Calculation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
21.01 Subsidiaries of the Registrant (Incorporated herein by reference
is Exhibit 21.1 to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997.) (File Number 0-21605)
23.01* Consent of Buchanan Ingersoll Professional Corporation (contained
in its opinion filed as Exhibit 5.01 hereto)
23.02** Consent of Deloitte & Touche LLP
24.01* Power of Attorney (appearing on signature page)
25.01* Form T-1 Statement of Eligibility of Trustee
99.01* Form of Letter of Transmittal and Notice of Guaranteed Delivery
</TABLE>
- --------
*Previously filed.
**Filed herewith.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes to respond to requests for information that
is incorporated by reference into the Prospectus pursuant to Item 4, 10(b),
11, or 13 of the Form S-4, within one business day of receipt of such request,
and to send the incorporated documents by first-class mail or other equally
prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the
date of responding to the request.
The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the registrant undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
II-4
<PAGE>
The registrant undertakes that every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of a Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be
deemed part of the Registration Statement as of the time it was
declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at such
time shall be deemed to be the initial bona fide offering thereof.
(3) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) ((S)230.424(b) of this chapter), if, in
the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
Provided, however, that paragraphs (3)(i) and (3)(ii) above do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the registration statement.
(4) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(5) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE>
(6) For purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual
report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Coudersport, Commonwealth of Pennsylvania, on the 20th day of October, 1997.
HYPERION TELECOMMUNICATIONS, INC.
By:/s/ Timothy J. Rigas
----------------------------------
Timothy J. Rigas
Chief Financial Officer and
Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
Chairman and Director
/s/ * October 20,
- ----------------------------- 1997
John Rigas
Vice Chairman and Director
/s/ * October 20,
- ----------------------------- 1997
Michael J. Rigas
Vice Chairman, Treasurer,
/s/ Timothy J. Rigas Chief Financial Officer and October 20,
- ----------------------------- Director 1997
Timothy J. Rigas
Vice Chairman, Chief
/s/ * Executive Officer and October 20,
- ----------------------------- Director 1997
James P. Rigas
President, Chief Operating
/s/ * Officer, Secretary and October 20,
- ----------------------------- Director 1997
Daniel R. Milliard
Senior Vice President and
/s/ * Director October 20,
- ----------------------------- 1997
Charles R. Drenning
II-7
<PAGE>
SIGNATURE TITLE DATE
Senior Vice President and
/s/ * Director October 20,
- ----------------------------- 1997
Paul D. Fajerski
Senior Vice President and
/s/ * Director October 20,
- ----------------------------- 1997
Randolph S. Fowler
Director
- -----------------------------
Pete J. Metros
Director
/s/ * October 20,
- ----------------------------- 1997
James L. Gray
Chief Accounting Officer and
/s/ * Assistant Secretary October 20,
- ----------------------------- 1997
Edward E. Babcock, Jr.
/s/ Timothy J. Rigas October 20,
- ----------------------------- 1997
Timothy J. Rigas,
as Attorney-in-Fact
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 Purchase Agreement effective as of May 13, 1996 between Teleport
Communications Group Inc. and Hyperion Telecommunications of
Florida, Inc. (Incorporated herein by reference is Exhibit 2.1 to
Registration Statement No. 333-06957 on Form S-4.)
3.1 Certificate of Incorporation of Registrant, together with all
amendments thereto. (Incorporated herein by reference is Exhibit
3.1 to Registration Statement No. 333-12619 on Form S-1.)
3.2 Bylaws of Registrant. (Incorporated herein by reference is Exhibit
3.2 to Registration Statement No. 333-12619 on Form S-1.)
4.1 Indenture, dated as of April 15, 1996, between the Registrant and
Bank of Montreal Trust Company. (Incorporated herein by reference
is Exhibit 4.1 to Registration Statement No. 333-06957 on Form S-
4.)
4.2 First Supplemental Indenture, dated as of September 11, 1996,
between, the Registrant and Bank of Montreal Trust Company.
(Incorporated herein by reference is Exhibit 4.2 to Registration
Statement No. 333-12619 on Form S-4.)
4.3 Form of 13% Senior Discount Note. (Incorporated herein by
reference is Exhibit 4.3 to Registration Statement No. 333-12619
on Form S-4.)
4.4 Registration Rights Agreement dated as of April 15, 1996, between
the Registrant and the Initial Purchasers. (Incorporated herein by
reference is Exhibit 4.3 to Registration Statement No. 333-06957
on Form S-4.)
4.5 Subordinated Note dated April 15, 1996 by the Company in favor of
Adelphia. (Incorporated herein by reference is Exhibit 4.3 to
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996 (File No. 0-21605).)
4.6 Form of Class A Common Stock Certificate. (Incorporated herein by
reference is Exhibit 4.1 to Registrant's Registration Statement on
Form 8-A, dated October 23, 1996.)
4.7 Indenture, dated as of August 27, 1997, with respect to the
Registrant's 12 1/4% Senior Secured Notes due 2004, between the
Registrant and the Bank of Montreal Trust Company. (Incorporated
herein by reference is Exhibit 4.01 to Form 8-K dated August 27,
1997 (File No. 0-21605).)
4.8 Form of 12 1/4% Senior Secured Note due 2004 (contained in Exhibit
4.7)
4.9 Pledge Agreement between the Registrant and the Bank of Montreal
Trust Company as Collateral Agent, dated as of August 27, 1997.
(Incorporated herein by reference is Exhibit 4.03 to Form 8-K
dated August 27, 1997 (File No. 0-21605).)
4.10 Registration Rights Agreement between the Registrant and the
Initial Purchasers, dated August 27, 1997, regarding the 12 1/4%
Senior Secured Notes due 2004. (Incorporated herein by reference
is Exhibit 4.04 to Form 8-K dated August 27, 1997 (File No. 0-
21605).)
4.11 Pledge, Escrow and Disbursement Agreement, between the Registrant
and the Bank of Montreal Trust Company, dated as of August 27,
1997. (Incorporated herein by reference is Exhibit 4.05 to Form 8-
K dated August 27, 1997 (File No. 0-21605).)
4.12 Second Supplemental Indenture, dated as of August 27, 1997,
between the Registrant and the Bank of Montreal Trust Company,
regarding the Registrant's 13% Senior Discount Notes due 2003.
(Incorporated herein by reference is Exhibit 4.06 to Form 8-K
dated August 27, 1997 (File No.
0-21605).)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
5.1* Opinion of Buchanan Ingersoll Professional Corporation
10.1 Purchase Agreement dated as of April 10, 1996 between the
Registrant and Bear, Stearns & Co. Inc., Chase Securities Inc. and
NationsBanc Capital Markets, Inc. (collectively, the "Initial
Purchasers"). (Incorporated herein by reference is Exhibit 1.1 to
Registration Statement No. 333-06957 on Form S-4.)
10.2 Employment Agreement between the Registrant and Charles R.
Drenning. (Incorporated herein by reference is Exhibit 10.1 to
Registration Statement No. 333-06957 on Form S-4.)
10.3 Employment Agreement between the Registrant and Paul D. Fajerski.
(Incorporated herein by reference is Exhibit 10.2 to Registration
Statement No. 333-06957 on Form S-4.)
10.4 Employment Agreement between the Registrant and Randolph S.
Fowler. (Incorporated herein by reference is Exhibit 10.3 to
Registration Statement No. 333-06957 on Form S-4.)
10.5 Pre-Incorporation and Shareholder Restrictive Agreement between
Adelphia, Paul D. Fajerski, Charles R. Drenning and Randolph S.
Fowler. (Incorporated herein by reference is Exhibit 10.5 to
Registration Statement No. 333-06957 on Form S-4.)
10.6 Term Loan Note dated May 10, 1996 between Charles R. Drenning in
favor of Registrant in the amount of $1,000,000. (Incorporated
herein by reference is Exhibit 10.6 to Registration Statement No.
333-06957 on Form S-4.)
10.7 Term Loan Note dated May 10, 1996 between Paul D. Fajerski in
favor of Registrant in the amount of $1,000,000. (Incorporated
herein by reference is Exhibit 10.7 to Registration Statement No.
333-06957 on Form S-4.)
10.8 Term Loan Note dated May 10, 1996 between Randolph S. Fowler in
favor of Registrant in the amount of $1,000,000. (Incorporated
herein by reference is Exhibit 10.8 to Registration Statement No.
333-06957 on Form S-4.)
10.9 Term Loan and Stock Pledge Agreement dated May 10, 1996 between
the Registrant and Charles R. Drenning. (Incorporated herein by
reference is Exhibit 10.9 to Registration Statement No. 333-06957
on Form S-4.)
10.10 Term Loan and Stock Pledge Agreement dated May 10, 1996 between
the Registrant and Paul D. Fajerski. (Incorporated herein by
reference is Exhibit 10.10 to Registration Statement No. 333-06957
on Form S-4.)
10.11 Term Loan and Stock Pledge Agreement dated May 10, 1996 between
the Registrant and Randolph S. Fowler. (Incorporated herein by
reference is Exhibit 10.11 to Registration Statement No. 333-06957
on Form S-4.)
10.12 Letter Agreement dated March 19, 1996 between the Registrant,
Charles R. Drenning, Paul D. Fajerski, Randolph S. Fowler and
Adelphia. (Incorporated herein by reference is Exhibit 10.12 to
Registration Statement No. 333-06957 on Form S-4.)
10.13 Warrant Agreement dated as of April 15, 1996, by and among
Hyperion Telecommunications, Inc. and Bank of Montreal Trust
Company. (Incorporated herein by reference is Exhibit 10.13 to
Registration Statement No. 333-06957 on Form S-4.)
10.14 Warrant Registration Rights Agreement dated as of April 15, 1996,
by and among Hyperion Telecommunications, Inc. and the Initial
Purchasers. (Incorporated herein by reference is Exhibit 10.14 to
Registration Statement No. 333-06957 on Form S-4.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.15 Form of Management Agreement. (Incorporated herein by reference is
Exhibit 10.15 to Registration Statement No. 333-06957 on Form S-
4.)
10.16 Employment Agreement between Hyperion Telecommunications, Inc. and
Daniel R. Milliard dated as of March 4, 1997. (Incorporated herein
by reference is Exhibit 10.03 to Current Report on Form 8-K of
Adelphia Communications Corporation dated May 1, 1997 (File Number
0-16014).)
10.17 1996 Long-Term Incentive Compensation Plan. (Incorporated herein
by reference is Exhibit 10.17 to Registration Statement No. 333-
13663 on Form S-1.)
10.18 Registration Rights Agreement among Charles R. Drenning, Paul D.
Fajerski, Randolph S. Fowler, Adelphia Communications Corporation
and the Company. (Incorporated herein by reference is Exhibit
10.18 to Registration Statement No. 333-13663 on Form S-1.)
10.19 Registration Rights Agreement between Adelphia Communications
Corporation and the Company. (Incorporated herein by reference is
Exhibit 10.19 to Registration Statement No. 333-13663 on Form S-
1.)
10.20 Extension Agreement dated as of January 8, 1997, among Hyperion
Telecommunications, Inc., Adelphia Communications Corporation,
Charles R. Drenning, Paul D. Fajerski, Randolph S. Fowler, and six
Trusts named therein. (Incorporated herein by reference is Exhibit
10.04 to Current Report on Form 8-K of Adelphia Communications
Corporation dated May 1, 1997 (File Number 0-16014).)
10.21 Purchase Agreement among the Registrant, Bear Stearns & Co. Inc.,
Chase Securities Inc., TD Securities (USA) Inc., CIBC Wood Gundy
Securities Corp., and Scotia Capital Markets (the "Initial
Purchasers") dated August 21, 1997. (Incorporated herein by
reference is Exhibit 10.01 to Form 8-K dated August 27, 1997 (File
No. 0-21605).)
12.1** Calculation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
21.01 Subsidiaries of the Registrant (Incorporated herein by reference
is Exhibit 21.1 to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997.) (File Number 0-21605)
23.01* Consent of Buchanan Ingersoll Professional Corporation (contained
in its opinion filed as Exhibit 5.01 hereto)
23.02** Consent of Deloitte & Touche LLP
24.01* Power of Attorney (appearing on signature page)
25.01* Form T-1 Statement of Eligibility of Trustee
99.01* Form of Letter of Transmittal and Notice of Guaranteed Delivery
</TABLE>
- --------
*Previously filed.
**Filed herewith.
<PAGE>
EXHIBIT 12.1
HYPERION TELECOMMUNICATIONS, INC.
CALCULATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA THREE THREE
YEAR MONTHS MONTHS
YEAR ENDED MARCH 31, ENDED ENDED ENDED
--------------------------------------------- MARCH 31, JUNE 30, JUNE 30,
1993 1994 1995 1996 1997 1997 1997 1997
------- ------- ------- -------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loss before Income
Taxes, Equity in Net
Loss of Joint Ventures
and Cumulative Effect
of Change in Accounting
Principle.............. $ (881) $(4,294) $(5,922) $ (9,525) $(23,065) $(53,690) $(10,726) $(18,382)
Add:
Equity in Net Loss of
Joint Ventures......... (194) (528) (1,799) (4,292) (7,223) (7,223) (2,540) (2,540)
Fixed Charges, Excluding
Capitalized Interest... -- 2,164 3,321 6,088 28,377 59,002 8,077 15,733
------- ------- ------- -------- -------- -------- -------- --------
Net Loss Available for
Combined Fixed Charges
and Preferred Stock
Dividends.............. (1,075) (2,658) (4,400) (7,729) (1,911) (1,911) (5,189) (5,189)
------- ------- ------- -------- -------- -------- -------- --------
Combined Fixed Charges
and Preferred Stock
Dividends:
Interest Expense...... -- 2,164 3,321 6,088 28,377 59,002 8,077 15,733
Preferred Stock
Dividends............ -- -- -- -- -- 27,000 -- 6,400
------- ------- ------- -------- -------- -------- -------- --------
Total Combined Fixed
Charges and Preferred
Stock Dividends........ -- 2,164 3,321 6,088 28,377 86,002 8,077 22,133
------- ------- ------- -------- -------- -------- -------- --------
Ratio of Earnings to
Combined Fixed Charges
and Preferred Stock
Dividends.............. -- -- -- -- -- -- -- --
Deficiency in Earnings
Required
to Cover Combined Fixed
Charges and Preferred
Stock Dividends........ $(1,075) $(4,822) $(7,721) $(13,817) $(30,288) $(87,913) $(13,266) $(27,322)
======= ======= ======= ======== ======== ======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 23.02
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-36461 of Hyperion Telecommunications, Inc. of our report dated June 13,
1997 appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
October 20, 1997
