<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1997
REGISTRATION NO. 333-12619
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
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
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
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)
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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 any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box.[X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION NOVEMBER 5, 1997
HYPERION TELECOMMUNICATIONS, INC.
329,000 WARRANTS TO PURCHASE AN AGGREGATE OF 613,427 SHARES OF CLASS B
COMMON STOCK AND 613,427 SHARES OF CLASS B COMMON STOCK ISSUABLE UPON
EXERCISE OF THE WARRANTS
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This Prospectus is being used in connection with the offering from time to
time by certain holders (the "Selling Securityholders") of warrants (the
"Warrants" or "Class B Warrants"), each to purchase 1.8645 shares of Class B
common stock, $.01 par value per share (the "Class B Common Stock"), of
Hyperion Telecommunications, Inc., a Delaware corporation (together with its
subsidiaries, the "Company" or "Hyperion"), at an exercise price of $.01 per
share (subject as to both the number of shares and the exercise price to anti-
dilution provisions), and the shares of Class B Common Stock issuable upon
exercise of the Warrants (the "Warrant Shares"). This Prospectus may also be
used by the Company in connection with the issuance from time to time of the
Warrant Shares. The Warrants may be exercised at any time after the earlier to
occur of (i) May 1, 1997 or (ii) in the event of a Change of Control (as
defined), the date the Company mails notice thereof to holders of the Warrants.
Unless exercised, the Warrants will expire on April 1, 2001.
The Warrants and the Warrant Shares may be offered by the Selling
Securityholders in transactions in the over-the-counter-market at prices
obtainable at the time of sale or in privately negotiated transactions at
prices determined by negotiation. The Selling Securityholders may effect such
transactions by selling the Warrants or the Warrant Shares to or through
securities broker-dealers, and such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling
Securityholders and/or the purchasers of the Warrants or the Warrant Shares for
whom such broker-dealers may act as agent or to whom they sell as principal, or
both (which compensation as to a particular broker-dealer might be in excess of
customary commissions). Additionally, agents or dealers may acquire Warrants,
Warrant Shares or interests therein as a pledgee and may, from time to time,
effect distributions of the Warrants, Warrant Shares or interests in such
capacity. See "The Selling Securityholders" and "Plan of Distribution." The
Selling Securityholders, the brokers and dealers through whom sales of the
Warrants or Warrant Shares are made and any agent or dealer who distributes
Warrants or Warrant Shares acquired as pledgee may be deemed "underwriters"
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"), and any profits realized by them on the sale of the Warrants or Warrant
Shares may be considered to be underwriting compensation.
The Company will receive proceeds from the exercise of the Warrants. Except
for the sale of the Warrant Shares upon exercise of the Warrants, the Company
is not selling any of the Warrants or Warrant Shares and will not receive any
of the proceeds from the sale of the Warrants or Warrant Shares being sold by
the Selling Securityholders. The cost of registering the Warrants and the
Warrant Shares is being borne by the Company.
The Company has not and does not currently intend to apply for the listing of
the Warrants or the Warrant Shares on any securities exchange or for quotation
through the Nasdaq National Market.
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY MATTERS
DISCUSSED UNDER THE CAPTION "RISK FACTORS" ON PAGE 11.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company. Neither the delivery
of this Prospectus nor any sale made hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Company since the date hereof.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities offered hereby 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.
THE DATE OF THIS PROSPECTUS IS NOVEMBER , 1997
<PAGE>
AVAILABLE INFORMATION
In accordance with Section 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), Hyperion is subject to the informational
requirements of the Exchange Act and files reports and other information with
the Securities and Exchange Commission (the "Commission"). Such reports and
other information may be inspected and copied at the Public Reference Section
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, DC 20549, and will also be available 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.
The Company has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-1 under the Securities Act with respect to the securities
offered by this Prospectus. 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, reference is made to such
Registration Statement and the exhibits and schedules filed as part thereof.
The Registration Statement and the exhibits and schedules thereto filed with
the Commission may be inspected without charge at the Public Reference Section
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, DC 20549, and will also be available for inspection and copying at
the regional offices of the Commission located at Seven World Trade Center,
13th Floor, New York, New York 10048, and the Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any portion of the reports and other information referred
to above and the Registration Statement may be obtained from the Public
Reference Section of the Commission upon payment of certain prescribed fees.
Electronic registration statements made through the Electronic Data Gathering,
Analysis, and Retrieval system are publicly available through the Commission's
Web site (http://www.sec.gov), which is maintained by the Commission and which
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
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PROSPECTUS SUMMARY
The following information is qualified in its entirety by the more detailed
information and financial statements and notes thereto, appearing elsewhere in
this Prospectus or incorporated by reference herein. For a description of
certain terms used in this Prospectus, see the Glossary attached to this
Prospectus as Appendix A. Unless the context otherwise requires, references in
this Prospectus (i) to the "Company" or "Hyperion" mean Hyperion
Telecommunications, Inc. together with its subsidiaries, and (ii) to the
"networks," the "Company's networks" or the "Operating Companies' networks"
mean the 22 telecommunications networks in which the Company, as of September
1, 1997, had ownership interests through 17 Operating Companies (which, as
defined herein, are (a) wholly owned or majority-owned subsidiaries of the
Company or (b) joint ventures, partnerships, corporations or limited liability
companies managed by the Company and in which the Company holds an equity
interest of 50% or less). Unless otherwise specified, information regarding the
networks that is contained in this Prospectus is as of September 1, 1997, at
which time the Company had ownership interests in 22 networks, including the
networks in Albany and Binghamton, New York (in which, however, the Company no
longer holds an ownership interest as a result of the consummation of the TWEAN
Agreement on September 12, 1997; see "--Recent Developments"). As of the date
of this Prospectus, 17 of the networks were 50% or less owned by the Company.
As described more fully herein, the Company designs, constructs, manages and
operates networks on behalf of the Operating Companies, and it is through these
networks that the Company and the Operating Companies provide
telecommunications services. See "--Ownership of the Company and the Operating
Companies." The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements. Certain information included or
incorporated by reference in this Prospectus, including Management's Discussion
and Analysis of Financial Condition and Results of Operations, is forward-
looking, such as information relating to the effects of future regulation,
future capital commitments and the effects of competition. Such forward-looking
information involves important risks and uncertainties that could significantly
affect expected results in the future from those expressed in any forward-
looking statements made by, or on behalf of, the Company. These risks and
uncertainties include, but are not limited to, uncertainties relating to
economic conditions, acquisitions and divestitures, government and regulatory
policies, the pricing and availability of equipment, materials, inventories and
programming, technological developments and changes in the competitive
environment in which the Company operates. Persons reading this Prospectus are
cautioned that such statements are only predictions and that actual events or
results may differ materially. In evaluating such statements, persons reading
this Prospectus 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 reading this Prospectus should
carefully consider the factors set forth herein under the caption "Risk
Factors."
THE COMPANY
The Company is a leading facilities-based provider of local
telecommunications services with state-of-the-art fiber optic networks located
in regionally clustered markets primarily within the eastern half of the United
States. As of June 30, 1997, Hyperion's 17 operating networks served 35 cities
with approximately 3,640 route miles of fiber optic cable connecting 1,603
buildings and 106 local exchange carrier ("LEC") central offices. The Company's
22 networks (which includes five under construction) have generally been
developed by partnering with a local cable operator or utility provider (the
"Local Partner"), which has enabled the Company to finance its network
expansion at a significantly lower cost than other competitive local exchange
carriers ("CLECs") and to rapidly construct high-capacity fiber optic networks
which provide the Company broader coverage than other CLECs in its markets.
According to Company estimates, this broad network coverage enables the Company
to directly reach approximately 60% of the business access lines currently in
service in its markets. In the markets where the Company's 22 networks are
operating or under construction, as of June 30, 1997, the Company believes its
addressable market opportunity was approximately $16.2 billion annually,
substantially all of which is currently serviced by the incumbent LECs and
interexchange carriers ("IXCs"). This addressable market estimate does not
include the enhanced data services market which the Company has entered, or the
Internet access market which it plans to enter in the near future.
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The Company's current service offerings include switched local dial tone (in
13 markets), enhanced data services (in seven markets), including frame relay,
high speed Internet access, video conferencing, dedicated access and long
distance access. The Company also plans to be an Internet Service Provider
("ISP") in a majority of its markets by the end of fiscal 1998. In addition,
the Company will begin selling long distance services by the end of 1997
through a resale agreement with an IXC and expects to begin offering
facilities-based long distance services through the regional interconnection of
the Company's networks in the near future. With 75% of all U.S.
telecommunications intraLATA and interLATA toll traffic terminating, on
average, within 300 miles of its origination point, the Company believes that
the breadth of its networks, their regional clustering, and the current and
planned interconnection of the networks will enable the Company to originate
and terminate a significant proportion of its customers' communications traffic
over its own networks, rather than relying primarily on the network of the
incumbent LEC.
Hyperion's targeted customer base consists of small, medium and large
businesses, governmental and educational end users and IXCs. Some of these end
user customers include America Online, Sprint, Hershey Medical Center and HCA
International. The Company services its customers through a dedicated sales
force of approximately 70 highly trained professionals focused on selling the
Company's portfolio of service offerings. The Company expects to increase its
sales force and marketing efforts significantly by the end of the fiscal year.
Management believes that the Company's ability to utilize its extensive network
clusters to offer a single source solution for all of its customers'
telecommunications needs provides it with a significant competitive advantage
over other CLECs. Further, Hyperion believes it can continue to attract end
user customers by offering (i) a single point of contact for billing,
installation and service coordination, (ii) high-capacity fiber optic network
connection directly to all or substantially all of a customer's premises due to
the breadth of the Company's network coverage and (iii) high quality,
solutions-oriented customer service. The Company also believes that major IXCs
such as AT&T, MCI and Sprint will seek to offer their business customers an
integrated package of switched local and long distance services using the
networks of CLECs such as Hyperion. The Company believes that it is well
positioned to capitalize on this opportunity as its networks generally offer
the broadest coverage in their markets, which is attractive to both end user
customers and major IXCs.
The Company initiated its switched services deployment plan in 1997 and
currently provides switched services in 13 markets, nine of which were placed
in operation during the last five months, with switching for the remaining two
operating markets (excluding Albany and Binghamton, New York) expected to be
operational by the end of 1997. In the markets it currently serves, the Company
estimates that there are approximately 11 million business access lines in
service. The Company has experienced initial success in the sale of access
lines with approximately 16,000 access lines sold as of September 30, 1997, of
which approximately 5,500 lines are installed and the remainder are scheduled
for service by the end of 1997. The timing of certain installations may be
extended due to necessary upgrading of customer facilities, the complexity of
installation or customer scheduling requirements. Delivery of on-network
switched services is expected to provide faster, more reliable access line
provisioning and more responsive customer service and monitoring. The Company
believes that its large upfront capital investment in its networks, coupled
with the selective use of unbundled network elements, will provide higher
operating margins than can be achieved by other CLECs.
Since inception in October 1991 through June 30, 1997, the Company and its
partners have invested approximately $339.4 million to build and develop the
network infrastructure and to fund operations. As of June 30, 1997, the gross
property, plant and equipment of the Company, its networks and the Company's
Network Operations and Control Center (the "NOCC"), including the Company's
investment in Telergy (see "--Recent Developments"), was approximately $286.0
million. The Company anticipates that its future capital expenditure
requirements will be largely based on a selective network build-out strategy
that combines both on-network and off-network connections to customers.
The Company has increased, and intends to continue to increase, its ownership
interests in Operating Companies when it can do so on attractive economic
terms. This goal has been facilitated by the substantial completion of a number
of Hyperion's networks along with the desire of certain of its current Local
Partners to
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reduce their telecommunications investments and focus on their core cable
operations. For example, the Company has entered into agreements to increase or
has recently increased its ownership interest to 100% in Operating Companies in
five of its markets. See "--Ownership of the Company and the Operating
Companies." As a result, since December 31, 1995, the Company's weighted
average ownership interest (based on gross property, plant and equipment) in
its Operating Companies has, after giving effect to pending definitive
agreements, increased to 66.4% from 34.5%.
GROWTH STRATEGY
The Company's objective is to be the leading local telecommunications
services provider to small, medium and large businesses, governmental and
educational end users and IXCs within its markets. To achieve this objective,
the Company has pursued a facilities-based strategy to provide extensive, high
capacity network coverage and to broaden the range of telecommunications
products and services it offers to targeted customers. The principal elements
of the Company's growth strategy include the following:
Provide Bundled Package of Telecommunications Services. The Company believes
that a significant portion of business and government customers prefer a
single-source telecommunications provider that delivers a full range of
efficient and cost effective solutions to meet their telecommunications needs.
These customers require reliability, high quality, broad geographic coverage,
end-to-end service, solutions-oriented customer service and the timely
introduction of new and innovative services. The Company believes it will be
able to continue to compete effectively for end users by offering superior
reliability, product diversity, service and custom solutions to end user needs
at competitive prices. The Company also offers its local services to IXCs and
has entered into national service agreements with AT&T and MCI to be their
preferred supplier of dedicated access and switched access transport services.
See "Business--AT&T Certification" and "--Recent Developments--Preferred
Provider Alliance with MCI."
Expand Solutions-Oriented Sales Effort. The Company provides an integrated
solutions approach to satisfy its end users' communications requirements
through a well trained and focused team of direct sales and engineering support
professionals. In its marketing efforts, the Company emphasizes its extensive
fiber optic network, which provides the reach and capacity to address the needs
of its customers more effectively than many of its competitors who rely solely
upon leased facilities or who have limited network build-outs in their markets.
The Company intends to double the size of its current direct sales force of
over 70 persons by the end of the year and increase the number of its customer
care professionals from 44 to approximately 70 as it increases the breadth of
its product offerings to satisfy the growing communications needs of its
customers. Further, by the end of 1997, the Company expects to initiate direct
marketing and sales of local communications services on an unbundled loop basis
to retail and small business customers in certain markets, generally offering
such services under either the Hyperion name or a co-branded name that includes
the name of the particular Local Partner.
Continue to Increase Broad Based Network Clusters and Interconnect
Networks. The Company intends to build on its extensive networks by (i)
expanding its networks into nearby areas that are under-served by its
competitors, (ii) establishing new networks in close proximity to existing
markets and (iii) interconnecting the networks within its regional clusters.
The Company believes that clustering and interconnecting its large networks
enables it to (i) carry a greater amount of traffic on its own networks, which
leverages the fixed cost structure of its networks, thereby increasing revenues
and margins, (ii) take advantage of economies of scale in management, network
operations and sales and marketing, (iii) increase the number of customers that
the Company's networks can service and (iv) increase the networks' ability to
provide reliable, end-to-end connectivity on a regionally focused basis.
Create Additional Partnerships with Utility Companies. The Company intends to
continue to construct new networks either through partnerships or long-term
fiber lease agreements with utility companies, which significantly reduces the
cost and time required to construct a fiber optic network. This approach
enables the
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Company to offer services more rapidly as well as lower the overhead costs
associated with operating and maintaining a network. Utility companies are
attractive partners for the Company due to their (i) contiguous and broad
geographic coverage with extensive conduits and rights-of-way in both business
and residential areas, (ii) significant access to capital resources, (iii)
existing relationships with business and residential customers and (iv)
reputation for reliability and quality customer service. In turn, the Company
believes that it is an attractive partner for utility companies because it can
offer them a significant stake in its networks, both from a financial and
operational perspective, and provide network operations management expertise.
RECENT DEVELOPMENTS
12 7/8% Senior Exchangeable Redeemable Preferred Stock Offering. On October
9, 1997, Hyperion issued $200.0 million aggregate liquidation preference of 12
7/8% Senior Exchangeable Redeemable Preferred Stock due 2007 (the "Preferred
Stock") primarily to qualified institutional investors in a private placement
(the "Preferred Stock Offering"). 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.
Offering of Senior Secured Notes. On August 27, 1997, the Company announced
the sale of $250.0 million aggregate principal amount of 12 1/4% Senior Secured
Notes due 2004 (the "Senior Secured Notes") in a private placement exempt from
registration (the "Senior Secured Note Offering"). The Company secured the
Senior Secured Notes through the pledge of the common stock of certain of its
wholly-owned subsidiaries. Of the net proceeds of the Senior Secured Note
Offering of approximately $243.3 million, $83.4 million was placed in an escrow
account to provide for payment in full when due of the first six scheduled
interest payments on the Senior Secured Notes, with the remainder of the net
proceeds to be used to fund the acquisition of increased ownership interests in
certain of its networks, the continued expansion of its networks, and working
capital.
Preferred Provider Alliance with MCI. On June 13, 1997, the Company entered
into agreements (collectively, the "MCI Preferred Provider Agreement") with
MCImetro Access Transmission Services, Inc. (together with its affiliate, MCI
Communications, "MCI"). Pursuant to these agreements, the Company is designated
MCI's preferred provider of new end user dedicated access circuits and of end
user dedicated access circuits resulting from conversions from the incumbent
LEC in the Company's markets. In addition, Hyperion has a right of first
refusal to provide MCI all new dedicated local network access circuits such as
POP-to-POP or POP-to-LSO connections.
Entergy Agreement. On April 24, 1997, the Company and Entergy Corporation
("Entergy") formed three joint ventures in which the Company, through three of
its wholly owned Subsidiaries, and Entergy each own a 50% interest (the
"Entergy-Hyperion Joint Ventures"). The Entergy-Hyperion Joint Ventures will
offer competitive telecommunications services primarily to commercial customers
in the Little Rock, Arkansas, Jackson, Mississippi, and Baton Rouge, Louisiana,
metropolitan areas (the "Entergy Networks"). In addition, they intend to offer
a full range of switched telecommunications services, dedicated access to long
distance carriers and private line services.
Fiber Interconnection of Northeast Cluster. Pursuant to agreements with
Telergy, Inc. ("Telergy"), the Company will lease dark fiber to connect certain
of its New York networks. Telergy has commenced construction of a fiber optic
backbone network which is scheduled to be completed in stages, with completion
of Buffalo to Syracuse in September 1997, completion of Syracuse to Albany
expected by the end of 1997, and final completion of Albany to New York City
expected by the end of 1999.
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Changes in Network Ownership.
. The Company has entered into purchase agreements (collectively, the "New
Jersey Agreement") dated October 31, 1997 with subsidiaries of Tele-
Communications, Inc. ("TCI") and Sutton Capital Associates, Inc.
("Sutton") to increase its ownership interests in the New Brunswick and
Morristown, NJ networks to 100%.
. On August 11, 1997, the Company entered into agreements (collectively,
the "TCI Agreement") with certain subsidiaries of TCI pursuant to which
the Company will purchase all of TCI's interest in the Operating Company
that owns the Louisville and Lexington networks.
. On August 4, 1997, the Company entered into an agreement with Lenfest
Telephony ("Lenfest") to increase its interest in the Harrisburg
Operating Partnership to 100%.
. On May 8, 1997, the Company entered into agreements (collectively, the
"TWEAN Agreement") with Time Warner Entertainment Advance/Newhouse and
Advance/Newhouse Partnership (collectively "TWEAN") to, among other
things, consolidate the Company's interests in New York state by
increasing its ownership interest in the Syracuse network to 100%. On
September 12, 1997, the Company consummated the TWEAN Agreement and
thereby (i) increased its ownership interests in the Buffalo and
Syracuse networks to 60% and 100%, respectively, and (ii) eliminated its
ownership interests in the Albany and Binghamton networks.
. Upon the consummation of the TCI Agreement, the Company will increase
its ownership interest in the Buffalo network to 100%.
These transactions are consistent with the Company's goal to own at least a
50% interest in each of its Operating Companies and to dispose of its interests
in those in which acquiring a controlling interest is not economically
attractive. The Company may consider similar transactions from time to time in
its other markets. For an additional discussion of Recent Developments, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Recent Developments."
OWNERSHIP OF THE COMPANY AND THE OPERATING COMPANIES
The Company is an 88% owned subsidiary of Adelphia Communications Corporation
("Adelphia"), the seventh largest cable television company in the United States
which, as of June 30, 1997, owned or managed cable television systems that
served approximately 1.9 million subscribers in 12 states. The balance of the
Company is currently owned by senior executives of the Company. As of September
1, 1997, the Company's 22 networks were owned through (i) partnerships or
limited liability companies with Local Partners (the "Operating Partnerships"),
(ii) three wholly owned subsidiaries of the Company, (iii) one corporation in
which the Company is a minority shareholder and (iv) one company in which the
Company is the majority equityholder (the entities described in clauses (ii),
(iii) and (iv) are collectively referred to as the "Operating Corporations,"
and the Operating Corporations and the Operating Partnerships are collectively
referred to as the "Operating Companies"). The Company is responsible for the
network design, construction, management and operation of the Operating
Companies, for which it receives management fees.
The Company's executive offices are located at Main at Water Street,
Coudersport, Pennsylvania 16915, and its telephone number is (814) 274-9830.
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The following is an overview of the Company's networks and respective
ownership interests as of September 1, 1997.
<TABLE>
<CAPTION>
ACTUAL OR ACTUAL PRO FORMA
EXPECTED DATE HYPERION HYPERION
COMPANY NETWORKS OF OPERATION(A) INTEREST INTEREST(B) LOCAL PARTNER(S)
- ---------------- --------------- -------- ----------- ----------------------------
<S> <C> <C> <C> <C>
Northeast Cluster
Vermont.................... 11/94 100.0% 100.0%(h) (c)
Syracuse, NY............... 8/92 50.0 100.0(h) Time Warner/Advance(d)
Buffalo, NY................ 1/95 40.0 100.0(h) Tele-Communications, Inc.
Time Warner/Advance(c)
Albany, NY................. 2/95 50.0 -- Time Warner/Advance(d)
Binghamton, NY............. 3/95 20.0 -- Time Warner/Advance(d)
Mid-Atlantic Cluster
Charlottesville, VA........ 11/95 100.0 100.0 (c)
Scranton/Wilkes-Barre, PA.. 12/97 100.0 100.0 (c)
Harrisburg, PA............. 4/95 50.0 100.0 Lenfest Telephony
Philadelphia, PA........... 8/96 50.0 50.0 PECO Energy(e)
Allentown/Bethlehem/Easton/
Reading, PA ("ABER")...... 12/97 50.0 50.0 PECO Energy(e)
York, PA................... 5/97 50.0 50.0 Susquehanna Cable
Richmond, VA............... 9/93 37.0 37.0 Media One
Morristown, NJ............. 7/96 19.7 19.7 Tele-Communications, Inc.(f)
New Brunswick, NJ.......... 11/95 19.7 19.7 Tele-Communications, Inc.(f)
Mid-South Cluster
Lexington, KY.............. 6/97 50.0 100.0(h) Tele-Communications, Inc.(g)
Louisville, KY............. 3/95 50.0 100.0(h) Tele-Communications, Inc.(g)
Nashville, TN.............. 11/94 95.0 95.0(h) InterMedia Partners
Baton Rouge, LA............ 12/97 50.0 50.0 Entergy
Jackson, MS................ 12/97 50.0 50.0 Entergy
Little Rock, AR............ 12/97 50.0 50.0 Entergy
Other Networks
Wichita, KS................ 9/94 49.9 49.9 Gannett
Jacksonville, FL........... 9/92 20.0 20.0(h) Media One
Weighted Average
Ownership(i)............... 56.8 66.4
</TABLE>
- --------
(a) Refers to the date on which (i) the network is connected to at least one
IXC POP, (ii) the network is capable of accepting traffic from IXCs and end
users, (iii) the Company's central office is fully functional and (iv) the
initial network SONET fiber ring has been completed.
(b) Gives effect to pending agreements which provide for the Company to
increase or decrease its ownership interests in its networks. The Company
is permitted to reenter the markets in which it has eliminated its
ownership interests and intends to reenter the Albany market by April 1998.
As of the consummation of the TWEAN Agreement on September 12, 1997, the
Company's interests in the Buffalo and Syracuse networks increased to 60%
and 100%, respectively, and the Company's interests in the Albany and
Binghamton networks were eliminated. See "Recent Developments."
(c) Adelphia or its affiliates lease fiber capacity to the Operating Companies
in these networks.
(d) The interests in the Albany, Binghamton and Syracuse networks are all owned
by one Operating Company.
(e) The interests in the Philadelphia and ABER networks are owned by one
Operating Company.
(f) The interests in the Morristown and New Brunswick networks are owned by one
Operating Company. Sutton Capital Associates also owns a minority interest
in the Operating Company.
(g) The interests in the Lexington and Louisville networks are owned by one
Operating Company.
(h) Represents a network that is owned by an Operating Company or a subsidiary,
all of the Capital Stock of which is or will be pledged by the Company as
security for the Senior Secured Notes.
(i) Based upon gross property, plant and equipment of the Company and the
Operating Companies.
7
<PAGE>
SUMMARY DESCRIPTION OF WARRANTS
Total Number of Warrants.... 329,000 Warrants, which when exercised would
entitle the holders thereof to acquire an
aggregate of 613,427 shares of Class B Common
Stock of the Company, representing
approximately 5.78% of the outstanding Common
Stock of the Company on a fully-diluted basis
as of the date of issuance of the Warrants.
Expiration of Warrants...... The Warrants will expire automatically on
April 1, 2001 (the "Expiration Date"). The
Company will give notice of expiration not
less than 90 nor more than 120 days prior to
the Expiration Date to the registered holders
of the then outstanding Warrants. If the
Company fails to give this Notice, the
Warrants will not expire until 90 days after
the Company gives such notice.
Exercise.................... Each Warrant, when exercised, will entitle
the holder thereof to purchase 1.8645 shares
of the Class B Common Stock of the Company at
an exercise price of $.01 per share. The
Warrants are exercisable at any time on or
after the earlier to occur of (i) May 1, 1997
and (ii) in the event a Change of Control
occurs, the date the Company mails notice
thereof to holders of the Warrants. The
number of shares of Class B Common Stock of
the Company for which, and the price per
share at which, a Warrant is exercisable are
subject to adjustment upon the occurrence of
certain events, as provided in the warrant
agreement relating to the Warrants (the
"Warrant Agreement"). See "Description of
Warrants."
THE OFFERING OF WARRANT SHARES
Shares of Class B Common
Stock to be Offered by
Hyperion Upon Exercise of
the Warrants................
613,427(1)
Shares of Class B Common
Stock to be Outstanding
after the Offering of
Warrant Shares..............
10,613,427(1)
Shares of Class A Common
Stock Outstanding as of
November 1, 1997............ 122,000
Use of Proceeds............. Any proceeds received by the Company upon the
exercise of the Warrants will be used for
general corporate purposes.
- --------
(1) Subject to adjustment upon the occurrence of certain events, as provided in
the Warrant Agreement. See "Description of Warrants."
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data for each of the four years
in the period ended March 31, 1997 have been derived from the audited
consolidated financial statements of the Company and the related notes thereto.
The unaudited information for the fiscal year ended March 31, 1993 is derived
from other Company information. These data should be read in conjunction with
the consolidated financial statements and related notes thereto for each of the
three years in the period ended March 31, 1997 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus. The statement of operations data with respect to the fiscal
year ended March 31, 1994 have been derived from audited consolidated financial
statements of the Company not included herein. The data as of June 30, 1997 and
for the three months ended June 30, 1996 and 1997 are unaudited; however, in
the opinion of management, such data reflect all adjustments (consisting only
of normal recurring adjustments) necessary to fairly present the data for such
interim periods. Operating results for the three months ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ending March 31, 1998.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30,
---------------------------------------------- ------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (A)(B):
Telecommunications
service and management
fee revenue........... $ 89 $ 417 $ 1,729 $ 3,322 $ 5,088 $ 1,102 $ 1,520
Operating expenses:
Network operations..... 19 330 1,382 2,690 3,432 859 1,180
Selling, general and
administrative........ 921 2,045 2,524 3,084 6,780 1,027 2,380
Depreciation and
amortization.......... 30 189 463 1,184 3,945 695 1,372
------- ------- -------- -------- -------- -------- --------
Operating loss......... (881) (2,147) (2,640) (3,636) (9,069) (1,479) (3,412)
Gain on sale of
investment............ -- -- -- -- 8,405 8,405 --
Interest income........ -- 17 39 199 5,976 1,433 763
Interest expense and
fees ................. -- (2,164) (3,321) (6,088) (28,377) (6,169) (8,077)
Equity in net loss of
joint ventures........ (194) (528) (1,799) (4,292) (7,223) (1,636) (2,540)
Net (loss) income...... (1,075) (4,725) (7,692) (13,620) (30,547) 551 (13,266)
OTHER COMPANY DATA (A):
EBITDA (c)............. $ (851) $(1,958) $ (2,177) $ (2,452) $ (5,124) $ (784) $ (2,040)
Capital expenditures
and Company
investments (d)....... 3,891 8,607 10,376 18,899 79,396 6,568 36,797
Cash used in operating
activities............ (725) (2,121) (2,130) (833) (4,823) (2,657) (2,407)
Cash (used in) provided
by investing
activities............ (3,806) (8,607) (10,376) (18,899) (72,818) 5,050 (36,797)
Cash provided by
financing activities.. 4,645 10,609 12,506 19,732 137,455 129,749 698
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------------
ACTUAL AS ADJUSTED (E)
-------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA (A):
Cash and cash equivalents............................ $ 21,308 $375,708
Restricted cash (f).................................. -- 83,400
Total assets......................................... 169,907 614,407
Long term debt and exchangeable redeemable preferred
stock................................................ 222,251 666,751
Stockholders' equity (deficiency).................... (63,493) (63,493)
</TABLE>
- --------
(a) Financial information for the Company and its consolidated Subsidiaries. As
of June 30, 1997, 18 of the Company's networks were owned by joint ventures
in which it owns an interest of 50% or less, and for which the Company
reports its interest pursuant to the equity method of accounting consistent
with generally accepted accounting principles.
(b) Statement of Operations Data does not reflect the issuance of the Senior
Secured Notes or the Preferred Stock Offering. Interest expense and fees on
a pro forma basis, assuming the issuance of the Senior Secured Notes
occurred on April 1, 1996 would have been $59.0 and $15.7 million for the
year ended March 31, 1997 and the three months ended June 30, 1997,
respectively. Preferred stock dividends on a pro forma basis, assuming the
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 Preferred Stock Offering and the issuance
of the Senior Secured Notes, as if each such event occurred as of June 30,
1997.
(f) $83.4 million of the proceeds from the issuance of the Senior Secured Notes
was placed in an escrow account for the purchase of U.S. government
securities to provide for payment in full when due of the first six
scheduled interest payments on the Senior Secured Notes.
9
<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.
<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.
10
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider carefully the following risk factors in evaluating
the Company and its business before purchasing Warrants or Warrant Shares in
this offering.
Certain information included or incorporated by reference in this
Prospectus, is forward-looking, such as information relating to the effects of
future regulation, future capital commitments and the effects of competition.
These statements appear in a number of places in this Prospectus, including
"Prospectus Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," and include statements
regarding the intent, belief and current expectations of the Company and its
directors and officers. Such forward-looking information involves important
risks and uncertainties that could significantly affect expected results in
the future from those expressed in any forward-looking statements made by, or
on behalf of, the Company. These risks and uncertainties include, but are not
limited to, uncertainties relating to economic conditions, acquisitions and
divestitures, government and regulatory policies, the pricing and availability
of equipment, materials, and inventories, technological developments and
changes in the competitive environment in which the Company operates. Persons
reading this Prospectus are cautioned that such statements are only
predictions and that actual events or results may differ materially. In
evaluating such statements, readers should specifically consider the various
factors which could cause actual events or results to differ materially from
those indicated by such forward looking statements. See "--Forward Looking
Statements."
Absence of a Public Market for Warrants and Warrant Shares. The Warrants
were issued by the Company as part of a private placement of units in April
1996 (the "Private Placement"). Neither the Warrants nor the Warrant Shares
are listed on any securities exchange or for quotation through the Nasdaq
National Market. Accordingly, there can be no assurance as to the liquidity of
or the development any market for the Warrants or the Warrant Shares.
Negative Cash Flow and Operating Losses; Limited History of Operations. The
Company has experienced significant losses since its inception, with operating
losses of approximately $2.1 million, $2.6 million, $3.6 million, $9.1
million, $1.5 million and $3.4 million for the fiscal years ended March 31,
1994, 1995, 1996 and 1997 and the three months ended June 30, 1996 and 1997,
respectively. The Company expects to continue to incur substantial operating
losses in the foreseeable future as it pursues its plans to expand its
networks, service offerings and customer base. There can be no assurance that
such losses will not continue indefinitely. The Company currently accounts for
its ownership interests in the Operating Companies in which it does not have
majority ownership interest using the equity method and, therefore, the
Company's consolidated financial statements include only the Company's pro
rata share of such Operating Companies' and the South Florida Partnership's
net losses as equity in net losses of joint ventures.
The Company was formed in October 1991 and, as of June 30, 1997, only 11 of
its 17 operational networks had been in operation for more than 24 months and
five networks were not yet in operation. Prospective investors therefore have
limited historical financial information about the Company upon which to base
an evaluation of the Company's performance. The development of the Company's
businesses and the installation and expansion of its networks require
significant expenditures, a substantial portion of which are made before any
revenues may be realized. Certain of the expenditures, including marketing,
sales and general and administrative costs, are expensed as incurred, while
certain other expenditures, including network design and construction,
negotiation of rights-of-way and costs to obtain legal and regulatory
approval, are deferred until the applicable network is operational. The
Company will continue to incur significant expenditures in connection with the
construction, acquisition, development and expansion of the Company's and
Operating Companies' networks, services and customer base.
In light of the Company's limited operating history, its history of
significant operating losses and its expectation that it will continue to
incur significant expenses and operating losses for the foreseeable future,
there can be no assurance that the Company will be able to implement its
growth strategy or achieve or sustain profitability.
11
<PAGE>
Substantial Leverage. As of June 30, 1997, the Company's total amount of
debt outstanding was $222.3 million and the Company had a stockholders'
deficiency of $63.5 million. As of June 30, 1997, as adjusted to give effect
to the issuance of the Senior Secured Notes and the Preferred Stock, the
Company's total amount of debt and redeemable preferred stock outstanding
would have been $672.3 million (such amount at September 30, 1997 would
increase by approximately $6.8 million related to the Accreted Value (as
defined) with respect to the Senior Notes issued pursuant to the Senior Notes
Indenture dated as of April 15, 1996 (the "Senior Notes"). In addition, in
each year since its inception, despite increasing revenues, the Company's
earnings have been inadequate to cover its combined fixed charges and
preferred stock dividends by a substantial and increasing margin. Moreover,
the Company anticipates that earnings will be insufficient to cover combined
fixed charges and preferred stock dividends for the foreseeable future.
Commencing on October 15, 2001, semi-annual cash interest payments of $21.4
million will be due and payable on the Senior Notes, commencing on March 1,
1998, semi-annual cash payments of $15.3 million on the Senior Secured Notes
will become due and payable, and commencing on October 15, 2002, quarterly
cash dividends of $12.2 million on the Preferred Stock (assuming that all
dividends prior to such date are paid in additional shares of Preferred Stock)
will become due and payable.
Because the Company currently has, and anticipates that it will continue to
have, a substantial consolidated cash flow deficit, its ability to (i) make
cash interest payments on the Senior Notes commencing on October 15, 2001 and
to repay its obligations on the Senior Notes at maturity, (ii) make cash
interest payments on the Senior Secured Notes commencing on March 1, 1998, and
to repay its obligations on the Senior Secured Notes at maturity and (iii)
make cash dividend payments on the Preferred Stock commencing on October 15,
2002, and to redeem the Preferred Stock at maturity, will be dependent on
developing one or more sources of cash flow prior to the date on which such
cash payment obligations arise. To accomplish this, the Company may seek to
(i) refinance all or a portion of the Senior Notes, the Senior Secured Notes
and/or the Preferred Stock (or the Exchange Debentures, as the case may be),
(ii) sell all or a portion of its interests in one or more of the Operating
Companies, (iii) negotiate with its current Local Partners to permit any
excess cash generated by its Operating Companies to be distributed to partners
rather than invested in the businesses of such Operating Companies and/or (iv)
invest in companies that will make substantial cash distributions. There can
be no assurance that (i) there will be a market for the debt or equity
securities of the Company in the future, (ii) the Company will be able to sell
assets in a timely manner or on commercially reasonable terms or in an amount
that will be sufficient to make cash interest or dividend payments and to
repay the Senior Notes, the Senior Secured Notes and/or the Preferred Stock
(or the Exchange Debentures, as the case may be) when due, (iii) the Company
will be able to persuade its Local Partners that cash generated by the
operations of the Operating Companies should be distributed to partners,
members or shareholders or (iv) the Company will be able to locate and invest
in companies that will be mature enough to make substantial cash contributions
to the Company prior to the time such payments are due.
Significant Future Capital Requirements. Expansion of the Company's existing
networks and services and the development of new networks and services require
significant capital expenditures. The Company's operations have required and
will continue to require substantial capital investment for (i) the
installation of electronics for switched services in the Company's networks,
(ii) the expansion and improvement of the Company's NOCC and existing networks
and (iii) the design, construction and development of additional networks. The
Company plans to make substantial capital investments and investments in
Operating Companies in connection with the installation of 5ESS switches or
remote switching modules in all of its existing operating markets and will
install additional 5ESSs or remote switching modules in each of the Company's
future operational markets. To date, the Company has installed switches which
service 13 of its markets and expects that it will complete the installation
of switches in all of its markets by the end of 1997. In addition, the Company
intends to increase spending on marketing and sales significantly in the
foreseeable future in connection with the expansion of its sales force and
marketing efforts generally. The Company estimates that it will require
approximately $175 million to $200 million to fund anticipated capital
expenditures, working capital requirements and operating losses of the
Company, investments in existing Operating Companies and the acquisition of
100% of the ownership interests in the Buffalo, Louisville, Lexington and
Syracuse networks,
12
<PAGE>
through the fiscal year ended March 31, 1999. The Company currently expects
that the proceeds from 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," "Prospectus 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 Company will be successful in generating
sufficient cash flow or in raising sufficient debt or equity capital on terms
that it will consider acceptable, or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The expectations of required future capital expenditures are based on the
Company's current estimates. There can be no assurance that actual
expenditures will not significantly exceed current estimates or that the
Company will not accelerate its capital expenditure spending.
Holding Company Structure; Inability to Access Cash Flow. The Company is a
holding company with substantially all of its operations conducted through the
Operating Companies, and the Company expects to develop new networks and
operations in the future through joint ventures. In addition, as of June 30,
1997, 18 of the Company's 22 networks were owned by Joint Ventures in which
the Company owned 50% or less of the equity interests, and future Joint
Ventures may be developed in which the Company will own less than 50% of the
equity interests. Accordingly, the Company's cash flow and, consequently, its
ability to service its debt, including the Senior Notes, the Senior Secured
Notes, the Exchange Debentures, if any, any other indebtedness and its
obligations with respect to the Preferred Stock, is dependent on the Company
receiving its pro rata share of the cash flow of the Operating Companies and
the payment of funds by those Operating Companies in the form of management
fees, loans, dividends, distributions or otherwise. The Operating Companies
are separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due pursuant to the Senior Notes, the Senior
Secured Notes, the Preferred Stock or to make any funds available therefor,
whether in the form of loans, dividends, distributions or otherwise.
Furthermore, the Company may be unable to access its portion of the cash flow
of certain of the Operating Companies because it holds a 50% or less ownership
interest in certain of such entities and, therefore, does not have the
requisite control to cause such entities to make distributions or pay
dividends to the partners or equity holders. In addition, such entities will
be permitted to incur indebtedness that may severely restrict or prohibit the
making of distributions, the payment of dividends or the making of loans. See
"--Risks Associated with Joint Ventures" and "--Substantial Leverage."
Risk of New Service Acceptance by Customers. The Company is in the process
of introducing a number of services, primarily local exchange services, that
the Company believes are important to its long-term growth. The success of
these services will be dependent upon, among other things, the willingness of
customers to accept
13
<PAGE>
the Company as a new provider of such new telecommunications services. No
assurance can be given that such acceptance will occur, and the lack of such
acceptance could have a material adverse effect on the Company.
Restrictions on the Company's Ability to Pay Dividends. To date, the Company
has not paid dividends on its shares of capital stock. The ability of the
Company to pay cash dividends on the Preferred Stock, the Common Stock or
other capital stock and to redeem the Preferred Stock upon maturity is
substantially restricted under various covenants and conditions contained in
the indentures with respect to the Senior Notes, (the "Senior Indenture") and
the Senior Secured Notes ("the Senior Secured Indenture"). In addition to the
limitations imposed on the payment of dividends by the Senior Indenture and
the Senior Secured Indenture, under Delaware law the Company is permitted to
pay dividends on its capital stock only out of its surplus, or in the event
that it has no surplus, out of its net profits for the year in which a
dividend is declared or for the immediately preceding fiscal year. At June 30,
1997, the Company had a stockholders' deficiency of $63.5 million. In order to
pay dividends in cash, the Company must have surplus or net profits equal to
the full amount of the cash dividend at the time such dividend is declared.
The Company cannot predict what the value of its assets or the amount of its
liabilities will be in the future and, accordingly, there can be no assurance
that the Company will be able to pay cash dividends on its capital 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 interest of such other
partner. In addition, if a partner triggers such buy/sell provisions and the
Company is unable to purchase the initiating partner's interests, the Company
will be forced to sell its interests to the partner, thereby terminating the
partnership, which could result in a material adverse effect on the future
cash flow of the Company.
The bankruptcy or insolvency of a Local Partner or an Operating Company
could result in the termination of the respective Local Partner Agreement and
the related Fiber Lease Agreement (as defined). The effect of such
terminations could be materially adverse to the Company and the respective
Operating Company. Similarly, all of the Management Agreements (as defined),
two of the Local Partner Agreements and five of the Fiber Lease Agreements can
be terminated by the respective Local Partner at various times during the next
seven years. While the Company believes such agreements will be renewed, there
can be no assurance that the Local Partner will not seek to terminate the
agreements. See "Business--Operating Agreements." Accordingly, the failure to
renew such agreements could materially adversely affect the Company and the
respective Operating Companies. In addition, the failure of a Local Partner to
make required capital contributions could have a material adverse effect on
the Company and the respective Operating Company.
Neither the Senior Indenture, the Senior Secured Indenture, nor the
Preferred Stock Certificate of Designation restricts the amount of
indebtedness that can be incurred by Operating Companies in which the Company
owns a less than 45% interest. The Company expects that certain of the
Operating Companies may begin to incur substantial indebtedness in the
foreseeable future. Accordingly, the Company's ability to access the cash flow
and assets of such Operating Companies may be severely limited.
Competition. In each of the markets served by the Company's networks, the
services offered by the Company compete principally with the services offered
by the incumbent LEC serving that area. Incumbent LECs have long-standing
relationships with their customers, have the potential to subsidize
competitive services from monopoly service revenues, and benefit from
favorable state and federal regulations. In light of the passage of the
Telecommunications Act of 1996 (the "Telecommunications Act"), federal and
state regulatory initiatives will provide increased business opportunities to
CLECs such as the Company, but regulators are likely to provide incumbent LECs
with increased pricing flexibility for their services as competition
increases. If incumbent LECs are allowed by regulators to lower their rates
substantially or selectively, engage in excessive volume and term discount
pricing practices for their customers or charge CLECs excessive fees for
interconnection to the
14
<PAGE>
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 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
15
<PAGE>
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 Company, which is
empowered to expand the number of seats on the Company's Board of Directors up
to twelve and to fill the vacancies created thereby. See "Management--Board
Committees." In addition, Adelphia has agreed to vote its shares of the Common
Stock of the Company to elect the Management Stockholders to the Company's
Board of Directors. See "Certain Relationships and Transactions."
Dependence on Key Personnel. The success of the Company and its growth
strategy depends in large part on the Company's ability to attract and retain
key management, marketing and operations personnel. Currently, the Company's
businesses are managed by a small number of management and operating personnel
with certain other services, including financial and certain accounting
services, provided by Adelphia. There can be no assurance that the Company
will attract and retain the qualified personnel needed to manage, operate and
further develop its business. In addition, the loss of the services of any one
or more members of the Company's senior management team could have a material
adverse effect on the Company.
Expansion Risk; Additional Personnel. The Company is experiencing a period
of rapid expansion which the Company believes will accelerate in the
foreseeable future. The operating complexity of the Company, as well as the
responsibilities of management personnel, have increased as a result of this
expansion. The Company's ability to manage such growth effectively will
require it to continue to expand and improve its
16
<PAGE>
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 a
customer could have a material adverse effect on the Company's business. See
"Business--Company Strategy."
In addition, the Telecommunications Act establishes procedures under which
RBOCs can obtain authority to compete with the IXCs in the long distance
market, and there have been indications that certain RBOCs in markets served
by the Company may seek such authority in the near future. See "--Competition"
and "Competition." Due to the Operating Companies' dependence on business from
IXCs, any loss of market share by the IXCs could have a material adverse
effect on the Company.
Need to Obtain and Maintain Permits and Rights-of-Way. There can be no
assurance that the Company or the Operating Companies, through Local Partners,
Adelphia or their own efforts, will be able to maintain existing permits and
rights-of-way or to obtain and maintain the other permits and rights-of-way
needed to develop and operate existing and future networks. In addition, the
Company and the Operating Companies may require pole attachment or conduit use
agreements with incumbent LECs, utilities or other LECs to operate existing
and future networks, and there can be no assurance that such agreements will
be obtained or will be obtainable on reasonable terms. Failure to obtain or
maintain such permits, rights-of-way and agreements could have a material
adverse effect on the Company's ability to operate and expand its networks.
See "Business--Operating Agreements--Fiber Lease Agreements."
The amount of lease payments could be affected by the costs the Local
Partners incur for attachments to poles, or use of conduit, owned by incumbent
LECs or electric utilities. Various state public utility commissions ("State
PUCs"), and the FCC are reviewing whether use of Local Partner facilities for
telecommunications purposes (as occurs when the Operating Companies lease
fiber optic capacity from Local Partners) should entitle incumbent LECs and
electric utilities to higher pole attachment or conduit occupancy fees. Such
increased fees could result in an increase in the amount of the lease payments
made by the Operating Companies to the Local Partners and could have a
significant impact on the profitability of the Operating Companies.
Rapid Technological Changes. The telecommunications industry is subject to
rapid and significant changes in technology. While the Company believes that
for the foreseeable future these changes will neither materially affect the
continued use of fiber optic telecommunications networks nor materially hinder
the Company's ability to acquire necessary technologies, the effect of
technological changes on the businesses of the Company cannot be predicted.
Thus, there can be no assurance that technological developments will not have
a material adverse effect on the Company.
Lack of Dividend History. The Company has never declared or paid any cash
dividends on its Common Stock and does not expect to declare any such
dividends on its Common Stock in the foreseeable future. Payment of any future
dividends on its Common Stock will depend upon earnings and capital
requirements of the Company, the Company's debt facilities and other factors
the Board of Directors considers appropriate. The Company intends to retain
its earnings, if any, to finance the development and expansion of its
business, and therefore does not anticipate paying any dividends on its Common
Stock in the foreseeable future. The Company's ability to declare dividends on
its Common Stock is also restricted by certain covenants in the Senior
Indenture, Senior Secured Indenture and the Preferred Stock Certificate of
Designation.
17
<PAGE>
Forward Looking Statements. The statements contained in this Prospectus that
are not historical facts are "forward looking statements" (as such term is
defined in the Private Securities Litigation Reform Act of 1995), which
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "intends" or "anticipates" or
the negative thereof or other variations thereon or comparable terminology, or
by discussions of strategy that involve risks and uncertainties. Management
cautions the reader that these forward-looking statements, such as the
Company's plans to build and acquire networks in new areas, the market
opportunity presented by larger metropolitan areas, its anticipated
installation of local exchange service line and revenues from designated
markets during 1997, and statements regarding the development of the Company's
business, the markets for the other statements contained above and herein in
this Prospectus regarding matters that are not historical facts, are only
predictions. No assurance can be given that the future results will be
achieved; actual events or results may differ materially as a result of risks
facing the Company. Such risks include, but are not limited to, the Company's
ability to successfully market its services to current and new customers,
access markets, identify, finance and complete suitable acquisitions, design
and construct fiber optic networks, install cable and facilities, including
switching electronics, and obtain rights-of-way, building access rights and
any required governmental authorizations, franchises and permits, all in a
timely manner, at reasonable costs and on satisfactory terms and conditions,
as well as regulatory, legislative and judicial developments that could cause
actual results to vary materially from the future results indicated, expressed
or implied, in such forward-looking statements.
Anti-Takeover Provisions. The Company's Certificate of Incorporation and
Bylaws, the provisions of the Delaware General Corporation Law and the
Indentures with respect to the Senior Secured Notes and the Senior Notes may
make it difficult in some respects to effect a change of control of the
Company and replace incumbent management. The existence of these provisions
may have a negative impact on the price of the Common Stock, may discourage
third party bidders from making a bid for the Company, or may reduce any
premiums paid to stockholders for their Common Stock. In addition, the Board
has the authority to fix the rights and preferences of and issue shares of the
Company's Preferred Stock, which may have the effect of delaying or preventing
a change of control of the Company without action by its stockholders.
The Company and its Operating Companies are subject to regulation by State
PUCs in the states in which they operate. Certain State PUCs have passed or
are considering passing regulations that would require an investor who
acquires a specified percentage of the Company's or the relevant Operating
Company's securities, to obtain approval to own such securities from such
State PUC. See "Regulation--State Regulation."
USE OF PROCEEDS
Except for the sale of the Warrant Shares upon the exercise of the Warrants,
the Company is not selling any of the Warrants or the Warrant Shares and will
not receive any of the proceeds from the sale of the Warrants and the Warrant
Shares by the Selling Securityholders. Any proceeds received by the Company
upon the exercise of the Warrants will be used for general corporate purposes.
DIVIDEND POLICY
The Company has no plans to pay dividends on the Common Stock. The Company
presently intends to retain earnings to reduce outstanding indebtedness and to
fund the growth of the Company's business. The payment of any future dividends
will be determined by the Board of Directors in light of conditions then
existing, including the Company's results of operations, financial condition,
cash requirements, restrictions in financing agreements, business conditions
and other factors. The Company's ability to declare dividends on its Common
Stock is also restricted by certain covenants in the Senior Indenture, Senior
Secured Indenture and the Preferred Stock Certificate of Designation.
18
<PAGE>
CAPITALIZATION
The effect from the sale of the Warrant Shares upon exercise of the Warrants
will be approximately $6.1 thousand in gross proceeds to the Company.
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 Preferred Stock Offering and the Senior Secured Note 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
-------- --------
Senior exchangeable redeemable preferred stock due
2007, $.01 par value, 380,000 shares authorized, and
200,000 shares outstanding, as adjusted
(aggregate liquidation preference $200,000,000)..... $ -- $194,500
Common stockholders' equity (deficiency):
Class A Common Stock, $.01 par value, 300,000,000
shares
authorized, 122,000 shares issued and outstanding
(c)............................................... 1 1
Class B Common Stock, $.01 par value, 150,000,000
shares
authorized, 10,000,000 shares issued and outstand-
ing (d)........................................... 100 100
Additional paid-in capital......................... 182 182
Class B Common Stock Warrants...................... 11,087 11,087
Loans to stockholders.............................. (3,000) (3,000)
Accumulated deficit................................ (71,863) (71,863)
-------- --------
Total common stockholders' equity (deficiency).... (63,493) (63,493)
-------- --------
Total capitalization.............................. $158,758 $603,258
======== ========
</TABLE>
- --------
(a) Reflects the effect of $194.5 million in estimated net proceeds from the
Preferred Stock Offering and, $243.3 million in net proceeds from the sale
of the Senior Secured Notes.
(b) $83.4 million of the proceeds from the sale of the Senior Secured Notes
were placed in an escrow account for the purchase of U.S. government
securities to provide for payment in full when due of the first six
scheduled interest payments on the Senior Secured Notes.
(c) Excludes (i) 10,613,427 shares of Class A Common Stock reserved for
issuance upon conversion of outstanding Class B Common Stock and Class B
Common Stock issuable upon the exercise of outstanding Class B Warrants,
(ii) 2,378,000 shares of Class A Common Stock reserved for issuance under
the Company's 1996 Plan (as defined) and (iii) 281,040 shares of Class A
Common Stock issuable to MCI pursuant to the MCI Preferred Provider
Agreement. See "Management--Long-Term Compensation Plan" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
(d) Excludes 613,427 shares of Class B Common Stock issuable upon the exercise
of outstanding Class B Warrants. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for each of the
four years in the period ended March 31, 1997 have been derived from the
audited consolidated financial statements of the Company and the related notes
thereto. The unaudited information as of and for the fiscal year ended March
31, 1993 is derived from other Company information. These data should be read
in conjunction with the consolidated financial statements and related notes
thereto for each of the three years in the period ended March 31, 1997 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The balance sheet data as
of March 31, 1994 and 1995 and the statement of operations data with respect
to the fiscal year ended March 31, 1994 have been derived from audited
consolidated financial statements of the Company not included herein. The data
as of June 30, 1997 and for the three months ended June 30, 1996 and 1997 are
unaudited; however, in the opinion of management, such data reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
fairly present the data for such interim periods. Operating results for the
three months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending March 31, 1998.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30,
---------------------------------------------- ------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (A)(B):
Telecommunications
service and management
fee revenue........... $ 89 $ 417 $ 1,729 $ 3,322 $ 5,088 $ 1,102 $ 1,520
Operating expenses:
Network operations..... 19 330 1,382 2,690 3,432 859 1,180
Selling, general and
administrative........ 921 2,045 2,524 3,084 6,780 1,027 2,380
Depreciation and
amortization.......... 30 189 463 1,184 3,945 695 1,372
------- ------- -------- -------- -------- -------- --------
Operating loss......... (881) (2,147) (2,640) (3,636) (9,069) (1,479) (3,412)
Gain on sale of
investment............ -- -- -- -- 8,405 8,405 --
Interest income........ -- 17 39 199 5,976 1,433 763
Interest expense and
fees.................. -- (2,164) (3,321) (6,088) (28,377) (6,169) (8,077)
Equity in net loss of
joint ventures........ (194) (528) (1,799) (4,292) (7,223) (1,636) (2,540)
Net (loss) income...... (1,075) (4,725) (7,692) (13,620) (30,547) 551 (13,266)
Net (loss) income per
weighted average share
of common stock....... (0.11) (0.47) (0.77) (1.36) (2.88) 0.05 (1.24)
Common Stock dividends. -- -- -- -- -- -- --
Ratio of earnings
available to cover
combined fixed charges
and preferred stock
dividends (c)......... -- -- -- -- -- -- --
OTHER COMPANY DATA (A):
EBITDA (d)............. $ (851) $(1,958) $ (2,177) $ (2,452) $ (5,124) $ (784) $ (2,040)
Capital expenditures
and Company
investments (e)....... 3,891 8,607 10,376 18,899 79,396 6,568 36,797
Cash used in operating
activities............ (725) (2,121) (2,130) (833) (4,823) (2,657) (2,407)
Cash (used in) provided
by investing
activities............ (3,806) (8,607) (10,376) (18,899) (72,818) 5,050 (36,797)
Cash provided by
financing activities.. 4,645 10,609 12,506 19,732 137,455 129,749 698
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
---------------------------------------------- AS OF
1993 1994 1995 1996 1997 JUNE 30, 1997
------- ------- -------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (A):
Cash and cash equivalents.............. $ 118 $ -- $ -- $ -- $ 59,814 $ 21,308
Total assets........................... 4,316 14,765 23,212 35,269 174,601 169,907
Long term debt......................... 4,814 19,968 35,541 50,855 215,675 222,251
Stockholders' equity (deficiency)...... (1,286) (6,011) (13,703) (27,323) (50,254) (63,493)
</TABLE>
- --------
(a) Financial information for the Company and its consolidated Subsidiaries.
As of June 30, 1997, 18 of the Company's networks were owned by joint
ventures in which it owns an interest of 50% or less, and for which the
Company reports its interest pursuant to the equity method of accounting
consistent with generally accepted accounting principles.
(b) Statement of Operations Data does not reflect the issuance of the Senior
Secured Notes or the Preferred Stock Offering. Interest expense and fees
on a pro forma basis, assuming the issuance of the Senior Secured Notes
occurred on April 1, 1996, would have been $59.0 and $15.7 million for the
year ended March 31, 1997 and the three months ended June 30, 1997,
respectively. Preferred stock dividends on a pro forma basis, assuming the
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.
20
<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,
21
<PAGE>
substantially all of which is currently serviced by the incumbent LECs and
IXCs. This addressable market estimate does not include the enhanced data
services markets which the Company has entered or the Internet access market
which it plans to enter in the near future.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 in comparison with Three Months Ended June
30, 1996
Revenues increased 38% to $1.5 million for the three months ended June 30,
1997, from $1.1 million for the same quarter in the prior fiscal year. Growth
in revenues of $0.4 million resulted primarily from increased revenues from
telecommunications services from majority and wholly owned Operating Companies
as compared to the same quarter in the prior fiscal year due to increases in
the customer base and the impact of consolidation of the Nashville Operating
Company for the current fiscal quarter.
Network operations expense increased 37% to $1.2 million for the three
months ended June 30, 1997 from $0.9 million for the same quarter in the prior
fiscal year. The increase was attributable to the expansion of operations at
the NOCC and the consolidation of the Nashville Operating Company for the
current fiscal quarter.
Selling, general and administrative expense increased 132% to $2.4 million
for the three months ended June 30, 1997 from $1.0 million for the same
quarter in the prior fiscal year. The increase was due to both corporate and
NOCC overhead cost increases to accommodate the growth in the number of
operating companies managed and monitored by the Company.
Depreciation and amortization expense increased 97% to $1.4 million during
the three months ended June 30, 1997 from $0.7 million for the same quarter in
the prior fiscal year primarily as a result of increased depreciation
resulting from higher depreciable asset base at the NOCC and the majority and
wholly owned Operating Companies.
Gain on Sale of Investment for the three months ended June 30, 1996 was due
to the sale of the Company's 15.7% partnership interest in TCG of South
Florida to Teleport Communications Group, Inc. on May 16, 1996 for an
aggregate sales price of $11.6 million. This sale resulted in a gain of $8.4
million. There were no such similar transactions in the three months ended
June 30, 1997.
Interest income for the three months ended June 30, 1997 decreased 47% to
$0.8 million from $1.4 million for the same quarter in the prior fiscal year
as a result of reduced cash and cash equivalents due to utilization of the
proceeds of the Senior Notes and Class B Warrants.
Interest expense and fees increased 31% to $8.1 million during the three
months ended June 30, 1997 from $6.2 million for the same period in the prior
fiscal year. The increase was attributable to higher interest expense
associated with the accretion of the Senior Notes.
Equity in net loss of joint ventures increased by 55% to $2.5 million during
the three months ended June 30, 1997 from $1.6 million for the same quarter in
the prior fiscal year as the nonconsolidated Operating Companies increased
operations. The net losses of the Operating Companies for the three months
ended June 30, 1997 were primarily the result of increased revenues only
partially offsetting startup and other costs and expenses associated with
design, construction, operation and management of the networks of the
Operating Companies, and the effect of the typical lag time between the
incurrence of such costs and expenses and the subsequent generation of
revenues by a network.
The number of nonconsolidated Operating Companies paying management fees to
the Company increased from 11 at June 30, 1996 to 14 at June 30, 1997. These
Operating Companies and networks under construction paid management and
monitoring fees to the Company, which are included in revenues, aggregating
approximately $0.8 million for the three months ended June 30, 1996 and 1997.
The nonconsolidated Operating Companies' net losses, including networks under
construction, for the three months ended June 30, 1996 and 1997 aggregated
approximately $3.6 million and $6.3 million respectively.
22
<PAGE>
Net (loss) income changed from net income of $0.6 million for the three
months ended June 30, 1996 to a net loss of $13.3 million for the same quarter
in the current fiscal year. The increased net loss was primarily attributable
to a higher operating loss, interest expense associated with the Senior Notes,
increased equity in the net losses of the Company's joint ventures and
increased depreciation and amortization combined with lower interest income
and no gain on sale of investment.
Fiscal 1997 in comparison with Fiscal 1996
Revenues increased 53% to $5.1 million for the fiscal year ended March 31,
1997 ("Fiscal 1997") from $3.3 million in the prior fiscal year. Growth in
revenues of $1.8 million resulted primarily from continued expansion in the
number and size of Operating Companies and the resultant increase in
management fees of $0.8 million over the prior fiscal year. Revenues from
majority and wholly owned Operating Companies also increased approximately
$1.0 million as compared to the prior fiscal year due to increases in the
customer base and the impact of consolidation of the Nashville Operating
Company.
Network operations expense increased 28% to $3.4 million in Fiscal 1997 from
$2.7 million in the prior fiscal year. Substantially all of the increase was
attributable to the expansion of operations at the NOCC, as well as the
increased number and size of the Operating Companies which resulted in
increased employee related costs and equipment maintenance costs.
Selling, general and administrative expense increased 120% to $6.8 million
in Fiscal 1997 from $3.1 million in the prior fiscal year. Approximately $0.9
million of the $3.7 million increase was due to an increase in the amount of
allocated costs from Adelphia. These costs include charges for office space,
senior management support and shared services such as finance activities,
information systems, computer services, investor relation activities, payroll
and taxation. Such costs were estimated by Adelphia and do not necessarily
represent the actual costs that would be incurred if the Company was to secure
such services on its own. In addition, $0.7 million of the increase was due to
a write off of costs in connection with the postponement of the Company's
contemplated initial public offering in November 1996. The remainder of the
increase was due to increased administrative and sales and marketing efforts
as well as corporate and NOCC overhead cost increases due to growth in the
number of Operating Companies managed and monitored by the Company.
Depreciation and amortization expense increased 233% to $3.9 million during
Fiscal 1997 from $1.2 million in the prior fiscal year primarily as a result
of the amortization of $1.0 million of costs incurred in connection with the
issuance of the Senior Notes and increased depreciation resulting from higher
capital expenditures at the NOCC and the majority and wholly owned Operating
Companies.
Gain on sale of investment is due to the sale of the Company's 15.7%
partnership interest in the South Florida Partnership to Teleport
Communications Group Inc. on May 16, 1996 for an aggregate sales price of
approximately $11.6 million. This sale resulted in a gain of $8.4 million.
Interest income for Fiscal 1997 increased to $6.0 million from $0.2 million
in the prior fiscal year as a result of interest income earned on investment
of the proceeds of the Senior Notes and the Class B Warrants (defined herein).
Interest expense and fees increased 366% to $28.4 million during Fiscal 1997
from $6.1 million in the prior fiscal year. The increase was attributable to
$23.5 million of non-cash interest expense associated with the Senior Notes
partially reduced by lower affiliate interest expense due to decreased
borrowings from Adelphia.
Equity in net loss of joint ventures increased by 68% to $7.2 million during
Fiscal 1997 from $4.3 million in the prior fiscal year as more nonconsolidated
Operating Companies began operations. The net losses of the Operating
Companies for Fiscal 1997 were primarily the result of revenues only partially
offsetting startup and other costs and expenses associated with design,
construction, operation and management of the networks of the Operating
Companies, and the effect of the typical lag time between the incurrence of
such costs and expenses and the subsequent generation of revenues by a
network.
23
<PAGE>
The number of nonconsolidated networks paying management fees to the Company
increased from 13 at March 31, 1996 to 14 at March 31, 1997. These networks
paid management and monitoring fees to the Company, which are included in
revenues, aggregating approximately $3.2 million for Fiscal 1997, an increase
of approximately $0.8 million over the prior fiscal year. The nonconsolidated
networks' net losses, including networks under construction, for Fiscal 1997
aggregated approximately $17.1 million.
Net loss increased by 124% to $30.5 million during Fiscal 1997 from $13.6
million in the prior fiscal year. The increase was primarily attributable to
greater interest expense associated with the Senior Notes, increased equity in
the net losses of the Company's joint ventures, increased depreciation and
amortization, and increased selling, general, and administrative expenses
partially offset by higher interest income and the gain recognized on the sale
of the Company's investment in the South Florida Partnership.
Earnings before interest expense, income taxes, depreciation and
amortization, other non-cash charges, gain on sale of investment, interest
income and equity in net loss of joint ventures ("EBITDA") decreased 109% to
($5.1) million in Fiscal 1997 from ($2.5) million for the prior fiscal year.
Increased revenues from management fees and the majority and wholly owned
Operating Companies were more than offset by increased operating costs. EBITDA
and similar measurements of cash flow are commonly used in the
telecommunications industry to analyze and compare telecommunications
companies on the basis of operating performance, leverage, and liquidity.
While EBITDA is not an alternative indicator of operating performance to
operating income or an alternative to cash flows from operating activities as
a measure of liquidity as defined by generally accepted accounting principles,
and while EBITDA may not be comparable to other similarly titled measures of
other companies, the Company's management believes EBITDA is a meaningful
measure of performance.
Fiscal 1996 in comparison with Fiscal 1995
Revenues increased 92.1% to $3.3 million for the year ended March 31, 1996
("Fiscal 1996") from $1.7 million for the prior fiscal year. Approximately
$1.0 million of the increase resulted from continued expansion in the number
and size of Operating Companies and the resulting increase in management fees,
and $0.6 million of the increase resulted from the Vermont Operating Company
generating revenues during the entire fiscal year.
Network operations expense increased 94.6% to $2.7 million in Fiscal 1996
from $1.4 million for the prior fiscal year. Approximately $0.8 million of the
increase was attributable to the Vermont Operating Company reporting expenses
relating to its operations for the entire fiscal year and $0.4 million was
attributable to the expansion of operations at the NOCC, including systems
upgrades.
Selling, general and administrative expense increased 22% to $3.1 million in
Fiscal 1996 from $2.5 million for the prior fiscal year. Of the increase,
approximately $0.4 million was attributable to corporate overhead increases to
accommodate the growth in the number of Operating Companies managed by the
Company, and $0.1 million was attributable to the full twelve-months of
operations at the Vermont Operating Company.
Depreciation and amortization expense increased 156% to $1.2 million in
Fiscal 1996 from $0.5 million for the prior fiscal year primarily as a result
of increased capital expenditures at the Vermont Operating Company and the
NOCC.
Interest expense and fees increased 83% to $6.1 million in Fiscal 1996 from
$3.3 million for the prior fiscal year. The increase was directly attributable
to increased borrowings from Adelphia which were used to fund investments in
Operating Companies and the South Florida Partnership, capital expenditures
and the Company's operations. All of the Company's interest expense was non-
cash and was added to amounts due to Adelphia.
Equity in net loss of joint ventures increased by 139% to $4.3 million in
Fiscal 1996 from $1.8 million for the prior fiscal year as two more
nonconsolidated Operating Companies began operations. The net loss for the
nonconsolidated Operating Companies and the South Florida Partnership for the
year ended March 31, 1996 aggregated approximately $14.5 million. The net
losses of the Operating Companies for the year ended March 31, 1996 were
primarily the result of revenues only partially offsetting startup and other
costs and expenses
24
<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
25
<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
26
<PAGE>
capital expenditures and investments during the past several years. Capital
expenditures by the Company were $2.9 million, $6.1 million $24.6 million,
$1.8 million and $18.8 million for Fiscal 1995, Fiscal 1996, Fiscal 1997, and
the three months ended June 30, 1996 and 1997, respectively. Further,
investments made in the Company's nonconsolidated Operating Companies and the
South Florida Partnership by the Company were $7.5 million, $12.8 million,
$34.8 million, $4.8 million and $18.0 million in Fiscal 1995, Fiscal 1996,
Fiscal 1997, and the three months ended June 30, 1996 and 1997, respectively.
Also, during Fiscal 1997, the Company invested $20.0 million in fiber assets
and a senior secured note in furtherance of its strategy to interconnect its
networks in the northeastern United States. The Company expects that it will
continue to have substantial capital and investment requirements. The Company
also expects to have to continue to fund operating losses as the Company
develops and grows its business.
The Company recently received a firm commitment for a $25.0 million long
term lease facility from AT&T Capital Corporation. The lease facility provides
for financing for certain of the Operating Companies' switching equipment and
is expected to be available by the end of 1997.
Through June 30, 1997, Adelphia had made loans and advances totalling
approximately $68.3 million, including accrued interest, to the Company and
leased $3.4 million in fiber network construction to certain Operating
Companies. During April 1996, the Company repaid $37.8 million of such loans
and advances. In addition, Local Partners have invested approximately $91.2
million as their pro rata investment in those networks through June 30, 1997.
These amounts exclude previous investments in the South Florida Partnership
which were sold on May 16, 1996. These partners have also provided additional
capital of $56.4 million for the construction of the Company's networks
through the partnership agreements by funding the fiber construction of the
network and leasing the fiber to the partnership under long-term, renewable
agreements. In addition, the Company used $120.1 million to fund its pro rata
investment in the networks, capital expenditures and operations. Collectively,
these investments and the Fiber Lease Financings have totaled $339.4 million
from the Company's inception through June 30, 1997.
The Company has experienced substantial negative cash flow since its
inception. A combination of operating losses, the substantial capital
investments required to build the Company's wholly owned networks and its
state-of-the-art NOCC, and incremental investments in the Operating Companies
has resulted in substantial negative cash flow. For the fiscal years ended
March 31, 1995, 1996 and 1997 and the three months ended June 30, 1996 and
1997, cash used in operating activities totalled $2.1 million, $0.8 million,
$4.8 million, $2.7 million and $2.4 million, respectively, cash used in
(provided by) investing activities totalled $10.4 million, $18.9 million,
$72.8 million, $(5.1) million and $36.8 million, respectively, and cash
provided by financing activities totalled $12.5 million, $19.7 million, $137.5
million, $129.7 million and $0.7 million, respectively. Prior to April 15,
1996, funding of the Company's cash flow deficiency was principally
accomplished through additional borrowings from Adelphia. Prior to April 15,
1996, interest and fees on this unsecured credit facility were based upon the
weighted average cost of unsecured borrowings of Adelphia. The average
interest rate charged for all periods was 11.3% through April 15, 1996
(excluding fees charged which were based on the amount borrowed) and 16.5% for
the period since April 16, 1996.
On April 15, 1996, the Company issued $329.0 million of Senior Notes and
329,000 Class B Warrants to purchase an aggregate of 613,427 shares of its
common stock. Proceeds to the Company, net of discounts, commissions, and
other transaction costs were approximately $168.6 million. Such net proceeds
were used to fund the Company's capital expenditures, working capital
requirements, operating losses and its pro-rata investments in joint ventures,
to pay $25.0 million of indebtedness owing to Adelphia and to make loans of
$3.0 million to certain key members of management. Proceeds from the Senior
Notes and Class B Warrants were also used to repay amounts related to capital
expenditures, working capital requirements, operating losses and pro-rata
investments in joint ventures totaling $12.8 million incurred during the
period from January 1, 1996 to April 15, 1996. These amounts had been funded
during the same time period through advances from Adelphia. As of April 15,
1996, approximately $25.9 million of outstanding indebtedness owed to Adelphia
was evidenced by an unsecured subordinated note due April 16, 2003 (the
"Adelphia Note"), that accrues interest at 16.5% and is subordinated to the
Senior Notes. Interest on the Adelphia Note is payable quarterly in cash,
through the issuance
27
<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 Preferred Stock
Offering and the Senior Secured Note Offering, the remaining proceeds from the
Senior Notes, anticipated bank and/or vendor financings by the Operating
Companies, internal sources of funds, including cash flow from operations
generated by the Company, and additional debt or equity financings, as
appropriate. There can be no assurance, however, as to the availability of
funds from internal cash flow or from the private or public equity or debt
markets. In addition, the expectations of required future capital expenditures
are based on the Company's current estimate. There can be no assurance that
actual expenditures will not significantly exceed current estimates or that
the Company will not accelerate its capital expenditures program.
In addition, the Company expects that pro rata investments by the Company
and its Local Partners as well as Fiber Lease Financings and anticipated bank
or vendor financings will be adequate to fund the requirements of the
Operating Companies for capital expenditures, operating losses and working
capital for existing networks, networks currently under construction and
certain of the Company's planned additional markets during calendar years 1997
and 1998. There can be no assurance as to the availability of funds from
internal cash flow, the Local Partners or other external sources or as to the
terms of such financings. In addition, the indenture relating to the Senior
Notes provides certain restrictions upon the Company's ability to incur
additional indebtedness. The Company's inability to fund pro rata investments
required for the Operating Companies could result in a dilution
28
<PAGE>
of the Company's interest in the individual Operating Companies or could
otherwise have a material adverse effect upon the Company and/or the Operating
Companies.
Recent Developments
On October 9, 1997, the Company completed the Preferred Stock Offering and
on August 27, 1997, the Company completed the Senior Secured Note Offering.
See "Prospectus Summary--Recent Developments."
On February 20, 1997, the Company entered into several agreements regarding
the lease of dark fiber in New York state. Pursuant to these agreements and in
consideration of a payment of $20.0 million, the Company received (i) a $20
million Senior Secured Note due February 2002 from Telergy, Inc., and (ii) a
fully prepaid lease from a Telergy affiliate for at least 25 years (with two
additional ten-year extensions), as a preferred customer, for 24 strands of
dark fiber installed or to be installed in a New York fiber optic
telecommunications backbone network. The fiber optic backbone network will
cover approximately 500 miles from Buffalo to Syracuse to Albany to New York
City, New York, and will provide interconnection capability for the Company's
operating networks in the state of New York.
On April 24, 1997, the Company and Entergy Corporation formed three joint
ventures, in which the Company, through three of its wholly owned
Subsidiaries, and Entergy each own a 50% interest. The Entergy-- Hyperion
Joint Venture will offer competitive telecommunications services primarily to
commercial customers in the Little Rock, Arkansas, Jackson, Mississippi and
Baton Rouge, Louisiana metropolitan areas. In addition, they intend to offer a
full range of switched telecommunications services, dedicated access to long
distance carriers and private line services. The Company expects the networks
for these three cities to total approximately 350 route miles of fiber optic
cable.
On June 13, 1997, the Company entered into the MCI Preferred Provider
Agreement pursuant to which the Company is designated MCI's preferred provider
of new end user dedicated access circuits and of end user dedicated access
circuits resulting from conversion from the incumbent LEC in the Company's
markets. In addition, Hyperion has a right of first refusal to provide MCI all
new dedicated local network access circuits such as POP-to-POP or POP-to-LSO
connections. These arrangements will apply to virtually all of the Company's
current networks and the term of these arrangements is five years with a five
year renewal option. The agreements allow MCI to purchase local loop transport
services from Hyperion where Hyperion is collocated with the incumbent LEC.
The agreement also provides that the parties negotiate in good faith the terms
of a separate agreement for the utilization of the Company's local switches
and operating support systems to provide MCI branded local service. In
connection with the transaction, the Company has issued a warrant to MCI to
purchase 281,040 shares of Class A Common Stock, par value $.01 per share
("Class A Common Stock"), of the Company, which expires June 13, 2000, at the
lower of (i) $20 per share of Class A Common Stock or (ii) the public offering
price of the Company's Class A Common Stock if the Company completes an
initial public offering of its Class A Common Stock. MCI could receive
additional warrants to purchase Class A Common Stock with an exercise price
equal to the fair market value of the Class A Common Stock at the time of
issuance if MCI meets certain agreed upon purchase volume revenue thresholds.
Collectively, the warrants would entitle MCI to purchase Class A Common Stock
of the Company representing between 2.5% and 8.5% of the Common Stock of the
Company, with adjustments for future issuances of common stock.
On August 4, 1997 the Company signed an Equity Contribution and Exchange
Agreement with Lenfest Telephony, Inc. ("Lenfest") whereby Lenfest will
receive 225,115 shares of Class A Common Stock of the Company in exchange for
its partnership interest in the Harrisburg, Pennsylvania network. The
transaction is subject to normal closing conditions and receipt of regulatory
approvals.
On August 11, 1997, the Company entered into the TCI Agreement pursuant to
which the Company will purchase all of TCI's interest in the Buffalo, New
York, Louisville, Kentucky and Lexington, Kentucky markets. Upon consummation
of the transactions contemplated by the TCI Agreement, which is subject to
normal closing conditions and receipt of regulatory approval, the Company will
own 100% of each of the Louisville, Lexington and Buffalo networks.
29
<PAGE>
On September 12, 1997, the Company closed the TWEAN Agreement whereby the
Company consolidated its Operating Companies' interests in the state of New
York by (i) increasing its ownership interest in the Buffalo network to 60%
and in the Syracuse network to 100% and (ii) eliminating its ownership
interests in the Albany and Binghamton networks. In addition, the agreement
provides that neither party will be subject to the non-competition provisions
contained in the existing partnership agreements with respect to the markets
from which they are withdrawing.
The Company has entered into purchase agreements (collectively, the "New
Jersey Agreement") dated October 31, 1997 with subsidiaries of Tele-
Communications, Inc. ("TCI") and Sutton Capital Associates, Inc. ("Sutton"),
local partners in the New Brunswick and Morristown, NJ networks, whereby the
Company will pay TCI and Sutton $26.0 million and $0.3 million, respectively,
for their partnership interests in these New Jersey networks. Upon
consummation of these transactions, which are subject to normal closing
conditions and receipt of regulatory approval, the Company's ownership
interest in these networks will increase to 100%.
IMPACT OF INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations or on the operations of the Operating
Companies over the past three fiscal years.
30
<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
31
<PAGE>
in its markets. According to Company estimates, this broad network coverage
enables the Company to directly reach approximately 60% of the business access
lines currently in service in its markets. In the markets where the Company's
22 networks are operating or under construction, as of June 30, 1997, the
Company believes its addressable market opportunity was approximately $16.2
billion annually, substantially all of which is currently serviced by the
incumbent LECs and IXCs. This addressable market estimate does not include the
enhanced data services market which the Company has entered, or the Internet
access market which it plans to enter in the near future.
The Company's current service offerings include switched local dial tone (in
13 markets), and enhanced data services (in seven markets), including frame
relay, high speed Internet access, video conferencing, dedicated access and
long distance access. The Company also plans to be an ISP in a majority of its
markets by the end of fiscal 1998. In addition, the Company will begin selling
long distance services by the end of 1997 through a resale agreement with an
IXC and expects to begin offering facilities-based long distance services
through the regional interconnection of the Company's networks in the near
future. With 75% of all U.S. telecommunications intraLATA and interLATA toll
traffic terminating, on average, within 300 miles of its origination point,
the Company believes that the breadth of its networks, their regional
clustering, and their current and planned interconnection will enable the
Company to originate and terminate a significant proportion of its customers'
communications traffic over its own networks, rather than relying primarily on
the network of the incumbent LEC.
Hyperion's targeted customer base consists of small, medium and large
businesses, governmental and educational end users and IXCs. Some of the
Company's customers include America Online, Sprint, Hershey Medical Center and
HCA International. The Company services it customers through a dedicated sales
force of approximately 70 highly trained professionals focused on selling the
Company's portfolio of service offerings. The Company expects to increase its
sales force and marketing efforts significantly by the end of the fiscal year.
Management believes that the Company's ability to utilize its extensive
network clusters to offer a single source solution for all of its customers'
telecommunications needs provides it with significant competitive advantage
over other CLECs. Further, Hyperion believes it can continue to attract end
user customers by offering (i) a single point of contact for billing,
installation and service coordination, (ii) high-capacity fiber optic network
connection directly to all or substantially all of a customer's premises due
to the breadth of the Company's network coverage and (iii) high quality,
solutions-oriented customer service. The Company also believes that major IXCs
such as AT&T, MCI and Sprint will seek to offer their business customers an
integrated package of switched local and long distance services using the
networks of CLECs such as Hyperion. The Company believes that it is well
positioned to capitalize on this opportunity as its networks generally offer
the broadest coverage in their markets, which is attractive to both end user
customers and major IXCs.
The Company initiated its switched services deployment plan in 1997 and
currently provides switched services in 13 markets, nine of which were placed
in operation during the last five months, with switching for the remaining two
operating markets (excluding Albany and Binghamton, New York) expected to be
operational by the end of 1997. In the markets it currently serves, the
Company estimates that there are approximately 11 million business access
lines in service. The Company has experienced initial success in the sale of
access lines, with approximately 16,000 access lines sold as of September 30,
1997, of which approximately 5,500 lines are installed. The timing of certain
installations may be extended due to necessary upgrading of customer
facilities, the complexity of installation or customer scheduling
requirements. Delivery of on-network switched services is expected to provide
faster, more reliable access line provisioning and more responsive customer
service and monitoring. The Company believes that its large upfront capital
investment in its networks, coupled with the selective use of unbundled
network elements, will provide higher operating margins than can be achieved
by other CLECs.
Since inception in October 1991 through June 30, 1997, the Company and its
partners have invested approximately $339.4 million to build and develop the
network infrastructure and to fund operations. As of June 30, 1997, the gross
property, plant and equipment of the Company, its networks and the Company's
NOCC, including the Company's investment in Telergy (see "Prospectus Summary--
Recent Developments"), was approximately $286.0 million. The Company
anticipates that its future capital expenditure requirements will be largely
based on a selective network build-out strategy that combines both on-network
and off-network connections to customers.
32
<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.
33
<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.
34
<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.
35
<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.
36
<PAGE>
The following is an overview of the Company's networks and respective
ownership interests as of September 1, 1997.
<TABLE>
<CAPTION>
ACTUAL OR ACTUAL PRO FORMA
EXPECTED DATE HYPERION HYPERION
COMPANY NETWORKS OF OPERATION(A) INTEREST INTEREST(B) LOCAL PARTNER(S)
- ---------------- --------------- -------- ----------- ----------------------------
<S> <C> <C> <C> <C>
Northeast Cluster
Vermont.................... 11/94 100.0% 100.0%(h) (c)
Syracuse, NY............... 8/92 50.0 100.0(h) Time Warner/Advance(d)
Buffalo, NY................ 1/95 40.0 100.0(h) Tele-Communications, Inc.
Time Warner/Advance(c)
Albany, NY................. 2/95 50.0 -- Time Warner/Advance(d)
Binghamton, NY............. 3/95 20.0 -- Time Warner/Advance(d)
Mid-Atlantic Cluster
Charlottesville, VA........ 11/95 100.0 100.0 (c)
Scranton/Wilkes-Barre, PA.. 12/97 100.0 100.0 (c)
Harrisburg, PA............. 4/95 50.0 100.0 Lenfest Telephony
Philadelphia, PA........... 8/96 50.0 50.0 PECO Energy(e)
Allentown/Bethlehem/Easton/
Reading, PA ("ABER")...... 12/97 50.0 50.0 PECO Energy(e)
York, PA................... 5/97 50.0 50.0 Susquehanna Cable
Richmond, VA............... 9/93 37.0 37.0 Media One
Morristown, NJ............. 7/96 19.7 19.7 Tele-Communications, Inc.(f)
New Brunswick, NJ.......... 11/95 19.7 19.7 Tele-Communications, Inc.(f)
Mid-South Cluster
Lexington, KY.............. 6/97 50.0 100.0(h) Tele-Communications, Inc.(g)
Louisville, KY............. 3/95 50.0 100.0(h) Tele-Communications, Inc.(g)
Nashville, TN.............. 11/94 95.0 95.0(h) InterMedia Partners
Baton Rouge, LA............ 12/97 50.0 50.0 Entergy
Jackson, MS................ 12/97 50.0 50.0 Entergy
Little Rock, AR............ 12/97 50.0 50.0 Entergy
Other Networks
Wichita, KS................ 9/94 49.9 49.9 Gannett
Jacksonville, FL........... 9/92 20.0 20.0(h) Media One
Weighted Average Ownership
(i)........................ 56.8 66.4
</TABLE>
- --------
(a) Refers to the date on which (i) the network is connected to at least one
IXC POP, (ii) the network is capable of accepting traffic from IXCs and
end users, (iii) the Company's central office is fully functional and (iv)
the initial network SONET fiber ring has been completed.
(b) Gives effect to pending agreements which provide for the Company to
increase or decrease its ownership interests in its networks. The Company
is permitted to reenter the markets in which it has eliminated its
ownership interests and intends to reenter the Albany market by April
1998. As of the consummation of the TWEAN Agreement on September 12, 1997,
the Company's interests in the Buffalo and Syracuse networks increased to
60% and 100%, respectively, and the Company's interests in the Albany and
Binghamton networks were eliminated. See "Prospectus Summary--Recent
Developments."
(c) Adelphia or its affiliates lease fiber capacity to the Operating Companies
in these networks.
(d) The interests in the Albany, Binghamton and Syracuse networks are all
owned by one Operating Company.
(e) The interests in the Philadelphia and ABER networks are owned by one
Operating Company.
(f) The interests in the Morristown and New Brunswick networks are owned by
one Operating Company. Sutton Capital Associates also owns a minority
interest in the Operating Company.
(g) The interests in the Lexington and Louisville networks are owned by one
Operating Company.
(h) Represents a network that is owned by an Operating Company or a
subsidiary, all of the Capital Stock of which is or will be pledged by the
Company as security for the Senior Secured Notes.
(i) Based upon gross property, plant and equipment of the Company and the
Operating Companies.
37
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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]
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Local Partner Agreements
Each Local Partner Agreement establishes the structure of the applicable
Operating Partnership by determining, among other things, the partner's
capital contribution requirements, capital structure, purpose and scope of
business activities, transfer restrictions, dissolution procedures, duration
and competition restrictions, as well as the voting and buy/sell rights and
rights of first refusal of the partners of the Operating Partnership.
Ownership and Capital Contributions. The initial capital contributions and
percentage of ownership of the Operating Partnerships vary. Some of the Local
Partner Agreements establish maximum capital contributions such that each
partner's ultimate aggregate capital contribution is determined at the
Operating Partnership's inception. Initial capital contributions are generally
paid on an installment basis as determined by the management committee of the
Operating Partnership, which is comprised of representatives of each partner.
Additional capital contributions in excess of the initial capital contribution
may be required in several Local Partner Agreements, but generally either must
be initiated by the manager of the Operating Partnership or approved by at
least a majority vote of the management committee. Generally, the percentage
of ownership is also fixed at the Operating Partnership's inception. Absent an
agreement by the partners, generally, the only circumstances that result in
the dilution of such partner's ownership interest are a partner's failure to
make a capital contribution or its failure to exercise a right of first
refusal.
Matters Requiring a Vote. Most partner votes of an Operating Partnership
require only a majority vote; however, a unanimous 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
39
<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.
40
<PAGE>
Management Agreements
Generally, the Company or a wholly owned subsidiary of the Company provides
the Operating Partnerships with the following services pursuant to the
Management Agreement for a 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
41
<PAGE>
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.
42
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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
43
<PAGE>
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]
44
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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.
55
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
John J. Rigas............... 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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<PAGE>
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
57
<PAGE>
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.
58
<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
59
<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."
60
<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 November 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.
61
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company was founded in October 1991. From the Company's inception
through April 14, 1996, Adelphia, which owns 88% of the Company's outstanding
Common Stock, provided all the equity capital to the Company and also made
loans and advances totaling approximately $50.9 million. The Company repaid
$25 million of such indebtedness to Adelphia from the proceeds of the offering
of the Senior Notes and Class B Warrants (the "Class B Warrants") issued
pursuant to the Class B Warrant Agreement, between the Company and Bank of
Montreal Trust Company, as warrant agent, on April 15, 1996, on which date the
remaining $25.9 million, including accrued interest and fees of approximately
$1.2 million for the period January 1, 1996 through April 15, 1996, was
evidenced by the Adelphia note, an unsecured subordinated note due April 16,
2003 (the "Adelphia Note") that accrues interest at an annual rate of 16.5%
and is subordinated to the Senior Notes. Interest on the Adelphia Note is
payable quarterly in cash, through the issuance of identical subordinated
notes or in any combination thereof, at the option of the Company. Interest
(excluding fees relating to amounts borrowed) accrued on the indebtedness to
Adelphia at an annual rate of 11.3% prior to April 15, 1996. Proceeds from the
Senior Notes and Class B Warrants were also used to repay amounts related to
capital expenditures, working capital requirements, operating losses and pro-
rata investments in joint ventures totaling $12.8 million incurred during the
period from January 1, 1996 to April 15, 1996. These amounts had been funded
during the same time period through advances from Adelphia. Interest accrued
on the Adelphia Note was approximately $5.9 million as of June 30, 1997.
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.
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<PAGE>
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 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.
63
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of Hyperion and certain
provisions of Hyperion's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by Hyperion's Certificate of Incorporation
and Bylaws, each as amended, which documents are filed as exhibits with the
Commission and are incorporated herein by reference.
Hyperion's authorized capital stock consists of 300,000,000 shares of Class
A Common Stock, par value $.01 per share, 150,000,000 shares of Class B Common
Stock, par value $.01 per share, and 5,000,000 shares of preferred stock, par
value $0.01 per share.
COMMON STOCK
Shares of Class A Common Stock and Class B Common Stock are substantially
identical, except that holders of Class A Common Stock are entitled to one
vote per share and holders of Class B Common Stock are entitled to 10 votes
per share on all matters submitted to a vote of stockholders.
Class A Common Stock
The holders of Class A Common Stock are entitled to one vote per share on
all matters to be voted on by the stockholders. Subject to preferences that
may be applicable to any outstanding preferred stock, the holders of Class A
Common Stock and Class B Common Stock are entitled to receive dividends
ratably, if any such dividends are declared, from time to time by the Board of
Directors out of funds legally available therefor. Stock dividends declared on
Class A Common Stock shall be in shares of Class A Common Stock, and stock
dividends on Class B Common Stock shall be in shares of Class B Common Stock.
In the event of a liquidation, dissolution or winding up of the Company, the
holders of Class A Common Stock and Class B Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
rights of the holders of the preferred stock then outstanding. There are no
redemption or sinking fund provisions available to the Class A Common Stock.
All outstanding shares of Common Stock are fully paid and non-assessable, and
the shares of Class B Common Stock to be issued upon exercise of the Warrants
will be fully paid and non-assessable.
Class B Common Stock
The holders of Class B Common Stock are entitled to ten votes per share on
all matters to be voted on by the stockholders. Each share of Class B Common
Stock is convertible at the option of the holder into one share of Class A
Common Stock. In all other respects, the provisions of the Class B Common
Stock are identical to those of the Class A Common Stock.
Neither the holders of Class A Common Stock nor the holders of Class B
Common Stock have cumulative voting rights. For a discussion of the effects of
the voting rights of Adelphia, see "Risk Factors--Control by Principal
Stockholder."
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue from time to time such
shares of preferred stock, in one or more classes or series. Each class or
series of preferred stock shall have such number of shares, designations,
preferences, voting powers, qualifications and special or relative rights or
privileges as shall be determined by the Board of Directors, which may
include, among others, dividend rights, voting rights, redemption and sinking
fund provisions, liquidation preferences, conversion rights and preemptive
rights. The ownership and control of the Company by the holders of Common
Stock would be diluted if the Company were to issue preferred stock that had
voting
64
<PAGE>
rights or that was convertible into Common Stock. In addition, the holders of
preferred stock issued by the Company would be entitled by law to vote on
certain transactions such as a merger or consolidation, and thus the issuance
of preferred stock could dilute the voting rights of the holders of Common
Stock on such issues.
CLASS B WARRANTS
The Class B Warrants were issued pursuant to the Class B Warrant Agreement
between the Company and Bank of Montreal Trust Company, as warrant agent on
April 15, 1996 as part of a private placement by the Company of 329,000 units
consisting of $329.0 million aggregate principle amount at maturity of Senior
Notes and Class B Warrants to purchase an aggregate of 613,427 shares of
common stock of the Company. The following summary of certain provisions of
the Class B Warrant Agreement and the Class B Warrants does not purport to be
complete and is qualified in its entirety by reference to the Class B Warrant
Agreement and the Class B Warrants, including the definitions therein of
certain terms. As used in this section, the term "Company" refers only to
Hyperion Telecommunications, Inc. and not to its subsidiaries.
Each Warrant, when exercised, will entitle the holder thereof to purchase
1.8645 shares of Class B Common Stock (the "Class B Warrant Shares") at the
exercise price of $0.01 per share. The exercise price and the number of Class
B Warrant Shares issuable on exercise of a Class B Warrant are both subject to
adjustment in certain cases referred to below. The Class B Warrants are
exercisable at any time on or after the earlier to occur of (i) May 1, 1997
and (ii) in the event a Change of Control occurs, the date the Company mails
notice thereof to holders of the Senior Notes and to the holders of the Class
B Warrants, Class B Warrant Shares and any other securities issued or issuable
with respect thereto. Unless exercised, the Class B Warrants will
automatically expire on April 1, 2001, the Expiration Date. The Company will
give notice of expiration not less than 90 and not more than 120 days prior to
the Expiration Date to the registered holders of the then outstanding Class B
Warrants. If the Company fails to give such notice, the Class B Warrants will
not expire until 90 days after the Company gives such notice. In no event will
holders be entitled to any damages or other remedy for the Company's failure
to give such notice other than any such extension.
In connection with the issuance of the Class B Warrants, the Company agreed
to file Class B Warrant shelf registration statements under the Securities Act
(i) covering the Warrants, on or prior to October 1, 1996, and (ii) covering
the Class B Warrant Shares, on or prior to January 1, 1997, and to use its
best efforts to cause such Class B Warrant Shelf registration statements to be
declared effective by the Commission on or prior to 90 days after the dates
specified for such filings. The Company filed a Class B Warrant shelf
registration statement covering the Class B Warrants and the Class B Warrant
Shares on September 25, 1996 (the "Class B Warrant Shelf Registration
Statement") and the Class B Warrant Shelf Registration Statement was declared
effective by the Commission on December 30, 1996. The Company has agreed to
keep the Class B Warrant Shelf Registration Statements with respect to the
Class B Warrants and the Class B Warrant Shares as described in the
immediately preceding paragraph effective until October 1, 1999 and January 1,
2000, respectively. If the Company does not comply with its registration
obligations under the Class B Warrant Registration Rights Agreement, it will
be required to pay liquidated damages to holders of the Class B Warrants or
Class B Warrant Shares under certain circumstances.
DIVIDEND RESTRICTIONS
The terms of the Senior Indenture, the Senior Secured Indenture and the
Certificate of Designation contain restrictions on the ability of the Company
to pay dividends on the Common Stock. The payment of dividends on the Common
Stock is also subject to the preferences that may be applicable to any then
outstanding preferred stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is the American Stock
Transfer & Trust Company. The Transfer Agent and Registrar for the Class B
Warrants is Bank of Montreal Trust Company, New York, New York.
65
<PAGE>
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
DELAWARE LAW
Delaware General Corporation Law
Although the Company's Certificate of Incorporation currently provides that
the Company is not subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), the Company could become subject to Section 203 through
stockholder action in the future. Section 203, subject to certain exceptions,
prohibits a Delaware corporation, the voting stock of which is generally
publicly traded (i.e., listed on a national securities exchange or authorized
for quotation on an inter-dealer quotation system of a registered national
securities association) or held of record by more than 2,000 stockholders,
from engaging in any "business combination" with any "interested stockholder"
for a period of three years following the time that such stockholder became an
interested stockholder, unless (i) prior to such time, the Board of Directors
of the corporation approved either such business combination or the
transaction which resulted in such stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in such
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time such transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (y) by persons who are
directors and also officers and (z) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer; or
(iii) at or subsequent to such time, such business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation; (iii) subject to
certain exceptions, any transaction which results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transactions involving the corporation beneficially
owned by the interested stockholder; or (v) the receipt by the interested
stockholder of the benefit of any loans, advances, guarantees, pledges or
other financial benefits provided by or through the corporation. In general,
Section 203 defines an interested stockholder as any entity or person
beneficially owning (or within the past three years having owned) 15% or more
of the outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
Certificate of Incorporation
In addition to the voting rights of the Class A and Class B Common Stock
described above, the Company's Certificate of Incorporation, as amended, by
means of a "blank check preferred" provision authorizes the Board of
Directors, at any time, to divide any or all of the shares of preferred stock
into one or more series and to fix and determine the number of shares and the
designation of such series so as to distinguish it from the shares of all
other series. Further, the Board of Directors, when issuing a series of
preferred stock, may fix and determine the voting rights, designations,
preferences, qualifications, privileges, limitations, options, conversion
rights, restrictions and other special or relative rights of the preferred
stock of such series.
This blank check preferred provision gives the Board of Directors
flexibility in dealing with methods of raising capital and responding to
possible hostile takeover attempts. The provision may have the effect of
making it more difficult for a third party to acquire the Company, discourage
a third party from attempting to acquire the Company or deter a third party
from paying a premium to acquire a majority of the outstanding voting stock of
the Company. Additionally, depending on the rights and preferences of any
series of preferred stock issued and outstanding, the issuance of preferred
stock may adversely affect the voting and other rights of the holders of the
Common Stock, including the possibility of the loss of voting control to
others.
66
<PAGE>
DESCRIPTION OF WARRANTS
The Warrants were issued pursuant to the Warrant Agreement between the
Company and Bank of Montreal Trust Company, as warrant agent (the "Warrant
Agent") on April 15, 1996 as part of a private placement by the Company of
329,000 units consisting of $329.0 million aggregate principal amount at
maturity of Senior Notes and Warrants to purchase an aggregate of 613,427
shares of common stock of the Company (which has been reclassified as Class B
Common Stock). The following summary of certain provisions of the Warrant
Agreement and the Warrants does not purport to be complete and is qualified in
its entirety by reference to the Warrant Agreement and the Warrants, including
the definitions therein of certain terms. As used in this section, the term
"Company" refers only to Hyperion Telecommunications, Inc. and not to its
subsidiaries.
GENERAL
Each Warrant, when exercised, will entitle the holder thereof to purchase
1.8645 Warrant Shares at the Exercise Price of $0.01 per share. The Exercise
Price and the number of Warrant Shares issuable on exercise of a Warrant are
both subject to adjustment in certain cases referred to below. The Warrants
are exercisable at any time on or after the earlier to occur of (i) May 1,
1997 and (ii) in the event a Change of Control occurs, the date the Company
mails notice thereof to holders of the Senior Notes and to the holders of the
Warrants, Warrant Shares and any other securities issued or issuable with
respect thereto. Unless exercised, the Warrants will automatically expire on
April 1, 2001, the Expiration Date. The Warrants will entitle the holders
thereof to purchase in the aggregate approximately 5.78% of the outstanding
Class B Common Stock of the Company on a fully-diluted basis as of the date of
issuance of the Warrants. The Company will give notice of expiration not less
than 90 and not more than 120 days prior to the Expiration Date to the
registered holders of the then outstanding Warrants. If the Company fails to
give such notice, the Warrants will not expire until 90 days after the Company
gives such notice. In no event will holders be entitled to any damages or
other remedy for the Company's failure to give such notice other than any such
extension.
The Warrants may be exercised by surrendering to the Company the Warrant
certificates evidencing such Warrants, if any, with the accompanying form of
election to purchase, properly completed and executed, and upon payment of the
Exercise Price. Payment of the Exercise Price may be made in cash or by
certified or official bank check, payable to the order of the Company, or by
surrender of additional Warrants. Upon surrender of the Warrant certificate
and payment of the Exercise Price, the Warrant Agent will deliver or cause to
be delivered, to or upon the written order of such holder, stock certificates
representing the number of whole Warrant Shares or other securities or
property to which such holder is entitled under the Warrants and Warrant
Agreement, including without limitation any cash payment to adjust for
fractional interests in Warrant Shares issuable upon such exercise of
Warrants. If less than all of the Warrants evidenced by a Warrant certificate
are exercised, a new Warrant certificate will be issued for the remaining
number of Warrants.
No fractional Warrant Share will be issued upon exercise of the Warrants. If
any fraction of a Warrant Share would, except for the foregoing provision, be
issuable on the exercise of any Warrants (or specified portion thereof), the
Company must pay to the holder an amount in cash equal to the then current
market price per Warrant Share, as determined on the day immediately preceding
the date the Warrant is exercised, multiplied by such fraction, computed to
the nearest whole cent.
Certificates for Warrants will be issued in registered form only, and no
service charge will be made for registration of transfer or exchange upon
surrender of any Warrant certificate at the office of the Warrant Agent
maintained for that purpose. The Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration or transfer or exchange of Warrant
certificates.
The holders of the Warrants have no right to vote on matters submitted to
the stockholders of the Company and have no right to receive cash dividends.
The holders of the Warrants are not entitled to share in the assets of the
Company in the event of the liquidation, dissolution or winding up of the
Company's affairs.
67
<PAGE>
ADJUSTMENTS
The number and kind of Warrant Shares purchasable upon the exercise of the
Warrants and the Exercise Price both will be subject to adjustment in certain
events including: (i) the payment by the Company of dividends (or other
distributions) on Common Stock of the Company payable in Common Stock of the
Company or other shares of the Company's capital stock, (ii) subdivisions,
combinations and reclassifications of Common Stock of the Company, (iii) the
issuance to all holders of Common Stock of the Company of rights, options or
warrants that entitled them to subscribe for Common Stock of the Company, or
of securities convertible into or exchangeable for shares of Common Stock of
the Company, in either case for a consideration per share of Common Stock
which is less than the current market price per share (as defined) of Common
Stock of the Company and (iv) the distribution to all holders of Common Stock
of the Company of any of the Company's assets, debt securities or any rights
or warrants to purchase securities (excluding those rights and warrants
referred to in clause (iii) above and excluding cash dividends or other cash
distributions from current or retained earnings).
No adjustment in the Exercise Price will be required unless such adjustment
would require an increase or decrease of at least one percent (1%) in the
Exercise Price, provided, however, that any adjustment which is not made will
be carried forward and taken into account in any subsequent adjustment.
In case of certain consolidations or mergers of the Company, or the sale of
all or substantially all of the assets of the Company to another corporation,
each Warrant shall thereafter be exercisable for the right to receive the kind
and amount of shares of stock or other securities or property to which such
holder would have been entitled as a result of such consolidation, merger or
sale had the Warrants been exercised immediately prior thereto.
RESERVATION OF SHARES
The Company has authorized and reserved for issuance and will at all times
reserve and keep available such number of shares of Class B Common Stock as
will be issuable upon the exercise of all outstanding Warrants. Such shares of
Class B Common Stock, when paid for and issued, will be duly and validly
issued, fully paid and non-assessable, free of preemptive rights and free from
all taxes, liens, charges and security interests with respect to the issued
thereof.
AMENDMENT
From time to time, the Company and the Warrant Agent, without consent of the
holders of the Warrants, may amend or supplement the Warrant Agreement for
certain purposes, including curing defects or inconsistencies or making
changes that do not materially adversely affect the rights of any holder. Any
amendment or supplement to the Warrant Agreement that has a material adverse
effect on the interests of the holders of the Warrants requires the written
consent of the holders of a majority of the then outstanding Warrants. The
consent of each holder of the Warrants affected is required for any amendment
pursuant to which the Exercise Price would be increased or the number of
Warrant Shares purchasable upon exercise of Warrants would be decreased (other
than pursuant to adjustments provided in the Warrant Agreement as generally
described above).
REPORTS
Whether or not required by the rules and regulation of the Commission, so
long as any of the Warrants remain outstanding, the Company shall cause copies
of (i) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report thereon by the Company's
certified independent accountants; (ii) all current reports that would be
required to be filed with the Commission
68
<PAGE>
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 Section E of the Indenture with respect to the Senior
Notes to be filed with the Warrant Agent and the Commission and mailed to the
holders at their addresses appearing in the register of Warrants maintained by
the Warrant Agent.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Warrants to be resold as set
forth herein have been issued in the form of one Global Warrant. The Global
Warrant has been deposited with, or on behalf of, DTC, the Depositary and
registered in the name of the Global Warrant Holder.
Warrants that were issued as described below under "Certificated Securities"
will be issued in the form of registered definitive certificates (the
"Certificated Securities"). Upon the transfer to a qualified institutional
buyer of Certificated Securities initially issued to a purchaser of the
Warrants who does not hold its interest in the Warrants (a "Non-Global
Purchaser"), such Certificated Securities may, unless the Global Warrant has
previously been exchanged for Certificated Securities, be exchanged for an
interest in the Global Warrant representing the amount of warrants being
transferred
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers, banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively,
the "Indirect Participants" or the "Depositary's Indirect Participants") that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly. Persons who are not Participants may beneficially own
securities held by or on behalf of the Depositary only through the
Depositary's Participants or the Depositary's Indirect Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any Person having a beneficial interest in
the Global Warrant may, upon request to the Trustee, exchange such beneficial
interest for Warrants in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of, and cause the same to be delivered to, such Person or Persons (or
the nominee of any thereof). All such certificated Senior Notes would be
subject to the legend requirements described herein under "Notice of
Investors." In addition, if (i) the Company notifies the Trustee in writing
that the Depositary is no longer willing or able to act as a depositary and
the Company is unable to locate a qualified successor within 90 days or (ii)
the Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of Warrants in the form of Certificated Securities under
the Indenture, then, upon surrender by the Global Warrant Holder of its Global
Warrant, Warrants in such form will be issued to each Person that the Global
Warrant Holder and the Depositary identify as being the beneficial owner of
the related Warrants.
Neither the Company nor the Trustee will be liable for any delay by the
Global Warrant Holder or the Depositary in identifying the beneficial owners
of Warrants and the Company and the Trustee may conclusively rely on, and will
be protected in relying on, instructions from the Global Warrant Holder or the
Depositary for all purposes.
69
<PAGE>
THE SELLING SECURITYHOLDERS
The Selling Securityholders (which term includes their transferees,
pledgees, donees or their successors) may from time to time offer and sell
pursuant to this Prospectus any or all of the Warrants and Warrant Shares
issued upon exercise of the Warrants. The following table sets forth certain
information regarding the Selling Securityholders' ownership of the Company's
Common Stock and of the Warrants. No Selling Securityholder has held any
position, office or had any other material relationship with the Company, its
predecessors or affiliates during the past three years. Although the Selling
Securityholders may offer some or all of their respective Warrants or Warrant
Shares pursuant to the Prospectus, the following table assumes that all such
Warrants or Warrant Shares have been sold upon termination of any such sales.
In addition, the Selling Securityholders identified below may have sold,
transferred or otherwise disposed of all or a portion of their respective
Warrants or Warrant Shares since the date on which they provided information
thereon in transactions exempt from the registration requirements of the
Securities Act. To the knowledge of the Company, except as disclosed in the
table below, the Selling Securityholders did not own, nor have any rights to
acquire, any other shares of Common Stock as of the date of this Prospectus.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
- --------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BENEFICIALLY BENEFICIALLY
BENEFICIALLY OWNED BENEFICIALLY OWNED OWNED
NAME OF SELLING OWNED PRIOR TO OFFERED AFTER THIS PRIOR TO THIS OFFERED AFTER THIS
SECURITYHOLDER THIS OFFERING FOR SALE OFFERING OFFERING FOR SALE OFFERING
- --------------------------------------------------------
-------------------------
<CAPTION>
PERCENT PERCENT
OF TOTAL OF TOTAL
NUMBER OUT- NUMBER OUT-
OF STANDING OF STANDING
SHARES SHARES WARRANTS WARRANTS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. B. B. Sneed 932 0.01 932 0 500 0.15 500 0
2. Beneficial Standard
Life High Yield 3,729 0.04 3,729 0 2,000 0.61 2,000 0
3. Fidelity Investments 44,729 0.42 44,279 0 23,990 7.29 23,990 0
4. Harriet Rothkopf
1993 Annuity Trust
dated 7/24/93 37 0.00 37 0 20 0.01 20 0
5. Illinois Municipal
Retirement Fund 10,292 0.10 10,292 0 5,520 1.68 5,520 0
6. Investors Fiduciary
Service, Inc. 745 0.01 745 0 400 0.12 400 0
7. Judith Sidney 93 0.00 93 0 50 0.02 50 0
8. Lincoln National
Putnam Mst Fund 372 0.00 372 0 200 0.06 200 0
9. Lutheran Brotherhood
Research Corp. 44,748 0.42 44,748 0 24,000 7.29 24,000 0
10. ManUSA New Money
High Yield Fund 7,458 0.07 7,458 0 4,000 1.22 4,000 0
11. Massachusetts Mutual
Life Insurance 466 0.00 466 0 250 0.08 250 0
12. Mellon Bank Account
Set Up Unit 10,720 0.10 10,720 0 5,750 1.75 5,750 0
13. Northstar Advantage
High Total Return Fund 19,017 0.18 19,017 0 10,200 3.10 10,200 0
14. Northstar
Multisector Fund 279 0.00 279 0 150 0.05 150 0
15. Northstar Yield Bond
Fund 279 0.00 279 0 150 0.05 150 0
16. PCM Diversified
Income Trust 932 0.01 932 0 500 0.15 500 0
17. PCM Global Assets
Allocation 792 0.01 792 0 425 0.13 425 0
18. PCM High Yield Fund 8,828 0.08 8,828 0 4,735 1.44 4,735 0
19. Penn Capital
Management 55 0.00 55 0 30 0.01 30 0
20. Prospect Street High
Income Portfolio 932 0.01 932 0 500 0.15 500 0
- --------------------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
- ------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BENEFICIALLY BENEFICIALLY
BENEFICIALLY OWNED BENEFICIALLY OWNED OWNED
NAME OF SELLING OWNED PRIOR TO OFFERED AFTER THIS PRIOR TO THIS OFFERED AFTER THIS
SECURITYHOLDER THIS OFFERING FOR SALE OFFERING OFFERING FOR SALE OFFERING
- --------------------------------------------------------
-------------------------
<CAPTION>
PERCENT PERCENT
OF TOTAL OF TOTAL
NUMBER OUT- NUMBER OUT-
OF STANDING OF STANDING
SHARES SHARES WARRANTS WARRANTS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
21. Prudential High
Yield Fund 41,019 0.39 41,019 0 22,000 6.69 22,000 0
22. Putnam Asset
Allocation Fund 1,678 0.02 1,678 0 900 0.27 900 0
23. Putnam Asset
Allocation Fund 186 0.00 186 0 100 0.03 100 0
24. Putnam Convertible
Opportunities 466 0.00 466 0 250 0.08 250 0
25. Putnam Diverse
Income Fund 17,088 0.16 17,088 0 9,165 2.79 9,165 0
26. Putnam Equity Income
Fund 83 0.00 83 0 45 0.01 45 0
27. Putnam High Income
Convertible Fund 466 0.00 466 0 250 0.08 250 0
28. Putnam High Yield
Advantage 6,124 0.06 6,124 0 3,285 1.00 3,285 0
29. Putnam High Yield
Fund 29,748 0.28 29,748 0 15,955 4.85 15,955 0
30. Putnam Managed High-
Yield Trust 503 0.00 503 0 270 0.08 270 0
31. Putnam Master Income
Fund 1,752 0.02 1,752 0 940 0.29 940 0
32. Putnam Master
Intermediate Income 1,435 0.01 1,435 0 770 0.23 770 0
33. Putnam Premier
Income Fund 5,248 0.05 5,248 0 2,815 0.86 2,815 0
34. Putnam Short Term
Investment Grade Bond
Fund 745 0.01 745 0 400 0.12 400 0
35. Richard S. Trutanic
IRA 27 0.00 27 0 15 0.00 15 0
36. Richard S. Trutanic
IRA Rollover 27 0.00 27 0 15 0.00 15 0
37. Richard S. Trutanic
SEP IRA 27 0.00 27 0 15 0.00 15 0
38. Sunamerica Asset
Management High Income
Fund 7,458 0.07 7,458 0 4,000 1.22 4,000 0
39. Any other holder of
Warrants or Warrant
Shares (including Cede
& Co. on behalf of
such holders) or
future transferee from
such holders.......... 343,888 3.24 343,888 0 184,440 56.06 184,440 0
TOTAL 613,427/1/ 5.78% 613,427 0 329,000 100% 329,000 0
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
/1Total/shares reflects the number of shares which may be issued upon exercise
of all outstanding warrants. The actual number of Warrant Shares may be
lower since the Warrant Agreement provides for rounding to the next lowest
whole number upon any given exercise of Warrants; fractional shares will not
be issued by the Company.
The Warrants owned by the Selling Securityholders represent all of the
Warrants covered by the Registration Statement. Many of the Selling
Securityholders acquired their Warrants in April 1996, pursuant to the private
placement by the Company of units, each unit consisting of $1,000 principal
amount at maturity of Senior Notes and one Warrant. Cede & Co. may hold
Warrants pursuant to a global warrant on behalf of beneficial owners of the
Warrants. It is contemplated that this Prospectus may be supplemented from
time to time to include information with respect to such Selling
Securityholders.
71
<PAGE>
PLAN OF DISTRIBUTION
The Warrants and Warrant Shares may be sold from time to time to purchasers
directly by the Selling Securityholders. Alternatively, if permitted pursuant
to the Class B Warrant Registration Rights Agreement, the Selling
Securityholders may from time to time offer the Warrants and Warrant Shares to
or through underwriters, broker/dealers or agents, who may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Selling Securityholders or the purchasers of Warrants and Warrant
Shares for whom they may act as agents. The Selling Securityholders and any
underwriters, broker/dealers or agents that participate in the distribution of
Warrants and Warrant Shares may be deemed to be "underwriters" within the
meaning of the Securities Act and any profit on the sale of Warrants and
Warrant Shares by them and any discounts, commissions, concessions or other
compensation received by any such underwriter, broker/dealer or agent may be
deemed to be underwriting discounts and commission under the Securities Act.
The Warrants and Warrant Shares may be sold by a Selling Securityholder from
time to time, in one or more transactions at fixed prices, at prevailing
market prices at the time of sale, at varying prices determined at the time of
sale or at negotiated prices. Such prices will be determined by the Selling
Securityholder. The sale of the Warrants and Warrant Shares may be effected
(i) in transactions (which may involve crosses or block transactions) on any
national securities exchange or quotation service on which the Warrants or
Warrant Shares may be listed or quoted at the time of sale, (ii) in the over-
the-counter market, (iii) in transactions otherwise than on such exchanges or
in the over-the-counter market or (iv) through the writing of options. At the
time a particular offering of the Warrants or Warrant Shares is made, if
required, a prospectus supplement will be distributed which will set forth the
names of the Selling Securityholders, the aggregate amount and type of
Warrants and Warrant Shares being offered, the number of such securities owned
prior to and after the completion of any such offering, and, to the extent
required, the terms of the offering, including the name or names of any
underwriters, broker/dealers or agents, any discounts, commissions and other
terms constituting compensation from the Selling Securityholders and any
discounts, commissions or concessions allowed or reallowed or paid to
broker/dealers.
To comply with the securities laws of certain jurisdictions, if applicable,
the Warrants and Warrant Shares will be offered or sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in
certain jurisdictions the Warrants and Warrant Shares may not be offered or
sold unless they have been registered or qualified for sale in such
jurisdictions or any exemption from registration or qualification is available
and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the Warrants or Warrant Shares may be limited in
its ability to engage in market activities with respect to such Warrants or
Warrant Shares. In addition and without limiting the foregoing, each Selling
Securityholder will be subject to applicable provisions of the Exchange Act
and the rules and regulations thereunder, which provisions may limit the
timing of purchases and sales of any of the Warrants and Warrant Shares by the
Selling Securityholders. All of the foregoing may affect the marketability of
the Warrants and Warrant Shares.
All expenses of the registration of the Warrants and Warrant Shares pursuant
to the Class B Warrant Registration Rights Agreement will be paid by the
Company, including, without limitation, Commission filing fees and expenses of
compliance with state securities or "blue sky" laws; provided, however, that
the Selling Securityholders will pay all underwriting discount and selling
commissions, if any. The Selling Securityholders will be indemnified by the
Company against certain civil liabilities, including certain liabilities under
the Securities Act, or will be entitled to contribution in connection
therewith. The Company will be indemnified by the Selling Securityholders
against certain civil liabilities, including certain liabilities under the
Securities Act, or will be entitled to contribution in connection therewith.
This Prospectus may also be used by the Company in connection with the
issuance from time to time of the Warrant Shares.
72
<PAGE>
LEGAL MATTERS
The validity of the Warrants and Warrant Shares has been 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.
73
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets, March 31, 1996 and 1997, and unaudited
June 30, 1997............................................................ F-3
Consolidated Statements of Operations, Years Ended March 31, 1995, 1996
and 1997, and unaudited three months ended June 30, 1996 and 1997........ F-4
Consolidated Statements of Stockholders' Equity (Deficiency), Years Ended
March 31, 1995, 1996 and 1997, and unaudited three months ended
June 30, 1997............................................................ F-5
Consolidated Statements of Cash Flows, Years Ended March 31, 1995, 1996
and 1997, and unaudited three months ended June 30, 1996 and 1997........ F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Hyperion Telecommunications, Inc.:
We have audited the accompanying consolidated balance sheets of Hyperion
Telecommunications, Inc. and subsidiaries as of March 31, 1996 and 1997 and
the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for each of the three years in the period ended
March 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Hyperion Telecommunications,
Inc. and subsidiaries at March 31, 1996 and 1997 and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
June 13, 1997
F-2
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
----------------- -----------
1996 1997 1997
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
- -------
Current assets:
Cash and cash equivalents..................... $ -- $ 59,814 $ 21,308
Other current assets.......................... 282 768 1,158
------- -------- --------
Total current assets........................ 282 60,582 22,466
Investments..................................... 21,087 44,685 60,152
Property, plant and equipment--net.............. 12,561 53,921 71,633
Other assets--net............................... 1,045 15,376 15,619
Deferred income taxes--net...................... 294 37 37
------- -------- --------
Total....................................... $35,269 $174,601 $169,907
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY):
- ------------------------------------
Current liabilities:
Accounts payable.............................. $ 2,529 $ 2,342 $ 2,451
Due to affiliates--net........................ 8,707 6,081 6,930
Other current liabilities..................... 501 757 1,768
------- -------- --------
Total current liabilities................... 11,737 9,180 11,149
13% Senior Discount Notes due 2003.............. -- 187,173 193,900
Note payable--Adelphia.......................... 50,855 25,855 25,855
Other debt...................................... -- 2,647 2,496
------- -------- --------
Total liabilities........................... 62,592 224,855 233,400
------- -------- --------
Commitments and contingencies (Note 7)
Stockholders' equity (deficiency):
Class A Common Stock, $0.01 par value,
300,000,000 shares authorized and 0, 104,000
and 122,000 shares outstanding, respectively. -- 1 1
Class B Common Stock, $0.01 par value,
150,000,000 shares
authorized and 10,000,000 shares outstanding. 100 100 100
Additional paid in capital.................... -- 155 182
Class B Common Stock Warrants................. -- 11,087 11,087
Loans to Stockholders......................... -- (3,000) (3,000)
Accumulated deficit........................... (27,423) (58,597) (71,863)
------- -------- --------
Total stockholders' equity (deficiency)..... (27,323) (50,254) (63,493)
------- -------- --------
Total....................................... $35,269 $174,601 $169,907
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
--------------------------- -----------------
1995 1996 1997 1996 1997
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues...................... $ 1,729 $ 3,322 $ 5,088 $ 1,102 $ 1,520
------- -------- -------- ------- --------
Operating expenses:
Network operations.......... 1,382 2,690 3,432 859 1,180
Selling, general and
administrative.............. 2,524 3,084 6,780 1,027 2,380
Depreciation and
amortization................ 463 1,184 3,945 695 1,372
------- -------- -------- ------- --------
Total..................... 4,369 6,958 14,157 2,581 4,932
------- -------- -------- ------- --------
Operating loss................ (2,640) (3,636) (9,069) (1,479) (3,412)
Other income (expense):
Gain on sale of investment.. -- -- 8,405 8,405 --
Interest income............. 39 199 5,976 1,433 763
Interest expense and fees... (3,321) (6,088) (28,377) (6,169) (8,077)
------- -------- -------- ------- --------
(Loss) income before income
taxes and equity in net loss
of joint ventures ........... (5,922) (9,525) (23,065) 2,190 (10,726)
Income tax benefit (expense).. 29 197 (259) (3) --
------- -------- -------- ------- --------
(Loss) income before equity in
net loss of
joint ventures .............. (5,893) (9,328) (23,324) 2,187 (10,726)
Equity in net loss of joint
ventures...................... (1,799) (4,292) (7,223) (1,636) (2,540)
------- -------- -------- ------- --------
Net (loss) income............. $(7,692) $(13,620) $(30,547) $ 551 $(13,266)
======= ======== ======== ======= ========
Net (loss) income per weighted
average share of
common stock................. $ (0.77) $ (1.36) $ (2.88) $ 0.05 $ (1.24)
======= ======== ======== ======= ========
Weighted average shares of
common stock outstanding..... 10,000 10,000 10,591 10,525 10,735
======= ======== ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS B
CLASS A CLASS B ADDITIONAL COMMON STOCKHOLDERS'
COMMON COMMON PAID-IN STOCK LOANS TO ACCUMULATED EQUITY
STOCK STOCK CAPITAL WARRANTS STOCKHOLDERS DEFICIT (DEFICIENCY)
------- ------- ---------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994 $-- $100 $-- $ -- $ -- $ (6,111) $ (6,011)
Net loss.............. -- -- -- -- -- (7,692) (7,692)
---- ---- ---- ------- ------- -------- --------
Balance, March 31, 1995 -- 100 -- -- -- (13,803) (13,703)
Net loss.............. -- -- -- -- -- (13,620) (13,620)
---- ---- ---- ------- ------- -------- --------
Balance, March 31, 1996. -- 100 -- -- -- (27,423) (27,323)
Proceeds from issuance
of Class B Common
Stock warrants ...... -- -- -- 11,087 -- -- 11,087
Loans to stockholders
..................... -- -- -- -- (3,000) -- (3,000)
Excess of purchase
price of acquired
assets
over related party
predecessor owner's
carrying value....... -- -- -- -- -- (627) (627)
Issuance of Class A
Common Stock bonus .. 1 -- 155 -- -- -- 156
Net loss ............. -- -- -- -- -- (30,547) (30,547)
---- ---- ---- ------- ------- -------- --------
Balance, March 31, 1997
....................... 1 100 155 11,087 (3,000) (58,597) (50,254)
Issuance of Class A
Common Stock bonus
(unaudited).......... -- -- 27 -- -- -- 27
Net loss (unaudited).. -- -- -- -- -- (13,266) (13,266)
---- ---- ---- ------- ------- -------- --------
Balance, June 30, 1997
(unaudited)............ $1 $100 $182 $11,087 $(3,000) $(71,863) $(63,493)
==== ==== ==== ======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
---------------------------- ------------------
1995 1996 1997 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net (loss) income.......... $ (7,692) $(13,620) $(30,547) $ 551 $(13,266)
Adjustments to reconcile
net (loss) income to net
cash used in operating
activities:
Depreciation............. 397 1,061 2,604 335 1,054
Amortization............. 66 123 1,341 360 318
Equity in net loss of
joint ventures.......... 1,799 4,292 7,223 1,636 2,540
Non-cash interest
expense................. 3,321 6,088 23,467 4,915 6,727
Deferred income taxes.... (37) (206) 257 -- --
Gain on sale of
investment.............. -- -- (8,405) (8,405) --
Issuance of Class A
Common Stock bonus...... -- -- 156 -- 27
Changes in operating
assets and liabilities,
net of effects of
acquisition:
Other assets--net...... (550) (227) (624) (22) (951)
Accounts payable and
other current
liabilities........... 566 1,656 (295) (2,027) 1,144
-------- -------- -------- -------- --------
Net cash used in operating
activities.................. (2,130) (833) (4,823) (2,657) (2,407)
-------- -------- -------- -------- --------
Cash flows from investing
activities:
Net cash used for
acquisition.............. -- -- (5,040) -- --
Expenditures for property,
plant
and equipment............ (2,850) (6,084) (24,627) (1,818) (18,766)
Investment in fiber asset
and senior secured note.. -- -- (20,000) -- --
Proceeds from sale of
investment............... -- -- 11,618 11,618 --
Investments in joint
ventures................. (7,526) (12,815) (34,769) (4,750) (18,031)
-------- -------- -------- -------- --------
Net cash (used in) provided
by investing activities..... (10,376) (18,899) (72,818) 5,050 (36,797)
-------- -------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from Senior
Discount Notes........... -- -- 163,705 163,705 --
Proceeds from issuance of
Class B Common Stock
warrants................. -- -- 11,087 11,087 --
Costs associated with debt
financing................ -- -- (6,555) (6,221) --
Loans to stockholders..... -- -- (3,000) (3,000) --
Borrowings on (repayment
of) Note payable--
Adelphia................. 12,252 9,226 (25,000) (25,000) --
Repayment of debt......... -- -- -- -- (151)
Advances from (to)
affiliates............... 254 10,506 (2,782) (10,822) 849
-------- -------- -------- -------- --------
Net cash provided by
financing activities........ 12,506 19,732 137,455 129,749 698
-------- -------- -------- -------- --------
Net increase (decrease) in
cash and cash equivalents... -- -- 59,814 132,142 (38,506)
Cash and cash equivalents,
beginning of period......... -- -- -- -- 59,814
-------- -------- -------- -------- --------
Cash and cash equivalents,
end of period............... $ -- $ -- $ 59,814 $132,142 $ 21,308
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1)THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The consolidated financial statements include the accounts of Hyperion
Telecommunications, Inc. and its wholly and majority owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company was formed in 1991 and is an 88%
owned subsidiary of Adelphia Communications Corporation ("Adelphia"). The
remaining 12% is owned by certain key Company officers.
The Company provides telecommunications service through its subsidiaries and
joint ventures, in which it has less than a majority ownership interest. The
Company's efforts have been directed primarily toward becoming an owner and
manager of competitive local exchange carrier ("CLEC") business
telecommunications services in selected mid-sized cities. The Company
generally partners with a local cable television or utility company, whose
fiber facilities are located in the market areas, to build competitive access
fiber optic networks. The Company then operates the networks for a management
fee. Each network provides local special access, carrier-to-carrier, and
point-to-point telecommunications services to major businesses and government
customers. The Company's revenues are derived from a combination of direct
business telecommunication services provided by its subsidiaries and
management fees from its unconsolidated joint ventures.
Joint ventures in which the Company does not have a majority interest are
accounted for under the equity method of accounting.
Cash and cash equivalents
Cash and cash equivalents consist of highly liquid instruments with an
initial maturity date of three months or less.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Costs capitalized include amounts directly associated with
network engineering, design and construction.
Provision for depreciation of property, plant and equipment is computed
using the straight-line method over the estimated useful lives of the assets
beginning in the month the asset is available for use or is acquired.
The estimated useful lives of the Company's principal classes of property,
plant and equipment are as follows:
<TABLE>
<S> <C>
Telecommunications networks...................................... 10-20 years
Network monitoring and switching equipment....................... 5-10 years
Other............................................................ 3-10 years
</TABLE>
Revenue Recognition
The Company recognizes revenues related to management and network monitoring
of the joint ventures in the month that the related services are provided. The
Company recognizes revenue from telecommunications services in the month the
related service is provided. Revenues on billings to customers for services in
advance of providing such services are deferred and recognized when earned.
F-7
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1)THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Net Loss Per Weighted Average Share of Common Stock
The computation of net loss per weighted average share of common stock is
based upon the weighted average number of common shares and warrants
outstanding during the year. All references in the accompanying consolidated
financial statements to the number of shares of common stock have been
retroactively restated to reflect the stock split (See Note 6).
Income Taxes
Deferred income taxes are recognized for the tax effects of temporary
differences between financial statement and income tax bases of assets and
liabilities and for loss carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance is established
to reduce deferred tax assets to the net amount that management believes will
more likely than not be realized.
Other Assets
Costs incurred in developing new networks or expanding existing networks,
including network design, negotiating rights-of-way and obtaining
legal/regulatory authorizations are deferred and amortized over five years.
Pre-operating costs, included in other assets, represent certain
nondevelopment costs incurred during the pre-operating phase of a newly
constructed network and are amortized over five-year periods commencing with
the start of operations. Deferred debt financing costs, included in other
assets, are amortized over the term of the related debt. The unamortized
amounts at March 31, 1996 and 1997 were $0 and $6,033, respectively. Also
included in other assets at March 31, 1997 is a Senior Secured Note (See Note
3).
Asset Impairments
The Company reviews the carrying value of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable. Measurement of any
impairment would include a comparison of estimated future operating cash flows
anticipated to be generated during the remaining life of the assets with their
net carrying value. An impairment loss would be recognized as the amount by
which the carrying value of the assets exceeds their fair value.
Financial Instruments
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of accounts receivable. Concentration of
credit risk with respect to accounts receivable is limited due to the
dispersion of the Company's customer base among different customers and
geographic areas.
The Company's financial instruments include cash and cash equivalents, Note
payable--Adelphia, Senior Secured Note, and Senior Discount Notes. The
carrying values of the Note payable--Adelphia and the Senior Secured Note
approximated their fair values at March 31, 1996 and 1997. The carrying value
of the Senior Discount Notes exceeded fair value by approximately $5,400 at
March 31, 1997. The fair values of the Note payable--Adelphia and the Senior
Secured Note were estimated based upon the terms in comparison with other
similar instruments. The fair value of the Senior Discount Notes was based
upon quoted market prices.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
F-8
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1)THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" has been issued and is effective for periods ending after December 15,
1997, with early application not permitted. The general requirements of SFAS
No. 128 are designed to simplify the computation of earnings per share. The
new statement requires a calculation of basic and diluted earnings per share.
The adoption of SFAS No. 128 is not expected to have any effect on the
Company's calculation of earnings per share.
SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information," have
been issued and are effective for fiscal years beginning after December 15,
1997. SFAS No. 130 defines comprehensive income and outlines certain reporting
and disclosure requirements related to comprehensive income. SFAS No. 131
requires certain disclosures about business segments of an enterprise, if
applicable. The adoption of SFAS No. 130 and SFAS No. 131 is not expected to
have any effect on the Company's financial statements or disclosures.
Unaudited Interim Information
In the opinion of management, the accompanying unaudited interim financial
information as of June 30, 1997 and for the three months ended June 30, 1996
and 1997 contains all adjustments, consisting of only normal recurring
accruals necessary for a fair presentation of the data as of such date and for
such periods. This information does not include all footnotes which would be
required for complete financial statements prepared in accordance with
generally accepted accounting principles. The results of operations for the
three months ended June 30, 1997 are not necessarily indicative of the results
to be expected for the year ending March 31, 1998.
Reclassification
For the fiscal years ended March 31, 1995, 1996, and 1997, certain amounts
have been reclassified to conform with the June 30, 1997 presentation.
(2)PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------- JUNE 30,
1996 1997 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Telecommunications networks..................... $ 6,312 $12,236 $13,475
Network monitoring and switching equipment...... 5,267 19,301 20,442
Fiber asset under construction (Note 3)......... -- 11,500 11,500
Construction in process......................... 2,245 14,978 31,334
Other........................................... 388 1,131 1,151
------- ------- -------
14,212 59,146 77,902
Less accumulated depreciation................... (1,651) (5,225) (6,269)
------- ------- -------
Total......................................... $12,561 $53,921 $71,633
======= ======= =======
</TABLE>
(3)INVESTMENT IN FIBER ASSET AND SENIOR SECURED NOTE
On February 20, 1997, the Company entered into several agreements regarding
the leasing of dark fiber in New York state in furtherance of its strategy to
interconnect its networks in the northeastern United States.
F-9
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(3)INVESTMENT IN FIBER ASSET AND SENIOR SECURED NOTE, CONTINUED
Pursuant to these agreements and in consideration of a payment of $20,000, the
Company received a $20,000 Senior Secured note bearing interest at 22 1/2%
(subject to reduction upon early repayment of principal) due February 2002
(subject to early redemption options), from Telergy, Inc. ("Telergy") and a
fully prepaid lease from a Telergy affiliate for an initial lease term of 25
years (with two additional ten-year extensions) for 24 strands of dark fiber
installed or to be installed in a New York fiber optic telecommunications
backbone network. The Company has included $11,500 and $8,500 in Property,
Plant and Equipment and Other Assets, respectively, as the allocation of the
$20,000 payment between the fiber asset and the Senior Secured Note. The
allocation reflects the Company's estimate of the relative fair values of the
assets acquired.
(4)INVESTMENTS
The equity method of accounting is used to account for investments in joint
ventures in which the Company owns less than a majority interest. Under this
method, the Company's initial investment is recorded at cost and subsequently
adjusted for the amount of its equity in the net income or loss of its joint
ventures. Dividends or other distributions are recorded as a reduction of the
Company's investment. Investments in joint ventures accounted for using the
equity method reflect the Company's equity in their underlying net assets.
The Company's nonconsolidated investments are as follows:
<TABLE>
<CAPTION>
MARCH 31,
OWNERSHIP ----------------- JUNE 30,
PERCENTAGE 1996 1997 1997
---------- ------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Continental Fiber Technologies
(Jacksonville)..................... 20.0% $ 4,701 $ 7,330 $ 7,979
Multimedia Hyperion
Telecommunications (Wichita)....... 49.9% 2,620 3,306 3,306
Louisville Lightwave............... 50.0%(1) 996 4,683 8,644
NewChannels Hyperion
Telecommunications (Albany)........ 50.0%(2) 999 924 924
NewChannels Hyperion
Telecommunications (Binghamton).... 20.0%(2) 504 504 504
NHT Partnership (Buffalo).......... 40.0%(2) 2,457 4,717 5,300
NewChannels Hyperion
Telecommunications (Syracuse)...... 50.0%(2) 3,140 4,215 5,161
Hyperion of Harrisburg............. 50.0% 1,600 5,246 8,576
Hyperion of Tennessee (Nashville).. 25.0%(3) 1,345 -- --
Alternet of Virginia (Richmond).... 37.0% 3,406 7,018 7,212
New Jersey Fiber Technologies (New
Brunswick)......................... 19.7% 956 3,340 4,582
TCG of South Florida............... 15.7%(4) 4,679 -- --
PECO-Hyperion (Philadelphia) ...... 50.0% -- 10,750 15,000
Lexington Lightwave ............... 50.0% -- 2,311 4,261
Hyperion of York................... 50.0% -- 1,402 2,000
Other ............................. Various 497 949 1,277
------- -------- --------
27,900 56,695 74,726
Cumulative equity in net losses.... (6,813) (12,010) (14,574)
------- -------- --------
Total Investments.................. $21,087 $ 44,685 $ 60,152
======= ======== ========
</TABLE>
- --------
(1) The Company increased its ownership in this partnership on May 8, 1996
from 20% to 50%.
(2) As discussed in Note 12, the Company has entered into agreements, subject
to normal closing conditions and receipt of regulatory approval, to
exchange its interests in these networks.
(3) As discussed below, the Company increased its ownership in this
partnership on August 1, 1996 to 95%, and accordingly, has consolidated
this investment effective August 1, 1996.
(4) As discussed below, the Company sold its interest in TCG of South Florida
on May 16, 1996.
F-10
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(4)INVESTMENTS, CONTINUED
Summarized unaudited combined financial information for the Company's
investments being accounted for using the equity method of accounting,
excluding TCG of South Florida and Hyperion of Tennessee as of and for the
periods presented, is as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------- JUNE 30,
1996 1997 1997
-------- -------- --------
<S> <C> <C> <C>
Current assets.................................... $ 3,262 $ 5,684 $ 8,278
Non-current assets................................ 74,055 154,950 181,986
Current liabilities............................... 6,043 6,797 8,604
Non-current liabilities........................... 17,718 48,069 55,214
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
----------------------------- --------------------
1995 1996 1997 1996 1997
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 2,818 $ 6,497 $ 12,357 $ 2,651 $ 4,252
Net loss................ (3,454) (8,414) (17,052) (3,572) (6,259)
</TABLE>
On May 16, 1996, the Company sold its 15.7% interest in TCG of South Florida
for approximately $11,618 resulting in a pre-tax gain of approximately $8,400.
Amounts related to TCG of South Florida included in the Company's investments
and equity in net loss of joint ventures as of and for the year ended March
31, 1996 were $3,422 and $778, respectively. The Company's equity in net loss
of joint ventures included a loss of $221 for TCG of South Florida for the
fiscal year ended March 31, 1997.
On August 1, 1996, the Company purchased additional general and limited
partnership interests in Hyperion of Tennessee for approximately $5,000, which
increased the Company's ownership of Hyperion of Tennessee to 95%. The
following unaudited financial information of the Company assumes that this
acquisition had occurred on April 1, 1995:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1996 1997
--------------------
<S> <C> <C>
Revenues................................................ $ 3,963 $ 5,303
Net loss................................................ 15,239 31,002
Net loss per weighted average share of common stock..... $ 1.52 $ 2.93
</TABLE>
(5)FINANCING ARRANGEMENTS
Note Payable--Adelphia
The Company has an unsecured credit arrangement with Adelphia which had no
repayment terms prior to April 15, 1996. On April 15, 1996, $25,000 of the
proceeds from the sale of the 13% Senior Discount Notes (the "Notes") and
Class B Common Stock Warrants discussed below were used to repay a portion of
this obligation. Interest expense and fees on this credit arrangement were
based upon the weighted average cost of unsecured borrowings of Adelphia
during the corresponding periods. Interest at 11.28% per annum plus fees was
charged on the Note Payable--Adelphia for the years ended March 31, 1995 and
1996. The total amount of interest converted to note principal through April
15, 1996 was $9,007.
Effective April 15, 1996, the remaining balance due on the Note payable--
Adelphia is evidenced by an unsecured subordinated note due April 16, 2003.
This obligation bears interest at 16.5% per annum with interest
F-11
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(5)FINANCING ARRANGEMENTS, CONTINUED
payable quarterly in cash; by issuing additional subordinated notes; or a
combination of cash and additional subordinated notes, all of which is at the
Company's option. Interest accrued through June 30, 1997 on the amount
outstanding to Adelphia totaled $5,923 and is included in due to affiliates--
net.
13% Senior Discount Notes and Class B Common Stock Warrants
On April 15, 1996, the Company issued $329,000 of 13% Senior Discount Notes
due April 15, 2003 and 329,000 warrants to purchase an aggregate of 613,427
shares of its Class B Common Stock. Proceeds to the Company, net of discounts,
commissions, and other transaction costs were approximately $168,600. Such net
proceeds were used to pay $25,000 of the Note payable--Adelphia discussed
above, to make loans of $3,000 to certain key Company officers (see Note 6)
and to fund the Company's capital expenditures, working capital requirements,
operating losses and its pro-rata investments in joint ventures. Use of
proceeds from the Notes also included the repayment of amounts related to
capital expenditures, working capital requirements, operating losses and pro-
rata investments in joint ventures totaling $12,800 incurred during the period
from January 1, 1996 to April 15, 1996. These amounts had been funded during
the same time period through advances from Adelphia.
Prior to April 15, 2001, interest on the Notes is not payable in cash, but
is added to principal. Thereafter, interest is payable semi-annually
commencing October 15, 2001. The Notes are unsecured and are senior to the
Note payable--Adelphia and all future subordinated indebtedness. On or before
April 15, 1999 and subject to certain restrictions, the Company may redeem, at
its option, up to 25% of the aggregate principal amount of the Notes at a
price of 113% of the Accreted Value (as defined in the Indenture). On or after
April 15, 2001, the Company may redeem, at its option, all or a portion of the
Notes at 106.5% which declines to par in 2002, plus accrued interest.
The holders of the Notes may put the Notes to the Company at any time at a
price of 101% of accreted principle upon the occurrence of a Change of Control
(as defined in the Indenture). In addition, the Company will be required to
offer to purchase Notes at a price of 100% with the proceeds of certain asset
sales (as defined in the Indenture).
The Indenture stipulates, among other things, limitations on additional
borrowings, issuance of equity instruments, payment of dividends and other
distributions, repurchase of equity interests or subordinated debt, sale--
leaseback transactions, liens, transactions with affiliates, sales of Company
assets, mergers and consolidations.
In accordance with a registration rights agreement, the Company filed a
registration statement offering to exchange the Notes for Series B Senior
Discount Notes registered under the Securities Act of 1933, as amended (the
"Securities Act"). Terms of the Series B Senior Discount Notes are
substantially the same as the Notes. The above exchange was consummated within
the time periods stipulated in the agreement.
The Class B Common Stock Warrants are exercisable at $.01 per share, upon
the earlier of May 1, 1997 or a Change of Control. Unless exercised, the Class
B Common Stock Warrants expire on April 1, 2001. The number of shares and the
exercise price for which a warrant is exercisable are subject to adjustment
under certain circumstances. In accordance with a registration rights
agreement, the Company filed a shelf registration statement under the
Securities Act covering the Warrant Shares.
F-12
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(5)FINANCING ARRANGEMENTS, CONTINUED
If the Notes and Class B Common Stock Warrants had been issued on April 1,
1995, interest expense would have been approximately $27,796 for the year
ended March 31, 1996.
Other debt consists primarily of capital leases entered into in connection
with the acquisition of fiber leases for use in the telecommunications
networks. The interest rate on such debt ranges from 11.25% to 15.0%.
Maturities of debt for the five years after March 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................................... $489
1999............................................................... 554
2000............................................................... 529
2001............................................................... 382
2002............................................................... 324
</TABLE>
(6)STOCKHOLDERS' EQUITY
The Class B Common Stock of the Company held by Adelphia and certain key
Company officers (the "Officers") is subject to sale and transfer restriction
provisions. These provisions state that none of the Officers may transfer any
shares unless they have offered to sell such shares to Adelphia (or the other
remaining Officers if Adelphia declines) at a price per share equal to the
terms of the proposed third party sale or exchange.
In accordance with a shareholder agreement, upon termination of employment
or at any time after October 7, 1996, the Officers could have required
Adelphia to purchase all their outstanding Class B shares (the "Officers'
Option"). At any time after October 7, 2001, Adelphia could have required the
Officers to sell all of their outstanding Class B shares to Adelphia (the
"Adelphia Option"). The price per share shall be equal to the fair market
value of the shares as determined by a nationally recognized financial advisor
selected by Adelphia and the Officers.
On March 19, 1996, such shareholder agreement was amended primarily to (i)
grant the Officers certain registration rights regarding their Class B Common
Stock; (ii) extend the Officers' Option date until after October 7, 1998;
(iii) extend the Adelphia Option date until after October 7, 2003 and (iv)
provide for aggregate loans to the Officers of $3,000 from the proceeds
received from the sale of the Notes and Class B Common Stock Warrants
discussed in Note 5. Such loans, including accrued interest at a rate equal to
the rate which the Company is able to invest cash on a short-term basis, are
secured by a pledge of each Officer's Class B Common Stock in the Company and
are payable to the Company on the earlier of October 8, 1998 or the date of
the registration of an equity security of the Company as described below.
Also, an amount equal to the interest that accrues on such loans from the date
six months after the date the loans are made until due and payable will be
satisfied through additional compensation to the Officers. The shareholder
agreement is terminated upon the registration of an equity security of the
Company under the Securities Act or the Securities Exchange Act of 1934, as
amended, which equity security is of the same class as the equity security
held by the Officers.
On March 19, 1996, the Board of Directors of the Company approved a ten
thousand-for-one stock split of its Class B Common Stock and the reduction of
the par value from $1.00 per share to $.01 per share. In addition, on March
19, 1996, the Board of Directors approved charter amendments to increase the
Company's authorized shares of Class B Common Stock from 1,000 shares to
30,000,000 shares and authorized 5,000,000 shares of preferred stock with
terms of such preferred stock to be determined by the Board of Directors of
the Company. No preferred stock has been issued by the Company.
F-13
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(6)STOCKHOLDERS' EQUITY, CONTINUED
On October 3, 1996, the Board of Directors of the Company approved charter
amendments to (i) increase the Company's authorized shares from 30,000,000
shares of Common Stock to 150,000,000 shares of Class B Common Stock, (ii)
authorize 300,000,000 shares of a second class of common stock (Class A Common
Stock), and (iii) reclassify each previously authorized and outstanding share
of Common Stock as Class B Common Stock. Holders of the Class A Common Stock
and Class B Common Stock vote as a single class on all matters submitted to a
vote of the stockholders, with each share of Class A Common Stock entitled to
one vote and each share of Class B Common Stock entitled to ten votes. In
addition, each share of Class B Common Stock is automatically convertible into
one share of Class A Common Stock. In the event a cash dividend is paid, the
holders of the Class A Common Stock and the Class B Common Stock will be paid
an equal amount.
All references in the accompanying consolidated financial statements to the
number of shares of common stock and the par value have been retroactively
restated to reflect the stock split, the par value reduction and the other
actions taken by the Board of Directors on March 19 and October 3, 1996.
On October 3, 1996, the Board of Directors and stockholders of the Company
approved the Company's 1996 Long-Term Compensation Plan (the "1996 Plan"). The
1996 Plan provides for the grant of (i) options which qualify as "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended, (ii) options which do not so qualify, (iii) share awards
(with or without restrictions on vesting), (iv) stock appreciation rights and
(v) stock equivalent or phantom units. The number of shares of Class A Common
Stock available for issuance initially will be 1,750,000. Such number is to
increase each year by 1% of outstanding shares of all classes of the Company's
Common Stock, up to a maximum of 2,500,000 shares. Options, awards and units
may be granted under the 1996 Plan to directors, officers, employees and
consultants. The 1996 Plan provides that incentive stock options must be
granted with an exercise price of not less than the fair market value of the
underlying Common Stock on the date of grant. Options outstanding under the
Plan may be exercised by paying the exercise price per share through various
alternative settlement methods. On March 4, 1997 and April 1, 1997, the
company issued 104,000 and 18,000 shares, respectively, of Class A Common
Stock to Daniel R. Milliard pursuant to his employment agreement with the
Company. No other stock options, stock awards, stock appreciation rights or
phantom stock units have been granted under the Plan.
(7)COMMITMENTS AND CONTINGENCIES
The Company rents office space, node space and fiber under leases with terms
which are generally less than one year or under agreements that are generally
cancelable on short notice. Total rental expense under all operating leases
aggregated $478, $1,210 and $1,103 for the years ended March 31, 1995, 1996
and 1997, respectively.
The minimum future lease obligations under the noncancelable operating
leases as of March 31, 1997 are approximately:
<TABLE>
<CAPTION>
PERIOD ENDING MARCH 31,
-----------------------
<S> <C>
1998.................................................................... $553
1999.................................................................... 524
2000.................................................................... 507
2001.................................................................... 521
2002.................................................................... 462
Thereafter.............................................................. 113
</TABLE>
F-14
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(7)COMMITMENTS AND CONTINGENCIES, CONTINUED
Certain investors in two of the joint ventures have the right after a
specified period of time to sell their interest to the Company. Under one
agreement, the sales price represents the investor's aggregate capital
contribution less distributions plus interest accrued at the prime rate. The
Company's obligation under this commitment at June 30, 1997 was approximately
$3,729. The sales price under the second agreement is equal to the fair market
value of such investor's interest.
The Company has entered into employment agreements with certain key Company
officers, the terms of which expire on October 20, 1998, as amended. The
employment agreements provide for base salary, benefits and bonuses payable if
specified management goals are attained. In addition, the employment
agreements contain noncompetition and nondisclosure provisions.
The Company has entered into an employment agreement with the President of
the Company, the terms of which expire on March 31, 2001, unless extended by
the Company for additional one year periods. The employment agreement provides
for base salary, benefits, stock options or stock grants and cash and stock
bonuses payable if specified management goals are attained as established
annually by the Board of Directors. In addition, the employment agreement
contains noncompetition and nondisclosure provisions.
The Company's operations and the operations of its joint ventures may be
adversely affected by changes and developments in governmental regulation,
competitive forces and technology. The telecommunications industry is subject
to extensive regulation at the federal, state and local levels. On February 8,
1996, President Clinton signed the Telecommunications Act of 1996 (the
"Telecommunications Act"), the most comprehensive reform of the nation's
telecommunications laws since the Communications Act of 1934.
The more significant provisions of the Telecommunications Act and certain
of its possible effects are as follows:
The Telecommunications Act removes legal barriers of entry in local
telephone markets. This provision should enable the Company to provide a
full range of services in any state while potentially increasing the level
of competition the Company faces in all its markets.
The Telecommunications Act requires incumbent Local Exchange Company's
("LECs") to "interconnect" with competitors which will provide access to
certain networks under reasonable rates, terms and conditions.
The Telecommunications Act establishes procedures for LEC and Bell
Operating Company ("BOC") entry into new markets, including long distance
and cable television service.
By allowing the BOCs to enter the long distance market, this may reduce the
market share of the major long distance carriers (the Company's joint
ventures' primary customers) and have adverse consequences on the Company's
joint ventures' ability to generate revenues from the long distance
carriers.
The Telecommunications Act eliminates the requirement that LECs obtain FCC
authorization before constructing new facilities for interstate services
and limits the FCC's ability to review LEC tariff filings. The changes will
increase the speed with which the LECs are able to introduce new service
offerings and new pricing of existing services, thereby increasing the
LEC's ability to compete with the Company.
F-15
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(7)COMMITMENTS AND CONTINGENCIES, CONTINUED
On July 2, 1996 the FCC released its First Report and Order and Further
Notice of Proposed Rulemaking promulgating rules and regulations to
implement Congress' statutory directive concerning number portability (the
"Number Portability Order"). The FCC ordered all LECs to begin phased
development of a long-term service provider portability method in the 100
largest Metropolitan Statistical Areas ("MSAs") no later than October 1,
1997, and to complete deployment in those MSAs by December 31, 1998. Number
portability must be provided in those areas by all LECs to all requesting
telecommunications carriers. As new carriers are at a competitive
disadvantage without telephone number portability, the Company believes the
Number Portability Order should enhance the Company's ability to offer
service in competition with the incumbent LECs, but it is uncertain how
effective these regulations will be in promoting number portability. The
Number Portability Order sets interim criteria for number portability cost
recovery. The FCC deferred selecting a long term number portability cost
recovery scheme to a further rulemaking proceeding which is expected to be
decided later in 1997.
On August 8, 1996 the FCC released its First Report and Order and Second
Report and Order and Memorandum Opinion and Order promulgating rules and
regulations to implement Congress' statutory directive concerning the
interconnection obligations of all telecommunications carriers, including
obligations of CLEC and incumbent LEC networks and incumbent LEC pricing of
interconnection and unbundled elements (the "Local Competition Orders").
The Local Competition Orders adopt a national framework for interconnection
but leave to the individual states the task of implementing the FCC's
rules. Because implementation of the Local Competition Orders is occurring
at the state level, it is uncertain how these new requirements will affect
the Company. To the extent that CLECs are able to interconnect with
incumbent LEC networks on favorable terms, the Company believes its ability
to provide competitive local exchange services will increase. On May 8,
1997, the FCC issued an order to implement the provisions of the
Telecommunications Act relating to the preservation and advancement of
universal telephone service (the "Universal Service Order"). The Universal
Service Order requires all telecommunications carriers providing interstate
telecommunications services, including the Company, to contribute to
universal service support. Such contributions will be assessed based on
interstate and international end-user telecommunications revenues.
Universal service support will be distributed to all carriers designated as
"eligible carriers" by state commissions. This could be advantageous to the
Company or it could be beneficial to the Company's competitors depending on
the geographic areas for which subsidies are available.
In a related proceeding, on May 16, 1997, the FCC issued an order to
implement certain reforms to its access charge rules (the "Access Charge
Reform Order"). To the extent that the Access Charge Reform Order requires
incumbent LECs to impose lower, cost-based access charges on Interexchange
or Long Distance Carriers ("IXCs"), the Company's potential margins in
providing customers with access services may decrease.
F-16
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(8)RELATED PARTY TRANSACTIONS
The following table summarizes the Company's transactions with related
parties:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, JUNE 30,
-------------------- -------------
1995 1996 1997 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Management fees........................ $1,045 $1,950 $2,600 $ 679 $ 614
Network monitoring fees................ 217 446 604 119 216
Special access fees.................... 189 651 540 180 170
------ ------ ------ ------ ------
Total.................................. $1,451 $3,047 $3,744 $ 978 $1,000
====== ====== ====== ====== ======
EXPENSES:
Interest expense and fees.............. $3,321 $6,088 $4,731 $1,254 $1,259
Allocated corporate costs.............. 511 417 1,199 80 326
Fiber leases........................... 303 1,022 738 282 16
------ ------ ------ ------ ------
Total.................................. $4,135 $7,527 $6,668 $1,616 $1,601
====== ====== ====== ====== ======
</TABLE>
Management fees from related parties represent fees received by the Company
from its unconsolidated joint ventures for the performance of financial,
legal, regulatory, network design, construction and other administrative
services.
Network monitoring fees represent fees received by the Company for technical
support for the monitoring of each individual joint venture's
telecommunications system.
Special access fees represent amounts charged to joint ventures for use of
the network of a wholly owned subsidiary of the Company.
Interest income charged on certain affiliate receivable balances with joint
ventures was $65, $199, $230, $13, and $110 for the years ended March 31,
1995, 1996, and 1997, and the three months ended June 30, 1996 and 1997,
respectively.
Interest expense and fees relate to the Note payable--Adelphia (See Note 5).
Allocated corporate costs represent costs incurred by Adelphia on behalf of
the Company for the administration and operation of the Company. These costs
include charges for office space, corporate aircraft and shared services such
as finance activities, information systems, computer services, human
resources, and taxation. Such costs were estimated by Adelphia and do not
necessarily represent the actual costs that would be incurred if the Company
was to secure such services on its own.
Fiber lease expense represents amounts paid to various subsidiaries of
Adelphia for the utilization of existing cable television plant for
development and operation of the consolidated operating networks.
During the year ended March 31, 1997, the Company purchased from Adelphia
for approximately $6,485, Adelphia's historic cost to acquire the assets,
certain fiber that had previously been leased from Adelphia. Because the
entities involved in the transaction are under the common control of Adelphia,
the excess of the purchase price of the assets over the predecessor owner's
net book value was charged to accumulated deficit.
F-17
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(9)INCOME TAXES
Adelphia and its corporate subsidiaries (including the Company) file a
consolidated federal income tax return. For financial reporting purposes,
current and deferred income tax assets and liabilities are computed on a
separate company basis. The net operating loss carryforwards and the valuation
allowance are adjusted for the effects of filing a consolidated income tax
return, similar to provisions of the Internal Revenue Code. At March 31, 1997,
the Company had net operating loss carryforwards for federal income tax
purposes of $30,478 expiring through 2012.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
(b) operating loss carryforwards.
The Company's net deferred tax asset is comprised of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Differences between book and tax basis of intangible
assets.................................................. $ 119 $ 197
Net operating loss carryforwards....................... 9,302 11,539
Investment in Partnerships............................. 1,401 2,793
Other.................................................. 134 50
-------- --------
Total................................................. 10,956 14,579
Valuation allowance.................................... (10,459) (12,356)
-------- --------
Total................................................. 497 2,223
-------- --------
DEFERRED TAX LIABILITIES:
Differences between book and tax basis of property,
plant and
equipment............................................. 203 2,186
-------- --------
Net deferred tax asset.................................. $ 294 $ 37
======== ========
</TABLE>
The net change in the valuation allowance for the years ended March 31,
1996 and 1997 was an increase of $5,164 and $1,897, respectively.
Income tax benefit (expense) for the years ended March 31, 1995, 1996 and
1997 is as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1995 1996 1997
---- ---- -----
<S> <C> <C> <C>
Current..................................................... $(8) $ (9) $ (2)
Deferred.................................................... 37 206 (257)
--- ---- -----
Total....................................................... $29 $197 $(259)
=== ==== =====
</TABLE>
F-18
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(9)INCOME TAXES, CONTINUED
A reconciliation of the statutory federal income tax rate and the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate....................... 35.0% 35.0% 35.0%
Change in valuation allowance........................... (39.0) (34.6) (34.6)
State taxes, net of federal benefit and other........... 4.4 1.0 (1.2)
----- ----- -----
Income tax benefit (expense)............................ 0.4% 1.4% (0.8)%
===== ===== =====
</TABLE>
(10) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables summarize the financial results of the Company for each
of the quarters in the years ended March 31, 1996 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1995 1995 1995 1996
-------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues......................... $ 686 $ 612 $ 1,198 $ 826
------- ------- ------- -------
Operating expenses:
Network operations.............. 628 613 637 812
Selling, general and
administrative................... 831 534 1,010 709
Depreciation and amortization... 250 278 333 323
------- ------- ------- -------
Total.......................... 1,709 1,425 1,980 1,844
------- ------- ------- -------
Operating loss................... (1,023) (813) (782) (1,018)
Other income (expense):
Interest income................. 16 10 -- 173
Interest expense and fees....... (1,328) (1,372) (1,478) (1,910)
------- ------- ------- -------
Loss before income taxes and eq-
uity in net loss
of joint ventures............... (2,335) (2,175) (2,260) (2,755)
Income tax benefit (expense)..... 19 59 (20) 139
------- ------- ------- -------
Loss before equity in net loss of
joint ventures.................. (2,316) (2,116) (2,280) (2,616)
Equity in net loss of joint ven-
tures........................... (797) (845) (1,509) (1,141)
------- ------- ------- -------
Net loss......................... $(3,113) $(2,961) $(3,789) $(3,757)
======= ======= ======= =======
Net loss per weighted average
share of common stock........... $ (0.31) $ (0.30) $ (0.38) $ (0.38)
======= ======= ======= =======
Weighted average shares of common
stock
outstanding (in thousands)...... 10,000 10,000 10,000 10,000
======= ======= ======= =======
</TABLE>
F-19
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(10) QUARTERLY FINANCIAL DATA (UNAUDITED), CONTINUED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1996 1997
-------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues......................... $ 1,102 $ 1,175 $ 1,334 $ 1,477
------- ------- -------- --------
Operating expenses:
Network operations.............. 859 728 752 1,093
Selling, general and
administrative................... 1,027 1,164 2,545 2,044
Depreciation and amortization... 695 886 1,002 1,362
------- ------- -------- --------
Total.......................... 2,581 2,778 4,299 4,499
------- ------- -------- --------
Operating loss................... (1,479) (1,603) (2,965) (3,022)
Other income (expense):
Gain on sale of investment...... 8,405 -- -- --
Interest income................. 1,433 1,696 1,190 1,657
Interest expense and fees....... (6,169) (7,108) (7,482) (7,618)
------- ------- -------- --------
Income (loss) before income taxes
and equity in net loss
of joint ventures............... 2,190 (7,015) (9,257) (8,983)
Income tax (expense) benefit..... (3) 120 63 (437)
------- ------- -------- --------
Income (loss) before equity in
net loss of joint ventures...... 2,187 (6,895) (9,194) (9,420)
Equity in net loss of joint ven-
tures........................... (1,636) (1,362) (2,145) (2,080)
------- ------- -------- --------
Net income (loss)................ $ 551 $(8,257) $(11,339) $(11,500)
======= ======= ======== ========
Net income (loss) per weighted
average share
of common stock................. $ 0.05 $ (0.78) $ (1.07) $ (1.08)
======= ======= ======== ========
Weighted average shares of common
stock
outstanding (in thousands)...... 10,525 10,613 10,613 10,613
======= ======= ======== ========
</TABLE>
(11) SUBSEQUENT EVENTS (THROUGH DATE OF INDEPENDENT AUDITORS' REPORT):
On June 13, 1997, the Company entered into agreements with MCImetro Access
Transmission Services, Inc. (together with its affiliate, MCI Communications,
"MCI"). Pursuant to this agreement the Company is designated MCI's preferred
provider for new end user dedicated access circuits and of conversions of end
user dedicated access circuits as a result of conversions from the incumbent
LEC in the Company's markets. Hyperion also has certain rights of first
refusal to provide MCI with certain telecommunications services. Under this
arrangement, the Company issued a warrant to purchase 281,040 shares of Class
A Common Stock to MCI representing 2 1/2% of the Common Stock of the Company
on a fully diluted basis. MCI can receive additional warrants to purchase up
to an additional 6% of the shares of the Company's Class A Common Stock, on a
fully diluted basis, at fair value, if MCI meets certain purchase volume
thresholds over the term of the agreement.
F-20
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(12) EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT:
On August 4, 1997, the Company entered into an agreement with Lenfest
Telephony to increase the Company's interest in Hyperion of Harrisburg to 100%
in exchange for 225,115 shares of the Company's Class A Common Stock.
On August 11, 1997, the Company entered into agreements with subsidiaries of
Tele-Communications, Inc. to (i) increase the Company's interest in Louisville
Lightwave and Lexington Lightwave to 100% and (ii) increase the Company's
interest in NHT Partnership (Buffalo) to 100%.
Both of these transactions are subject to normal closing conditions and
receipt of regulatory approvals.
On August 27, 1997, the Company issued $250,000 aggregate principal amount
of 12 1/4% Senior Secured Notes due September 1, 2004 (the "Secured Notes") in
a private placement. Interest is payable semi-annually commencing March 1,
1998. The Secured Notes are secured by a first priority pledge of (i) the
Pledged Securities (as defined in the Indenture) and (ii) the Stock Collateral
(as defined in the Indenture). On or prior to September 1, 2000, the Company
may redeem up to 25% of the aggregate principal amount of the Secured Notes at
112.25% of principal with the net proceeds of one or more Qualified Equity
Offerings (as defined in the Indenture). Commencing September 1, 2001, the
Company may redeem the Secured Notes in whole or in part at 106.125% of
principal declining annually to par on September 1, 2003. Holders of the
Secured Notes have the right to require the Company to redeem their Secured
Notes at 101% of principal upon a Change of Control (as defined in the
Indenture). The Indenture stipulates, among other things, limitations on
additional borrowings, payment of dividends or distributions, repurchase of
equity interests, transactions with affiliates and the sale of assets. The
Indenture also provides for payment to the Secured Notes holders of liquidated
damages of up to 2% per annum of the Secured Notes principal if the Company
does not file a registration statement or cause such registration statement to
become effective within a prescribed time period with respect to an offer to
exchange the Secured Notes for a new issue of debt securities registered under
the Securities Act, with terms substantially the same as those of the Secured
Notes. The new issue of debt securities is expected to be recorded at the same
carrying value as the Secured Notes and, accordingly, no gain or loss is
expected to be recognized. Of the $243,300 net proceeds, after payment of
transaction costs, approximately $83,400 was placed in escrow for the purchase
of the Pledged Securities to provide for payment of the first six scheduled
interest payments on the Secured Notes. The Company intends to use the
remainder of the net proceeds to fund (i) capital expenditures, (ii) the
acquisition of additional ownership interests in certain of its joint ventures
and (iii) working capital.
On May 8, 1997, the Company entered into agreements with Time Warner
Entertainment Advance/Newhouse and Advance/Newhouse Partnership (collectively,
"TWEAN") to exchange interests in four New York CLEC networks. On September
12, 1997, the Company consummated the agreements and thereby (i) increased its
ownership interests in the Buffalo and Syracuse networks to 60% and 100%,
respectively, and (ii) eliminated its ownership interests in the Albany and
Binghamton networks.
On October 9, 1997, the Company issued $200,000 aggregate liquidation
preference of 12 7/8% Senior Exchangeable Redeemable Preferred Stock due 2007
(the "Preferred Stock") in a private placement. The Company is required to
redeem all of the Preferred Stock on October 15, 2007 at 100% of the
liquidation preference of the Preferred Stock then outstanding. Dividends are
payable quarterly, commencing January 15, 1998, at 12 7/8% of the liquidation
preference of outstanding Preferred Stock. Through October 15, 2002, dividends
are payable in cash or additional shares of Preferred Stock at the Company's
option. Subsequent to
F-21
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1997
(INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
October 15, 2002, dividends are payable in cash. Prior to October 15, 2000,
subject to certain conditions, the Company may redeem up to 35% of the
aggregate liquidation preference of the originally issued Preferred Stock at
112.875% of the liquidation preference thereof with the net proceeds of one or
more Qualified Equity Offerings (as defined). Commencing October 15, 2002, the
Company may redeem the Preferred Stock in whole or in part at 106.438% of the
liquidation preference thereof declining annually to par on October 15, 2005.
Holders of the Preferred Stock have the right to require the Company to redeem
their Preferred Stock at 101% of the liquidation preference thereof upon a
Change of Control (as defined). The Certificate of Designation stipulates,
among other things, limitations on additional borrowings, payment of dividends
or distributions, transactions with affiliates and the sale of assets. A
related Registration Rights Agreement provides for payment to the Preferred
Stock holders of liquidated damages of up to 1% per annum of the Preferred
Stock liquidation preference if the Company does not file a registration
statement or cause such registration statement to become effective within a
prescribed time period with respect to an offer to exchange the Preferred
Stock for a new issue of securities registered under the Securities Act, with
terms substantially the same as those of the Preferred Stock. The new issue of
securities is expected to be recorded at the same carrying value as the
Preferred Stock and, accordingly, no gain or loss is expected to be
recognized. The Company intends to use the net proceeds of approximately
$194,500 to fund the acquisition of increased ownership interests in certain
of its networks, for capital expenditures, including the construction and
expansion of new and existing networks, and for general corporate and working
capital purposes. Pending such uses, the net proceeds will be invested in
cash, short-term investments and other cash equivalents.
The Company may, at its option, on any dividend payment date, exchange in
whole, but not in part, the then outstanding shares of Preferred Stock for 12
7/8% Senior Subordinated Debentures due October 15, 2007 (the "Exchange
Debentures"). Interest, redemption and registration rights provisions of the
Exchange Debentures are consistent with the provisions of the Preferred Stock.
F-22
<PAGE>
APPENDIX A
GLOSSARY
Access Charges--The fees paid by long distance carriers to LECs for
originating and terminating long distance calls over the LECs' local networks.
ATM (Asynchronous Transfer Mode)--A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits
of a standard fifty-three bit-long packet or cell. ATM-based packet transport
was specifically developed to allow switching and transmission of mixed voice,
data and video (sometimes referred to as "multi-media" information) at varying
rates. The ATM format can be used by many different information systems,
including LANs.
Broadband--Broadband communications systems can transmit large quantities of
voice, data and video by way of digital or analog signals. Examples of
broadband communication systems include DS-3 fiber optic systems, which can
transmit 672 simultaneous voice conversations, or a broadcast television
station signal, that transmits high resolution audio and video signals into
the home. Broadband connectivity is also an essential element for interactive
multimedia applications.
CAP (Competitive Access Provider)--A company that provides its customers
with an alternative to the incumbent local telephone company for local
transport of private line, special access and interstate transport of switched
access telecommunications services. CAPs are also referred to in the industry
as alternative local telecommunications service providers (ALTs), metropolitan
area network providers (MANs) and alternative access vendors (AAVs).
Central Offices or LEC-COs--The switching centers or central switching
facilities of the LECs or CLECs.
Centrex--Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except the equipment is located at the
carrier's premises and not at the premises of the customer. These features
include direct dialing within a given phone system, direct dialing of incoming
calls, and automatic identification of outbound calls. This is a value-added
service that LECs and CLECs can provide to a wide range of customers who do
not have the size or the funds to support their own on-site PBX.
CLEC (Competitive Local Exchange Carrier)--A CAP that also provides switched
local telecommunications services.
Collocation--The ability of a CAP, IXC or end user to connect its network to
a LEC-COs. Physical collocation occurs when a CAP places its network
connection equipment inside the LEC-COs. Virtual collocation is an alternative
to physical collocation pursuant to which the LEC permits a CAP to connect its
network to the LEC-COs on comparable terms, even though the CAP's network
connection equipment is not physically located inside the central offices.
Dedicated Lines--Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the public switched network).
Digital--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission and switching technologies
employ a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. Digital transmission and switching
technologies offer a threefold improvement in speed and capacity over analog
techniques, allowing much more efficient and cost-effective transmission of
voice, video and data.
A-1
<PAGE>
Dialing Parity--Dialing parity exists when a customer calling to or from the
network of a CLEC is not required to dial any more digits than for a
comparable call originating and terminating on the incumbent LEC's network.
Diverse Access Routing--A telecommunications network configuration in which
signals are transported simultaneously along two different paths so that if
one cable is cut, traffic can continue in the other direction without
interruption to its destination. The Company's networks generally provide
diverse access routing.
DS-0, DS-1, DS-3--Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit rate of up to 64
kilobits per second. DS-1 service has a bit rate of 1.544 megabits per second
and DS-3 service has a bit rate of 45 megabits per second.
FCC--Federal Communications Commission
Fiber Mile--The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route mile" below.
Fiber Optics--Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission. Fiber optic technology involves sending laser light pulses
across glass strands in order to transmit digital information. A strand of
fiber optic cable is as thick as a human hair yet is said to have more
bandwidth capacity than copper cable the size of a telephone pole.
Fiber Optic Ring Network--Most CAPs have built their networks in ring
configurations in order to ensure that, if one segment of a network is damaged
or cut, the traffic is simply re-routed and sent to its destination in the
opposite direction. The Company uses a "self-healing" optical fiber ring
architecture known as SONET.
Frame Relay--Frame relay is a high speed data packet switching service used
to transmit data between computers. Frame relay supports data units of
variable lengths at access speeds ranging from 56 kilobits to 1.5 megabits.
This service is appropriate for connecting LANs, but is not appropriate for
voice and video applications due to the variable delays which can occur. Frame
relay was designed to operate at higher speeds on modern fiber optic networks.
Frame Relay Service--Data communications service that functions as a fast
packet transport service of variable length data packets between customer
designated locations and supports the establishment of software defined
logical connections and circuits that act as private facilities on a public
platform.
Hubs--Collection centers located centrally in an area where
telecommunications traffic can be aggregated at a central point for transport
and distribution.
Interconnection Decisions--Rulings by the FCC announced in September 1992
and August 1993, which require the RBOCs and most other LECs to provide
interconnection in LEC-COs to any CAP, IXC or end user seeking such
interconnection for the provision of interstate special access and switched
access transport services.
InterLATA Calls--InterLATA calls are calls that pass from one LATA to
another. Typically, these calls are referred to as long distance calls. The
Telecommunications Act establishes procedures under which the RBOCs can
receive authority to provide interLATA services.
A-2
<PAGE>
IntraLATA Calls--IntraLATA calls, also known as short haul calls, are those
calls that originate and terminate within the same LATA. All states allow
intraLATA competition, but dialing parity still does not exist in most states
and very little LEC intraLATA revenue has been won by competitors.
IXC (Interexchange or Long Distance Carriers)--Usually referred to as long
distance carriers. There are many facilities-based IXCs, including AT&T, MCI,
WorldCom and Sprint, as well as a few CAPs that provide interexchange service.
Kilobit--One thousand bits of information. The information-carrying capacity
(i.e., bandwidth of a circuit may be measured in "kilobits per second.")
LANs (Local Area Networks)--The interconnection of computers for the purpose
of sharing files, programs and various devices such as work stations, printers
and high-speed modems. LANs may include dedicated computers or file servers
that provide a centralized source of shared files and programs.
LATAs--The geographically defined Local Access and Transport Areas in which
LECs are authorized by the MFJ to provide local exchange services. These LATAs
roughly reflect the population density of their respective states (for example
California has 11 LATAs while Wyoming has one). There are 164 LATAs in the
United States.
LEC (Local Exchange Carrier)--A company providing local telephone services.
LEC-CO--Local Exchange Carrier's Central Office.
Local Exchange Areas--A geographic area determined by the appropriate state
regulatory authority in which local calls generally are transmitted without
toll charges to the calling or called party.
Megabit--One million bits of information. The information-carrying capacity
(i.e., bandwidth) of a circuit may be measured in "megabits per second."
MFJ (Modified Final Judgment)--The MFJ was a consent decree entered into in
1982 between AT&T and the Department of Justice which forced the breakup of
the old Bell System through the divestiture of the seven separate Regional
Bell Operating Companies (RBOCs) from AT&T. Divestiture resulted in two
distinct segments of the telecommunications service market: local and long
distance. This laid the groundwork for intense competition in the long
distance industry, but essentially created seven separate regionally-based
local exchange service monopolies. The Telecommunications Act removes most MFJ
restrictions on a prospective basis from AT&T and the RBOCs.
Network Systems Integration--Involves the creation of a turnkey
telecommunications network including (i) route and site selection and
obtaining rights of way and legal authorizations to install the network; (ii)
design and engineering of the system, including technology and vendor
assessment and selection, determining fiber optic circuit capacity, and
establishing reliability/flexibility standards; and (iii) project and
construction management, including contract negotiations, purchasing and
logistics, installation as well as testing and construction management.
Number Portability--The ability of an end user to change local exchange
carriers while retaining the same telephone number.
Off-Net--A customer that is not physically connected to one of the Company's
networks but who is accessed through interconnection with a LEC network.
On-Net--A customer that is physically connected to one of the Company's
networks.
Overlash--An aerial cable construction technique that involves the
attachment of a new cable to an existing cable by placing the new cable beside
the existing cable, and lashing (or binding) the two cables together by means
of a lashing wire that is wrapped around both cables. This technique allows
for the addition of new cable facilities utilizing existing pole attachments
without the requirement for additional space on the pole.
A-3
<PAGE>
PCS (Personal Communications Service)--A type of wireless telephone system
that uses light, inexpensive handheld sets and communicates via low power
antennas.
PBX--A Private Branch Exchange is a switching system within an office
building which allows calls from outside to be routed directly to the
individual or through a central number. A PBX also allows for calling within
an office by way of four digit extensions. Centrex is a service which can
simulate this service from an outside switching source, thereby eliminating
the need for a large capital expenditure on a PBX.
Physical Collocation--Physical Collocation occurs when a CAP places its own
network connection equipment inside the LEC-CO. The Telecommunications Act
gives the FCC authority to mandate physical collocation. See Virtual
Collocation.
POPs (Points of Presence)--Locations where an IXC has installed transmission
equipment in a service area that serves as, or relays calls to, a network
switching center of that IXC.
Private Line--A private, dedicated telecommunications connection between
different end user locations (excluding IXC POPs).
Private Line Data Interconnect Service--A data transport service utilizing
data products and private line facilities that are packaged together with data
products.
Public Switched Network--That portion of a LEC's network available to all
users generally on a shared basis (i.e., not dedicated to a particular user).
Public Utility Commission--A state regulatory body which regulates
utilities, including telephone companies providing intrastate services. In
some states this regulatory body may have a different name, such as public
service commission.
RBOCs (Regional Bell Operating Companies)--The seven local telephone
companies established by the MFJ. The RBOCs were prohibited from providing
interLATA services and from manufacturing telecommunications equipment under
the MFJ, but the Telecommunications Act of 1996 establishes procedures for
lifting these restrictions.
Reciprocal Compensation--The compensation paid by a local carrier for
termination of a local call on the network of a competing carrier which is
obligated to pay a comparable charge to terminate traffic on the network of
the first carrier. Reciprocal compensation is distinct from the one way access
charges by which the IXCs compensate LEC's for originating or terminating
traffic.
Redundant Electronics--A telecommunications facility using two separate
electronic devices to transmit a telecommunications signal so that if one
device malfunctions, the signal may continue without interruption.
Remote Modules (or Remote Switching Modules)--Telephone switching units that
are attached to a host switch (usually via DS1 lines) in a different
geographic location. Remote modules provide the capability of offering
switching functionality to areas that will not economically support a host
switch.
Rights of Way--Rights of certain entities (usually utility, cable TV or
telephone companies and local government agencies) to "pass over" or place
facilities on, over, or underneath property. This includes the ability to
place cable on poles, in conduit, and to bury cable underground.
Route Miles--The number of miles of the telecommunications path in which
fiber optic cables are installed as it would appear on a network map.
Second and Third Tier Markets--Metropolitan markets in the United States
with population bases ranging from 250,000 to two million.
Special Access Services--The lease of private, dedicated telecommunications
lines or "circuits" along the network of a LEC or a CAP, which lines or
circuits run to or from the IXC POPs. Examples of special access services are
telecommunications lines running between POPs of a single IXC, from one IXC
POP to the POP of another IXC or from an end user to its IXC POP. Special
access services do not require the use of switches.
A-4
<PAGE>
SONET (Synchronous Optical Network)--SONET is the electronics and network
architecture which enable transmission of voice, video and data (multimedia)
at very high speeds. This state-of-the-art self-healing ring network offers
advantages over older linear networks in that a cut line or equipment failure
can be overcome by re-routing calls within the network. If the line is cut,
the traffic is simply reversed and sent to its destination around the other
side of the ring.
Switch--A sophisticated computer that accepts instructions from a caller in
the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits
or selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
Switched Access Transport Services--Transportation of switched traffic along
dedicated lines between the LEC central offices and IXC POPs.
Switched Services--Services which utilize a switch, as opposed to dedicated
services which are non-switched. These services are the greatest source of
revenue for carriers.
Switched Traffic--Telecommunications traffic along a switched network.
Virtual Collocation--Virtual collocation is an alternative to physical
collocation in which the CAPs connect their equipment to the LECs facilities
from a remote location and request that the LEC install the necessary
electronics in its central office which is then leased by the LEC to the CAP
for charges which are generally higher than the charges for physical
collocation. However, the CAP avoids payment of the initial capital costs for
the leased facilities which the CAP must incur under physical collocation.
Voice Grade Equivalent Circuit--One DS-0. One voice grade equivalent circuit
is equal to 64 kilobits of bandwidth per second.
A-5
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE HYPERION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF HYPERION SINCE THE DATE HEREOF
OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
-----------
TABLE OF CONTENTS
Page
<TABLE>
<S> <C>
Available Information....................................................... 1
Prospectus Summary.......................................................... 2
Risk Factors................................................................ 11
Use of Proceeds............................................................. 18
Dividend Policy............................................................. 18
Capitalization.............................................................. 19
Selected Consolidated Financial Data........................................ 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................. 21
Business.................................................................... 31
Competition................................................................. 46
Regulation.................................................................. 47
Management.................................................................. 56
Security Ownership of Certain Beneficial Owners and Management.............. 61
Certain Relationships and Transactions...................................... 62
Description of Capital Stock................................................ 64
Description of Warrants..................................................... 67
The Selling Securityholders................................................. 70
Plan of Distribution........................................................ 72
Legal Matters............................................................... 73
Experts..................................................................... 73
Index to Financial Statements............................................... F-1
Glossary.................................................................... A-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LOGO
[LOGO OF HYPERION TELECOMMUNICATIONS, INC.]
329,000 WARRANTS TO PURCHASE AN
AGGREGATE OF 613,427 SHARES OF CLASS B
COMMON STOCK AND 613,427 SHARES OF
CLASS B COMMON STOCK ISSUABLE UPON
EXERCISE OF THE WARRANTS
---------------
PROSPECTUS
---------------
NOVEMBER , 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an estimate of expenses which will be incurred in
connection with the issuance and distribution of the securities being
registered.
<TABLE>
<CAPTION>
PAYABLE BY
THE COMPANY
-----------
<S> <C>
SEC filing fee................................................ $ 100
Legal fees and expenses....................................... 30,000
Accounting fees and expenses.................................. 7,500
Miscellaneous expense......................................... 5,400
-------
Total....................................................... $43,000
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides in general that
a corporation may indemnify its directors, officers, employees or agents
against expenditures (including judgments, fines, amounts paid in settlement
and attorneys' fees) made by them in connection with certain lawsuits to which
they may be made parties by reason of their being directors, officers,
employees or agents and shall so indemnify such persons against expenses
(including attorneys' fees) if they have been successful on the merits or
otherwise. The bylaws of Hyperion provide for indemnification of the officers
and directors of Hyperion to the full extent permissible under Delaware law.
Hyperion's Certificate of Incorporation also provides, pursuant to Section
102(b)(7) of the Delaware General Corporation Law, that directors of Hyperion
shall not be personally liable to Hyperion or its stockholders for monetary
damages for breach of fiduciary duty as a director for acts or omissions,
provided that directors shall nonetheless be liable for breaches of the duty
of loyalty, bad faith, intentional misconduct, knowing violations of law,
unlawful distributions to stockholders, or transactions from which a director
derived an improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On April 15, 1996, the Company issued 329,000 Units consisting of $329.0
million aggregate principal amount at maturity of 13% Senior Discount Notes
due April 15, 2003 (the "Senior Notes") and 329,000 Warrants to purchase an
aggregate of 613,427 shares of common stock (the "Warrants") in a private
placement to institutional investors pursuant to the exemptions from
registration under Section 4(2) of the Securities Act and Rule 144A. Gross
proceeds were approximately $175.3 million and net proceeds to the Company
were approximately $168.6 million after discounts and commissions of
approximately $6.1 million and other transactions costs. The initial
purchasers for the Unit placement were Bear, Stearns & Co. Inc., Chase
Securities Inc. and NationsBanc Capital Markets, Inc.
On March 4, 1997 and April 1, 1997, the Company issued 104,000 shares and
18,000 shares, respectively, of Class A Common Stock of the Company to Daniel
R. Milliard, the President of the Company, as stock bonus awards pursuant to
his employment agreement. Such issuances were made under the Company's 1996
Long-Term Incentive Compensation Plan pursuant to the exemption from
registration under Section 4(2) of the Securities Act.
On June 13, 1997, the Company issued a warrant to MCIMetro Access
Transmission Services, Inc. ("MCI") to purchase 281,040 shares of 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
II-1
<PAGE>
Class A Common Stock if the Company completes an initial public offering of
its Class A Common Stock. The warrant was issued in reliance on the exemption
from registration under Section 4(2) of the Securities Act in connection with
the Company's designation as MCI's preferred provider of certain products and
services in the Company's markets pursuant to a new Preferred Provider
Agreement between the parties.
On August 27, 1997, the Company issued $250.0 million aggregate principal
amount of 12 1/4% Senior Secured Notes due 2004 (the "Senior Secured Notes")
in a private placement to institutional investors pursuant to exemptions from
registration under Section 4(2) of the Securities Act and Rule 144A and in
reliance upon Regulation S. Gross proceeds were $250.0 million and net
proceeds were approximately $243.3 million after underwriting discounts and
commissions of approximately $6.25 million and other transaction costs. The
initial purchasers for the Senior Secured Notes were Bear Stearns & Co. Inc.,
Chase Securities Inc., TD Securities, CIBC Wood Gundy Securities Corp. and
Scotia Capital Markets.
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") in a private placement to institutional investors
pursuant to exemptions from registration under Section 4(2) of the Securities
Act and Rule 144A and in reliance upon Regulation S. Gross proceeds were
$200.0 million and net proceeds were approximately $194.5 million after
underwriting discounts and commissions of approximately $5.0 million and other
transaction costs. The initial purchaser for the Preferred Stock was Bear
Stearns & Co. Inc.
ITEM 16. 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
3.01 to Registrant's Current Report on Form 8-K for the event
dated October 9, 1997.)
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.)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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).)
4.13 Certificate of Designation for 12 7/8% Series A and Series B
Senior Exchangeable Redeemable Preferred Stock due 2007.
(Contained in Exhibit 3.01 to Registrant's Current Report on Form
8-K for the event dated October 9, 1997 which is incorporated
herein by reference.)
4.14 Form of Certificate for 12 7/8% Senior Exchangeable Redeemable
Preferred Stock due 2007. (Incorporated herein by reference is
Exhibit 4.02 to the Registrant's Current Report on Form 8-K for
the event dated October 9, 1997.)
4.15 Form of Indenture, with respect to the Registrant's 12 7/8% Senior
Subordinated Exchange Debentures due 2007. (Contained as Annex A
in Exhibit 3.01 to Registrant's Current Report on Form 8-K for the
event dated October 9, 1997 which is incorporated herein by
reference.)
4.16 Registration Rights Agreement between the Registrant and the
Initial Purchaser dated October 9, 1997, regarding the 12 7/8%
Senior Exchangeable Redeemable Preferred Stock due 2007.
(Incorporated herein by reference is Exhibit 4.04 to the
Registrant's Current Report on Form 8-K for the event dated
October 9, 1997.)
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.)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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.)
10.15 Form of Management Agreement. (Incorporated herein by reference is
Exhibit 10.15 to Registration Statement No. 333-06957 on Form S-
4.)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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).)
10.22 Purchase Agreement among the Registrant and Bear Stearns & Co.
Inc. (the "Initial Purchaser") dated October 1, 1997 regarding the
12 7/8% Senior Exchangeable Redeemable Preferred Stock due 2007.
(Incorporated by reference is Exhibit 10.01 to the Registrant's
Current Report on Form 8-K for the event dated October 9, 1997.)
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)
</TABLE>
- --------
*Filed herewith.
** Previously filed.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter
II-5
<PAGE>
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 this form, within one business day of receipt of such request,
and to send the incorporated documents by first-class mail or other equally
prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the
date of responding to the request.
The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, 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.
(2) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (3)(i) and (3)(ii) above do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the registration statement.
(3) 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.
(4) 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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Coudersport, Commonwealth of Pennsylvania, on the 4th day of November, 1997.
HYPERION TELECOMMUNICATIONS, INC.
/s/ Daniel R. Milliard
By: ________________________________
Daniel R. Milliard President and
Chief Operating Officer
Pursuant to the requirements of the Securities Act, this Amendment to this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
* Chairman and Director November 4 ,
- ------------------------- 1997
John J. Rigas
* Vice Chairman and Director November 4 ,
- ------------------------- 1997
Michael J. Rigas
* Vice Chairman, Treasurer, November 4 ,
- ------------------------- Chief Financial Officer and 1997
Timothy J. Rigas Director
* Vice Chairman, Chief Executive November 4 ,
- ------------------------- Officer and Director 1997
James P. Rigas
/s/ Daniel R. Milliard President, Secretary, Chief November 4 ,
- ------------------------- Operating Officer and Director 1997
Daniel R. Milliard
* Senior Vice President and November 4 ,
- ------------------------- Director 1997
Charles R. Drenning
* Senior Vice President and November 4 ,
- ------------------------- Director 1997
Paul D. Fajerski
* Senior Vice President and November 4 ,
- ------------------------- Director 1997
Randolph S. Fowler
* Vice President and Chief November 4 ,
- ------------------------- Accounting Officer 1997
Edward E. Babcock
*/s/ Daniel R. Milliard
- -------------------------
Daniel R. Milliard, as attorney-in-fact
II-7
<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
3.01 to Registrant's Current Report on Form 8-K for the event
dated October 9, 1997.)
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).)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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).)
4.13 Certificate of Designation for 12 7/8% Series A and Series B
Senior Exchangeable Redeemable Preferred Stock due 2007.
(Contained in Exhibit 3.01 to Registrant's Current Report on Form
8-K for the event dated October 9, 1997 which is incorporated
herein by reference.)
4.14 Form of Certificate for 12 7/8% Senior Exchangeable Redeemable
Preferred Stock due 2007. (Incorporated herein by reference is
Exhibit 4.02 to the Registrant's Current Report on Form 8-K for
the event dated October 9, 1997.)
4.15 Form of Indenture, with respect to the Registrant's 12 7/8% Senior
Subordinated Exchange Debentures due 2007. (Contained as Annex A
in Exhibit 3.01 to Registrant's Current Report on Form 8-K for the
event dated October 9, 1997 which is incorporated herein by
reference.)
4.16 Registration Rights Agreement between the Registrant and the
Initial Purchaser dated October 9, 1997, regarding the 12 7/8%
Senior Exchangeable Redeemable Preferred Stock due 2007.
(Incorporated herein by reference is Exhibit 4.04 to the
Registrant's Current Report on Form 8-K for the event dated
October 9, 1997.)
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.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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).)
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).)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.22 Purchase Agreement among the Registrant and Bear Stearns & Co.
Inc. (the "Initial Purchaser") dated October 1, 1997 regarding the
12 7/8% Senior Exchangeable Redeemable Preferred Stock due 2007.
(Incorporated by reference is Exhibit 10.01 to the Registrant's
Current Report on Form 8-K for the event dated October 9, 1997.)
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)
</TABLE>
- --------
*Filed herewith.
** Previously filed.
<PAGE>
EXHIBIT NO. 23.02
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 1 to Registration
Statement No. 333-12619 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
November 4, 1997
