SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended December 31, 1996
____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to _____________
Commission File Number: 333-06957
HYPERION TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1669404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Main at Water Street
Coudersport, PA 16915-1141
(Address of principal (Zip code)
executive offices)
814-274-9830
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At February 14, 1997, 0 shares of Class A Common Stock, par value
$0.01, and 10,000,000 shares of Class B Common Stock, par value
$0.01, of the registrant were outstanding.
<PAGE>
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HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets - March 31, 1996 and December 31, 1996...............................................3
Consolidated Statements of Operations - Three and Nine Months Ended December 31, 1995
and 1996.................................................................................................4
Consolidated Statements of Cash Flows - Nine Months Ended December 31, 1995
and 1996....................................................................................................5
Notes to Interim Consolidated Financial Statements...............................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................................................11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................................24
Item 2. Changes in Securities..........................................................................................24
Item 3. Defaults Upon Senior Securities................................................................................24
Item 4. Submission of Matters to a Vote of Security Holders............................................................24
Item 5. Other Information..............................................................................................24
Item 6. Exhibits and Reports on Form 8-K...............................................................................25
SIGNATURES..............................................................................................................26
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
March 31, December 31,
1996 1996
--------- ---------
ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents $ -- $ 96,378
Other current assets 282 843
--------- ---------
Total current assets 282 97,221
Investments 21,087 35,362
Property, plant and equipment - net 12,561 34,420
Other assets - net 1,045 7,327
Deferred income taxes - net 294 477
--------- ---------
Total $ 35,269 $ 174,807
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
Current liabilities:
Accounts payable $ 2,529 $ 3,721
Due to affiliates - net 8,707 451
Other current liabilities 501 849
--------- ---------
Total current liabilities 11,737 5,021
13% Senior Discount Notes due 2003 -- 180,828
Note payable - Adelphia 50,855 25,855
Other debt -- 1,384
--------- ---------
Total liabilities 62,592 213,088
Commitments and contingencies (Note 4)
Stockholders' equity (deficiency):
Class A Common Stock, $0.01 par value, 300,000,000
shares authorized and 0 shares outstanding -- --
Class B Common Stock, $0.01 par value, 150,000,000
shares authorized and 10,000,000 shares outstanding 100 100
Class B Common Stock Warrants -- 11,087
Loans to Stockholders -- (3,000)
Accumulated deficit (27,423) (46,468)
--------- ---------
Total stockholders' equity (deficiency) (27,323) (38,281)
--------- ---------
Total $ 35,269 $ 174,807
========= =========
See notes to interim consolidated financial statements.
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HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 1,198 $ 1,334 $ 2,496 $ 3,611
-------- -------- -------- --------
Operating expenses:
Network operations 637 752 1,878 2,339
Selling, general and administrative 1,010 2,545 2,375 4,736
Depreciation and amortization 333 1,002 861 2,583
-------- -------- -------- --------
Total 1,980 4,299 5,114 9,658
-------- -------- -------- --------
Operating loss (782) (2,965) (2,618) (6,047)
Other income (expense):
Gain on sale of investment -- -- -- 8,405
Interest income -- 1,190 26 4,319
Interest expense and fees (1,478) (7,482) (4,178) (20,759)
-------- -------- -------- --------
Loss before income taxes and
equity in net loss of joint ventures (2,260) (9,257) (6,770) (14,082)
Income tax (expense) benefit (20) 63 58 180
-------- -------- -------- --------
Loss before equity in net loss
of joint ventures (2,280) (9,194) (6,712) (13,902)
Equity in net loss of joint ventures (1,509) (2,145) (3,151) (5,143)
-------- -------- -------- --------
Net loss $ (3,789) $(11,339) $ (9,863) $(19,045)
======== ======== ======== ========
Net loss per weighted average
share of common stock $ (0.38) $ (1.07) $ (0.99) $ (1.80)
======== ======== ======== ========
Weighted average shares of
common stock outstanding
(in thousands) 10,000 10,613 10,000 10,584
======== ======== ======== ========
See notes to interim consolidated financial statements.
</TABLE>
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine Months
Ended December 31,
----------------------
1995 1996
--------- ---------
Cash flows from operating activities:
Net loss $ (9,863) $ (19,045)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation 752 1,555
Amortization 109 1,028
Noncash interest expense 4,152 17,123
Equity in net loss of joint ventures 3,151 5,143
Gain on sale of investment -- (8,405)
Deferred income tax benefit (65) (180)
Change in operating assets and liabilities, net of effects
of acquisition:
Other assets - net 88 (1,019)
Accounts payable and other current liabilities 1,826 1,208
--------- ---------
Net cash provided by (used in) operating activities 150 (2,592)
--------- ---------
Cash flows from investing activities:
Net cash used for acquisition -- (5,040)
Expenditures for property, plant and equipment (4,473) (14,950)
Proceeds from sale of investment -- 11,618
Investments in joint ventures (9,097) (23,398)
--------- ---------
Net cash used in investing activities (13,570) (31,770)
--------- ---------
Cash flows from financing activities:
Proceeds from debt -- 163,705
Proceeds from issuance of stock warrants -- 11,087
Costs associated with debt financing -- (6,374)
Loans to stockholders -- (3,000)
Borrowing on (repayment of) note payable - Adelphia 11,776 (25,000)
Advances from (to) related parties 1,644 (9,678)
--------- ---------
Net cash provided by financing activities 13,420 130,740
--------- ---------
Increase in cash and cash equivalents -- 96,378
Cash and cash equivalents, beginning of period -- --
--------- ---------
Cash and cash equivalents, end of period $ -- $ 96,378
========= =========
See notes to interim consolidated financial statements.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
Hyperion Telecommunications, Inc. is an 89% owned subsidiary of
Adelphia Communications Corporation ("Adelphia"). The accompanying unaudited
interim financial statements of Hyperion Telecommunications, Inc. and its
majority owned subsidiaries (the "Company") have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, all adjustments, consisting of only
normal recurring accruals necessary to present fairly the unaudited results of
operations for the three and nine months ended December 31, 1995 and 1996, have
been included. These interim consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements included in its
Registration Statement No. 333-06957 on Form S-4 Amendment No. 3 filed August
12, 1996 and Registration Statement No. 333-12619 on Form S-1 Amendment No. 1
filed on December 27, 1996. The results of operations for the nine months ended
December 31, 1996, are not necessarily indicative of the results to be expected
for the year ending March 31, 1997.
1. Significant Events Subsequent to March 31, 1996:
Common Stock Changes. 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 at the option
of the holder. 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 per share
of common stock.
Long Term Stock Compensation Plan. 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. No stock options, stock awards, stock
appreciation rights or phantom stock units have been granted under the Plan.
Issuance of 13% Senior Discount Notes and Warrants. On April 15,
1996, the Company issued $329,000 in the aggregate principal amount at maturity
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 and to make loans of $3,000 to certain key Company officers and
will be used 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 13% Senior Discount Notes ("13% Senior Discount 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.
Sale of Partnership Investment. On May 16, 1996, the Company
completed the sale of its 15.7% partnership interest in TCG of South Florida
("TCG of South Florida" or the "South Florida Partnership") to Teleport
Communications Group Inc. for an aggregate sales price of approximately $11,618
resulting in a pre-tax gain of approximately $8,405. As part of the transaction,
the Company was released from its covenant not to compete with respect to the
South Florida market. The Company plans to use the proceeds from the sale to
continue to expand and develop its existing markets, complete new networks under
construction and enter additional markets.
Other Changes in Partnership Interests. Pursuant to a binding letter
of intent with TKR Cable Company dated January 29, 1996, and a subsequent
amendment to the related partnership agreement dated May 8, 1996, the Company
agreed to make additional capital contributions to Louisville Lightwave (which
will also operate the network under construction in Lexington, Kentucky) and as
a result has increased its partnership ownership interest to 50%. There were no
additional required capital contributions as of December 31, 1996 pursuant to
this agreement.
Pursuant to a Purchase Agreement dated July 25, 1996, the Company
purchased general and limited partnership interests in Hyperion of Tennessee
from InterMedia and Robin Media on August 1, 1996. The aggregate purchase price
was approximately $5,000. As a result of this acquisition, the Company's
ownership interest in this partnership was increased to 95%. The acquisition has
been accounted for using the purchase method. Accordingly, the financial results
of the acquired operations have been included in the consolidated results of the
Company effective August 1, 1996.
Time Warner Letter of Intent. Under a non-binding letter of intent
with Time Warner, dated as of June 17, 1996, the Company would consolidate its
investment interests in the State of New York by (i) increasing its ownership
interest in the Buffalo network to 50% and in the Syracuse network to 100% and
(ii) eliminating its ownership interests in and management responsibility for
the Albany and Binghamton networks. In addition, the letter of intent provides
that, upon the consummation of the transaction, neither party will be subject to
the non-competition provisions contained in the existing partnership agreements
with respect to the markets from which they are withdrawing. The consummation of
the transaction is subject to numerous terms and conditions including the
negotiation and execution of definitive, binding agreements. No assurances can
be given as to whether or when, or the terms upon which, such transaction will
be consummated.
Adjustment for Corporate Shared Services from Adelphia. During the
quarter ended December 31, 1996, Adelphia increased its estimate of allocated
costs charged to the Company which represent costs incurred by Adelphia on
behalf of the Company for the administration and operation of certain of the
Company's functions. This increase caused Selling, general and administrative
expenses to increase by approximately $600 for the nine months ended December
31, 1996 which has been recognized as additional expense in the quarter ended
December 31, 1996. These costs include charges for office space, senior
management support and shared services such as finance activities, information
systems, computer services, investor relations activities, human resources,
payroll and taxation. Such costs were estimated by Adelphia and do not
necessarily represent the actual costs that would be incurred if the Company
were to secure such services on its own.
Write off of Costs Associated with Postponed Initial Public Offering.
During the quarter ended December 31, 1996, the Company charged to Selling,
general and administrative expense $650 of costs in connection with the
postponement of the Company's contemplated initial public offering in November
1996.
2. Investments:
The equity method of accounting is used to account for investments in
joint ventures in which the Company holds less than a majority interest. Under
this method, the Company's initial investment is recorded at cost and
subsequently adjusted for the amount of its equity in the net income or losses
of its joint ventures. Dividends or other distributions are recorded as a
reduction of the Company's investment. Investments in joint ventures accounted
for using the equity method reflect the Company's equity in their underlying net
assets.
<PAGE>
The Company's nonconsolidated investments are as follows:
<TABLE>
<CAPTION>
Ownership March 31, December 31,
Percentage 1996 1996
----------- ----------------------
Investments accounted for using the equity method:
<S> <C> <C> <C>
Continental Fiber Technologies (Jacksonville) 20.0 $ 4,701 $ 7,202
Multimedia Hyperion Telecommunications (Wichita) 49.9 2,620 3,031
Louisville Lightwave 50.0(1) 996 3,985
NewChannels Hyperion Telecommunications (Albany) 50.0 999 924
NewChannels Hyperion Telecommunications (Binghamton) 20.0 504 504
NHT Partnership (Buffalo) 40.0 2,457 4,217
NewChannels Hyperion Telecommunications (Syracuse) 50.0 3,140 3,215
Hyperion of Harrisburg 50.0 1,600 3,480
Hyperion of Tennessee (Nashville) 95.0(2) 1,345 --
Alternet of Virginia (Richmond) 37.0 3,406 6,210
New Jersey Fiber Technologies (New Brunswick) 19.7 956 1,773
TCG of South Florida 15.7(3) 4,679 --
PECO-Hyperion (Philadelphia) 50.0 -- 9,950
Other Various 497 772
-------- --------
27,900 45,263
Cumulative equity in net losses (6,813) (9,901)
-------- --------
Total Investments $ 21,087 $ 35,362
======== ========
<FN>
(1) As discussed in Note 1, the Company increased its ownership in this
partnership on May 8, 1996 to 50%.
(2) As discussed in Note 1, the Company increased its ownership in this
partnership on August 1, 1996, and accordingly, has consolidated this investment
effective August 1, 1996.
(3) As discussed in Note 1, the Company sold its interest in TCG of South Florida on May 16, 1996.
</FN>
</TABLE>
<PAGE>
Summarized combined unaudited 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 for all periods, is as follows:
March 31, December 31,
1996 1996
------------ ------------
Current assets $ 3,262 $ 7,711
Non-current assets 74,055 129,565
Current liabilities 6,043 7,039
Non-current liabilities 17,718 34,632
Nine Months Ended
December 31,
----------------------------
1995 1996
------------ ------------
Revenues $ 4,532 $ 8,498
Net loss (5,821) (11,707)
3. Supplemental Cash Flow Information:
There were no cash payments made for interest for the nine months
ended December 31, 1995 and 1996, respectively.
4. Commitments and Contingencies:
Reference is made to Management's Discussion and Analysis of
Financial Condition and Results of Operations for a discussion of material
commitments and contingencies.
-------------------------------------------------
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction
with the Company's unaudited Consolidated Financial Statements and the Notes
thereto appearing elsewhere in this Form 10-Q and audited Consolidated Financial
Statements and Notes thereto appearing in Form S-4 Amendment No. 3 filed August
12, 1996 ("Form S-4") and Form S-1 Amendment No. 1 filed December 27, 1996
("Form S-1").
Overview
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-Q, 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, and inventories, technological developments and changes in the
competitive environment in which the Company operates. Unless otherwise stated,
the information contained in this Form 10-Q is as of and for the three and nine
months ended December 31, 1996.
The "Company" or "Hyperion" mean Hyperion Telecommunications, Inc.
together with its majority-owned subsidiaries, except where the context
otherwise requires. Unless the context otherwise requires, references herein to
the "networks," the "Company's networks" or the "Operating Companies' networks"
mean the 18 telecommunications networks (including three networks under
construction) owned as of December 31, 1996 by 14 Operating Companies (which, as
defined herein, are (i) wholly and majority owned subsidiaries of the Company
and (ii) joint venture partnerships and corporations managed by the Company and
in which the Company holds less than a majority equity interest with one or more
other partners).
The Company, through its Operating Companies, provides a competitive
alternative to the telecommunications services offered by the incumbent local
exchange carriers ("LECs") in its markets. Since its inception in October 1991
through December 31, 1996, the Company has experienced substantial growth,
building from its original two partnerships covering two networks to covering 18
networks and 33 cities through its 14 Operating Companies. The Operating
Companies' customers are principally small, medium and large businesses and
government and educational end users as well as Interchange or Long Distance
Carriers ("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.
The Company's Operating Companies are made up of three wholly-owned
subsidiaries, one majority owned subsidiary and 10 joint venture investments
(through which the Company has an interest in 14 networks) in which the Company
owns 50% or less as of December 31, 1996. Results of the wholly and 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 South Florida Partnership through May 16, 1996
are recorded under the caption "Equity in net loss of joint ventures" in the
Company's consolidated financial statements and results of operations utilizing
the equity method of accounting. Correspondingly, the Company's initial
investments in these Operating Companies and the South Florida Partnership have
been carried at cost, and subsequently have been 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 the Operating Companies and receives
management fees from the Operating Companies for its management and network
monitoring services. Management fees, which are generally based on the Company's
cost of providing such service, 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 revenues.
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 December 31,
1996, the Company's networks and networks under construction had approximately
3,162 route miles, approximately 151,782 fiber miles and were connected to
approximately 1,183 buildings. The Operating Companies have also installed seven
switches or remote modules which serve seven markets. The Company has built its
Network Operations and Control Center (the "NOCC") in Coudersport, Pennsylvania,
which provides for remote control, monitoring and diagnosis of all of the
Operating Companies' networks. Funding for the development of the Operating
Companies has come from investments by the Company and the local partners as
well as from fiber lease financings which enable the Company to finance the
building of fiber optic plant through long-term leases. Excluding investments in
the South Florida Partnership, the combined capital invested through December
31, 1996 by the Company and the local partners in the Operating Companies'
networks, the NOCC and other activities totaled approximately $220,000.
Recent Developments
Common Stock Changes. 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 per share of common stock.
Long Term Stock Compensation Plan. 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, (ii) 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. No stock options, stock awards, stock
appreciation rights or phantom stock units have been granted under the Plan.
Issuance of 13% Senior Discount Notes and 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 and to make loans of $3,000 to
certain key Company officers and will be used 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 13% Senior Discount
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.
Sale of Partnership Investment. On May 16, 1996, the Company
completed the sale of its 15.7% partnership interest in TCG of South Florida to
Teleport Communications Group Inc. for an aggregate sales price of approximately
$11,618 resulting in a pre-tax gain of approximately $8,405. As part of the
transaction, the Company was released from its covenant not to compete with
respect to the South Florida market. The Company plans to use the proceeds from
the sale to continue to expand and develop its existing markets, complete new
networks under construction and enter additional markets.
Other Changes in Partnership Interests. The Company recently entered
into agreements pursuant to which the Company's ownership interests in certain
of the Operating Companies have increased in three markets. These transactions
are consistent with the Company's goal to own at least a 50% interest in its
Operating Companies in the future, and where appropriate the Company may
consider similar transactions from time to time in its other markets.
Pursuant to a binding letter of intent with TKR Cable Company dated
January 29, 1996, and a subsequent amendment to the related partnership
agreement dated May 8, 1996, the Company agreed to make additional capital
contributions to its Louisville, Kentucky Operating Partnership (which will also
operate the network under construction in Lexington, Kentucky) and as a result
has increased its partnership ownership interest to 50%. There were no
additional required capital contributions as of December 31, 1996 pursuant to
this agreement.
Time Warner Letter of Intent. Under a non-binding letter of intent
with Time Warner, dated as of June 17, 1996, the Company would consolidate its
Operating Companies' interests in the State of New York by (i) increasing its
ownership interest in the Buffalo network to 50% and in the Syracuse network to
100% and (ii) eliminating its ownership interests in and management
responsibility for the Albany and Binghamton networks. In addition, the letter
of intent provides that, upon the consummation of the transaction, neither party
will be subject to the non-competition provisions contained in the existing
partnership agreements with respect to the markets from which they are
withdrawing. The consummation of the transaction is subject to numerous terms
and conditions including the negotiation and execution of definitive, binding
agreements. No assurances can be given as to whether or when, or the terms upon
which, such transaction will be consummated.
Results of Operations
Three Months Ended December 31, 1996 in Comparison with Three Months Ended
December 31, 1995
Revenues increased 11% to $1,334 for the three months ended December
31, 1996 from $1,198 for the same quarter in the prior fiscal year. Growth in
revenues of $136 resulted primarily from increased revenues 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 18% to $752 for the three months
ended December 31, 1996 from $637 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 152% to $2,545
for the three months ended December 31, 1996 from $1,010 for the same quarter in
the prior fiscal year. Of the $1,535 increase, approximately $600 was due to an
increase in 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, human resources, payroll and taxation. Such costs were estimated by
Adelphia and do not necessarily represent the actual costs that would be
incurred if the Company were to secure such services on its own. In addition,
$650 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 both corporate and NOCC overhead
cost increases and the impact of consolidation of the Nashville Operating
Company for the current fiscal quarter.
Depreciation and amortization expense increased 201% to $1,002 during
the three months ended December 31, 1996 from $333 for the same quarter in the
prior fiscal year primarily as a result of increased amortization of $249 of
costs incurred in connection with the issuance of the 13% Senior Discount Notes
and increased depreciation resulting from higher capital expenditures at the
NOCC and the majority and wholly owned Operating Companies.
Interest income for the three months ended December 31, 1996
increased from $0 to $1,190 as a result of interest income earned on investment
of the proceeds of the 13% Senior Discount Notes and Warrants during the current
quarter.
Interest expense and fees increased 406% to $7,482 during the three
months ended December 31, 1996 from $1,478 for the same period in the prior
fiscal year. The increase was directly attributable to $6,258 of interest
expense associated with the 13% Senior Discount Notes partially reduced by lower
affiliate interest expense due to decreased borrowings from Adelphia.
Equity in net loss of joint ventures increased by 42% to $2,145
during the three months ended December 31, 1996 from $1,509 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
December 31, 1996 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.
The number of nonconsolidated Operating Companies paying management
fees to the Company increased from 10 at December 31, 1995 to 14 at December 31,
1996. These Operating Companies and networks under construction paid management
and monitoring fees to the Company, which are included in revenues, aggregating
approximately $768 for the three months ended December 31, 1996, as compared
with $758 for the same quarter in the prior fiscal year. The nonconsolidated
Operating Companies' net losses, including networks under construction, for the
three months ended December 31, 1996 aggregated approximately $4,247.
Net loss increased from $3,789 for the three months ended December
31, 1995 to $11,339 for the same quarter in the current fiscal year. The
increased net loss was primarily attributable to higher interest expense
associated with the 13% Senior Discount Notes, increased equity in the net
losses of the Company's joint ventures, increased depreciation and amortization
and increased Selling, general, and administrative expenses related to the
increased allocated costs from Adelphia and the write off of costs in connection
with the postponement of the Company's contemplated initial public offering in
November 1996, and was partially offset by increased interest income on
investment of the proceeds from the 13% Senior Discount Notes.
Nine Months Ended December 31, 1996 in Comparison with Nine Months Ended
December 31, 1995
Revenues increased 45% to $3,611 for the nine months ended December
31, 1996 from $2,496 for the same period in the prior fiscal year. Growth in
revenues of $1,115 resulted primarily from continued expansion in the number and
size of Operating Companies and the resultant increase in management fees of
$663 over the same period in the prior fiscal year. Revenues from majority and
wholly-owned Operating Companies also increased approximately $326 as compared
to same period in 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 25% to $2,339 for the nine
months ended December 31, 1996 from $1,878 for the same period 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 99% to $4,736
for the nine months ended December 31, 1996 from $2,375 for the same period in
the prior fiscal year. Approximately $600 of the $2,361 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
were to secure such services on its own. In addition, $650 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 both corporate and NOCC overhead costs increased due to
growth in the number of Operating Companies managed and monitored by the
Company.
Depreciation and amortization expense increased 200% to $2,583 during
the nine months ended December 31, 1996 from $861 for the same period in the
prior fiscal year primarily as a result of the amortization of $732 of costs
incurred in connection with the issuance of the 13% Senior Discount Notes and
increased depreciation resulting from higher capital expenditures at the NOCC
and the majority and wholly owned Operating Companies.
Interest income for the nine months ended December 31, 1996 increased
to $4,319 from $26 for the same period in the prior fiscal year as a result of
interest income earned on investment of the proceeds of the 13% Senior Discount
Notes and Warrants.
Interest expense and fees increased 397% to $20,759 during the nine
months ended December 31, 1996 from $4,178 for the same period in the prior
fiscal year. The increase was directly attributable to $17,123 of interest
expense associated with the 13% Senior Discount Notes partially reduced by lower
affiliate interest expense due to decreased borrowings from Adelphia.
Equity in net loss of joint ventures increased by 63% to $5,143
during the nine months ended December 31, 1996 from $3,151 for the same period
in the prior fiscal year as more nonconsolidated Operating Companies began
operations. The net losses of the Operating Companies for the nine months ended
December 31, 1996 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.
The number of nonconsolidated Operating Companies paying management
fees to the Company increased from 10 at December 31, 1995 to 14 at December 31,
1996. These Operating Companies and networks under construction paid management
and monitoring fees to the Company, which are included in revenues, aggregating
approximately $2,302 for the nine months ended December 31, 1996, an increase of
approximately $663 over the same period in the prior fiscal year. The
nonconsolidated Operating Companies' net losses, including networks under
construction, for the nine months ended December 31, 1996 aggregated
approximately $11,707.
Net loss increased from $9,863 for the nine months ended December 31,
1995 to $19,045 for the same period in the current fiscal year. The increase was
primarily attributable to greater interest expense associated with the 13%
Senior Discount Notes, increased equity in the net losses of the Company's joint
ventures, increased depreciation and amortization, increased Selling, general,
and administrative expenses related to the increased allocated costs from
Adelphia and the write off of costs in connection with the postponement of the
Company's contemplated initial public offering in November 1996, and was reduced
by higher interest income and the gain recognized for the sale of the Company's
investment in TCG of South Florida.
Supplementary Operating Company Revenue Analysis
The Company believes that working with local partners to develop
markets enables the Company to build larger networks in a rapid and cost
effective manner. In pursuit of this strategy, the Company has entered into 10
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 only 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; earnings before interest
expense, income taxes, depreciation and amortization ("EBITDA"); and capital
expenditures. While EBITDA is not an alternative to operating income as defined
by generally accepted accounting principles, the Company's management believes
EBITDA is a meaningful measure of performance. Revenues and EBITDA of the
Operating Companies indicate the level of operating 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 network construction and expansion efforts in
those markets. The financial information set forth below, however, is not
indicative of the Company's overall financial position.
Revenues
------------------------------------------------------
Three Months Ended Nine Months Ended
December 31, December 31,
Cluster 1995 1996 1995 1996
------------ ------------ ------------ ------------
Northeast $ 1,066 $ 1,417 $ 2,789 $ 3,978
Mid-Atlantic 209 615 516 1,427
Mid-South 115 328 306 843
Other Networks 652 1,438 1,781 3,727
------------ ------------ ------------ ------------
Total $ 2,042 $ 3,798 $ 5,392 $ 9,975
============ ============ ============ ============
There can be no assurance, however, 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
------------------------------------------------------
Three Months Ended Nine Months Ended
December 31, December 31,
Cluster 1995 1996 1995 1996
------------ ------------ ------------ ------------
Northeast $ (119) $ 422 $ (647) $ 680
Mid-Atlantic (208) (651) (501) (2,430)
Mid-south (356) (177) (636) (601)
Other Networks 157 285 358 969
------------ ------------ ------------ ------------
Total $ (526) $ (121) $ (1,426) $ (1,382)
============ ============ ============ ============
<PAGE>
Capital Expenditures
------------------------------------------------------
Three Months Ended Nine Months Ended
December 31, December 31,
Cluster 1995 1996 1995 1996
------------ ------------ ------------ ------------
Northeast $ 1,174 $ 2,128 $ 4,870 $ 12,320
Mid-Atlantic 3,938 11,255 9,102 43,321
Mid-south 4,482 4,235 8,907 10,425
Other Networks 3,168 4,164 13,839 10,948
------------ ------------ ------------ ------------
Total $ 12,762 $ 21,782 $ 36,718 $ 77,014
============ ============ ============ ============
Liquidity and Capital Resources
The development of the Company's business and the installation and
expansion of the Operating Companies' networks, combined with the construction
of the Company's NOCC, have resulted in substantial capital expenditures and
investments during the past several years. Capital expenditures by the Company
were $4,473 and $14,950 for the nine months ended December 31, 1995 and 1996,
respectively. Further, investments made by the Company in nonconsolidated
Operating Companies and the South Florida Partnership were $9,097 and $23,398
for the nine months ended December 31, 1995 and 1996, respectively. The Company
expects that it will continue to have substantial capital and investment
commitments. The Company also expects to continue to fund operating losses as
the Company develops and grows its business.
On May 16, 1996, the Company completed the sale of its 15.7%
partnership interest in TCG of South Florida to Teleport Communications Group
Inc. for an aggregate sales price of approximately $11,618 resulting in a
pre-tax gain of approximately $8,405. 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 a Purchase 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 approximately $5,000. As a result of this
acquisition, the Company's ownership interest in this partnership was increased
to 95%.
Through December 31, 1996, Adelphia had made loans and advances
totaling approximately $65,000, including accrued interest, to the Company and
leased $1,000 in fiber network construction to certain Operating Companies.
During April 1996, the Company repaid $37,800 of such loans and advances. In
addition, local partners have invested approximately $77,000 as their pro rata
investment in those networks. These amounts exclude previous investments in the
South Florida Partnership which were sold on May 16, 1996. These partners have
also provided additional capital of $32,000 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 $45,000 to fund
its pro rata investment in the networks, capital expenditures and operations.
Collectively, Adelphia's and the Company's partners' investments and the fiber
lease financings have totaled approximately $220,000 from the Company's
inception through December 31, 1996.
The Company has experienced negative cash flow since its inception. A
combination of operating losses, 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. 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 through April 15,
1996 was 11.3% (excluding fees charged which were based on the amount borrowed)
and 16.5% for the period since April 16, 1996.
The Company repaid $25,000 of its indebtedness to Adelphia from the
proceeds of the 13% Senior Discount Notes and Warrants on April 15, 1996. Also,
as of April 15, 1996, approximately $26,000 of outstanding indebtedness owed to
Adelphia was evidenced by an unsecured subordinated note due April 16, 2003,
that accrues interest at 16.5% and is subordinated to the 13% Senior Discount
Notes. Interest on the subordinated note is payable quarterly in cash, through
the issuance of identical subordinated notes, or in any combination thereof, at
the option of the Company. Interest accrued through December 31, 1996 on the
amount outstanding to Adelphia totaled $3,455.
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 the Company's networks and (iii) the
design, construction and development of additional networks. The Company plans
to make substantial capital investments in Operating Companies in connection
with: (i) the deployment of switches in all of its operating markets by
mid-1997, (ii) the expansion of existing markets and (iii) the construction and
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 local partners. The Company estimates that it will
require substantial capital to fund anticipated capital expenditures, working
capital requirements and operating losses of the Company and to make investments
in existing and new Operating Companies and to fund requirements in connection
with certain of the Company's planned additional markets during the calendar
year 1997 and 1998. The Company expects that it will have adequate resources to
fund such short and long term liquidity needs through the proceeds from the
offering of the 13% Senior Discount Notes and Warrants, anticipated vendor
financings, internal sources of funds including cash flow from operations and
additional debt or equity financings as appropriate. There can be no assurance,
however, 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 13% Senior Discount Notes provide certain restrictions upon the
Company's ability to incur additional indebtedness. The Company's inability to
fund pro rata investments required for the Operating Companies could result in a
dilution of the Company's interest in the individual Operating Companies or
could otherwise have a material adverse effect upon the Company and/or the
Operating Companies.
Regulatory and Competitive Matters
On February 8, 1996, the Telecommunications Act of 1996 (the
"Telecommunications Act") was signed into law and is considered to be the most
comprehensive reform of the nation's telecommunications laws since the
Communications Act of 1934. The Telecommunications Act will result in
substantial changes in the marketplace for voice, data and video services. These
changes will open the local exchange market to competition and will result in a
substantial increase in the addressable market for the Company's networks. Among
its more significant provisions, the Telecommunications Act (i) removes legal
barriers to entry in local telephone markets, (ii) requires incumbent Local
Exchange Carriers ("LECs") to "interconnect" with competitors, (iii) establishes
procedures for incumbent LEC entry into new markets, such as long distance and
cable television, (iv) relaxes regulation of telecommunications services
provided by incumbent LECs and all other telecommunications service providers,
and (v) directs the FCC to establish a subsidy mechanism for the preservation of
universal service. The more significant provisions of the Telecommunications Act
and certain of its possible effects are as follows:
The Telecommunications Act removes legal barriers to entry in local
telephone markets. This 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 LECs to "interconnect" with
competitors and to provide access to certain network elements under
reasonable rates, terms and conditions. It is uncertain how effective
these requirements will be in promoting competition or how they will
affect the Company until the FCC orders requiring the LECs to provide
telephone number portability, dialing parity, reciprocal compensation,
resale, access to rights-of-way and unbundling of network services are
implemented. As described below, the FCC has issued several orders
addressing these issues which are generally favorable to competitors, but
these orders are subject to reconsideration and appeal.
The Telecommunications Act establishes procedures for LEC and Bell
Operating Company ("BOC") entry into new markets, including long distance
and cable television service. The Company's management believes LECs are
now more likely to invest in fiber optic networks and enter the video
market which will generate a revenue stream previously unavailable to
them. These facilities can then also be used to provide services that
compete with the Company. BOC entry into the long distance market may
reduce the market share of the major long distance carriers (the
Company's joint ventures' primary customers) and have adverse
consequences on the Company's joint ventures' ability to generate
revenues from the long distance carriers.
The Telecommunications Act eliminates the requirement that LECs obtain
FCC authorization before constructing new facilities for interstate
services and limits the FCC's ability to review LEC tariff filings. The
changes will increase the speed with which the LECs are able to introduce
new service offerings and new pricing of existing services, thereby
increasing the LEC's ability to compete with the Company.
The Telecommunications Act requires the FCC to establish an explicit
mechanism for subsidizing service to markets that are less desirable,
either because of the high cost of providing service or the limited
revenues that might be available. This could be advantageous to the
Company or it could be beneficial to the Company's competitors depending
on the geographic areas and the type of customers for which subsidies are
available and how the subsidies are funded.
The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. In each of the
areas served by an Operating Company, services similar to those offered by the
Operating Company are offered by the incumbent LEC serving that area. Incumbent
LECs have long-standing relationships with their customers, have far greater
technical and financial resources and provide services that an Operating Company
may not currently be authorized by state regulators to offer. Following the
enactment of the Telecommunications Act, there has been significant merger
activity among the BOCs 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 LECs excessive pricing flexibility or
other regulatory relief, such decisions could have a material adverse effect on
the Company.
Competition for the Company's and the Operating Companies' services
are based on price, quality, network reliability, service features and
responsiveness to customer needs. The Company believes that its management
expertise, coupled with its highly reliable, state-of-the-art digital networks
and back-office infrastructure, which offer significant transmission capacity at
competitive prices, will allow it to compete effectively with the incumbent
LECs, which may not yet have fully deployed fiber optic networks in many of the
Company's target markets. The Company believes that the Operating Companies
price their services at a modest discount compared to the prices of incumbent
LECs while providing a higher level of customer service. The Company's networks
provide diverse access routing and redundant electronics, design features not
widely deployed by the incumbent LEC networks at the present time. However, as
incumbent LECs continue to upgrade their networks, any competitive advantage
held by the Company due to the superiority of its facilities may diminish.
Other current or potential competitors of the Company's networks
include other CLECs, IXCs, wireless telecommunications providers, microwave
carriers, satellite carriers, private networks built by large end users and
cable television operators or utilities in markets in which the Company has not
partnered with one or the other. In many markets served by the Company, one or
more CLECs already are providing service. Furthermore, the three major IXCs have
announced ambitious plans to enter the local exchange market. There is no
assurance that these IXCs will choose to obtain local services from the
Operating Companies in the Company's markets. In addition, the
Telecommunications Act requires all local exchange providers, including new
entrants, to offer their services for resale. This requirement permits companies
to enter the market for local telecommunications services without investing in
new facilities, thereby increasing the number of likely competitors in any given
market, and enables the IXCs to provide local services by reselling the service
of the incumbent LEC rather than using services provided by the Company.
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 Number Portability Order should
enhance the Company's ability to offer service in competition with the incumbent
LECs, but it is uncertain how effective these regulations will be in promoting
number portability. The Number Portability Order does not address how the costs
of implementing long-term service portability will be recovered. This issue is
subject to an additional comment period and is not expected to be decided until
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 of CLEC and incumbent LEC networks and incumbent LEC pricing of
unbundled elements (the "Local Competition Orders"). The Local Competition
Orders adopt a national framework for interconnection but leaves to the
individual states the task of implementing the FCC's rules. Because
implementation of the Local Competition Orders will be at the state level, it is
uncertain how these new requirements will affect the Company. However, to the
extent that CLECs are able to interconnect with incumbent LEC networks on
favorable terms, the Company's ability to provide competitive local exchange
services will increase.
A number of parties have filed appeals from the FCC's August 8, 1996
First Report and Order. These appeals have been consolidated in the United
States Court of Appeals for the Eighth Circuit. On October 15, 1996 the Eighth
Circuit issued an order which stayed the effectiveness of key provisions of the
First Report and Order. The court's decision suspended virtually all of the
pricing rules established by the FCC, which include the rules requiring
incumbent LECs to provide unbundled network elements and interconnection based
upon a pricing methodology set by the FCC, as well as the default of proxy
prices established by the FCC for network elements, interconnection, and resale
at wholesale rates of incumbent LEC services. The court's decision also
suspended the regulation which entitles any competitor to obtain from an
incumbent LEC any interconnection term or unbundled element price at the same
rates, terms, and conditions as those elements or services are available to any
other competitor. Nothing in the court order prevents negotiations and
arbitrations from continuing, and, despite the stay, a majority of the
arbitration decisions thus far adopted by the state commissions appear to be
consistent with the FCC's pricing rules. Arguments on the appeal cases were
heard on January 17 1997, and no decision is expected for several months.
On November 7, 1996, as required by the Telecommunications Act, a
Federal-State Joint Board adopted recommendations to the FCC looking toward the
adoption of new universal service support mechanisms. As a telecommunications
service provider, the Company is a potential contributor to a federal universal
service support mechanism and would be a potential recipient of funds from such
a mechanism. The Company has not yet determined the impact of such a mechanism.
The FCC must adopt rules in this proceeding by May 8, 1997.
On December 24, 1996 the FCC released a Notice of Proposed Rulemaking
that seeks to reform the system of interstate access charges to make it
compatible with the Telecommunications Act and with state and Federal actions to
open local networks to competition (the "Access Charge Order"). With the Access
Charge Order the FCC issued a Third Report and Order to implement changes to its
incumbent LEC price cap rules, along with a Notice of Inquiry to examine the
implications of usage of the public switched telephone network by information
service and Internet access providers. To the extent that the rules promulgated
as a result of this proceeding reduce access charges to reflect the
forward-looking costs of providing access, the Company's competitive advantage
in providing customers with access services will decrease. Further, to the
extent that incumbent LECs are provided the proposed substantial flexibility to
restructure access rates in advance of substantial facilities-based competition,
such flexibility could be misused to the detriment of emerging competitors such
as the Company. New rules are expected as a result of the Access Charge Order in
the first half of 1997.
------------------------------------------------
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At a joint meeting of the Board of Directors and the stockholders held
on October 3, 1996, the stockholders of the Company voted on and approved the
following items:
(a) The election of the following persons to comprise the full Board
of Directors of the Company: John J. Rigas , Michael J. Rigas, Timothy J.
Rigas, James P. Rigas, Daniel R. Milliard, Charles R. Drenning, Paul D. Fajerski
and Randolph S. Fowler;
(b) The amendment and restatement of the Company's Certificate of
incorporation (see Part I, Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Developments - Common
Stock Changes"); and
(c) The adoption of the Company's 1996 Long Term Compensation Plan (see
Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments -- Long-Term Stock Compensation
Plan").
The voting on each of the above-mentioned items was as follows:
Class of Stock Votes For Votes Withheld
Class A -- --
Class B 100,000,000 --
Item 5. Other Information
None
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3.1 Certificate of Incorporation of Registrant, together
with all amendments thereto (Incorporated herein by reference is
Exhibit 3.1 to Registrant's Registration Statement on Form 8- A,
dated October 23, 1996.)
Exhibit 3.2 Bylaws of Registrant (Incorporated herein by
reference is Exhibit 3.2 to Registrant's Registration
Statement on Form 8-A, dated October 23, 1996.)
Exhibit 27.01 Financial Data Schedule (supplied for the
information of the Commission).
(b) Reports on Form 8-K:
Form 8-Ks were filed on October 29, November 13, November 14,
1996 and February 13, 1997 which reported information under
Items 5 and 7 thereof. No financial statements were filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYPERION TELECOMMUNICATIONS, INC.
(Registrant)
Date: February 14, 1997 By: /s/ Timothy J. Rigas
----------------------
Timothy J. Rigas
Vice Chairman, Chief Financial Officer
(authorized officer), and Treasurer
Date: February 14, 1997 By: /s/ Edward E. Babcock, Jr.
--------------------------
Edward E. Babcock, Jr.
Vice President, Finance and
Chief Accounting Officer
<TABLE> <S> <C>
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ENDED DECEMBER 31, 1996
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
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<INVENTORY> 0
<CURRENT-ASSETS> 97,221
<PP&E> 34,420<F1>
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 174,807
<CURRENT-LIABILITIES> 5,021
<BONDS> 213,088
0
0
<COMMON> 100
<OTHER-SE> (38,381)
<TOTAL-LIABILITY-AND-EQUITY> 174,807
<SALES> 0
<TOTAL-REVENUES> 3,611
<CGS> 0
<TOTAL-COSTS> 9,658
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (20,759)
<INCOME-PRETAX> (14,802)
<INCOME-TAX> (180)
<INCOME-CONTINUING> (13,902)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,045)
<EPS-PRIMARY> (1.80)
<EPS-DILUTED> (1.80)
<FN>
<F1>PP&E IS LISTED NET OF DEPRECIATION
<F2>PP&E IS LISTED NET OF DEPRECIATION
</FN>
</TABLE>
