<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1998
REGISTRATION NO. 333-48209
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
HYPERION TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 4813 25-1669404
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
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)
-----------
JAMES P. RIGAS, CHIEF EXECUTIVE OFFICER
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 STEVEN DELLA ROCCA, ESQUIRE
BUCHANAN INGERSOLL LATHAM & WATKINS
PROFESSIONAL CORPORATION 53RD AT THIRD, SUITE 1000
21ST FLOOR, 301 GRANT STREET 885 THIRD AVENUE
PITTSBURGH, PENNSYLVANIA 15219 NEW YORK, NEW YORK 10022-4802
(412) 562-8826 (212) 906-1200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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,
check the following box. [_]
-----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be used
in connection with an underwritten public offering in the United States and
Canada (the "U.S. Prospectus") and one to be used in a concurrent underwritten
public offering outside the United States and Canada (the "International
Prospectus"). The U.S. Prospectus and the International Prospectus are
identical except for the front and back cover pages. The form of U.S.
Prospectus is included herein and is followed by the alternate pages to be
used in the International Prospectus. The alternate pages for the
International Prospectus included herein are each labeled "International
Prospectus Alternate Page". Final forms of each prospectus will be filed with
the Securities and Exchange Commission under Rule 424(b) under the Securities
Act of 1933, as amended.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 30, 1998
P R O S P E C T U S
LOGO
HYPERION TELECOMMUNICATIONS, INC.
10,000,000 Shares
Hyperion Telecommunications, Inc.
Class A Common Stock
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Of the 10,000,000 shares of Class A Common Stock, par value $.01 per share
(the "Class A Common Stock"), of Hyperion Telecommunications, Inc. ("Hyperion"
or the "Company") offered hereby, 8,000,000 shares are being offered in the
United States and Canada (the "U.S. Offering") and 2,000,000 shares are being
offered in a concurrent international offering outside of the United States and
Canada (the "International Offering" and, together with the U.S. Offering, the
"Offerings"). The initial public offering price and the aggregate underwriting
discount per share will be identical for both Offerings. See "Underwriting."
The Company expects to enter into an agreement with Adelphia Communications
Corporation ("Adelphia") and/or certain affiliates of Adelphia pursuant to
which, upon the consummation of the Offerings (i) Adelphia or such affiliates
will agree to purchase in cash an estimated 3,555,556 shares of Class A Common
Stock from the Company (based on $15.00 per share, the midpoint of the range
per share set forth below) at a price equal to the public offering price less
the underwriting discount, or an aggregate of approximately $50.0 million (the
"Adelphia Share Purchase") and (ii) in connection with the contribution to the
Company by Adelphia of the Company's indebtedness and payables owed to Adelphia
(the "Adelphia Note Contribution"), the Company will issue an estimated
3,875,556 shares of Class A Common Stock to Adelphia (based on $15.00 per
share, the midpoint of the range per share set forth below) at a price equal to
the public offering price less the underwriting discount, or an aggregate of
approximately $54.5 million. After giving effect to the shares issued pursuant
to the Adelphia Share Purchase and the Adelphia Note Contribution (together,
the "Adelphia New Shares") and to the Offerings, Adelphia will own
approximately 69.7% of the outstanding Common Stock (as defined) and 82.2% of
the total voting power of the Company. See "Prospectus Summary--The Offerings."
Prior to the Offerings, there has not been a public market for the Class A
Common Stock of the Company. It is currently estimated that the initial public
offering price per share will be between $14.00 and $16.00. See "Underwriting"
for information relating to the factors considered in determining the initial
public offering price. Application has been made for quotation of the Class A
Common Stock on the Nasdaq National Market under the symbol "HYPT."
The Company has two classes of common stock, Class A Common Stock and Class B
Common Stock, par value $.01 per share (the "Class B Common Stock" and,
together with the Class A Common Stock, the "Common Stock"). The Class A Common
Stock and Class B Common Stock are substantially identical, except that holders
of Class A Common Stock are entitled to one vote per share and holders of Class
B Common Stock are entitled to 10 votes per share on all matters submitted to a
vote of stockholders. Immediately following the consummation of the Offerings
(assuming no exercise of the over-allotment option granted to the
Underwriters), the holders of the Class B Common Stock will have approximately
94.4% of the combined voting power of the outstanding Class A Common Stock and
Class B Common Stock. See "Description of Capital Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- -----------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -----------------------------------------------
Total(4) $ $ $
</TABLE>
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(1) The total Price to Public excludes the total proceeds to Hyperion from
the Adelphia Share Purchase. See "Underwriting."
(2) For information regarding indemnification of the Underwriters, see
"Underwriting."
(3) Before deducting expenses estimated at $ payable by the Company.
The Company will also receive $50.0 million from the issuance of shares
of Class A Common Stock to Adelphia in connection with the Adelphia Share
Purchase. The sale of Class A Common Stock to Adelphia by the Company
will be at a per share price of $14.06 (the total Price to the Public
less the underwriting discount).
(4) The Company has granted the U.S. Underwriters and the Managers an option,
exercisable within 30 days of the date hereof, to purchase up to an
aggregate of 1,500,000 shares of Class A Common Stock on the same terms
and conditions as set forth above, for the purpose of covering over-
allotments, if any. If such over-allotment option is exercised in full,
the total Price to the Public, Underwriting Discount and Commissions and
Proceeds to the Company will be $ , $ , and $ , respectively. See
"Underwriting."
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The shares of Class A Common Stock are being offered severally by the
Underwriters named herein, subject to prior sale, when, as and if accepted by
them and subject to certain other conditions. It is expected that certificates
for the shares of the Class A Common Stock offered hereby will be made
available for delivery on or about 1998, at the office of Smith Barney
Inc., 333 West 34th Street, New York, New York 10001.
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Salomon Smith Barney
Credit Suisse First Boston
NationsBanc Montgomery Securities LLC
, 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF CLASS A COMMON
STOCK, INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
[DESCRIPTION OF ARTWORK -- Gatefold map showing the eastern half of the United
States and an enlarged version of certain east coast states noting the location
of the Company's networks and containing network statistics of the Company for
its existing and new networks.]
<PAGE>
PROSPECTUS SUMMARY
The following information is qualified in its entirety by the more detailed
information and financial statements and notes thereto, appearing elsewhere in
this Prospectus or incorporated by reference herein. For a description of
certain terms used in this Prospectus, see the Glossary attached to this
Prospectus as Annex 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 46 cities in which the Company, as
of March 31, 1998, had ownership interests through 20 Operating Companies (as
defined herein). As of the date of this Prospectus, ten of the networks are 50%
or less owned by the Company and are managed by the Company. Unless otherwise
specified, information regarding the networks that is contained in this
Prospectus is as of December 31, 1997, at which time the Company had ownership
interests in 21 networks. See "--Ownership of the Company and the Operating
Companies." Unless otherwise stated, the information contained in this
Prospectus assumes no exercise of the Underwriters' overallotment options and
gives effect to a 3.25-for-1 split of the outstanding shares of the Company's
Common Stock.
Prospective investors should carefully consider the factors set forth herein
under the caption "Risk Factors."
THE COMPANY
Hyperion 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
March 31, 1998, Hyperion had 22 networks (the "Existing Networks"), including
four networks under construction. The Existing Networks serve 46 cities and
include approximately 5,363 route miles of fiber optic cable. In addition, as
of March 31, 1998, the Company's 18 networks in operation were connected to
1,909 buildings and the Company's facilities were collocated in 113 local
exchange carrier ("LEC") central offices. Management believes that the
Company's Existing Networks represent an addressable market opportunity of
approximately 6.8 million business access lines or approximately $13.3 billion
annually, substantially all of which is currently serviced by 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.
Over the next eighteen months, the Company plans to complete development and
construction of 14 new networks serving 29 additional cities (the "New
Networks") with the goal of expanding the Company's regionally focused networks
and further facilitating the regional interconnection of certain of its
markets. The Company believes that with the addition of these New Networks, it
will have a total addressable market opportunity of approximately 13.2 million
business access lines or approximately $26.0 billion annually. Once fully
constructed, management believes the Company's Existing Networks and New
Networks will include at least 8,100 route miles of fiber optic cable and will
be connected to at least 210 LEC central offices. The Company has installed in
17 of its Existing Networks, and will install in all of its networks, a
standard switching platform based on the Lucent Technologies ("Lucent") 5ESS
switch technology. Management believes this consistent platform will enable the
Company to (i) deploy features and functions quickly in all of its networks,
(ii) expand switching capacity in a cost effective manner and (iii) lower
maintenance costs through reduced training and spare parts requirements.
In early 1997, Hyperion began to implement a business strategy focused on
selling communications services directly to targeted business end users in
addition to other telecommunications service providers. As part of this
strategy, the Company accelerated the installation of its Lucent 5ESS-based
standard switching platform in its Existing Networks and increased the size of
its direct sales force and customer service organization. In addition, the
Company has begun to use resold services and unbundled network elements to
provide rapid market entry and to develop its customer base in advance of
capital deployment in its Existing Networks and New Networks. The
1
<PAGE>
Company has experienced significant growth in the sale of access lines from
approximately 7,000 as of March 31, 1997 to approximately 41,500 as of March
31, 1998. Of the current access lines sold, approximately 81% are provisioned
using Company owned networks (which lines are referred to as "on-net"), though
this percentage will decline as the Company continues to offer switched
services on an unbundled network element and total service resale basis.
However, the Company believes it will provision a majority of its access lines
on its own networks for the foreseeable future. The Company expects that
through the delivery of switched services on-net, it will be able to provide
faster, more reliable access line provisioning with higher operating margins
and more responsive customer service and monitoring.
Hyperion intends to offer a complete range of telecommunications services to
its customers in all of its markets. The Company's current service offerings
include local switched dialtone, long distance, dedicated access and enhanced
services such as frame relay, high speed Internet access and video
conferencing. The Company also plans to become an Internet Service Provider
("ISP") in all of its markets, and expects to provide such services in a
majority of its markets during 1998. The Company has begun selling long
distance services pursuant to a resale agreement with IXC Communications, Inc.
("IXCC") 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 or IXC. Management believes that the Company
will benefit from lower operating costs once it is able to offer all of its
various services over its own networks.
Hyperion's targeted customers include medium and large businesses,
governmental and educational end users, and other telecommunications service
providers, such as value added resellers ("VARs"), ISPs and IXCs. As of March
31, 1998, the Company served customers through a dedicated sales force of
approximately 128 highly trained professionals focused on selling the Company's
portfolio of service offerings. The Company expects to increase its marketing
efforts by doubling the size of its current sales force during fiscal 1999.
Management believes that a significant competitive advantage over other CLECs
is the Company's ability to utilize its broad geographic networks and extensive
network clusters to offer a single source solution for all of its customers'
telecommunications needs principally over its own regional network clusters.
Further, Hyperion believes it can continue to attract end user customers by
offering (i) a high-capacity fiber optic network connection directly to
substantially all of a customer's premises, due to the breadth of the Company's
network coverage, (ii) high quality, solutions-oriented customer service and
(iii) a single point of contact for a complete range of telecommunication
services. The Company also believes that a number of telecommunications
providers such as VARs and IXCs will seek to offer their business customers an
integrated package of switched local and long distance services using the
networks of facilities-based CLECs such as Hyperion. The Company believes that
it is well positioned to capitalize on this opportunity since its networks
generally have broader geographic coverage than other CLECs in its markets.
LOCAL PARTNERSHIP STRATEGY
Hyperion's Existing Networks have typically been developed by partnering with
a local cable operator or utility provider (the "Local Partner") who generally
owns or controls extensive conduits and rights-of-way. In all but three of the
Company's Existing Networks, Hyperion retains at least a 50% equity stake in
the respective Operating Companies. In all of its Operating Companies, Hyperion
is responsible for the design, management and operation of the Operating
Companies' networks pursuant to management agreements. Management believes that
its partnering strategy provides the Company with the following significant
competitive advantages over other CLECs: (i) by sharing the cost of
construction and utilizing the rights-of-way controlled by the Local Partner,
the Company has been able to build its networks more quickly and at a lower
cost and (ii) by partnering with Local Partners that typically operate in a
broad geographic region, Hyperion is frequently able to expand its partnering
agreements into
2
<PAGE>
multiple contiguous markets, thereby supporting its clustering strategy. As of
December 31, 1997, as adjusted for the recent purchase of certain partners'
interests (see "--Recent Developments"), the Company and its partners have
invested $401.6 million in 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, Inc. See
"Business--Operating Agreements--Fiber Lease Agreements". The Company's
proportionate share of this gross property, plant and equipment investment was
approximately $305.1 million. The Company believes that its large upfront
capital investment in its networks, coupled with the selective use of unbundled
network elements and total service resale, will provide higher operating
margins than can be achieved by other CLECs, which typically have a lower
percentage of on-net 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. To date, this goal has been facilitated by the substantial completion of
a number of Hyperion's networks, along with the desire of certain Local
Partners to reduce their telecommunications investments and focus on their core
cable or utility operations. For Operating Companies in which the Company does
not own a majority interest, partnership agreements generally provide for
rights of first refusal or buy/sell arrangements enabling the Company to have
an opportunity to acquire additional equity interests or sell its equity
interests in the network. Since September 1997, the Company has increased its
ownership interest to 100% in Operating Companies in seven of its markets. 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 increased to 76.0% from 44.0%.
RECENT DEVELOPMENTS
Increased Network Ownership. On September 12, 1997 and February 12, 1998, the
Company consummated purchase agreements with former Local Partners, Time Warner
Entertainment Advance/Newhouse ("TWEAN"), Tele-Communications, Inc. and Lenfest
Telephony, Inc., thereby increasing the Company's ownership interest in seven
of its networks to 100% (collectively, the "Rollups"). As a result of the
Rollups, the Company's weighted average ownership in its networks, based upon
gross property plant and equipment, increased to 76.0%. The Rollups 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.
Completed Strategic Agreements. The Company has recently completed a number
of strategic agreements that expand the number of markets served by the
Company. In April 1998, the Company entered into agreements with Metromedia
Fiber Network Services, Inc. to lease long haul fiber from Washington D.C. to
Stamford, CT. On December 1, 1997, the Company entered into an agreement with
Allegheny Energy to provide communications services over networks to be
constructed in State College and Altoona, Pennsylvania. Also in December 1997,
the Company initiated service on three networks pursuant to an agreement with
Entergy Corporation ("Entergy") whereby the Company and Entergy each have a 50%
stake in networks located in Little Rock, Arkansas, Jackson, Mississippi, and
Baton Rouge, Louisiana. In addition, in June 1997, the Company entered into
agreements (collectively, the "MCI Preferred Provider Agreement") with MCImetro
Access Transmission Services, Inc. (together with its affiliate, MCI
Communications, Inc., "MCI") designating the Company as MCI's preferred
provider of end user dedicated access circuits for new MCI customers and of end
users 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 in the
Company's markets. The Company also granted certain warrants to MCI to purchase
Class A Common Stock (the "MCI Warrant") and the Company expects Adelphia to
purchase certain of such warrants from MCI in connection with the Offerings.
See "Description of Capital Stock--Warrants."
Completed Recent Financings. On October 9, 1997, Hyperion sold $200.0 million
aggregate liquidation preference (the "Preferred Stock Offering") of 12 7/8%
Senior Exchangeable Redeemable Preferred Stock due
3
<PAGE>
2007 (the "Preferred Stock") and on August 27, 1997, the Company sold $250.0
million aggregate principal amount (the "Senior Secured Note Offering") of 12
1/4% Senior Secured Notes due 2004 (the "Senior Secured Notes"). The combined
net proceeds from these offerings were approximately $438.7 million, with $83.4
million from the Senior Secured Note Offering being placed in an escrow account
to provide for payment of the first six scheduled interest payments on the
Senior Secured Notes, and the remainder of the proceeds used to fund capital
expenditures, the acquisition of increased ownership interests in certain
networks, the continued expansion of its networks and for general corporate and
working capital purposes.
On December 31, 1997, the Company consummated an agreement for a $24.5
million long term lease facility with AT&T Capital Corporation (the "AT&T Lease
Agreement"). The lease facility provides financing for certain of the Operating
Companies' switching equipment and includes the sale and leaseback of certain
switching equipment, for which the Company received $14.9 million.
Participation in LMDS Auction. On March 25, 1998, the Federal Communications
Commission ("FCC") completed the auction of licenses for Local Multipoint
Distribution Service ("LMDS"). The Company, through a limited partnership in
which it is a 49.9% limited partner, was the successful bidder at a net cost of
$25.6 million for 232 31-GHz licenses, which cover approximately 38% of the
nation's population - in excess of 90 million people in the eastern half of the
United States. The Company funded $10 million of such purchase in January 1998,
and is committed to provide further funding to consummate such purchase upon
the granting of such licenses by the FCC, expected in May 1998. LMDS is a fixed
broadband point-to-multipoint service which the FCC anticipates will be used
for the deployment of wireless local loop, high-speed data transfer and video
broadcasting services. The Company plans to use such spectrum for "last-mile"
connectivity in certain of its markets, and believes the spectrum to be highly
complementary to its fiber-based systems. There can be no assurances that LMDS
spectrum will provide a cost-effective means to connect to end user locations.
GROWTH STRATEGY
Hyperion's objective is to be the leading local telecommunications service
provider to businesses, governmental and educational end users, VARs, ISPs and
IXCs within its markets. To achieve this objective, the Company has pursued a
regionalized 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:
Focus on Telecommunications-Intensive Customers. The Company provides its
services to telecommunications-intensive customers which include medium and
large businesses, governmental and educational end users, and other
telecommunications providers. Management believes that its target customers are
a large and under-served universe who generally have no choice other than to
buy communications services from the incumbent LEC or IXC. These customers
generally seek reliability, high quality, broad geographic coverage, end-to-end
service, solutions-oriented customer service and timely introduction of new and
innovative services. 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.
Increase Size and Scope of Network Clusters. Over the next eighteen months,
the Company plans to complete development and construction of 14 New Networks
serving 29 additional cities within the Company's current regional clusters,
either as sole owner/operator or through partnerships or long-term fiber lease
agreements. The Company believes that the mature size and scope of its Existing
Network clusters, combined with changes in the legislative and regulatory
environment, enable the Company to build new networks on its own more
efficiently. In addition, where appropriate, the Company intends to continue to
enter into arrangements with Local Partners. The Company believes that this
expansion strategy permits it to (i) construct networks faster and at a lower
cost than it could on its own, (ii) provide broader network coverage than if
the Company installed its own fiber optic cable and (iii) capitalize on the
existing relationships the Local Partner has with business customers. The
Company believes that its partnering strategy combined with the interconnection
of its regional
4
<PAGE>
network clusters differentiates the Company from other CLECs and allows a
greater proportion of traffic to be carried on-net, which decreases
transmission costs and therefore increases cash flow margins.
Maximize On-Net Traffic Through Facilities-Based Services. By providing
switched voice, enhanced services and long distance access on its own fiber
optic networks, the Company believes it can better control the provisioning,
delivery and monitoring of its services as well as increase its operating
margins. On-net services improve the Company's ability to provide bundled
service offerings by reducing the Company's reliance upon incumbent LECs for
servicing and technological upgrades of leased dedicated transport or unbundled
network elements. The Company currently provides approximately 81% of its
switched services to customers on-net and believes it will provision a majority
of its access lines on its own networks for the foreseeable future.
Provide Bundled Package of Telecommunications Services. The Company believes
that a significant portion of business, governmental and educational customers
prefer a single-source telecommunications provider that delivers a full range
of efficient and cost effective solutions to meet their telecommunications
needs. Hyperion believes that offering a customized, integrated package of
telecommunications services positions the Company to best address the
increasing telecommunications requirements of businesses within its markets.
Expand Solutions-Oriented Sales Effort. The Company provides an integrated
solutions approach to satisfy its end users' telecommunications 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 128 professionals during fiscal 1999.
OWNERSHIP OF THE COMPANY AND THE OPERATING COMPANIES
Hyperion is a 79.2% owned subsidiary (69.7% after the consummation of the
Offerings, the issuance of the Adelphia New Shares, the purchase of the MCI
Warrant and Additional MCI Warrants by Adelphia and the issuance of the
Adelphia Warrant), on a fully diluted basis as of March 31, 1998, of Adelphia
Communications Corporation ("Adelphia"). See "--Recent Developments" and
"Description of Capital Stock--Warrants." Adelphia is the seventh largest cable
television company in the United States and, as of March 31, 1998, owned or
managed cable television systems that served approximately 1.97 million
subscribers in 12 states. In addition, senior executives of the Company owned
10.9% of the Common Stock of the Company (7.0% after the consummation of the
Offerings, the issuance of the Adelphia New Shares, the purchase of the MCI
Warrant and Additional MCI Warrants by Adelphia and the issuance of the
Adelphia Warrant), on a fully diluted basis as of March 31, 1998. Upon the
consummation of the Offerings, Adelphia will acquire an aggregate of 7,431,112
shares of Class A Common Stock pursuant to the Adelphia Note Contribution and
the Adelphia Share Purchase, will purchase from MCI warrants to purchase
1,360,331 shares of Class A Common Stock, and will receive a warrant to
purchase an additional 200,000 shares of Class A Common Stock (the "Adelphia
Warrant"). See "--The Offerings," "Certain Relationships and Transactions" and
"Description of Capital Stock--Warrants." As of March 31, 1998, the Company's
22 Existing Networks were owned through (i) eight partnerships or limited
liability companies with Local Partners (together with the entities described
in clause (iv) below, the "Operating Partnerships"), encompassing nine
networks, (ii) 10 wholly owned subsidiaries of the Company, encompassing 11
networks, (iii) one corporation, encompassing one network, in which the Company
is a minority shareholder and (iv) one company, encompassing one network, in
which the Company is the majority equityholder (the entities described in
clauses (ii) and (iii) 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, management, billing and operation of the
Operating Companies, for which it receives management fees.
The location of the Company's executive offices is Main at Water Street,
Coudersport, Pennsylvania 16915, and its telephone number is (814) 274-9830.
5
<PAGE>
The following is an overview of Hyperion's networks and respective ownership
interests as of March 31, 1998.
<TABLE>
<CAPTION>
ACTUAL OR
EXPECTED DATE HYPERION
COMPANY NETWORKS OF OPERATION(A) INTEREST LOCAL PARTNER
- ---------------- --------------- -------- -------------------
<S> <C> <C> <C>
Northeast Cluster
Vermont............................ 11/94 100.0% --
Syracuse, NY....................... 8/92 100.0 --
Buffalo, NY........................ 1/95 100.0 --
Albany, NY......................... 12/98 100.0 --
Mid-Atlantic Cluster
Charlottesville, VA................ 11/95 100.0 --
Scranton/Wilkes-Barre, PA.......... 5/98 100.0 --
Harrisburg, PA..................... 4/95 100.0 --
Morristown, NJ..................... 7/96 100.0 --
New Brunswick, NJ.................. 11/95 100.0 --
Philadelphia, PA................... 8/96 50.0 PECO Energy
Allentown/Bethlehem/Easton/Reading,
PA ("ABER")....................... 5/98 50.0 PECO Energy
York, PA........................... 5/97 50.0 Susquehanna Cable
State College/Altoona, PA.......... 6/98 50.0 Allegheny Energy
Richmond, VA....................... 9/93 37.0 MediaOne
Mid-South Cluster
Lexington, KY...................... 6/97 100.0 --
Louisville, KY..................... 3/95 100.0 --
Nashville, TN...................... 11/94 95.0 InterMedia Partners
Baton Rouge, LA.................... 12/97 50.0 Entergy
Jackson, MS........................ 12/97 50.0 Entergy
Little Rock, AR.................... 12/97 50.0 Entergy
Other Networks
Wichita, KS........................ 9/94 49.9 Gannett
Jacksonville, FL................... 9/92 20.0 MediaOne
WEIGHTED AVERAGE OWNERSHIP(b)...... -- 76.0% --
</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) Based upon gross property, plant and equipment of the Company and the
Operating Companies as of December 31, 1997, as adjusted for the recent
purchase of certain partners' interests pursuant to the Rollups.
6
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
Class A Common Stock Offered: (1)
U.S. Offering............................... 8,000,000
International Offering...................... 2,000,000
----------
Total...................................... 10,000,000
==========
Common Stock outstanding after the Offerings:
(1)(2)(3)
Class A Common Stock........................ 22,171,705
Class B Common Stock........................ 32,500,000
----------
Total ..................................... 54,671,705
==========
Use of Proceeds ............................... The Company intends to use the net
proceeds from the Offerings and the
Adelphia Share Purchase to fund the
Company's capital expenditures, working
capital requirements, potential increases
in ownership interests in existing
networks and for general corporate
purposes. See "Use of Proceeds."
Voting Rights.................................. The holders of Class A Common Stock
generally have rights identical to
holders of Class B Common Stock, 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 the
Company's stockholders. See "Description
of Capital Stock."
Proposed Nasdaq National Market Symbol ........ HYPT
</TABLE>
- --------
(1) Does not include up to an aggregate of up to 1,500,000 shares of Class A
Common Stock which may be issued pursuant to the over-allotment options
granted to the Underwriters. See "Underwriting."
(2) Includes (i) 1,360,331 shares of Class A Common Stock issuable upon
exercise of the MCI Warrant and Additional MCI Warrants, (ii) 200,000
shares of Class A Common Stock issuable upon exercise of the Adelphia
Warrant, (iii) 731,624 shares of Class A Common Stock issuable upon
exercise of the Lenfest Warrant (as defined), (iv) 1,993,638 shares of
Class B Common Stock issuable upon the exercise of Class B Warrants and
convertible into Class A Common Stock, and (v) 7,431,112 shares of Class A
Common Stock pursuant to the Adelphia Note Contribution and the Adelphia
Share Purchase. The weighted average exercise price for the Class B
Warrants, the MCI Warrant and the Lenfest Warrant, all of which are
currently exercisable, and the Additional MCI Warrants which will be issued
upon consummation of the Offerings, collectively is $2.05 per share.
Excludes 7,670,000 shares of Class A Common Stock available for grant under
the Company's 1996 Plan (as defined). See "Management--Long-Term
Compensation Plan" and "Description of Capital Stock--Common Stock" and "--
Warrants."
(3) Upon the consummation of the Offerings, (i) Adelphia and/or certain of its
affiliates will purchase approximately $50.0 million worth of Class A
Common Stock from the Company (or an estimated 3,555,556 shares) at a
purchase price equal to the public offering price less the underwriting
discount (such purchase is referred to herein as the "Adelphia Share
Purchase") and (ii) in connection with the Adelphia Note Contribution, the
Company will issue approximately 3,875,556 shares of Class A Common Stock
to Adelphia. The estimated number of shares of Class A Common Stock to be
issued to Adelphia in connection with the Adelphia Note Contribution has
been determined by dividing (x) the sum of (i) the estimated fair market
value of the Company's unsecured subordinated note due April 16, 2003 owed
to Adelphia (the "Adelphia Note"), plus (ii) the outstanding amounts
payable for certain products and services provided to the Company by
Adelphia including accrued and unpaid interest thereon (such sum is
estimated to be approximately $54.5 million as of March 31, 1998) by (y)
the assumed public offering price of $15 per share (the midpoint of the
range set forth on the cover page of this Prospectus) less the underwriting
discount per share. See "Certain Relationships and Transactions."
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------------------------------------- ------------------------------
PRO FORMA PRO FORMA
--------- ---------
1993 1994 1995 1996 1997 1997(A) 1996 1997 1997(A)
------- ------- -------- -------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(B):
(DOLLARS IN THOUSANDS EXCEPT PER
SHARE DATA)
Telecommunications
service and
management fee
revenue.............. $ 89 $ 417 $ 1,729 $ 3,322 $ 5,088 $ 8,710 $ 3,611 $ 8,690 $ 12,435
Operating expenses:
Network operations.... 19 330 1,382 2,690 3,432 5,219 2,339 5,263 7,562
Selling, general and
administrative....... 921 2,045 2,524 3,084 6,780 9,602 4,736 9,099 12,720
Depreciation and
amortization......... 30 189 463 1,184 3,945 13,243 2,583 7,027 15,379
------- ------- -------- -------- -------- --------- -------- --------- ---------
Operating loss........ (881) (2,147) (2,640) (3,636) (9,069) (19,354) (6,047) (12,699) (23,226)
Interest income....... -- 17 39 199 5,976 5,980 4,319 7,951 7,951
Interest expense and
fees (c) ............ -- (2,164) (3,321) (6,088) (28,377) (59,002) (20,759) (35,934) (48,269)
Equity in net loss of
joint ventures....... (194) (528) (1,799) (4,292) (7,223) (4,317) (5,143) (9,284) (5,846)
Net loss applicable to
common stockholders
(d).................. (1,075) (4,725) (7,692) (13,620) (30,547) (95,548) (19,045) (55,760) (89,290)
Net loss per weighted
average share of
common stock......... $ (0.03) $ (0.15) $ (0.24) $ (0.42) $ (0.89) $ (2.72) $ (0.55) $ (1.60) $ (2.51)
Weighted average
shares of common
stock................ 32,500 32,500 32,500 32,500 34,421 35,153 34,398 34,889 35,621
OTHER COMPANY DATA (B):
EBITDA (e)............ $ (851) $(1,958) $ (2,177) $ (2,452) $ (5,124) $ (6,111) $ (3,464) $ (5,672) $ (7,847)
Capital expenditures
and Company
investments (f)...... 3,891 8,607 10,376 18,899 79,396 86,016 38,348 80,953 79,011
Cash used in operating
activities........... (725) (2,121) (2,130) (833) (4,823) (32,851) (2,592) (1,609) (12,407)
Cash used in investing
activities........... (3,806) (8,607) (10,376) (18,899) (72,818) (186,981) (31,770) (171,991) (201,867)
Cash provided by
financing activities. 4,645 10,609 12,506 19,732 137,455 560,413 130,740 446,649 426,001
Weighted average
ownership interest in
networks (g)......... -- 48.1% 45.8% 44.4% 53.4% 75.0% 49.7% 59.3% 76.0%
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(H)
--------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA (B):
Cash and cash equivalents........................... $ 332,863 $462,537
U.S. government securities--pledged (i)............. 85,027 85,027
Total assets........................................ 634,850 834,856
Note payable--Adelphia ............................. 34,454 --
Long term debt and exchangeable redeemable preferred
stock.............................................. 722,666 683,939
Common stock and other stockholders' equity
(deficiency)....................................... (106,181) 139,707
</TABLE>
- --------
(a) Reflects the effects of the Rollups, the Preferred Stock Offering and the
Senior Secured Note Offering as if such events occurred as of the beginning
of each period presented.
(b) The data presented represents financial information for the Company and its
consolidated subsidiaries. As of December 31, 1997, 14 of the Company's
networks were owned by joint ventures in which it owned an interest of 50%
or less, and for which the Company reported its interest pursuant to the
equity method of accounting consistent with generally accepted accounting
principles.
(c) Includes $30.6 million and $23.0 million of interest expense from the
Senior Secured Notes for the pro forma year ended March 31, 1997 and the
pro forma nine months ended December 31, 1997, respectively.
(d) Includes $27.0 million and $19.9 million of accumulated preferred stock
dividends from the Preferred Stock for the pro forma year ended March 31,
1997 and the pro forma nine months ended December 31, 1997, respectively.
(e) 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 to operating income as an indicator of operating performance or
an alternative to cash flows from operating activities as a measure of
liquidity, all 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.
(f) For the fiscal years ended March 31, 1993, 1994, 1995, 1996, 1997 and pro
forma 1997 and the nine months ended December 31, 1996, 1997 and pro forma
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, $51.6, $14.9, $34.9 and $65.0 million, respectively, and the
Company's investments in its less than wholly owned Operating Companies and
the South Florida Partnership (as defined) were $1.9, $5.5, $7.5, $12.8,
$34.8, $14.4, $23.4, $46.1 and $14.0 million, respectively, for the same
periods. Furthermore, during the 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.
(g) Based upon gross property, plant and equipment of the Company and the
Operating Companies at the end of each period presented.
(h) Reflects the effects of the Offerings, the Adelphia Note Contribution, the
Adelphia Share Purchase, the Rollups and the repayment of $3.0 million of
loans to Management Stockholders (as defined), as if such events occurred
as of December 31, 1997.
(i) $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.
8
<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."
The Company reports its interest in its 50% or less owned networks pursuant to
the equity method of accounting consistent with generally accepted accounting
principles. As a result, the financial information set forth below is not
indicative of the Company's overall financial position, and investors should
not place undue reliance on such information in connection with the Offerings.
<TABLE>
<CAPTION>
NETWORK DATA (UNAUDITED)(A):
NINE MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------------- ------------------
1993 1994 1995 1996 1997 1996 1997
(DOLLARS IN THOUSANDS) ------ ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Network revenues....... $ 195 $ 962 $ 3,056 $ 7,763 $ 15,223 $ 9,975 $ 19,274
Operating expenses:
Network operations..... 504 789 1,946 4,871 8,069 5,306 9,686
Selling, general and
administrative......... 353 1,145 2,439 5,316 8,827 6,051 15,495
Depreciation and
amortization........... 207 839 2,467 6,137 14,305 9,929 18,336
------ ------- ------- ------- -------- -------- --------
Operating loss......... $ (869) $(1,811) $(3,796) $(8,561) $(15,978) $(11,311) $(24,243)
====== ======= ======= ======= ======== ======== ========
OTHER OPERATING DATA:
EBITDA (b)............. $ (662) $ (972) $(1,329) $(2,424) $ (1,673) $ (1,382) $ (5,907)
Capital expenditures... 4,947 13,790 24,658 45,177 128,270 77,014 121,524
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
--------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
(DOLLARS IN THOUSANDS) ------ ------- ------- ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSET AND LIABILITY DATA:
Gross property, plant and
equipment (c)............ $6,952 $21,907 $49,107 $97,318 $228,384 $401,646
Capital lease obligations
(d)...................... 1,244 3,291 11,166 18,163 47,423 77,107
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
--------------- DECEMBER 31,
1996 1997 1997
------- ------- ------------
<S> <C> <C> <C>
OTHER NETWORK DATA:
Networks (e)...................................... 17 21 21
Cities served (f)................................. 19 33 44
Route miles (f)................................... 2,210 3,461 4,744
Fiber miles (f)................................... 106,080 166,131 220,010
Buildings connected............................... 822 1,270 1,776
LEC central offices collocated.................... 44 104 108
Access lines sold................................. 0 7,000 28,000
Access lines installed............................ 0 1,450 11,800
Switches installed (g)............................ 5 7 16
Employees (h)..................................... 155 261 490
</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 (as defined) 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 to operating income as an indicator of operating performance or
an alternative to cash flows from operating activities as a measure of
liquidity, all 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 and, with respect
to information as of December 31, 1997, is adjusted for the purchase of
certain partners' interests after December 31, 1997 (see "--Recent
Developments").
(d) Represents fiber lease financings with the respective Local Partners for
each network and other capital leases. As of December 31, 1997, $20.1
million of these capital lease obligations were included in the Company's
consolidated financial statements.
(e) Includes networks under construction.
(f) Data for the periods ended March 31, 1996 and 1997 excludes networks under
construction. Data for the period ended December 31, 1997 includes networks
under construction.
(g) Represents Lucent 5ESS switches or remote switch modules which deliver full
switch functionality.
(h) Employees includes employees of both the Operating Companies and the
Company.
9
<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 shares of Class A Common Stock
offered hereby.
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 the Company's ability to successfully
market its services to current and new customers, access markets on a
nondiscriminatory basis, identify, 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 risks and
uncertainties relating to general 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.
NEGATIVE CASH FLOW AND OPERATING LOSSES; LIMITED HISTORY OF OPERATIONS
The Company has experienced significant losses since its inception, with
operating losses of approximately $2.6 million, $3.6 million, $9.1 million,
$6.0 million and $12.7 million for the fiscal years ended March 31, 1995, 1996
and 1997 and the nine months ended December 31, 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 March 31, 1998, only 11 of
its 18 operational networks had been in operation for more than 24 months and
four Existing 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 Existing
Networks and New 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
10
<PAGE>
can be no assurance that the Company will be able to implement its growth
strategy or achieve or sustain profitability.
SIGNIFICANT FUTURE CAPITAL REQUIREMENTS
Expansion of the Company's Existing Networks and services and the
development of New Networks and additional networks and services requires
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 New 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 Networks 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 in 17 of its
Existing Networks and plans to install in all of its New Networks a standard
switching platform based on the Lucent 5ESS switch technology. 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 $420 million to fund anticipated capital expenditures, working
capital requirements and operating losses of the Company and investments in
its Existing Networks and New Networks through the end of 1999. The Company
believes that the net proceeds from the Offerings and the Adelphia Share
Purchase, together with its existing cash balance and internally generated
funds, will be sufficient to fund the Company's capital expenditures, working
capital requirements, operating losses and pro rata investments in the
Operating Companies (exclusive of future increases in ownership interests in
the Operating Companies and the funds necessary to acquire LMDS spectrum as a
result of the LMDS Auction and any additional funds allocated to the
construction and deployment of associated facilities) through mid-2000.
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, successful
bidding in the LMDS Auction, continued acquisition of increased ownership in
its networks and material variances from expected capital expenditure
requirements for Existing Networks and New 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 the end of 1999. In
addition, it is possible that expansion of the Company's networks may include
the geographic expansion of the Company's existing clusters and the
development of other new markets not currently planned. 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 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 purchase 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.
11
<PAGE>
RISK OF NEW SERVICE ACCEPTANCE BY CUSTOMERS
The Company is in the process of introducing a number of services, primarily
local exchange services, that the Company believes are important to its long-
term growth. The success of these services will be dependent upon, among other
things, the willingness of customers to accept the Company as a new provider
of such new telecommunications services. No assurance can be given that such
acceptance will occur, and the lack of such acceptance could have a material
adverse effect on the Company.
EXPANSION RISK; ADDITIONAL PERSONNEL
The Company is experiencing a period of rapid expansion which the Company
believes will accelerate in the foreseeable future. The operating complexity
of the Company, as well as the responsibilities of management personnel, have
increased as a result of this expansion. The Company's ability to manage such
growth effectively will require it to continue to expand and improve its
operational and financial systems and to expand, train and manage its employee
base. In addition, the Company and the Operating Companies intend to
significantly increase the hiring of additional sales and marketing personnel.
There can be no assurance that such new personnel will be successfully
integrated into the Company or the Operating Companies, as the case may be, or
whether a sufficient number of qualified personnel will be 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.
HOLDING COMPANY STRUCTURE; INABILITY TO ACCESS CASH FLOW
The Company is a holding company with substantially all of its operations
conducted through the Operating Companies, and the Company expects that it may
develop new networks and operations in the future through joint ventures. In
addition, as of March 31, 1998, 10 of the Company's 22 Existing 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 (as defined),
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."
SUBSTANTIAL LEVERAGE
As of December 31, 1997, the Company's total amount of debt and redeemable
preferred stock outstanding was $722.7 million and the Company had a
stockholders' deficiency of $106.2 million. 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 Company's 13% Senior Discount Notes due April 15, 2003 (the "Senior
Notes"), commencing on March 1, 1998, semi-annual cash payments of $15.3
million on the Senior Secured Notes are due and payable, and commencing on
October 15, 2002, quarterly cash dividends of
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$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 operating 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 debentures exchanged therefor, including
any such debentures issued in lieu of cash interest thereon, as the case may
be, the "Exchange Debentures"), (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 the 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 redeem the Preferred Stock (or repay 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.
CONTROL BY PRINCIPAL STOCKHOLDER; EFFECT OF TRANSFER OF CLASS B COMMON STOCK
Adelphia owns 79.2% (69.7% after consummation of the Offerings, the issuance
of the Adelphia New Shares, the purchase of the MCI Warrant and Additional MCI
Warrants by Adelphia and the issuance of the Adelphia Warrant), on a fully
diluted basis, of the Company as of March 31, 1998, with an additional 10.9%,
on a fully diluted basis owned by Messrs. Milliard, Drenning, Fajerski and
Fowler, all of whom are senior executives of the Company. Adelphia owns 83.9%
of the fully diluted Class B Common Stock of the Company, which is entitled to
ten votes per share, whereas the holders of Class A Common Stock are entitled
to one vote per share. Except as provided in the Lock-Up Agreements (as herein
defined), there are no contractual restrictions or restrictions in the
Company's certificate of incorporation regarding the ability to transfer the
Class B Common Stock. See "Certain Relationships and Transactions,"
"Description of Capital Stock" and "Shares Eligible for Future Sale." Upon the
completion of the Offerings and the issuance of the Adelphia New Shares and
after giving effect to the exercise of the Warrants (as defined), Adelphia
would continue to control approximately 82.2% of the combined voting power of
both classes of Common Stock. 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, Adelphia will be able to transfer control of
the Company through the transfer of its Class B Common Stock to an unrelated
third party. In such event, such third party transferee could use its voting
control in the Company to engage in corporate transactions such as those set
forth above that could adversely effect the holders of the Class A Common
Stock.
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
certain officers and directors of the Company, who are also officers and
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directors of Adelphia, have certain fiduciary obligations to the Company under
Delaware law, such officers and 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
to up to 14 and to fill the vacancies created thereby. See "Management--Board
Committees." In addition, pursuant to the stockholder agreement, 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. Upon the
consummation of the Offerings, the stockholder agreement with the Management
Stockholders will terminate. See "Certain Relationships and Transactions."
NEED TO OBTAIN AND MAINTAIN PERMITS AND RIGHTS-OF-WAY
The Company expects that in connection with its planned construction and
development of certain of its New Networks that it will be required to obtain
and maintain permits and rights-of-way to develop and operate such networks.
There can be no assurance that the Company or the Operating Companies, through
Local Partners, Adelphia or their own efforts, will be able to obtain new
permits and rights-of-way, 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 Networks and New 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 Networks and New
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 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 and could have a significant impact on the profitability
of the Operating Companies.
COMPETITION
In each of the markets served by the Company's networks, the services
offered by the Company compete principally with the services offered by the
incumbent LEC serving that area. Incumbent LECs have long-standing
relationships with their customers, have the potential to subsidize
competitive services from monopoly service revenues, and benefit from
favorable state and federal regulations. In light of the passage of the
Telecommunications Act of 1996 (the "Telecommunications Act"), federal and
state regulatory initiatives will provide increased business opportunities to
CLECs such as the Company, but regulators are likely to provide incumbent LECs
with increased pricing flexibility for their services as competition
increases. If incumbent LECs are allowed by regulators to lower their rates
substantially or selectively engage in excessive volume and term discount
pricing practices for their customers or charge CLECs excessive fees for
interconnection to the incumbent LECs' networks, the net income and cash flow
of CLECs, including the Operating Companies, could be materially and adversely
affected.
The Telecommunications Act also establishes procedures under which the
Regional Bell Operating Companies ("RBOCs") can obtain authority to provide
long distance services if they comply with certain interconnection
requirements. To date, the FCC authority to provide in-region interLATA
service has been sought by Ameritech in Michigan, Southwestern Bell in
Oklahoma, and BellSouth in Louisiana and South Carolina. The Department of
Justice has opposed each request, and each request has been denied by the FCC.
An approval could result in decreased market share for the major IXCs, which
are among the Operating Companies' significant customers. Such a result could
have an adverse effect on the Company.
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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 and subsidize the price of their long distance prices
with charges on local service. Other combinations are occurring in the
industry, which may have an effect on the Company, such as the pending
combination between Worldcom and MCI or between AT&T Corp. and Teleport
Communications Group Inc. ("TCG"). The effects of these combinations, if
consummated, are unknown at this time. The Company believes that, if
consummated, such combinations will also affect the Company's strategy of
originating and terminating a significant proportion of its customers'
communications traffic over its own networks, rather than relying on the
network of the incumbent LEC.
The Company also faces, and will continue to face, competition from other
current and potential market entrants, including other CLECs, incumbent LECs
which are not subject to RBOC restrictions on long distance, 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 of the 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 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, universal service or other requirements.
Challenges to these tariffs and certificates by third parties or independent
action by state public utility commissions ("State PUCs") could cause the
Company to incur substantial legal and administrative expenses.
Although the Telecommunications Act is intended to eliminate many legal
barriers to entry, no assurance can be given that changes in current or future
regulations adopted by the FCC or State PUCs or other legislative or judicial
initiatives relating to the telecommunications industry, including initiatives
that address access charge and universal service requirements, will 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 interpretations of the
Telecommunications Act. The ability of the Company and the Operating Companies
to compete in these new market segments may be adversely affected if incumbent
LECs are granted greater pricing flexibility and other regulatory relief that
enables them to impose costs on potential competitors or otherwise restrict
the Company's ability to serve its customers and attract new customers. In
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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 repeatedly. 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 PUCs establish prices
designed to pass on to the CLECs part of the cost of providing universal
service.
The Company also depends on timely and high-quality provisioning by LECs for
purposes of interconnecting the Company's and LEC's networks, purchasing
elements of the LEC's network to serve the Company's customers, transferring
the phone numbers of new Company customers from the LEC that formerly served
them and obtaining other facilities and services. While the Telecommunications
Act requires LECs to provide the same quality of service to the Company and
other CLECs as LECs provide to their own end user customers, on some occasions
LECs have provided poor-quality service. The Company cannot attract and
maintain customers for which such facilities and services must be purchased
from LECs if the quality of service is less than the customer has experienced
or obtained from the LEC.
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.
RISK RELATED TO LMDS STRATEGY
LMDS is a new service, and major telecommunications equipment manufacturers
have yet to introduce infrastructure products for the LMDS frequency band. As
a result, no wireless local loop systems are currently
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operating under LMDS, and implementation of such systems could be subject to
unforeseen delays, costs and possible quality and implementation issues.
Material aspects of the Company's LMDS implementation strategy are still being
developed and defined, and there can be no assurance that the Company will
develop and implement a successful and profitable LMDS strategy, or that
implementation of its LMDS strategy will not involve substantial expense.
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.
IMPACT OF THE YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have data-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. The Company
has assessed its systems and believes them to be year 2000 compliant. In
addition, the Company has received assurance from its major software vendors
that the products used by the Company are year 2000 compliant and will
function adequately. If the systems of other companies on whose services the
Company depends or with whom the Company's systems interface are not year 2000
compliant, it could have a material adverse effect on the Company. The Company
will continue its year 2000 issue assessment and, if it comes to the attention
of the Company's management that any of its systems, or the systems of those
on whom the Company relies, are not year 2000 compliant, the Company intends
to develop an action plan, and assess the resources it would be required to
devote, to address such problem. There can be no assurance that devoting
further resources of the Company will prevent the year 2000 issue from having
a material adverse effect on the Company.
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.
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.
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DEPENDENCE ON BUSINESS FROM IXCS
For the fiscal year ended March 31, 1997 and for the nine months ended
December 31, 1997, approximately 61% and 50%, respectively, 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 current revenue stream. See "Business--Growth Strategy."
In addition, the Telecommunications Act establishes procedures under which
RBOCs can obtain authority to compete with the IXCs in the long distance
market, which could result in a decreased market share for IXCs. See "--
Competition" and "Competition." Due to the Operating Companies' dependence on
business from IXCs, any significant loss of market share by the IXCs 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 cash dividends on its shares of Common
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"), the Senior Secured Notes ("the Senior Secured Indenture")
and the Certificate of Designation with respect to the Preferred Stock. 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
December 31, 1997, the Company had a stockholders' deficiency of $106.2
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.
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. See "Dividend
Policy."
DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. Investors purchasing Class A
Common Stock in the Offerings at the initial offering price will therefore
incur immediate and substantial net tangible book value dilution of $12.35 per
share of Class A Common Stock (assuming no exercise of the Underwriters' over-
allotment option). To the extent that the Class B Warrants, the MCI Warrant,
the Additional MCI Warrants, the Adelphia Warrant or the Lenfest Warrant
(collectively, the "Warrants") or outstanding options to purchase the Common
Stock are exercised or further Common Stock is issued by the Company at prices
less than the then current net tangible book value, there will be further
dilution to the holders of Class A Common Stock. See "Dilution."
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NO PRIOR TRADING MARKET FOR CLASS A COMMON STOCK; POTENTIAL VOLATILITY OF
STOCK PRICE
Prior to the Offerings, there has been no public market for the Class A
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained after the Offerings. The initial public offering price
will be determined through negotiations between the Company and the
representatives of the Underwriters (the "Representatives") based on several
factors and may not be indicative of the market price of the Class A Common
Stock after the Offerings. See "Underwriting." The market price of the shares
of Class A Common Stock may be significantly affected by factors such as
actual or anticipated fluctuations in the Company's operating results, new
products or services or new contracts by the Company or its competitors,
legislative and regulatory developments, conditions and trends in the
telecommunications industry, general market conditions and other factors
beyond the Company's control. In addition, the stock market has, from time to
time, experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stock of
telecommunications companies and that have often been unrelated to the
operating performance of particular companies. These broad market fluctuations
may also adversely affect the market price of the Company's Class A Common
Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Class A Common Stock in the public market
after the Offerings may have an adverse effect on the market price of the
Class A Common Stock. The Company, Adelphia, Mr. Milliard and the Management
Stockholders have agreed that they will not, directly or indirectly, offer,
sell, grant any option to purchase or otherwise dispose (or approve any offer,
sale, grant or other disposition) of any shares of Class A Common Stock
(including the Adelphia New Shares), Class B Common Stock or other capital
stock of the Company or any securities convertible into, or exercisable or
exchangeable for, any share of Class A Common Stock or other capital stock of
the Company (the "Lock-Up Agreements") (except in connection with pending
acquisitions, certain transfers to affiliates, the Company's 1996 Plan and
issuances upon the exercise of the Warrants), without the prior written
consent of Smith Barney Inc. for a period of 180 days after the date of this
Prospectus. Unless otherwise restricted, all shares of Class A Common Stock
issuable upon conversion of the outstanding Class B Common Stock will be
immediately eligible for sale in the public market in reliance upon Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"), subject
to the restrictions contained therein. All shares of Common Stock outstanding
prior to the Offerings and the Adelphia New Shares are subject to registration
rights agreements with the Company. See "Certain Relationships and
Transactions." Additionally, the Company intends to register under the
Securities Act up to 8,125,000 shares of Class A Common Stock issued or
reserved for future grants under the Company's 1996 Plan. See "Shares Eligible
for Future Sale."
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 Class A Common Stock, may discourage third party bidders from making a bid
for the Company, or may reduce any premiums paid to stockholders for their
shares of Class A 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 states have statutes and
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 or State PUC. See "Regulation--State Regulation."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the Class A Common Stock
offered hereby (including the Adelphia Share Purchase), after deducting the
underwriting discounts and commissions and estimated expenses of the
Offerings, are estimated to be approximately $190 million, based upon an
assumed offering price of $15.00 per share, the midpoint of the range set
forth on the cover page of this Prospectus (approximately $211 million if the
Underwriters' over-allotment option is exercised in full).
The Company currently intends to use the net proceeds from the Offerings and
the Adelphia Share Purchase, together with the remaining net proceeds from the
offerings of the Senior Secured Notes, the Preferred Stock and the AT&T Lease
Agreement, to fund the Company's capital expenditures, working capital
requirements, operating losses and pro rata investments in Operating Companies
and for general corporate purposes. The Operating Companies and the Company
will invest a substantial portion of these proceeds in capital expenditures.
These capital expenditures will include: (i) connecting new buildings to the
Company's networks; (ii) purchasing electronics (including switches) to
increase the services capabilities of the Company's Existing Networks
(including the completion of the four networks currently under construction)
and (iii) funding construction of the New Networks over the next eighteen
months. The Company estimates that it will require approximately $420 million
to fund anticipated capital expenditures, working capital requirements and
operating losses of the Company and investments in its Existing Networks and
its New Networks through the end of 1999. The Company believes that the net
proceeds from the Offerings and the Adelphia Share Purchase, together with its
existing cash balance and internally generated funds, will be sufficient to
fund the Company's capital expenditures, working capital requirements,
operating losses and pro rata investments in the Operating Companies
(exclusive of future increases in ownership interests in the Operating
Companies, if any, and the funds necessary to acquire LMDS spectrum as a
result of the LMDS Auction and any additional funds allocated to the
construction and deployment of associated facilities) through mid-2000. In
addition, the Company may use a portion of the proceeds to acquire its Local
Partner's interests in its Existing Networks or to purchase other
telecommunications-related assets. Management will retain a substantial amount
of discretion over the application of the net proceeds of the Offerings and
there can be no assurance that the application of net proceeds will not vary
significantly from the Company's current plans. Pending such uses, the net
proceeds will be invested in short-term, highly liquid investment-grade
securities.
The Company intends to evaluate potential acquisitions as a means to further
develop its market presence and product offerings. The Company has no definite
agreement with respect to any acquisition, although from time to time it has
discussions with other companies and assesses opportunities on an ongoing
basis. A portion of the net proceeds from the Offerings may also be used to
finance acquisitions.
20
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company as
of December 31, 1997, on a pro forma basis to reflect the Rollups and on a pro
forma, as adjusted basis to reflect the receipt of net proceeds from the sale
of 10,000,000 shares of Class A Common Stock offered by the Company (assuming
no exercise of the Underwriters' over-allotment option) at an assumed initial
public offering price of $15.00 per share, the Rollups, the Adelphia Share
Purchase, the Adelphia Note Contribution and the repayment of $3.0 million of
loans to Management Stockholders. This table should be read in conjunction
with the Company's consolidated financial statements and related notes thereto
included elsewhere in this Prospectus. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------
PRO PRO FORMA
ACTUAL FORMA (A) AS ADJUSTED (B)
--------- --------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................ $ 332,863 $ 270,412 $462,537
U.S. government securities--pledged (c).. 85,027 85,027 85,027
--------- --------- --------
Total cash and cash equivalents, in-
cluding restricted cash............... $ 417,890 $ 355,439 $547,564
========= ========= ========
Long-term debt:
13% Senior Discount Notes due 2003..... $ 207,918 $ 207,918 $207,918
12 1/4% Senior Secured Notes due 2004.. 250,000 250,000 250,000
Note Payable--Adelphia (d)............. 34,454 34,454 --
Other debt............................. 29,573 25,300 25,300
--------- --------- --------
Total long-term debt.................. 521,945 517,672 483,218
--------- --------- --------
Senior exchangeable redeemable preferred
stock due 2007 ......................... 200,721 200,721 200,721
--------- --------- --------
Common stock and other stockholders' eq-
uity (deficiency):
Class A Common Stock, $.01 par value,
300,000,000 shares
authorized, 396,500 shares issued and
outstanding
(17,827,612 as adjusted) (e).......... 4 4 178
Class B Common Stock, $.01 par value,
150,000,000 shares
authorized, 32,500,000 shares issued
and outstanding (f)................... 325 325 325
Additional paid-in capital............. 179 179 231,530
Class A Common Stock Warrant........... -- 13,000 13,000
Class B Common Stock Warrants.......... 11,087 11,087 11,087
Loans to stockholders.................. (3,000) (3,000) --
Accumulated deficit.................... (114,776) (116,413) (116,413)
--------- --------- --------
Total common stockholders' equity (defi-
ciency)................................. (106,181) (94,818) 139,707
--------- --------- --------
Total capitalization..................... $ 616,485 $ 623,575 $823,646
========= ========= ========
</TABLE>
- --------
(a) Reflects the effect of the Rollups as if such events occurred as of
December 31, 1997.
(b) Reflects the effects of (i) $190 million in estimated net proceeds from
the issuance and sale by the Company of shares of Class A Common Stock in
the Offerings, and the Adelphia Share Purchase, (ii) the Adelphia Note
Contribution, (iii) the Rollups, as if such events occurred as of December
31, 1997 and (iv) the repayment of $3.0 million of loans to Management
Stockholders.
(c) $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.
(d) The fair market value of the principal amount of the Adelphia Note
together with accrued interest thereon to the date of the closing of the
Offerings, will be contributed to the Company in connection with the
Adelphia Note Contribution. See "Prospectus Summary--The Offerings."
(e) Excludes (i) 913,380 shares of Class A Common Stock issuable upon exercise
of the MCI Warrant (as defined), which is currently exercisable, and an
additional 446,951 shares of Class A Common Stock issuable to MCI upon
exercise of Additional MCI Warrants (as defined) to be granted upon
consummation of the Offerings, (ii) 200,000 shares of Class A Common Stock
issuable upon exercise of the Adelphia Warrant (as defined) to be granted
upon consummation of the Offerings, (iii) 731,624 shares of Class A Common
Stock issuable upon exercise of the Lenfest Warrant (as defined), which is
currently exercisable and (iv) 1,993,638 shares of Class B Common Stock
issuable upon the exercise of Class B Warrants, which are currently
exercisable. In addition, there are (i) 34,493,638 shares of Class A
Common Stock reserved for issuance upon the conversion of outstanding ten
to one voting Class B Common Stock and Class B Common Stock issuable upon
exercise of the Class B Warrants, and (ii) 7,728,500 shares of Class A
Common Stock available for grant under the Company's 1996 Plan (as
defined). See "Management--Long-Term Compensation Plan" and "Description
of Capital Stock--Common Stock" and "--Warrants."
(f) Excludes 1,993,638 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."
21
<PAGE>
DIVIDEND POLICY
The Company has no plans to pay dividends on the Common Stock. The Company
presently intends to retain any earnings to fund the growth of the Company's
business. The payment of any future dividends will be determined by the Board
of Directors in light of conditions then existing, including the Company's
results of operations, financial condition, cash requirements, restrictions in
financing agreements, business conditions and other factors. The ability of
the Company to pay dividends is restricted by covenants contained in the
Indentures relating to the Senior Secured Notes and the Senior Notes and in
the Certificate of Designation for the Preferred Stock. See "Risk Factors--
Restrictions on the Company's Ability to Pay Dividends."
22
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of December 31,
1997 was $(106,181,000) or approximately $(3.23) per share. Net tangible book
value per share represents the amount of the Company's stockholders' equity
(deficiency), less intangible assets, divided by 32,896,500 shares of Common
Stock outstanding.
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Class A Common Stock in
the Offerings and the pro forma net tangible book value per share of the
Common Stock immediately after completion of the Offerings. After giving
effect to (i) the sale by the Company of 10,000,000 shares of Class A Common
Stock in the Offerings at an assumed initial public offering price of $15.00
per share, after deduction of underwriting discounts and commissions and
estimated offering expenses, (ii) the sale of the Adelphia New Shares, and
(iii) the rollups and the repayment of the management stockholders' loans, the
pro forma net tangible book value of the Company as of December 31, 1997 would
have been $139,707,000, or $2.65 per share of Common Stock. This represents an
immediate increase in net tangible book value of $5.88 per share to existing
stockholders and an immediate dilution of net tangible book value of $12.35
per share to purchasers of Class A Common Stock in the Offerings, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Public offering price per share of Class A Common Stock.......... $15.00
Net tangible book value per share of Common Stock before the
Offerings..................................................... $(3.23)
Increase per share of Common Stock attributable to the Adelphia
New Shares.................................................... 2.23
Increase per share of Common Stock attributable to new
investors..................................................... 3.30
Increase per share of Common Stock attributable to the rollups
and the repayment
of the Management Stockholders loans.......................... 0.35
------
Pro forma net tangible book value per share of Common Stock after
the Offerings and the issuance of the Adelphia New Shares....... 2.65
------
Net tangible book value dilution per share....................... $12.35
======
</TABLE>
The following table sets forth as of December 31, 1997 the difference
between the existing stockholders and the new investors in the Offerings (at
an assumed initial public offering price of $15.00 per share) with respect to
the number of shares purchased from the Company, the total consideration paid
and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 32,896,500 65.36% $ 405,000 0.16% $ 0.01
Adelphia New Shares...... 7,431,112 14.77 104,500,000 41.00 $14.06
New investors............ 10,000,000 19.87 150,000,000 58.84 $15.00
---------- ------ ------------ ------
Total................ 50,327,612 100.00% $254,905,000 100.00%
========== ====== ============ ======
</TABLE>
The foregoing tables assume no exercise of options issued under the
Company's 1996 Plan or outstanding Warrants. As of December 31, 1997, there
were 7,728,500 shares of Class A Common Stock reserved for issuance under the
Company's 1996 Plan, 1,993,638 shares of Class B Common Stock issuable upon
the exercise of outstanding Class B Warrants at an exercise price of $0.00308
per share, 913,380 shares of Class A Common Stock issuable upon the exercise
of the MCI Warrant at $6.15 per share and 731,624 shares of Class A Common
Stock issuable upon the exercise of the Lenfest Warrant by delivery thereof.
The foregoing tables also assume no exercise of the Underwriters' over-
allotment options. To the extent that any of such shares are issued in
connection with the 1996 Plan, outstanding Warrants or the Underwriters' over-
allotment options, there will be further dilution to new investors. See
"Management--Long-Term Compensation Plan" and "--Employment Contracts" and
"Description of Capital Stock--Common Stock" and "--Warrants."
23
<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 and the other
Company 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 December 31, 1997 and for the nine months
ended December 31, 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 nine months ended December 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
---------------------------------------------- -------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- -------- -------- -------- -------- ---------
STATEMENT OF OPERATIONS
DATA (A)(B): (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Telecommunications
service and management
fee revenue........... $ 89 $ 417 $ 1,729 $ 3,322 $ 5,088 $ 3,611 $ 8,690
Operating expenses:
Network operations..... 19 330 1,382 2,690 3,432 2,339 5,263
Selling, general and
administrative........ 921 2,045 2,524 3,084 6,780 4,736 9,099
Depreciation and
amortization.......... 30 189 463 1,184 3,945 2,583 7,027
------- ------- -------- -------- -------- -------- ---------
Operating loss......... (881) (2,147) (2,640) (3,636) (9,069) (6,047) (12,699)
Gain on sale of
investment............ -- -- -- -- 8,405 8,405 --
Interest income........ -- 17 39 199 5,976 4,319 7,951
Interest expense and
fees.................. -- (2,164) (3,321) (6,088) (28,377) (20,759) (35,934)
Equity in net loss of
joint ventures........ (194) (528) (1,799) (4,292) (7,223) (5,143) (9,284)
Net loss............... (1,075) (4,725) (7,692) (13,620) (30,547) (19,045) (49,966)
Net loss applicable to
common stockholders... (1,075) (4,725) (7,692) (13,620) (30,547) (19,045) (55,760)
Net loss per weighted
average share
of common stock....... $ (0.03) $ (0.15) $ (0.24) $ (0.42) $ (0.89) $ (0.55) $ (1.60)
Common stock dividends. -- -- -- -- -- -- --
OTHER COMPANY DATA (A):
EBITDA (c)............. $ (851) $(1,958) $ (2,177) $ (2,452) $ (5,124) $ (3,464) $ (5,672)
Capital expenditures
and Company
investments (d)....... 3,891 8,607 10,376 18,899 79,396 38,348 80,953
Cash used in operating
activities............ (725) (2,121) (2,130) (833) (4,823) (2,592) (1,609)
Cash used in investing
activities............ (3,806) (8,607) (10,376) (18,899) (72,818) (31,770) (171,991)
Cash provided by
financing activities.. 4,645 10,609 12,506 19,732 137,455 130,740 446,649
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
---------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
------- ------- -------- -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (A):
Cash and cash
equivalents........... $ 118 $ -- $ -- $ -- $ 59,814 $ 332,863
Total assets........... 4,316 14,765 23,212 35,269 174,601 634,850
Long term debt and
exchangeable
redeemable preferred
stock................. 4,814 19,968 35,541 50,855 215,675 722,666
Common stock and other
stockholders' equity
(deficiency).......... (1,286) (6,011) (13,703) (27,323) (50,254) (106,181)
</TABLE>
- --------
(a) The data presented represents financial information for the Company and
its consolidated subsidiaries. As of December 31, 1997, 14 of the
Company's networks were owned by joint ventures in which it owned 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 reflects the Preferred Stock Offering as of
October 9, 1997 and the Senior Secured Notes Offering as of August 27,
1997, their respective offering dates. Preferred Stock dividends on a pro
forma basis, assuming such offering occurred on April 1, 1996 and 1997
would have been $27.0 and $19.9 million for the year ended March 31, 1997
and the nine months ended December 31, 1997, respectively. Interest
expense and fees on a pro forma basis, assuming the Senior Secured Notes
Offering occurred on April 1, 1996 would have been $59.0 and $48.3 million
for the year ended March 31, 1997 and the nine months ended December 31,
1997, respectively. Net loss per weighted average share of common stock
assuming the Offerings, the Preferred Stock Offering and the Senior
Secured Notes Offering had occurred on April 1, 1996 and 1997 would have
been $(1.90) and $(1.77) for the year ended March 31, 1997 and the nine
months ended December 31, 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 to operating income as an indicator of operating performance
or an alternative to cash flows from operating activities as a measure of
liquidity, all 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 nine months ended December 31, 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, $14.9 and $34.9
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, $23.4 and $46.1 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.
24
<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." The Company reports its interest in its 50% or less owned
networks pursuant to the equity method of accounting consistent with generally
accepted accounting principles. As a result, the financial information set
forth below is not indicative of the Company's overall financial position and
investors should not place undue reliance on such information in connection
with the Offerings.
<TABLE>
<CAPTION>
NETWORK DATA
(UNAUDITED)(A):
NINE MONTHS
ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------------- ------------------
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 $ 9,975 $ 19,274
Operating expenses:
Network operations..... 504 789 1,946 4,871 8,069 5,306 9,686
Selling, general and
administrative......... 353 1,145 2,439 5,316 8,827 6,051 15,495
Depreciation and
amortization........... 207 839 2,467 6,137 14,305 9,929 18,336
------ ------- ------- ------- -------- -------- --------
Operating loss......... $ (869) $(1,811) $(3,796) $(8,561) $(15,978) $(11,311) $(24,243)
====== ======= ======= ======= ======== ======== ========
OTHER OPERATING DATA:
EBITDA (b)............. $ (662) $ (972) $(1,329) $(2,424) $ (1,673) $ (1,382) $ (5,907)
Capital expenditures... 4,947 13,790 24,658 45,177 128,270 77,014 121,524
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
--------------------------------------- DECEMBER 31,
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 $401,646
Capital lease obligations
(d)...................... 1,244 3,291 11,166 18,163 47,423 77,107
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
--------------- DECEMBER 31,
1996 1997 1997
------- ------- ------------
<S> <C> <C> <C>
OTHER NETWORK DATA:
Networks (e)...................................... 17 21 21
Cities served (f)................................. 19 33 44
Route miles (f)................................... 2,210 3,461 4,744
Fiber miles (f)................................... 106,080 166,131 220,010
Buildings connected............................... 822 1,270 1,776
LEC central offices collocated.................... 44 104 108
Access lines sold................................. 0 7,000 28,000
Access lines installed............................ 0 1,450 11,800
Switches installed (g)............................ 5 7 16
Employees (h)..................................... 155 261 490
</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 to operating income as an indicator of operating performance
or an alternative to cash flows from operating activities as a measure of
liquidity, all 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 and, with respect
to information as of December 31, 1997, is adjusted for the purchase of
certain partners' interests after December 31, 1997 (see "Prospectus
Summary--Recent Developments").
(d) Represents fiber lease financings with the respective Local Partners for
each network and other capital leases. As of December 31, 1997, $20.1
million of these capital lease obligations were included in the Company's
consolidated financial statements.
(e) Includes networks under construction.
(f) Data for the periods ended March 31, 1996 and 1997 excludes networks under
construction. Data for the period ended December 31, 1997 includes
networks under construction.
(g) Represents Lucent 5ESS switches or remote switch modules which deliver
full switch functionality.
(h) Employees includes employees of both the Operating Companies and the
Company.
25
<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
and IXCs in its markets. Since its inception through December 31, 1997, the
Company has experienced substantial growth, building from its original two
partnerships covering two networks to 18 Operating Companies and 21 networks.
At December 31, 1997, 18 of these 21 networks were operational. The Operating
Companies' customers are principally medium and large businesses, governmental
and educational end users ISPs 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 geographic coverage, lower upfront and
ongoing costs and superior service and reliability.
As of December 31, 1997, the Company's Operating Companies were made up of
five wholly owned subsidiaries, two majority-owned partnerships and 11 joint
ventures (through which the Company has an interest in 14 networks) where the
Company owns 50% or less of the aggregate equity interests in such Operating
Companies. On February 12, 1998, the Company purchased certain partners'
ownership interests in several networks. As a result, the Company increased
its ownership interest in six networks to 100% and, as of March 31, 1998, the
20 Operating Companies consisted of 10 wholly owned subsidiaries (covering 11
networks), one majority-owned partnership (covering one network) and nine
joint ventures (covering ten networks).
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 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 are carried at cost and are subsequently adjusted for the Company's
pro rata share of the Operating Companies' net losses, additional capital
contributions to the Operating Companies and distributions from the Operating
Companies 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 and switch monitoring services. Management fees
are determined by Local Partner Agreements and vary depending upon the market.
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' telecommunications
service revenues will represent an increasing proportion of the Company's
revenue. In addition, the Company sold its ownership interest in Teleport
Communications Group Inc. ("TCG") of South Florida (the "South Florida
Partnership") in May 1996, which was also accounted for using the equity
method of accounting prior to the sale.
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 March 31, 1998, Hyperion had
22 Existing Networks, including four networks under development. These
Existing Networks serve 46 cities and include approximately 5,363 route miles
of fiber optic cable. In addition, as of March 31, 1998, the Company's 18
networks in operation were connected to 1,909 buildings and the Company's
facilities were collocated in 113 LEC central offices. As of December 31,
1997, the Operating Companies had installed 16 switches or remote modules. The
Company's NOCC in Coudersport, Pennsylvania provides for remote control,
monitoring and diagnosis of all Operating Company networks and switches.
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. As of December 31, 1997, as adjusted for the
recent purchase of certain partners' interests (see "Prospectus Summary--
Recent Developments"), the Company and its partners have invested $401.6
million in the gross property, plant and equipment of the Company, its
networks and the Company's NOCC, including the
26
<PAGE>
Company's investment in Telergy, Inc. See "Business--Operating Agreements--
Fiber Lease Agreements." 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 Existing Networks are operating or are
under construction, the Company believes its addressable market opportunity
was approximately $13.3 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 markets which the Company
has entered or the Internet access market which it plans to enter in the near
future.
Over the next eighteen months, the Company plans to complete development and
construction of 14 new networks serving 29 additional cities (the "New
Networks") through a continuation of partnerships with Local Partners and the
construction of its own networks, generally utilizing established rights of
way of local electric utility providers. These New Networks will generally
expand the Company's regionally focused clustering strategy and will, in
certain cases, further facilitate the regional interconnection of its markets.
Management believes that with the addition of these New Networks, its
addressable market opportunity will be approximately $26.0 billion annually.
RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1997 IN COMPARISON WITH NINE MONTHS ENDED
DECEMBER 31, 1996
Revenues increased 141% to $8.7 million for the nine months ended December
31, 1997 from $3.6 million for the same period in the prior fiscal year.
Growth in revenues of $5.1 million resulted from an increase in revenues from
majority and wholly-owned Operating Companies of $3.3 million as compared to
the same period in the prior fiscal year due to increases in the customer base
and the consolidation of the Buffalo and Syracuse networks. The increase also
resulted from continued expansion in the number and size of Operating
Companies and the resultant increase in management fees of $1.5 million over
the same period in the prior fiscal year.
Network operations expense increased 125% to $5.3 million for the nine
months ended December 31, 1997 from $2.3 million for the same period in the
prior fiscal year. The increase was attributable to the expansion of
operations at the NOCC and the increased number and size of the operations of
the Operating Companies which resulted in increased employee related costs and
equipment maintenance costs and the consolidation of the Buffalo and Syracuse
networks.
Selling, general and administrative expense increased 92% to $9.1 million
for the nine months ended December 31, 1997 from $4.7 million for the same
period in the prior fiscal year. The increase was due to increases in the
sales force required to support the existing networks and in corporate and
NOCC overhead costs to accommodate the growth in the number, size and
operations of Operating Companies managed and monitored by the Company, as
well as the consolidation of the Buffalo and Syracuse networks.
Depreciation and amortization expense increased 172% to $7.0 million during
the nine months ended December 31, 1997 from $2.6 million for the same period
in the prior fiscal year primarily as a result of increased amortization of
deferred financing costs and increased depreciation resulting from higher
capital expenditures, and thus a higher depreciable asset base, at the NOCC
and the wholly and majority-owned Operating Companies and the consolidation of
the Buffalo and Syracuse networks.
Interest income for the nine months ended December 31, 1997 increased by 84%
to $8.0 million from $4.3 million for the same period in the prior fiscal year
as a result of increased cash and cash equivalents and U.S. government
securities due to the investment of the proceeds of the Senior Secured Notes
and the Preferred Stock.
27
<PAGE>
Interest expense and fees increased 73% to $35.9 million during the nine
months ended December 31, 1997 from $20.8 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 and interest on the Senior
Secured Notes.
Equity in net loss of joint ventures increased by 81% to $9.3 million during
the nine months ended December 31, 1997 from $5.1 million for the same period
in the prior fiscal year as more nonconsolidated Operating Companies began
operations. The net losses of the nonconsolidated Operating Companies for the
nine months ended December 31, 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. The increase was partially offset by the consolidation
of the Buffalo and Syracuse networks.
The number of nonconsolidated Operating Companies paying management fees to
the Company decreased from 12 at December 31, 1996 to eight at December 31,
1997 due to the Rollup transaction with TWEAN (see "Prospectus Summary--Recent
Developments"). These Operating Companies and networks under construction paid
management and monitoring fees to the Company, which are included in revenues,
aggregating $3.8 million for the nine months ended December 31, 1997, an
increase of $1.5 million over the same period in the prior fiscal year. The
nonconsolidated Operating Companies' net losses, including networks under
construction, but not including the networks involved in the Rollup
transaction with TWEAN, for the nine months ended December 31, 1996 and 1997
aggregated $10.2 million and $20.2 million, respectively.
Net loss increased from $19.0 million for the nine months ended December 31,
1996 to $50.0 million for the same period in the current fiscal year. The
increase was primarily attributable to a higher operating loss, increased
interest expense, increased equity in the net losses of the Company's joint
ventures, the consolidation of the Buffalo and Syracuse networks, and no gain
similar to that recognized in the prior fiscal year for the sale of the
Company's investment in TCG of South Florida.
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.
28
<PAGE>
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 nonconsolidated
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.
The number of nonconsolidated networks paying management fees to the Company
increased from 11 at March 31, 1996 to 12 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.
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.
29
<PAGE>
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 nonconsolidated Operating Companies for the year ended March 31,
1996 were primarily the result of revenues only partially offsetting startup
and other costs and expenses associated with the design, construction,
operation and management of the networks of the Operating Companies, and the
effect of the typical lag time between the incurrence of such costs and
expenses and the subsequent generation of revenues by a network.
The number of nonconsolidated networks paying management fees to the Company
increased from nine at March 31, 1995 to 11 at March 31, 1996. Such 11
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.
SUPPLEMENTARY OPERATING COMPANY FINANCIAL ANALYSIS
The Company believes that working with Local Partners to develop markets has
enabled the Company to build larger networks in a rapid and cost effective
manner. In pursuit of this strategy, as of December 31, 1997, the Company had
11 joint ventures with Local Partners covering 14 networks where the Company
owned 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 have been 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 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 construction
and expansion efforts in those markets. The financial information set forth
below, however, is not indicative of the Company's overall financial position.
30
<PAGE>
Supplementary Operating Company Financial Information by Cluster (unaudited)
<TABLE>
<CAPTION>
REVENUES
-----------------------------------------------
NINE MONTHS ENDED
DECEMBER 31,
FISCAL FISCAL FISCAL -------------------
1995 1996 1997 1996 1997
------- ------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Northeast...................... $ 1,393 $ 3,991 $ 5,553 $ 3,978 $ 5,980
Mid-Atlantic................... 267 735 2,227 1,427 5,084
Mid-South...................... 44 473 1,264 843 1,452
Other Networks................. 1,352 2,564 6,179 3,727 6,758
------- ------- -------- -------- ---------
Total........................ $ 3,056 $ 7,763 $ 15,223 $ 9,975 $ 19,274
======= ======= ======== ======== =========
<CAPTION>
EBITDA
-----------------------------------------------
NINE MONTHS ENDED
FISCAL FISCAL FISCAL DECEMBER 31,
------- ------- -------- -------------------
1995 1996 1997 1996 1997
------- ------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Northeast...................... $ (183) $ (765) $ 594 $ 680 $ (93)
Mid-Atlantic................... (308) (766) (3,681) (2,430) (5,491)
Mid-South...................... (605) (878) (503) (601) (2,343)
Other Networks................. (233) (15) 1,917 969 2,020
------- ------- -------- -------- ---------
Total........................ $(1,329) $(2,424) $ (1,673) $ (1,382) $ (5,907)
======= ======= ======== ======== =========
<CAPTION>
CAPITAL EXPENDITURES
-----------------------------------------------
NINE MONTHS ENDED
FISCAL FISCAL FISCAL DECEMBER 31,
------- ------- -------- -------------------
1995 1996 1997 1996 1997
------- ------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Northeast...................... $ 8,167 $ 6,978 $ 28,654 $ 12,320 $ 18,774
Mid-Atlantic................... 3,923 14,351 67,892 43,321 43,239
Mid-South...................... 4,002 7,321 19,455 10,425 40,681
Other Networks................. 8,566 16,527 12,269 10,948 18,830
------- ------- -------- -------- ---------
Total........................ $24,658 $45,177 $128,270 $77,014 $121,524
======= ======= ======== ======== =========
</TABLE>
There can be no assurance that the Operating Companies will continue to
experience revenue growth at the rates indicated in the table above, or at
all. See "Risk Factors--Negative Cash Flow and Operating Losses; Limited
History of Operations." Furthermore, there can be no assurance that the
Company will be able to benefit from such growth in revenues if such growth
occurs. See "Risk Factors--Holding Company Structure; Inability to Access Cash
Flow."
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 $2.9 million, $6.1 million $24.6 million, $14.9 million and $34.9 million
for Fiscal 1995, Fiscal 1996, Fiscal 1997, and the nine months ended December
31, 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, $23.4 million and
$46.1 million in Fiscal 1995, Fiscal 1996, Fiscal 1997, and the nine months
ended December 31, 1996 and 1997, respectively. Also, during Fiscal 1997, the
Company invested $20.0 million in fiber assets and a senior secured note
pursuant to agreements with Telergy, Inc. and its affiliates 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.
31
<PAGE>
On February 12, 1998 and September 12, 1997, the Company consummated the
Rollups with various of its Local Partners, thereby increasing the Company's
ownership interest in seven of its networks to 100% for an aggregate cash
purchase price of $53 million and certain other consideration. See
"Description of Capital Stock--Warrants." As a result of these transactions,
the Company's weighted average ownership in its networks, based upon gross
property plant and equipment, increased to 76.0%. 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.
On December 31, 1997 the Company consummated an agreement for a $24.5
million long term lease facility from AT&T Capital Corporation. The lease
facility provides financing for certain of the Operating Companies' switching
equipment. Included in the lease facility is the sale and leaseback of certain
switching equipment for which the Company received $14.9 million in cash.
Through December 31, 1997, Adelphia had made loans and advances totalling
approximately $72.3 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 $93.0
million as their pro rata investment in those networks through December 31,
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 $57.2 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 $180.4 million to fund its
pro rata investment in the networks, capital expenditures and operations.
Collectively, these investments and the Fiber Lease Financings have totaled
$406.3 million from the Company's inception through December 31, 1997.
On October 9, 1997, the Company issued $200.0 million aggregate liquidation
preference of 12 7/8% Senior Exchangeable Redeemable Preferred Stock due
October 15, 2007. This offering was accomplished primarily in reliance on Rule
144A of the Securities Act. Proceeds to the Company, net of commissions and
other transaction costs, were approximately $194.7 million. Such proceeds 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.
On August 27, 1997, the Company issued $250.0 million aggregate principal
amount of 12 1/4% Senior Secured Notes due September 1, 2004 in a private
placement. This offering was accomplished primarily in reliance on Rule 144A
of the Securities Act. The Senior Secured Notes are collateralized through the
pledge of the common stock of certain of its wholly owned subsidiaries. Of the
proceeds to the Company, net of commissions and other transaction costs, of
approximately $244.0 million, $83.4 million was invested in U.S. government
securities and placed in an escrow account for payment in full when due of the
first six scheduled semi-annual interest payments on the Senior Secured Notes
as required by the Senior Secured Indenture. The remainder of such proceeds
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.
On April 15, 1996, the Company issued $329.0 million of Senior Notes and
329,000 Class B Warrants to purchase an aggregate of 1,993,638 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
32
<PAGE>
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 and the Senior Secured 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
converted to additional subordinated notes from the inception of the Adelphia
Note on April 15, 1996 through December 31, 1997 has totalled $8.6 million. In
connection with the Offerings, the Adelphia Note will be converted into Class
A Common Stock of the Company. See "Certain Relationships and Transactions. "
On May 16, 1996, the Company completed the sale of its 15.7% partnership
interest in the South Florida Partnership to TCG 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 used the proceeds from the sale to develop its existing
markets.
The Company has experienced substantial negative operating 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 nine months ended December 31, 1996 and
1997, cash used in operating activities totalled $2.1 million, $0.8 million,
$4.8 million, $2.6 million and $1.6 million, respectively, cash used in
investing activities totalled $10.4 million, $18.9 million, $72.8 million,
$31.8 million and $172.0 million, respectively, and cash provided by financing
activities totalled $12.5 million, $19.7 million, $137.5 million, $130.7
million and $446.6 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.
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, (iii)
the design, construction and development of additional networks, including the
New Networks and (iv) the acquisition of additional ownership interests in
Existing Networks or New Networks. The Company estimates that it will require
approximately $420 million to fund anticipated capital expenditures, working
capital requirements and operating losses of the Company and investments in
its existing and its planned new Operating Companies through the end of 1999.
Expansion of the Company's networks will include the geographic expansion of
the Company's Existing Networks and the construction of New Networks over the
next eighteen months. The Company expects to build these New Networks in
additional markets, which in some cases will include additional partnerships
with utility partners. Also, in the future, the Company may increase its
ownership interests in Existing Networks. The Company currently expects that
the net proceeds from the Offerings and the Adelphia Share Purchase, together
with its existing cash balance and internally generated funds balance, will be
sufficient to fund the Company's capital expenditures, working capital
requirements, operating losses and pro rata investments in the Operating
Companies through mid-2000. In addition to the foregoing, the Company will use
funds for the purchase of LMDS spectrum in the LMDS Auction and to construct
and develop associated facilities. The Company is in the process of defining
its plans for utilization of the LMDS Spectrum, which could involve
substantial additional funds. There can be no assurance,
33
<PAGE>
however, as to the availability of funds from internal cash flow, Local
Partner investments or from the private or public equity or debt markets.
Also, the indentures relating to the Senior Notes and the Senior Secured Notes
and the Certificate of Designation for the Preferred Stock both 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. 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.
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.
34
<PAGE>
BUSINESS
THE COMPANY
Hyperion 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 March 31, 1998, Hyperion had 22 Existing Networks, including four networks
under construction. The Existing Networks serve 46 cities and include
approximately 5,363 route miles of fiber optic cable. In addition, as of March
31, 1998, the Company's 18 networks in operation were connected to 1,909
buildings and the Company's facilities were collocated in 113 LEC central
offices. Management believes that the Company's Existing Networks represent an
addressable market opportunity of approximately 6.8 million business access
lines or approximately $13.3 billion annually, substantially all of which is
currently serviced by incumbent LECs and IXCs. This addressable market
estimate does not include the enhanced data services market which the Company
has recently entered, or the Internet access market which it plans to enter in
the near future.
Over the next eighteen months, the Company plans to complete development and
construction of 14 New Networks serving 29 additional cities with the goal of
expanding the Company's regionally focused networks and further facilitating
the regional interconnection of certain of its markets. The Company believes
that with the addition of these New Networks, it will have a total addressable
market opportunity of approximately 13.2 million business access lines or
approximately $26.0 billion annually. Once fully constructed, management
believes the networks will include at least 8,100 route miles of fiber optic
cable and will be connected to at least 210 LEC central offices. The Company
has installed in 17 of its Existing Networks, and will install in all of its
networks a standard switching platform based on the Lucent 5ESS switch
technology. Management believes this consistent platform will enable the
Company to (i) deploy features and functions quickly in all of its networks,
(ii) expand switching capacity in a cost effective manner and (iii) lower
maintenance costs through reduced training and spare parts requirements.
In early 1997, Hyperion began to implement a business strategy focused on
selling communications services directly to targeted end users in addition to
other telecommunications service providers. As part of this strategy, the
Company accelerated the installation of its Lucent 5ESS-based standard
switching platform in its Existing Networks and increased the size of its
direct sales force and customer service organization. In addition, the Company
has begun to use resold services and unbundled network elements to provide
rapid market entry and to develop its customer base in advance of capital
deployment in its Existing Networks and New Networks. The Company has
experienced significant growth in the sale of access lines from approximately
7,000 as of March 31, 1997 to approximately 41,500 as of March 31, 1998. Of
the current access lines sold, approximately 81% are provisioned on-net,
though this percentage will decline as the Company continues to offer switched
services on an unbundled network element and total service resale basis.
However, the Company believes it will provision a majority of its access lines
on its own networks for the foreseeable future. The Company expects that
through the delivery of switched services on-net it will be able to provide
faster, more reliable access line provisioning with higher operating margins
and more responsive customer service and monitoring.
Hyperion intends to offer a complete range of telecommunications services to
its customers in all of its markets. The Company's current service offerings
include local switched dialtone, long distance, dedicated access and enhanced
services such as frame relay, high speed Internet access and video
conferencing. The Company also plans to become an ISP in all of its markets,
and expects to provide such services in a majority of its markets during 1998.
The Company has begun selling its long distance services pursuant to a resale
agreement with IXCC 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 or IXC.
Management believes that the Company will benefit from lower operating costs
once it is able to offer its various services over its own networks.
35
<PAGE>
Hyperion's targeted customers include medium and large businesses,
governmental and educational end users, and other telecommunications service
providers, such as VARs, ISPs and IXCs. As of March 31, 1998, the Company
served customers through a dedicated sales force of approximately 128 highly
trained professionals focused on selling the Company's portfolio of service
offerings. The Company expects to increase its marketing efforts by doubling
the size of its current sales force during fiscal 1999. Management believes
that a significant competitive advantage over other CLECs is the Company's
ability to utilize its broad geographic networks and extensive network
clusters to offer a single source solution for all of its customers'
telecommunications needs principally over its own regional network clusters.
Further, Hyperion believes it can continue to attract end user customers by
offering (i) high-capacity fiber optic network connection directly to
substantially all of a customer's premises, due to the breadth of the
Company's network coverage, (ii) high quality, solutions-oriented customer
service, and (iii) a single point of contact for a complete range of
telecommunication services. The Company also believes that a number of
telecommunications service providers such as VARs and IXCs will seek to offer
their business customers an integrated package of switched local and long
distance services using the networks of facilities-based CLECs such as
Hyperion. The Company believes that it is well positioned to capitalize on
this opportunity since its networks generally have broader geographic coverage
than other CLECs in its markets.
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 nine
months ended December 31, 1997 is set forth in the Company's consolidated
financial statements and notes thereto included herein.
Hyperion's Existing Networks have typically been developed by partnering
with a Local Partner who generally owns or controls extensive conduits and
rights-of-way. In all but three of the Company's Existing Networks, Hyperion
retains a 50% or greater equity stake in the respective Operating Companies.
In all of its Operating Companies, Hyperion is responsible for the design,
management and operation of the Operating Companies' networks pursuant to
management agreements. Management believes that its partnering strategy
provides the Company with the following significant competitive advantages
over other CLECs: (i) by sharing the cost of construction and utilizing the
rights-of-way controlled by the Local Partner, the Company is able to build
its networks more quickly and at a lower cost and (ii) by partnering with
Local Partners that typically operate in a broad geographic region, Hyperion
is frequently able to expand its partnering agreements into multiple
contiguous markets, thereby supporting its clustering strategy. As of December
31, 1997, as adjusted for the recent purchase of certain partners' interests,
the Company and its partners have invested $401.6 million in the gross
property, plant and equipment of the Company, its networks and the Company's
NOCC, including the Company's investment in Telergy, Inc. See "--Operating
Agreements--Fiber Lease Agreements." The Company's proportionate share of this
gross property, plant and equipment investment was approximately $305.1
million. The Company believes that its large upfront capital investment in its
networks, coupled with the selective use of unbundled network elements and
total service resale, will provide higher operating margins than can be
achieved by other CLECs, which typically have a lower percentage of on-net
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. To date, this goal has been facilitated by the substantial
completion of a number of Hyperion's networks, along with the desire of
certain Local Partners to reduce their telecommunications investments and
focus on their core cable or utility operations. For Operating Companies in
which the Company does not own a majority interest, partnership agreements
generally provide for rights of first refusal or buy/sell arrangements
enabling the Company to have an opportunity to acquire or sell additional
equity interest in the network. Since September 1997, the Company has
increased its ownership interest to 100% in Operating Companies in seven of
its markets. 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 increased to 76.0% from 44.0%.
36
<PAGE>
GROWTH STRATEGY
Hyperion's objective is to be the leading local telecommunications service
provider to businesses, governmental and educational end users, VARs, ISPs and
IXCs within its markets. To achieve this objective, the Company has pursued a
regionalized 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:
Focus on Telecommunications-Intensive Customers. The Company provides its
services to telecommunications-intensive customers which include medium and
large businesses, governmental and educational end users, and other
telecommunications providers. Management believes that its target customers
are a large and under-served universe who generally have no choice other than
to buy communications services from the incumbent LEC or IXC. These customers
generally seek reliability, high quality, broad geographic coverage, end-to-
end service, solutions-oriented customer service and 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 meet 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.
Increase Size and Scope of Network Clusters. Over the next eighteen months,
the Company plans to complete development and construction of 14 New Networks
serving 29 additional cities within the Company's current clusters, as sole
owner/operator or through partnerships or long-term fiber lease agreements.
The Company believes that the mature size and scope of its Existing Network
clusters, combined with changes in the legislative and regulatory environment,
enable the Company to build new networks on its own more efficiently. In
addition, where appropriate, the Company intends to continue to enter into
arrangements with Local Partners. The Company believes that this expansion
strategy permits it to (i) construct networks faster and at a lower cost than
it could on its own, (ii) provide broader network coverage than if the Company
installed its own fiber optic cable and (iii) capitalize on the existing
relationships the Local Partner has with business customers. The Company
believes that its partnering strategy combined with the interconnection of its
regional network clusters differentiates the Company from other CLECs and
allows a greater proportion of traffic to be carried on-net, which decreases
transmission costs and therefore increases cash flow margins. Management also
believes that the Company is an attractive partner for utility companies
because it can offer them a significant stake in its networks, while providing
network operations management expertise.
Maximize On-Net Traffic Through Facilities-Based Services. By providing
switched voice, enhanced services and long distance access on its own fiber
optic networks, the Company believes it can better control the provisioning,
delivery and monitoring of its services as well as increase its operating
margins. On-net services improve the Company's ability to provide bundled
service offerings by reducing the Company's reliance upon incumbent LECs for
servicing and technological upgrades of leased dedicated transport or
unbundled network elements. The Company currently provides approximately 81%
of its switched services to customers on-net, though this percentage will
decline as the Company continues to offer switched services on an unbundled
network element and total service resale basis. However, the Company believes
it will provision a majority of its access lines on its own networks for the
foreseeable future.
Provide Bundled Package of Telecommunications Services. The Company believes
that a significant portion of business, governmental and educational customers
prefer a single-source telecommunications provider that delivers a full range
of efficient and cost effective solutions to meet their telecommunications
needs. Hyperion believes that offering a customized, integrated package of
telecommunications services positions the Company to best address the
increasing telecommunications requirements of businesses within its markets.
As a facilities-based, single source provider of bundled telecommunications
services, the Company believes it can satisfy the growing telecommunications
demands of its customers on a more effective and cost efficient basis than
many of its competitors.
37
<PAGE>
Expand Solutions-Oriented Sales Effort. The Company provides an integrated
solutions approach to satisfy its end users' telecommunications 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 128 professionals during fiscal 1999 as it
increases the breadth of its product offerings to satisfy the growing
telecommunications needs of its customers. Further, during fiscal 1999, the
Company expects to initiate direct marketing and sales of local
telecommunications services on an unbundled loop basis and total service
resale to small business customers in all of its markets.
PRODUCTS AND SERVICES
Hyperion's products and services are designed to appeal to the sophisticated
telecommunications needs of its business, governmental and educational
customers.
Local Services. Hyperion provides local dial-tone services to customers,
which allows them to complete calls in their calling area and to access a long
distance calling area. Local services and long distance services can be
bundled together using the same transport facility. Hyperion's networks are
designed to allow a customer to easily increase or decrease capacity and alter
enhanced services as the telecommunications requirements of the business
change. In addition to its core local services, Hyperion also provides access
to third party directory assistance and operator services.
Long Distance Services. Hyperion provides domestic and international long
distance services for completing intrastate, interstate and international
calls. Long distance service is offered as an additional service to Hyperion's
local exchange customers. Long distance calls which do not terminate on
Hyperion's networks (which are currently the bulk of such calls) are passed to
long distance carriers which route the remaining portion of the call.
Enhanced Services. In addition to providing typical enhanced services such
as voicemail, call transfer and conference calling, Hyperion offers additional
value-added enhanced services to complement its core local and long distance
services. These enhanced service offerings include:
Access to Internet Services--Enables customers to use their available
capacity for access to ISPs.
Data Networking Services--The Company can provide high-speed, broadband
services to use for
data and internet access such as Integrated Services Digital Network
(ISDN) and Primary Rate Interface (PRI).
Specialized Application Services--The Company can create products and
services that are tailored for target industries with special
telecommunications needs such as the hospitality industry. These
services typically include non-measured rate local calling, expanded
local calling area, discounted long distance rates and tailored
trunking configurations.
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<PAGE>
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 potential market size of the Company's Existing Networks and New Networks.
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 "--Products and 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.
<TABLE>
<CAPTION>
TRADITIONAL TOTAL REVENUE
CLUSTER ACCESS SERVICES SWITCHED SERVICES LONG-DISTANCE POTENTIAL
- ------- --------------- ----------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Northeast............... $ 94 $ 2,009 $1,052 $ 3,156
Mid-Atlantic............ 411 9,446 4,929 14,786
Mid-South............... 179 3,508 1,843 5,530
Other Networks.......... 77 1,453 765 2,294
---- ------- ------ -------
Total................. $761 $16,416 $8,589 $25,766
==== ======= ====== =======
</TABLE>
OWNERSHIP OF THE COMPANY AND THE OPERATING COMPANIES
Overview
Hyperion is a 79.2% owned subsidiary (69.7% after the consummation of the
Offerings, the issuance of the Adelphia New Shares, the purchase of the MCI
Warrant and Additional MCI Warrants by Adelphia, and the issuance of the
Adelphia Warrant), on a fully diluted basis, as of March 31, 1998, of
Adelphia. Adelphia is the seventh largest cable television company in the
United States and, as of March 31, 1998, owned or managed cable television
systems that served approximately 1.97 million subscribers in 12 states. In
addition, senior executives of the Company owned 10.9% of the Common Stock of
the Company (7.0% after the consummation of the Offerings and the issuance of
the Adelphia New Shares), on a fully diluted basis, as of March 31, 1998. Upon
the consummation of the Offerings, Adelphia will acquire an aggregate of
7,431,112 shares of Class A Common Stock pursuant to the Adelphia Note
Contribution and the Adelphia Share Purchase, will purchase from MCI warrants
to purchase 1,360,331 shares of Class A Common Stock, and will receive the
Adelphia Warrant to purchase 200,000 shares of Class A Stock. See "Prospectus
Summary--The Offerings" and "Description of Capital Stock--Warrants." As of
March 31, 1998, the Company's 22 networks were owned through (i) eight
partnerships or limited liability companies with Local Partners (together with
the entities described in clause (iv) below, the "Operating Partnerships")
encompassing nine networks, (ii) 10 wholly owned subsidiaries of the Company
encompassing 11 networks, (iii) one corporation, encompassing one network, in
which the Company is a minority shareholder and (iv) one company, encompassing
one network, in which the Company is the majority equityholder (the entities
described in clauses (ii) and (iii) 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, management, billing and
operation of the Operating Companies, for which it receives management fees.
39
<PAGE>
The following is an overview of the Hyperion networks and respective
ownership interests as of March 31, 1998.
<TABLE>
<CAPTION>
ACTUAL OR
EXPECTED DATE HYPERION
COMPANY NETWORKS OF OPERATION(A) INTEREST LOCAL PARTNER
- ---------------- --------------- -------- -------------------
<S> <C> <C> <C>
Northeast Cluster
Vermont............................ 11/94 100.0% --
Syracuse, NY....................... 8/92 100.0 --
Buffalo, NY........................ 1/95 100.0 --
Albany, NY......................... 12/98 100.0 --
Mid-Atlantic Cluster
Charlottesville, VA................ 11/95 100.0 --
Scranton/Wilkes-Barre, PA.......... 5/98 100.0 --
Harrisburg, PA..................... 4/95 100.0 --
Morristown, NJ..................... 7/96 100.0 --
New Brunswick, NJ.................. 11/95 100.0 --
Philadelphia, PA................... 8/96 50.0 PECO Energy
Allentown/Bethlehem/Easton/Reading,
PA................................ 5/98 50.0 PECO Energy
York, PA........................... 5/97 50.0 Susquehanna Cable
State College/Altoona, PA.......... 6/98 50.0 Allegheny Energy
Richmond, VA....................... 9/93 37.0 MediaOne
Mid-South Cluster
Lexington, KY...................... 6/97 100.0 --
Louisville, KY..................... 3/95 100.0 --
Nashville, TN...................... 11/94 95.0 InterMedia Partners
Baton Rouge, LA.................... 12/97 50.0 Entergy
Jackson, MS........................ 12/97 50.0 Entergy
Little Rock, AR.................... 12/97 50.0 Entergy
Other Networks
Wichita, KS........................ 9/94 49.9 Gannett
Jacksonville, FL................... 9/92 20.0 MediaOne
WEIGHTED AVERAGE OWNERSHIP(b)...... -- 76.0% --
</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) Based upon gross property, plant and equipment of the Company and the
Operating Companies as of December 31, 1997, as adjusted for the recent
purchase of certain partners' interests pursuant to the Rollups.
CLUSTER STATISTICS(A)
<TABLE>
<CAPTION>
NINE
FISCAL YEAR MONTHS
ENDED ENDED
MARCH 31, DECEMBER 31,
ROUTE FIBER BUILDINGS LEC-COS 1997 1997
CLUSTER MILES MILES CONNECTED COLLOCATED REVENUES REVENUES
- ------- ----- ------- --------- ---------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Northeast............... 1,397 59,323 334 12 $ 5,553 $ 5,980
Mid-Atlantic............ 1,636 78,546 576 59 2,227 5,084
Mid-South............... 934 44,844 516 21 1,264 1,452
Other Networks.......... 777 37,297 350 16 6,179 6,758
----- ------- ----- --- ------- -------
Total................. 4,744 220,010 1,776 108 $15,223 $19,274
===== ======= ===== === ======= =======
</TABLE>
- --------
(a) Non-financial information is as of December 31, 1997 and includes networks
under construction.
40
<PAGE>
OPERATING AGREEMENTS
Generally, subsidiaries of the Company have entered into partnership
agreements (or limited liability 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 have been
formed and operated pursuant to three key agreements: (i) a partnership or
limited liability company 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"). As of March 31, 1998, 10 of
the Company's 22 Existing Networks were 50% or less owned by the Company.
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
[CHART APPEARS HERE]
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. The following
discussion applies to partnership and limited liability company agreements.
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. 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.
41
<PAGE>
Matters Requiring a Vote. Most partner or management committee votes of an
Operating Partnership require only a majority vote; however, a unanimous or
supermajority vote of the partners or management committee is generally
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. 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, or
impose restrictions that significantly limit a partner's ability to transfer
its partnership interest. 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 affiliates
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 partner the opportunity to purchase the interest at the same
price and under the same terms as the third party's offer.
In addition, in most of the Operating Partnerships, either partner can,
after a specified period of time, usually five to eight years after the
inception of the partnership, make an offer to the other partner to sell its
own interest. Within 30 to 60 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. A partner in one of the
partnerships has the right after a specified period of time to put its
interest in the respective partnership 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. One 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 2005. 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.
42
<PAGE>
Substantially all of the Fiber Lease Agreements are in their initial terms.
Most of 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.
In cases where the Company acquires 100% of the ownership interest of an
Operating Partnership by an acquisition of interests from the Local Partner,
the Fiber Lease Agreement typically is amended to provide for a 10 to 25 year
lease of fiber optic capacity from the former Local Partner that exited the
partnership.
On February 20, 1997, the Company entered into several agreements with
Telergy, Inc. and certain of its affiliates 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. (which, as amended, is due
January 1999), and (ii) a fully prepaid lease from a Telergy affiliate for at
least 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 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.
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.
43
<PAGE>
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 Lease Agreement
On December 31, 1997 the Company consummated an agreement for a $24.5
million long term lease facility from AT&T Capital Corporation (the "AT&T
Lease Agreement"). The AT&T Lease Agreement provides financing for certain of
the Operating Companies' switching equipment. Included in the AT&T Lease
Agreement is the sale and leaseback of certain switching equipment for which
the Company received $14.9 million. The terms of the switching equipment
leases under the AT&T Lease Agreement are seven and one half years, commencing
December 31, 1997. The AT&T Lease Agreement requires the Company to maintain
and insure the leased equipment and prohibits the Company from subleasing the
equipment, except to certain designated Company subsidiaries. Under the AT&T
Lease Agreement, the Company is required to indemnify AT&T Capital Corporation
for certain claims with respect to the leased equipment and for certain tax
liabilities.
SALES AND MARKETING
The Company targets its network sales and marketing activities to medium and
large businesses, government and educational end users and resellers,
including IXCs. The Company services its customers through a dedicated sales
force of approximately 128 highly trained professionals focused on selling the
Company's portfolio of service offerings, and currently has over 270 expert
technicians, customer service representatives and administrative support
staff, enabling the Company to provide its customers with continuous support
and superior service. The Company expects to increase its marketing efforts by
doubling the size of its current sales force during fiscal 1999 as it
increases the breadth of its product offerings to satisfy the growing
telecommunications needs of its customers. In addition, the Company has
initiated direct marketing and sales of local telecommunications services on
an unbundled loop basis to or through total service resale to 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
PUCs 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 medium and large businesses,
governmental and educational institutions and other telecommunications service
providers. End users are currently marketed through Company direct sales
representatives in each market. The national sales organization also provides
support for the local sales groups and develops new product offerings and
customized telecommunications applications and solutions which address the
specific requirements of particular customers. In addition, the Company
markets the Operating Companies' products through advertisements, media
relations, direct mail and participation in trade conferences. End users
typically commit to a service agreement for a term of three to five years
which is either renegotiated or automatically converted to a month-to-month
arrangement at the end of the contract term. 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.
44
<PAGE>
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. 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.
THE COMPANY'S NETWORKS
Network Development and Design
Prior to any network construction in a particular market, the Company's
corporate development staff reviews the demographic, economic, competitive and
telecommunications demand characteristics of the market. These characteristics
generally include market location, the size of the telecommunications market,
the number and size of business, educational and government end users and the
economic prospects for the area. In addition, the Company also carefully
analyzes demand information provided by IXCs, including demand for end user
special access and volume of traffic from the LEC-CO and the IXC POPs. The
Company also analyzes market size utilizing a variety of data, including
available estimates of the number of interstate access and intrastate private
lines in the region, which is available from the FCC.
If a particular market targeted for development is deemed to have
sufficiently attractive demographic, economic, competitive and
telecommunications demand characteristics, the Company's network planning and
design personnel, generally 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:
(i) availability and ease of fiber deployment; (ii) location of IXC POPs;
(iii) the Company's market information; and (iv) 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
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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."
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.
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 supports all of the Company's networks including the management
of 1,909 building connections, 17 switches or remote switching modules and
5,363 network route miles as of March 31, 1998. 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.
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Equipment Supply
The Company and the Operating Companies purchase fiber optic transmission
and other electronic equipment from Lucent, Fujitsu, Tellabs, and other
suppliers at negotiated prices. The Company expects that fiber optic cable,
equipment and supplies for the construction and development of its networks
will continue to be readily available from Lucent, Fujitsu, 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 fifteen Lucent switches and two Lucent remote
switching modules, which deliver full switching functionality, in seventeen 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 1998
and additional 5ESSs or remote switching modules in each of the Company's New
Networks.
Connections to Customer Locations
Office buildings are connected by network backbone extensions to one of a
number of physical rings of fiber optic cable, which originate and terminate
at the Operating Company's central office. Signals are sent simultaneously on
both primary and alternate protection paths through a network backbone to the
Operating Company's central office. Within each building, Operating Company-
owned internal wiring connects the Operating Company's fiber optic terminal
equipment to the customer premises. Customer equipment is connected to
Operating Company-provided electronic equipment generally located where
customer transmissions are digitized, combined and converted to an optical
signal. The traffic is then transmitted through the network backbone to the
Operating Company's central office where it can be reconfigured for routing to
its ultimate destination on the network.
The Operating Company locates its fiber optic equipment in space provided by
the building owner or, more typically, on a customer's premises. IXCs often
enter into discussions with building owners to allow the Company to serve the
IXCs' customers. This network configuration enables the Company to share
electronic equipment among multiple customers, causes little interruption for
customers during installation and maintenance and allows the Company to
introduce new services rapidly and at low incremental cost.
The following diagram is an illustration of an Operating Company fiber optic
transport network in a typical market.
LOGO
[LOGO OF CHART APPEARS HERE]
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EMPLOYEES
As of December 31, 1997, the Operating Companies and the Company,
respectively, employed 321 and 169 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 December 31, 1997, the Company's total telecommunications equipment in
service consists of fiber optic and switching 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
PUCs 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, salesmanship 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 in the past announced ambitious plans to enter the local
exchange market. If this occurs, 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 with little or no investment
in new facilities, thereby increasing the number of likely competitors in any
given market, and enable 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 PUCs
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, franchise and
right-of-way licensing requirements.
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 original enactment of 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 by Congress 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 PUCs in almost all cases, the Telecommunications
Act should limit substantially the ability of a State PUC 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 likely 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 PUCs 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 (i) the construction of
facilities to serve all residents and business customers in such areas, (ii)
the acquisition from other carriers of network facilities required to provide
such service, or (iii) the resale of other carriers' services. The Company
believes that State PUCs have limited authority to impose such requirements
under the Telecommunications Act. The imposition of such conditions by State
PUCs, however, 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 so ordered by State PUCs. 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 incumbent LECs. These requirements will
provide access to certain networks under reasonable rates, terms and
conditions. Specifically, LECs must provide the following:
Telephone Number Portability. Telephone number portability enables a
customer to keep the same telephone number when the customer switches local
exchange carriers. New entrants are at a competitive disadvantage without
telephone number portability because of inconvenience and costs to customers
that must change numbers.
Dialing Parity. All LECs must provide dialing parity, which means that a
customer calling to or from a CLEC network cannot be required to dial more
digits than is required for a comparable call originating and terminating on
the LEC's network.
Reciprocal Compensation. The duty to provide reciprocal compensation means
that LECs must terminate calls that originate on competing networks in
exchange for a given level of compensation and that they are entitled to
termination of calls that originate on their network for which they must pay a
given level of compensation.
Resale. LECs generally may not prohibit or place unreasonable restrictions
on the resale of their 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 incumbent 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. Incumbent 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 areas served
by 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 number 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, 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 CLECs
and LECs, and incumbent 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 PUCs.
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 methodology for pricing interconnection and
unbundled network elements, a rule permitting new entrants to "pick and
choose" among various provisions of existing interconnection agreements
between LECs and their competitors, and other provisions relating to the
purchase of access to unbundled network elements. The Operating Companies had
negotiated and obtained State PUCs approval of a number of interconnection
agreements with incumbent LECs prior to this Eighth Circuit decision. The
Eighth Circuit decision has created 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.
On August 22, 1997, the Eighth Circuit issued an order vacating the FCC's
rules implementing the Telecommunications Act's dialing parity requirement. On
October 14, 1997, the Eighth Circuit issued an Order on Rehearing of the
ruling that incumbent LECs need not provide combinations of network elements
to CLECs, even when the incumbent LEC has already combined the same elements
within its own network. This Order broadened the restrictions previously
placed on combinations of network elements by the Eighth Circuit in its July
18, 1997 opinion striking down many of the pricing and unbundling rules issued
by the FCC. In the July 18 opinion, the Eighth Circuit had held, among other
things, that incumbent LECs had no obligation under the Telecommunications Act
to combine network elements for CLECs, and that the incumbent LECs' only
obligation with respect to unbundling was to provide CLECs with access to the
individual network elements, leaving each
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CLEC to combine those network elements itself. Accordingly, the Eighth Circuit
vacated Section 51.315 (c)-(f) of the FCC's unbundling rules, which had
required incumbent LECs to combine network elements at the request of CLECs
except where such combinations were technically infeasible or would impair the
quality of the network. On the Order on Rehearing, the Eighth Circuit
clarified that incumbent LECs can now separate already combined network
elements before handing them off to the CLEC to recombine.
The Supreme Court has agreed to review the various Eighth Circuit decisions
vacating major portions of the FCC's Local Competition Orders. In so doing,
the Court also granted several cross-petitions for review by incumbent LECs
challenging portions of the Eighth Circuit opinion that upheld certain FCC
determinations with respect to unbundled network elements. A decision by the
Supreme Court is not expected until early 1999.
On February 9, 1998, the FCC released its Report and Order on Pole
Attachment Rates for Telecommunications Providers ("Pole Attachment Order").
In light of the Telecommunication Act's requirement that the FCC prescribe
regulations to govern the charges for pole attachments used by
telecommunications carriers when parties fail to resolve a dispute over such
charges, the Pole Attachment Order addresses a number of factors that must be
considered in determining whether pole attachment rates are just, reasonable,
and nondiscriminatory.
Although the Number Portability Order, the Local Competition Orders, the
Pole Attachment Order, 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,
especially while the FCC's implementation of many such requirements has been
challenged. Ultimately the success of the Telecommunications Act to bring the
benefits of increased competition to consumers will depend in large part upon
State PUCs' implementation of the Telecommunications Act and the Local
Competition Orders, numerous state and federal rulemakings that in theory
should level the playing field between incumbent LECs and new entrants such as
the Company, and vigorous enforcement of Telecommunications Act requirements
at the state and federal levels. 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
incumbent LEC or arbitration at State PUCs, 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
with little or no investment in facilities.
Telecommunications Act requirements place burdens on an Operating Company
when it provides switched local exchange services and may disproportionately
benefit potential competitors. In particular, the obligation to offer services
for resale means that a company can resell the Operating Company's services
with little or no investment in facilities, although unlike incumbent LECs,
the Operating Companies are not required to offer services for resale at
discounted rates. Similarly, the obligation of LECs 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 may benefit other
potential competitors to a greater degree.
Finally, continuing challenges to state and federal rules and policies
implementing the Telecommunications Act, and individual actions by State PUCs
could cause the Company to incur substantial legal and administrative
expenses.
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.
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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 incorporates the interconnection
requirements discussed above. See "--Interconnection with LEC Facilities."
The ability of the RBOCs to provide interLATA services will enable 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 both to generate access revenues from the IXCs and to compete
in offering a package of local and long distance services. To date FCC
authority to provide in-region interLATA service has been sought by Ameritech
in Michigan, Southwestern Bell in Oklahoma and BellSouth in South Carolina and
Louisiana. The Department of Justice opposed each of these requests, and the
FCC denied them. More RBOC requests to provide in-region interLATA service are
expected to be filed with the FCC in the near future.
However, further FCC rulings on Section 271 applications were complicated by
a Texas Federal District Court ruling on December 31, 1997 that Section 271 of
the 1996 Act is unconstitutional. On February 11, 1998, this court granted a
request for stay of its decision pending the outcome of an appeal on the
merits to the U.S. Court of Appeals for the Fifth Circuit.
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 IXCs will no longer be able to file
tariffs with the FCC concerning their interexchange long distance services
(the "IXC Detariffing Order"). The IXC Detariffing Order has been stayed
pending review in the U.S. Court of Appeals for the District of Columbia.
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 exchange access
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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 the Company'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 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. Also, the FCC's existing system for subsidizing universal
service remains in effect and only incumbent LECs are likely to be eligible to
receive such 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 IXCs 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.
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Two aspects of the FCC's Access Charge Reform Order create potential
competitive benefits for competitive access providers, including the Company.
First, the abolition of the unitary rate structure option for local transport
may have an adverse effect on some IXCs, making alternative 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 petitions for review before
U.S. Courts of Appeals. Until the time when any such review proceeding 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 GENERALLY
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 IXCs to
withdraw their tariffs was stayed by that court on February 13, 1997. That
appeal is 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 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 PUCs to determine whether they are
excessive. If the FCC or State PUCs order the incumbent LECs to reduce these
rates, collocation will be a more attractive option for CLECs. Under the rules
adopted by the Local Competition Orders, incumbent LECs will also be required
to provide both virtual collocation and physical 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. As discussed earlier, 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
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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.
To promote the development of the internet, the FCC has treated traffic to
ISPs terminated in the local exchange as local calls, for which end user
customers normally pay fixed monthly charges or low per-minute rates up to a
cap. Incumbent LECs contend that traffic routed to the internet is interstate
in nature and that the charge for such calls should be charged at a different
rate. If the FCC changes its policy and requires a different payment
arrangement for internet calls routed through local ISPs, CLECs may no longer
receive the benefit of substantial call-termination revenue from LECs for CLEC
ISP customers whose traffic is mostly inbound (such that CLEC payments to the
LEC for terminating calls are minimal).
STATE REGULATION GENERALLY
Most State PUCs 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 Arkansas, Florida, Kansas, Kentucky,
Louisiana, Mississippi, New Jersey, New York, Pennsylvania, Tennessee, Vermont
and Virginia. The certificates or other authorizations permit the Operating
Companies to provide a full range of local telecommunications services,
including basic local exchange service. As the
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Company expands its operations into other states, it may become subject to the
jurisdiction of their respective public utility commissions. 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 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% 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, many of the Operating Companies have negotiated
interconnection agreements with one or more of the incumbent LECs.
Specifically, state commissions have approved interconnection agreements in
Arkansas (Southwestern Bell), Kentucky (BellSouth; GTE), Louisiana
(BellSouth), Mississippi (BellSouth), New Jersey (Bell Atlantic), Tennessee
(BellSouth), Vermont (NYNEX (now Bell Atlantic)), 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, while they await approval
of their interconnection agreements filed in December, 1997.
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.
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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, among
other reasons, such ownership might be deemed to constitute an indirect
controlling interest in the state Operating Company.
Several northeastern states have required NYNEX to comply with the
Telecommunications Act's requirements for in-region interLATA service as a
condition to approval of its merger with Bell Atlantic. Such requirements may
serve to expedite NYNEX-Bell Atlantic's entry into this market and may also
reduce the incentive these RBOCs now have to negotiate and renegotiate
interconnection agreements with the Operating Companies since the existence of
such agreements is a prerequisite to such entry.
LOCAL GOVERNMENT AUTHORIZATIONS
An Operating Company may be required to obtain from municipal authorities
street opening and construction permits, or operating franchises, to install
and expand its fiber optic networks in certain cities. In some cities, the
Local Partners or subcontractors may already possess the requisite
authorizations to construct or expand the Company's networks. An Operating
Company or its Local Partners also may be required to obtain a license to
attach facilities to utility poles in order to build and expand facilities.
Because utilities that are owned by a cooperative or municipality are not
subject to federal pole attachment regulation, there are no assurances that an
Operating Company or its Local Partners will be able to obtain pole
attachments from these utilities at reasonable rates, terms and conditions.
In some of the areas where the Operating Companies provide service, their
Local Partners pay license or franchise fees based on a percent of fiber lease
payment revenues. In addition, in areas where the Company does not use
facilities constructed by a Local Partner, the Operating Company may be
required to pay such fees. There are no assurances that certain municipalities
that do not currently impose fees will not seek to impose fees in the future,
nor is there any assurance that, following the expiration of existing
franchises, fees will remain at their current levels. In many markets, other
companies providing local telecommunications services, particularly the
incumbent LECs, currently are excused from paying license or franchise fees or
pay fees that are materially lower than those required to be paid by the
Operating Company or Local Partner. The Telecommunications Act requires
municipalities to charge nondiscriminatory fees to all telecommunications
providers, but it is uncertain how quickly this requirement will be
implemented by particular municipalities in which the Company operates or
plans to operate or whether it will be implemented without a legal challenge
initiated by the Company or another CLEC.
If any of the existing Local Partner Agreements or Fiber Lease Agreements
held by a Local Partner or an Operating Company for a particular market were
terminated prior to its expiration date and the Local Partner or Operating
Company were forced to remove its fiber optic cables from the streets or
abandon its network in place, even with compensation, such termination could
have a material adverse effect on the Company.
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MANAGEMENT
DIRECTORS AND OFFICERS
The directors and officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Executive Officers
John J. Rigas............... 73 Chairman and Director
James P. Rigas.............. 40 Vice Chairman, Chief Executive Officer and
Director
Michael J. Rigas............ 44 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......... 52 Senior Vice President, Engineering
Operations and Director
Paul D. Fajerski............ 49 Senior Vice President, Carrier Sales and
Director
Randolph S. Fowler.......... 46 Senior Vice President, Business Development,
Business Operations and Regulatory Affairs
and Director
Other Officers
Edward E. Babcock, Jr. ..... 35 Vice President, Finance
Thomas W. Cady.............. 43 Vice President of Sales and Marketing
Theodore A. Huf............. 56 Vice President of Engineering
John D. Lasater............. 45 Vice President of National Accounts
Non-Officer Directors
Pete J. Metros.............. 57 Director
James L. Gray............... 62 Director
</TABLE>
EXECUTIVE OFFICERS
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.
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Daniel R. Milliard is President, Chief Operating Officer, Secretary and a
Director of the Company, and Senior Vice President and Secretary and a
Director of Adelphia and its other subsidiaries. Mr. Milliard currently spends
substantially all of his time on concerns of the Company. He has been with
Adelphia since 1982. He served as outside general counsel to Adelphia's
predecessors from 1979 to 1982. Mr. Milliard graduated from American
University in 1970 with a B.S. degree in Business Administration. He received
an M.A. degree in Business from Central Missouri State University in 1971 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 a member 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, a competitive access provider in Pittsburgh, Pennsylvania.
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.
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, Business Operations 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.
OTHER OFFICERS
Edward E. Babcock, Jr., CPA, is Vice President, Finance of Hyperion. Mr.
Babcock joined Adelphia in May 1995 and previously held the position of
Director of Financial Administration and Chief Accounting Officer of Adelphia.
Prior to joining Adelphia, Mr. Babcock was the Vice President of Finance and
Administration of Pure Industries. Before joining Pure Industries, Mr. Babcock
spent eight years with the Pittsburgh office of Deloitte & Touche LLP. Mr.
Babcock received his B.S. degree in Accounting from The Pennsylvania State
University in 1984.
Thomas W. Cady, Vice President of Sales and Marketing, joined Hyperion in
March 1998. His responsibilities include the development of marketing and
sales programs for all of Hyperion's end user products and services. Prior to
joining Hyperion, Mr. Cady spent seven years with Xerox, five years with
IBM/ROLM and two years with Sprint/Telenet in a variety of sales, marketing
and management positions. Most recently, Mr.
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Cady held the position of Senior Vice President of Marketing and Business
Development for Cadmus Communications. Mr. Cady graduated from Virginia Tech
with a B.S. in Business Administration in 1977, and received an MBA from the
University of Richmond in 1984.
Theodore A. Huf, has served as Vice President of Engineering since March
1998, with responsibilities for both network and switch engineering. Mr. Huf
previously served as Director of Operations and Engineering for Hyperion since
December 1991, and was responsible for all city operations and network
engineering. Prior to joining Hyperion, Mr. Huf worked for Adelphia since 1971
in various engineering and operations management positions.
John D. Lasater, Vice President of National Accounts, joined Hyperion in
January 1998 and is responsible for national account marketing and sales. Mr.
Lasater joined MCI in 1991 as Manager of Major Accounts for Nashville,
Tennessee. In 1993 he was appointed Executive Manager, National Accounts for
MCI, managing the national account sales and marketing organization for
Tennessee and Kentucky. Prior to joining MCI, Mr. Lasater held sales and
marketing positions with South Central Bell and AT&T Information Systems. Mr.
Lasater is a 1975 summa cum laude graduate of Belmont University.
NON-OFFICER DIRECTORS
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. Since 1986, Mr. Metros has been
director of Adelphia Communications Corporation. Mr. Metros 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
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. Since 1992, Mr. Gray has served on
PRIMESTAR's board of directors. Since 1995, Mr. Gray has served as a director
of Sea Pines Associates, Inc. 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.
62
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company for services rendered during the Company's last three
fiscal years ending March 31, 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 -- -- 5,350(d)
Operating Officer
and Secretary 1995 187,412 -- -- 5,250(d)
Charles R. Drenning..... 1997 $167,712 $12,500 $-- $46,475(e)
Senior Vice President 1996 139,982 25,000 -- --
1995 128,254 17,345 -- --
Paul D. Fajerski........ 1997 $167,712 $12,500 $-- $46,475(e)
Senior Vice President 1996 139,982 25,000 -- --
1995 128,254 17,345 -- --
Randolph S. Fowler...... 1997 $167,712 $12,500 $-- $46,475(e)
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 338,000 shares of Class A Common Stock pursuant to his employment
agreement on March 4, 1997. On the date of grant, the 338,000 shares were
fully vested and will participate in dividends and distributions, and as
of March 4, 1997, had a value of approximately $156,000.
(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.
(e) Amount represents accrued interest in connection with the Loan Agreements.
See "Certain Relationships and Transactions."
BOARD COMMITTEES
The Special Nominating Committee of the Board of Directors was established
in October 1996 and currently 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 14 at any time
prior to the next annual meeting of the stockholders of the Company, and to
fill the vacancies created thereby.
The Compensation Committee of the Board of Directors was established in
April 1998 and consists of Mr. Gray and Mr. Metros. The Compensation Committee
is responsible for reviewing and approving matters
63
<PAGE>
involving the compensation of directors and executive officers of the Company,
administering the Company's 1996 Plan and making recommendations to the full
Board on these matters.
The Audit Committee of the Board of Directors consists of Mr. Gray, Mr.
Metros and Timothy J. Rigas. The Audit Committee's duties include reviewing,
acting on and reporting to the Board of Directors with respect to various
auditing and accounting matters, including the selection of the Company's
auditors, the scope of the annual audits, fees paid to auditors, the
performance of the Company's auditors and the accounting practices of the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
James Gray and Pete Metros serve as members of the newly-appointed
Compensation Committee of the Board of Directors. Neither Mr. Gray nor Mr.
Metros is or has been an officer or employee of the Company. During fiscal
1997, the Company's Board of Directors did not have a Compensation Committee.
Consequently, all Directors participated in deliberations concerning executive
officer compensation, including decisions relative to their own compensation.
See "Certain Relationships and Transactions."
DIRECTOR COMPENSATION
Directors who are not also employees of the Company each receive
compensation from the Company for services as a director at a rate of $750
plus reimbursement of expenses for each Board and committee meeting attended.
Directors who are employees of the Company do not receive any compensation for
services as a director or as a member of Board committees.
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 was initially 5,687,500. 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 8,125,000 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 option shares subject to
the Plan in excess of 3,250,000 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 455,000 shares of Class A Common Stock
issued to Mr. Milliard pursuant to his employment agreement discussed below,
of which 338,000 shares were issued on March 4, 1997 and 58,500 shares were
issued on each of April 1, 1997 and April 1, 1998 as stock bonuses pursuant to
such agreement.
In April 1998 and in recognition for valuable past service to the Company
and as an incentive for future services, the Company authorized the issuance
under the 1996 Plan to each of John J. Rigas, Michael J. Rigas, Timothy J.
Rigas and James P. Rigas of (i) stock options (the "Rigas Options") covering
100,000 shares of Class A Common Stock, which options will vest in equal one-
third amounts on the third, fourth and fifth year anniversaries of grant
(vesting conditioned on continued service as an employee or director) and
which shall be exercisable at the initial public offering price for the
Offerings and (ii) phantom stock awards (the "Rigas Grants") covering 100,000
shares of Class A Common Stock, which phantom awards will vest in equal one-
third amounts on the third, fourth and fifth year anniversaries of grant
(vesting conditioned on continued service as an
64
<PAGE>
employee or director). Also in April 1998, pursuant to an existing
stockholders agreement, the Company authorized the issuance under the 1996
Plan to each of Messrs. Drenning, Fajerski and Fowler of stock options (the
"Management Stockholder Options") covering 13,047 shares of Class A Common
Stock with exercise price and vesting terms identical to the Rigas Options. In
addition to the Rigas Options, the Rigas Grants, the Management Stockholder
Options and the stock options or share awards to be issued to Mr. Milliard
under his employment agreement, the Company currently expects to issue under
the 1996 Plan stock options, restrictive stock grants, phantom stock awards or
other awards to other 1996 Plan participants covering up to a total of 325,000
shares of Class A Common Stock during fiscal 1999.
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 338,000 shares of Class A Common Stock, stock
options to purchase 81,250 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 81,250 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 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.
MANAGEMENT SERVICES AGREEMENT
The Company has entered into a Management Services Agreement with Adelphia.
This agreement will establish the responsibilities, allocation and the
accounting and related payments in connection with shared corporate overhead
services in areas such as cash management of Company accounts, insurance and
risk management, financial accounting, financing, taxation, human resources,
legal, internal audit, executive time and space, personnel, payroll and
management information services, and shared use of office, aircraft, network
facilities and support equipment. In addition, Messrs. Timothy Rigas and James
Rigas will devote such time as is reasonably necessary to the business and
operations of Hyperion and Hyperion will reimburse Adelphia for these services
in accordance with the provisions of the Management Services Agreement.
65
<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
$25.0 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 Warrant Agreement, between the Company and Bank of
Montreal Trust Company, as warrant agent, on April 15, 1996 (the "Class B
Warrant Agreement"), 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, which
accrues interest at an annual rate of 16.5% and is subordinated to the Senior
Notes and Senior Secured 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 on the
Adelphia Note which was converted to additional subordinated notes from the
inception of the Adelphia Note on April 15, 1996 through December 31, 1997 has
totaled $8.6 million. There were also approximately $5.3 million of trade
payables owed by the Company to Adelphia as of December 31, 1997 for goods and
services previously provided. Upon the consummation of the Offerings, (i)
Adelphia and/or certain of its affiliates will purchase approximately $50.0
million worth of Class A Common Stock from the Company (or an estimated
3,555,556 shares) at a purchase price equal to the public offering price less
the underwriting discount (such purchase is referred to herein as the
"Adelphia Share Purchase") and (ii) in connection with the Adelphia Note
Contribution, the Company will issue approximately 3,875,556 shares of Class A
Common Stock to Adelphia. The estimated number of shares of Class A Common
Stock to be issued to Adelphia in connection with the Adelphia Note
Contribution has been determined by dividing (x) the sum of (i) the estimated
fair market value of the Company's unsecured subordinated note due April 16,
2003 owed to Adelphia (the "Adelphia Note"), which is expected to be
approximately $48.0 million as of the expected date of closing of the
Offerings (the "Closing Date"), consisting of approximately $36.4 million in
aggregate principal amount plus accrued interest paid in additional principal
through the expected Closing Date and approximately $11.6 million of premium
associated therewith, plus (ii) the outstanding amounts payable for certain
products and services provided to the Company by Adelphia including accrued
and unpaid interest thereon (such sum is estimated to be approximately $54.5
million as of March 31, 1998) by (y) the assumed public offering price of $15
per share (the midpoint of the range set forth on the cover page of this
Prospectus) less the underwriting discount per share. See "Prospectus
Summary--The Offerings."
Messrs. Milliard, Drenning, Fajerski and Fowler, all of whom are senior
executives of the Company, cumulatively hold approximately 11.0% of the
Company's Common Stock, on a fully diluted basis, prior to the Offerings.
Messrs. Drenning, Fajerski and Fowler are parties to a stockholder agreement,
as amended ("Stockholder Agreement") with Adelphia and together hold
approximately 9.8% of the Company's Common Stock, on a fully diluted basis,
prior to the Offerings. 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 and (ii) 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 each of
the Management Stockholders have the opportunity to sell at least $1.0 million
worth of their shares pursuant to the registration rights agreement discussed
below. Adelphia has also agreed to vote its shares in the Company to elect
each Management Stockholder to the Board of Directors of the Company as long
as such person is both an employee and a stockholder of the Company.
66
<PAGE>
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 $1.0 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 at least $1.0 million worth of 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, (ii)
twelve months after the effectiveness of the demand registration statement or
(iii) the date on which all such shares of Common Stock become freely
tradeable pursuant to Rule 144.
The Company and Adelphia have entered into a registration rights agreement
(the "Adelphia Registration Rights Agreement") which covers all Common Stock
held by Adelphia 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.
Pursuant to agreements among the Company, Adelphia and the Management
Stockholders, simultaneous with the consummation of the Offerings, (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 plus accrued interest thereon by each selling 71,111
shares of Class B Common Stock to Adelphia and using the proceeds therefrom to
repay such loans and (iii) the Company will pay to the Management Stockholders
bonus payments in the amount of interest accruing on the Loans from the date
six months after the date of the Loan Agreements and any additional amounts
necessary to pay income taxes applicable to such bonus payments.
During Fiscal 1995, 1996 and 1997 and the nine months ended December 31,
1997, the Company incurred charges from Adelphia of $0.5, $0.4, $1.2 and $1.3
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 an
allocation of Adelphia's incremental 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 or the costs which would be
charged on a pro-rata allocation of such costs under the Management Services
Agreement. See "Management--Management Services Agreement". During Fiscal
1995, 1996 and 1997 and the nine months ended December 31, 1997, the Company
paid Adelphia or certain of Adelphia's affiliates, fiber lease payments of
$0.3, $1.0, $0.7 and $0.1 million, respectively which management of the
Company believes represents the fair market value of such services.
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.
67
<PAGE>
In connection with the resolution of the number of Additional MCI Warrants
to be issued to MCI upon consummation of the Offerings, Adelphia has agreed to
purchase the MCI Warrant and the Additional MCI Warrants in consideration for
the payment by Hyperion to Adelphia of a fee of $500,000 and the issuance by
Hyperion of the Adelphia Warrant. See "Description of Capital Stock--
Warrants."
In April 1998, in recognition for valuable past service to the Company and
as an incentive for future services, the Company authorized the issuance under
the 1996 Plan to each of John J. Rigas, Michael J. Rigas, Timothy J. Rigas and
James P. Rigas of the Rigas Options and the Rigas Grants. Also in April 1998,
pursuant to an existing stockholders agreement, the Company authorized the
issuance under the 1996 Plan to each of Messrs. Drenning, Fajerski and Fowler
of the Management Stockholder Options. See "Management--Long-Term Incentive
Compensation Plan."
68
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Company's
Class A Common Stock and Class B Common Stock by (i) each person known by the
Company to be a beneficial owner of more than 5% of either the Class A Common
Stock or Class B Common Stock, (ii) the directors and executive officers and
(iii) all directors and executive officers as a group and, with respect to
beneficial ownership after the Offerings, reflects the Adelphia New Shares.
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK CLASS A CLASS B TOTAL TOTAL
OWNED PRIOR COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK
TO OWNED AFTER OWNED PRIOR TO OWNED PRIOR TO OWNED AFTER
OFFERINGS OFFERINGS AND AFTER OFFERINGS OFFERINGS (%) OFFERINGS (%)
------------ ------------ ------------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Adelphia Communications
Corporation (a)........ (b) (b)(c) 28,925,065(e) 87.77 72.6
Daniel R. Milliard...... 455,000 455,000 -- 1.37 0.9
Charles R. Drenning (d). (b) (b) 1,191,645(e) 3.62 2.2
Paul D. Fajerski (d).... (b) (b) 1,191,645(e) 3.62 2.2
Randolph S. Fowler (d).. (b) (b) 1,191,645(e) 3.62 2.2
All executive officers
and directors
as a group (eight
persons)(a)............ (b) (b) 32,500,000(f) 100.00 80.1
</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. Upon completion of the
Offerings and the issuance of the Adelphia New Shares, Adelphia will
possess approximately 82.2% of the combined power of both classes of
Common Stock. See "Description of Capital Stock."
(c) The information presented assumes no exercise of the over-allotment
options by the Underwriters. The information presented does not reflect
the Adelphia New Shares owned by Adelphia after the Offerings, the
issuance of the Adelphia Warrant to purchase 200,000 shares of the Class A
Common Stock and the purchase by Adelphia of the MCI Warrant to purchase
913,380 shares of Class A Common Stock and Additional MCI Warrants to
purchase 446,951 shares of the Class A Common Stock. In the event that the
over-allotment options are exercised in full by the Underwriters Adelphia
would own, excluding the aforementioned Warrants, 7,431,112 shares of
Class A Common Stock and 28,925,065 shares of Class B Common Stock, which
would represent 69.7% of the total Common Stock outstanding after the
Offerings and the issuance of the Adelphia New Shares.
(d) 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 260,000 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 260,000 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, and an aggregate of 19,604 shares which are the subject of gifts
made by Mr. Fajerski and over which he may retain voting power prior to
the Offerings.
(e) Represents Class B Common Stock owned prior to the Offerings, none of
which are being sold in the Offerings. However, if the Management
Stockholders sell shares to Adelphia to repay in full their respective
loans pursuant to their Loan Agreements at the closing of the Offerings,
then the shares held after the Offerings would be 1,120,534, 1,120,534,
1,120,534 and 29,138,398 for Messrs. Drenning, Fajerski, Fowler and
Adelphia, respectively.
(f) Includes 28,925,065 shares of Class B Common Stock held by Adelphia (see
(e) above). With respect to all shares of Common Stock held by Adelphia,
the following executive officers and directors of the Company share or may
be deemed to share voting and dispositive power over the shares, subject
to the discretion of the Board of Directors of Adelphia: John J. Rigas,
Michael J. Rigas, Timothy J. Rigas, James P. Rigas and Daniel R. Milliard.
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<PAGE>
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 A or 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. Except as provided
in the Lock-Up Agreements, there are no contractual restrictions, or
restrictions contained in the Certificate of Incorporation, regarding the
ability to transfer shares of Class B 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 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.
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On October 9, 1997, the Company 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. 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 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 provides for, among other things, limitations on (i) additional
borrowings, (ii) payment of dividends or distributions, (iii) transactions
with affiliates and (iv) the sale of assets.
WARRANTS
The Company's 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
1,993,638 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 Class B Warrant, when exercised, will entitle the holder thereof to
purchase 6.05969 shares of Class B Common Stock (the "Class B Warrant Shares")
at the exercise price of $0.00308 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 Statement 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
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required to pay liquidated damages to holders of the Class B Warrants or Class
B Warrant Shares under certain circumstances.
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 the MCI Warrant to
purchase 913,380 shares of Class A Common Stock, of the Company, which expires
June 13, 2000, at the lower of (i) $6.15 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.
Upon completion of the Offerings (including any underwriters' overallotment
options) and the issuance of the Adelphia Shares, the Company is obligated to
issue additional warrants to MCI to purchase 446,951 shares of Class A Common
Stock (and warrants to purchase an additional 38,461 shares of Class A Common
Stock if the overallotment option is exercised in full) (the "Additional MCI
Warrants"). The Additional MCI Warrants may be exercised by MCI at any time
within three years after the issuance thereof at the lower of (i) $6.15 per
share or (ii) the price per share of the Class A Common Stock sold in the
Offerings. In connection with the Offerings, the Company and MCI have entered
into a letter of understanding that provides as follows with respect to the
MCI Warrant and MCI's right to receive Additional MCI Warrants: the Additional
MCI Warrants issued with respect to the shares sold to the public in the
Offerings (including any underwriters' overallotment options) and with respect
to the Adelphia Shares will have an exercise price equal to the lower of $6.15
per share or the price per share to the public in the Offerings (the "IPO
Price"), and (ii) Adelphia has agreed to purchase from MCI the MCI Warrant and
the Additional MCI Warrants described in clause (i) above for a purchase price
equal to the number of Class A Common Stock shares issuable under the warrants
being purchased times the IPO Price minus the underwriting discount, less the
aggregate exercise price of such warrants. Furthermore, in consideration of
the obligations undertaken by Adelphia to facilitate the agreements between
MCI and Hyperion, Hyperion has agreed to pay to Adelphia a fee of $500,000 and
the Adelphia Warrant, which expires three years after its issuance, to
purchase 200,000 shares of Class A Common Stock at an exercise price equal to
the IPO Price. The Company expects to enter into definitive documentation with
MCI and Adelphia prior to consummation of the Offerings.
On February 12, 1998, the Company consummated an agreement with Lenfest
Telephony, Inc. ("Lenfest") whereby Lenfest received a warrant to obtain
731,624 shares of Class A Common Stock of the Company (the "Lenfest Warrant")
in exchange for its partnership interest in the Harrisburg, Pennsylvania
network. The Lenfest Warrant is currently exercisable for no additional
consideration.
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.
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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.
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 which has the
effect of increasing the proportionate share of any class or series of stock
of the corporation which is 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
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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.
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Class A
Common Stock applicable to "Non-United States Holders." A "Non-United States
Holder" is any beneficial owner of Class A Common Stock that, for United
States federal income tax purposes, is a non-resident alien individual, a
foreign corporation, a foreign partnership or a non-resident fiduciary of a
foreign estate or trust as such terms are defined in the Code. This discussion
is based on the Code and administrative and judicial interpretations as of the
date hereof, all of which are subject to change either retroactively or
prospectively. This discussion does not address all aspects of United States
federal income and estate taxation that may be relevant to Non-United States
Holders in light of their particular circumstances and does not address any
tax consequences arising under the laws of any state, local or foreign taxing
jurisdiction. Prospective investors are urged to consult with their tax
advisors regarding the United States federal, state and local income and other
tax consequences, and the non-United States tax consequences, of owning and
disposing of Class A Common Stock.
DIVIDENDS
Subject to the discussion below, any dividend paid to a Non-United States
Holder generally will be subject to United States withholding tax either at a
rate of 30% of the gross amount of the dividend or such lower rate as may be
specified by an applicable income tax treaty. For purposes of determining
whether tax is to be withheld at a 30% rate or at a reduced rate as specified
by an income tax treaty, the Company ordinarily will presume that dividends
paid to an address in a foreign country are paid to a resident of such country
absent knowledge that such presumption is not warranted. However, under
proposed United States Treasury regulations not currently in effect, a Non-
United States Holder would be required to file certain forms accompanied by a
statement from a competent authority of the treaty country in order to claim
the benefits of a tax treaty. Dividends paid to a holder with an address
within the United States generally will not be subject to withholding tax,
unless the Company has actual knowledge that the holder is a Non-United States
Holder.
Dividends received by a Non-United States Holder that are effectively
connected with a United States trade or business conducted by such Non-United
States Holder are exempt from withholding tax. However, such effectively
connected dividends are subject to regular United States income tax in the
same manner as if the Non-United States Holder were a United States resident.
A Non-United States Holder may claim exemption from withholding under the
effectively connected income exception by filing Form 4224 (Statement Claiming
Exemption from Withholding of Tax on Income Effectively Connected With the
Conduct of Business in the United States) each year with the Company or its
paying agent prior to the payment of the dividends for such year. Effectively
connected dividends received by a corporate Non-United States Holder may be
subject to an additional "branch profits tax" at a rate of 30% (or such lower
rate as may be specified by an applicable tax treaty) of such corporate Non-
United States Holder's effectively connected earnings and profits, subject to
certain adjustments.
A Non-United States Holder eligible for a reduced rate of United States
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
United States Internal Revenue Service (the "IRS").
GAIN ON DISPOSITION OF ORDINARY COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax with respect to a gain realized upon the sale or a
disposition of Class A Common Stock unless: (i) such gain is effectively
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connected with a United States trade or business of the Non-United States
Holder, (ii) the Non-United States Holder is an individual who is present in
the United States for a period or periods aggregating 183 days or more during
the taxable year in which such sale or disposition occurs and certain other
conditions are met, or (iii) the Company is or has been a "United States real
property holding corporation" for federal income tax purposes at any time
within the shorter of the five-year period preceding such disposition or such
holder's holding period and certain other conditions are met. The Company has
determined that it is not, has not been for the last five years, and does not
believe that it will become a "United States real property holding
corporation" for federal income tax purposes. If a Non-United States Holder
falls under clause (i) above, the Non-United States holder will be taxed on
the net gain derived from the sale under regular graduated United States
federal income tax rates (and, with respect to corporate Non-United States
Holders, may also be subject to the branch profits tax described above). If an
individual Non-United States Holder falls under clause (ii) above, the Non-
United States Holder generally will be subject to a 30% tax on the gain
derived from the sale, which gain may be offset by United States capital
losses recognized within the same taxable year of such sale.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, the Company must report to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax
withheld. A similar report is sent to the holder. Pursuant to tax treaties or
other agreements, the IRS may make its reports available to tax authorities in
the recipient's country of residence.
Unless the Company has actual knowledge that a holder is a non-United States
person, dividends paid to a holder at an address within the United States may
be subject to backup withholding at a rate of 31% if the holder is not an
exempt recipient as defined in Treasury Regulation Section 1.6049-4(c)(1)(ii)
(which includes corporations) and fails to provide a correct taxpayer
identification number and other information to the Company. Backup withholding
will generally not apply to dividends paid to holders at an address outside
the United States (unless the Company has knowledge that the holder is a
United States person.)
If the proceeds of the disposition of Class A Common Stock by a Non-United
States Holder are paid over, by or through a United States office of a broker,
the payment is subject to information reporting and to backup withholding at a
rate of 31% unless the disposing holder certifies as to its name, address and
status as a Non-United States Holder under penalties of perjury or otherwise
establishes an exemption. Generally, United States information reporting and
backup withholding will not apply to a payment of disposition proceeds if the
payment is made outside the United States through a non-United States office
of a non-United States broker. However, United States information reporting
requirements (but not backup withholding) will apply to a payment of
disposition proceeds outside the United States if (a) the payment is made
through an office outside the United States of a broker that is either (i) a
United States person for United States federal income tax purposes, (ii) a
"controlled foreign corporation" for United States federal income tax
purposes, or (iii) a foreign person which derives 50% or more of its gross
income for certain periods from the conduct of a United States trade or
business, and (b) the broker fails to maintain documentary evidence in its
files that the holder is a Non-United States Holder and that certain
conditions are met or that the holder otherwise is entitled to an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to 31% backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
The United States Treasury has recently issued proposed regulations
regarding the withholding and information reporting rules discussed above. In
general, the proposed regulations do not alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. If finalized in their current form,
the proposed regulations would generally be effective for payments made after
December 31, 1997, subject to certain transition rules.
ESTATE TAX
An individual Non-United States Holder who is treated as the owner of Class
A Common Stock at the time of his or her death or has made certain lifetime
transfers of an interest in Class A Common Stock will be required
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to include the value of such Class A Common Stock in his or her gross estate
for United States federal estate tax purposes and may be subject to United
States federal estate tax, unless an applicable estate tax treaty provides
otherwise.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have 50,386,112 shares of
Class A Common Stock outstanding or issuable on the conversion of outstanding
Class B Common Stock (assuming no exercise of the Underwriters' over-allotment
options or of the outstanding Warrants). Of these shares, the 10,000,000
shares of Class A Common Stock sold in the Offerings will generally be freely
tradeable without restriction or further registration under the Securities
Act. The 1,993,638 shares of Class A Common Stock which are issuable on
conversion of shares of Class B Common Stock issuable upon the exercise of
outstanding Class B Warrants, will be eligible for resale in the public market
upon their issuance in accordance with a registration statement filed by the
Company. The 731,624 shares of Class A Common Stock which are issuable upon
exercise of the Lenfest Warrant will be eligible for resale in the public
market after their issuance in accordance with registration rights agreements
entered into in connection therewith. These agreements provide for demand
registration of the Class A Common Stock issuable upon exercise of such
Warrants on demand upon completion of the Offerings in the case of the Lenfest
Warrant. In addition, the 200,000, 913,380 and 446,951 shares of Class A
Common Stock which are issuable upon exercise of the Adelphia Warrant, the MCI
Warrant and Additional MCI Warrants, respectively, will be eligible for resale
in the public market after their issuance in accordance with the Adelphia
Registration Rights Agreement. See "Certain Relationships and Transactions."
Assuming no exercise of the Underwriters' over-allotment options, 32,500,000
shares of Class A Common Stock issuable upon conversion of outstanding Class B
Common Stock will be subject to Lock-Up Agreements as described below. Upon
the expiration of the Lock-Up Agreements, or earlier at the discretion of
Smith Barney Inc., all of such shares of Class A Common Stock issuable upon
the conversion of Class B Common Stock, will be "restricted shares" which are
nonetheless eligible for sale in the public market pursuant to the provisions
and limitations of Rule 144 under the Securities Act ("Rule 144"). See "--Sale
of Restricted Shares." All shares of Common Stock outstanding prior to the
Offerings and the Adelphia New Shares are subject to registration rights
agreements with the Company. See "Certain Relationships and Transactions."
Additionally, the Company intends to register all shares of Class A Common
Stock reserved for issuance under its 1996 Plan, thus permitting the issuance
of such shares to plan participants under the Securities Act.
SALE OF RESTRICTED SHARES
In general, pursuant to Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares ("Restricted Shares")
for at least one year, is entitled to sell, within any three-month period, a
number of shares of Class A Common Stock equal to the greater of (i) one
percent of the shares of Class A Common Stock outstanding, or (ii) the average
weekly trading volume of the Class A Common Stock on the Nasdaq National
Market during the four calendar weeks immediately preceding the date on which
notice of such sale is filed with the Securities and Exchange Commission.
Sales pursuant to Rule 144 are also subject to certain requirements relating
to the manner of sale, notice and the availability of current public
information about the Company. A person (or persons whose shares are
aggregated) who is not an Affiliate (as such term is defined under the
Securities Act) and has not been an Affiliate of the Company at any time
during the three months immediately preceding the sale and who has
beneficially owned Restricted Shares for at least two years is entitled to
sell such shares pursuant to Rule 144(k) without regard to the Rule 144
limitations described above.
After consummation of the Offerings, the Company intends to file a
registration statement under the Securities Act covering the shares issuable
on the exercise of options for the purchase of Class A Common Stock granted
under the Company's 1996 Plan. The Company expects that this registration will
automatically become
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effective upon filing. Accordingly, shares registered under such registration
statement will immediately thereafter be available for sale in the public
market, subject to Rule 144 volume limitations applicable to Affiliates, and
subject to any applicable vesting restrictions.
LOCK-UP AGREEMENTS
The Lock-Up Agreements provide that the Company, Mr. Milliard and the
Management Stockholders will not, directly or indirectly, offer, sell, grant
any option to purchase or otherwise dispose (or approve any offer, sale, grant
or other disposition) of any shares of Class A Common Stock, Class B Common
Stock or other capital stock of the Company or any securities convertible
into, or exercisable or exchangeable for, any shares of Class A Common Stock,
Class B Common Stock or other capital stock of the Company (except in
connection with certain transfers to affiliates, the Company's 1996 Plan and
issuances upon the exercise of the Warrants) without the prior written consent
of Smith Barney Inc. for a period of 180 days after the date of this
Prospectus. Smith Barney Inc., in its discretion, may waive the foregoing
restrictions in whole or in part, with or without a public announcement of
such action.
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UNDERWRITING
Under the terms and subject to the conditions in the U.S. Underwriting
Agreement dated , 1998 (the "U.S. Underwriting Agreement"), each of the
Underwriters of the U.S. Offering named below (the "U.S. Underwriters"), for
whom Smith Barney Inc., Credit Suisse First Boston Corporation and NationsBanc
Montgomery Securities LLC are acting as the Representatives (the
"Representatives"), has severally agreed to purchase, and the Company has
agreed to sell to each U.S. Underwriter, shares of Class A Common Stock which
equal the number of shares set forth opposite the name of such U.S.
Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- ---------
<S> <C>
Smith Barney Inc...................................................
Credit Suisse First Boston Corporation.............................
NationsBanc Montgomery Securities LLC..............................
---
Total............................................................
===
</TABLE>
Under the terms and subject to the conditions contained in the International
Underwriting Agreement dated , 1998 (the "International Underwriting
Agreement"), each of the managers of the International Offering named below
(the "Managers"), for whom Smith Barney Inc., Credit Suisse First Boston
(Europe) Limited and NationsBanc Montgomery Securities LLC are acting as lead
manager (the "Lead Managers"), has severally agreed to purchase, and the
Company has agreed to sell to each Manager, shares of Class A Common Stock
which equal the number of shares set forth opposite the name of such Manager
below:
<TABLE>
<CAPTION>
NUMBER OF
MANAGERS SHARES
-------- ---------
<S> <C>
Smith Barney Inc...................................................
Credit Suisse First Boston (Europe) Limited........................
NationsBanc Montgomery Securities LLC..............................
---
Total............................................................
===
</TABLE>
The U.S. Underwriters and the Managers (collectively, the "Underwriters")
initially propose to offer part of the shares of Class A Common Stock directly
to the public at the public offering price set forth on the cover page of this
Prospectus and part to certain dealers at a price that represents a concession
not in excess of $ per share below the public offering price. The U.S.
Underwriters and the Managers may allow, and such dealers may reallow, a
concession not in excess of $ per share to the other U.S. Underwriters or
Managers, respectively, or to certain other dealers. After the initial public
offering, the public offering price and such concession may be changed by the
U.S. Underwriters and the Managers. The Representatives and the Lead Managers
have advised the Company that the U.S. Underwriters and the Managers do not
intend to confirm any shares of Class A Common Stock to accounts over which
they exercise discretionary authority.
The Company has granted to the U.S. Underwriters and the Managers an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of 1,500,000 additional shares of Class A Common Stock at the public
offering price set forth on the cover page of this Prospectus less
underwriting discounts and commissions. The U.S. Underwriters and the Managers
may exercise such option to purchase additional shares solely for the purpose
of covering over-allotments, if any, incurred in connection with the sale of
the shares offered hereby. To the extent such option is exercised, each U.S.
Underwriter and each Manager will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares set forth opposite such U.S. Underwriter's or
Manager's name in the preceding tables bears to the total number of shares in
such tables.
The Company, the U.S. Underwriters and the Managers have agreed to indemnify
each other against certain liabilities, including liabilities under the
Securities Act.
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The Company and Adelphia have agreed that, for a period of 180 days after
the date of this Prospectus, they will not, without the prior written consent
of Smith Barney Inc. (other than pursuant to certain permitted transfers, the
1996 Plan, or upon the issuance of shares upon the exercise of the Warrants)
offer, sell, contract to sell or otherwise dispose of any Shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or grant any options or warrants to purchase Shares of Common
Stock.
The U.S. Underwriters and the Managers have entered into an Agreement
between U.S. Underwriters and Managers pursuant to which each U.S. Underwriter
has agreed that, as part of the distribution of the 8,000,000 shares offered
in the U.S. Offering (i) it is not purchasing any such shares for the account
of anyone other than a U.S. or Canadian Person and (ii) it has not offered or
sold, and will not, offer, sell, resell or deliver, directly or indirectly,
any of such shares or distribute any prospectus relating to the U.S. Offering
outside the United States or Canada or to anyone other than a U.S. or Canadian
Person. In addition, each Manager has agreed that as part of the distribution
of the 2,000,000 shares offered in the International Offering: (i) it is not
purchasing any such shares for the account of any U.S. or Canadian Person and
(ii) it has not offered or sold, and will not offer, sell, resell or deliver
directly or indirectly, any of such shares or distribute any prospectus
relating to the International Offering in the United States or Canada or to
any U.S. or Canadian Person. Each Manager has also agreed that it will offer
to sell shares only in compliance with all relevant requirements of any
applicable laws.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. Underwriting Agreement, the
International Underwriting Agreement and the Agreement Between U.S.
Underwriters and Managers, including: (i) certain purchases and sales between
the U.S. Underwriters and the Managers, (ii) certain offers, sales, resales,
deliveries or distributions to or through investment advisors or other persons
exercising investment discretion, (iii) purchases, offers or sales by a U.S.
Underwriter who is also acting as Manager or by a Manager who is also acting
as a U.S. Underwriter and (iv) other transactions specifically approved by the
Representatives and the Lead Managers. As used herein, "U.S. or Canadian
Person" means any resident or national of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or any estate or trust the income of which
is subject to United States or Canadian income taxation regardless of the
source of its income (other than the foreign branch of any U.S. or Canadian
Person), and includes any United States or Canadian branch of a person other
than a U.S. or Canadian Person.
Any offer of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the relevant province of Canada
in which such offer is made.
Each Manager agrees that (i) it will not offer or sell any shares to persons
in the United Kingdom except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which will not involve an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995 ("the
Regulations"); (ii) it will comply with all applicable provisions of the
Financial Services Act 1986 and the Regulations with respect to anything done
by it in relation to the shares in, from, or otherwise involving the United
Kingdom; and (iii) it will only issue or pass on to any person in the United
Kingdom any document received by it in connection with the offer of the shares
if that person is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a
person to whom such document may otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction by the Company or
the Managers that would permit an offering to the general public of the shares
offered hereby in any jurisdiction other than the United States.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page of this
Prospectus.
79
<PAGE>
Pursuant to the Agreement Between U.S. Underwriters and Managers, sales may
be made between the U.S. Underwriters and the Managers of such number of
shares as may be mutually agreed. The price of any shares so sold shall be the
public offering price as then in effect for shares being sold by the U.S.
Underwriters and the Managers, less all or any part of the selling concession,
unless otherwise determined by mutual agreement. To the extent that there are
sales between the U.S. Underwriters and the Managers pursuant to the Agreement
Between U.S. Underwriters and Managers, the number of shares initially
available for sale by the U.S. Underwriters and by the Managers may be more or
less than the number of shares appearing on the front cover of this
Prospectus.
Prior to the Offerings there has not been any public market for the Class A
Common Stock of the Company. Consequently, the initial public offering price
for the shares of Class A Common Stock included in the Offerings has been
determined by negotiations between the Company, the Representatives and the
Lead Managers. Among the factors considered in determining such price will be
the history of and prospects for the Company's business and the industry in
which it competes, an assessment of the Company's management and the present
state of the Company's development, the past and present revenues and earnings
of the Company, the prospects for growth of the Company's revenues and
earnings, the current state of the economy in the United States and the
current level of economic activity in the industry in which the Company
competes and in related or comparable industries, and currently prevailing
conditions in the securities markets, including current market valuations of
publicly traded companies which are comparable to the Company.
Smith Barney Inc. provides investment banking services to the Company and
certain of its affiliates from time to time for which it receives customary
fees.
In connection with the Offerings and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more Class A Common Stock than the
total amount shown on the lists of Underwriters and participations which
appear above) and may effect transactions which stabilize, maintain or
otherwise affect the market price of the Class A Common Stock at levels above
those which might otherwise prevail in the open market. Such transactions may
include placing bids for the Class A Common Stock or effecting purchases of
the Class A Common Stock for the purpose of pegging, fixing or maintaining the
price of the Class A Common Stock or for the purpose of reducing a syndicate
short position created in connection with the Offerings. A syndicate short
position may be covered by exercise of the options described above in lieu of
or in addition to open market purchases. In addition, the contractual
arrangements among the Underwriters include a provision whereby, if the
Representatives purchase Class A Common Stock in the open market for the
account of the underwriting syndicate and the securities purchased can be
traced to a particular Underwriter or member of the selling group, the
underwriting syndicate may require the Underwriter or selling group member in
question to purchase the Class A Common Stock in question at the cost price to
the syndicate or may recover from (or decline to pay to) the Underwriter or
selling group member in question the selling concession applicable to the
securities in question. The Underwriters are not required to engage in any of
these activities and any such activities, if commenced, may be discontinued at
any time.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon
on behalf of the Company by Buchanan Ingersoll Professional Corporation,
Pittsburgh, Pennsylvania. Certain legal matters will be passed upon on behalf
of the Company by its special local regulatory counsel, Downs Rachlin & Martin
PLLC, St. Johnsbury, Vermont; and Swidler & Berlin, Washington, D.C. Certain
legal matters relating to the securities offered hereby will be passed upon on
behalf of the Representatives by Latham & Watkins, New York, New York.
80
<PAGE>
EXPERTS
The financial statements 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.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement and the exhibits
and schedules thereto. For further information with respect to the Company and
the Common Stock, reference is made to such Registration Statement and the
exhibits and schedules filed as part thereof. Statements contained in this
Prospectus regarding the contents of any contract or any other document are
necessarily summaries and each such statement is qualified in its entirety by
reference to the copy of such contract or document filed as an Exhibit to the
Registration Statement.
The Company is currently subject to the informational reporting requirements
of the Securities Exchange Act of 1934, as amended, and in accordance
therewith will file periodic reports, proxy statements and other information
with the Commission. The Registration Statement and the exhibits and schedules
thereto, as well as such periodic reports, proxy statements and other
information filed with the Commission, may be inspected without charge at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and will also be available for
inspection and copying at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and the
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any portion of the Registration Statement may be obtained
from the Public Reference Section of the Commission upon payment of certain
prescribed fees. Electronic registratioin statements made through the
Electronic Data Gathering, Analysis, and Retrieval system are publicly
available through the Commission's Web site (http://www.sec.gov), which is
maintained by the Commission and which contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent auditors.
81
<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 Decem-
ber 31, 1997.............................................................. F-3
Consolidated Statements of Operations, Years Ended March 31, 1995, 1996 and
1997, and
unaudited Nine Months Ended December 31, 1996 and 1997.................... F-4
Consolidated Statements of Common Stock and Other Stockholders' Equity (De-
ficiency), Years Ended March 31, 1995, 1996 and 1997, and unaudited Nine
Months Ended December 31, 1997............................................ F-5
Consolidated Statements of Cash Flows, Years Ended March 31, 1995, 1996 and
1997, and unaudited Nine Months Ended December 31, 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, common stock and other
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 (April 28, 1998 as to the sixth paragraph of Note 6)
F-2
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------- ------------
1996 1997 1997
------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
- -------
Current assets:
Cash and cash equivalents.................... $ -- $ 59,814 $332,863
Other current assets......................... 282 768 2,547
------- -------- --------
Total current assets....................... 282 60,582 335,410
U.S. government securities--pledged............ -- -- 85,027
Investments.................................... 21,087 44,685 73,958
Property, plant and equipment--net............. 12,561 53,921 112,883
Other assets--net.............................. 1,045 15,376 27,535
Deferred income taxes--net..................... 294 37 37
------- -------- --------
Total...................................... $35,269 $174,601 $634,850
======= ======== ========
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND
OTHER STOCKHOLDERS' EQUITY (DEFICIENCY):
- ----------------------------------------------
Current liabilities:
Accounts payable............................. $ 2,529 $ 2,342 $ 2,539
Due to affiliates--net....................... 8,707 6,081 1,415
Other current liabilities.................... 501 757 14,411
------- -------- --------
Total current liabilities.................. 11,737 9,180 18,365
13% Senior Discount Notes due 2003............. -- 187,173 207,918
12 1/4% Senior Secured Notes due 2004.......... -- -- 250,000
Note payable--Adelphia......................... 50,855 25,855 34,454
Other debt..................................... -- 2,647 29,573
------- -------- --------
Total liabilities.......................... 62,592 224,855 540,310
------- -------- --------
12 7/8% Senior Exchangeable Redeemable
Preferred Stock................................ -- -- 200,721
------- -------- --------
Commitments and contingencies (Note 7)
Common stock and other stockholders' equity
(deficiency):
Class A Common Stock, $0.01 par value,
300,000,000 shares authorized and 0, 338,000
and 396,500 shares outstanding,
respectively................................ -- 3 4
Class B Common Stock, $0.01 par value,
150,000,000 shares
authorized and 32,500,000 shares
outstanding................................. 325 325 325
Additional paid in capital................... -- 153 179
Class B Common Stock warrants................ -- 11,087 11,087
Loans to stockholders........................ -- (3,000) (3,000)
Accumulated deficit.......................... (27,648) (58,822) (114,776)
------- -------- --------
Total common stock and other stockholders'
equity (deficiency)........................ (27,323) (50,254) (106,181)
------- -------- --------
Total...................................... $35,269 $174,601 $634,850
======= ======== ========
</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>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31,
--------------------------- --------------------
1995 1996 1997 1996 1997
------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................... $ 1,729 $ 3,322 $ 5,088 $ 3,611 $ 8,690
------- -------- -------- --------- ---------
Operating expenses:
Network operations........ 1,382 2,690 3,432 2,339 5,263
Selling, general and
administrative............ 2,524 3,084 6,780 4,736 9,099
Depreciation and
amortization.............. 463 1,184 3,945 2,583 7,027
------- -------- -------- --------- ---------
Total................... 4,369 6,958 14,157 9,658 21,389
------- -------- -------- --------- ---------
Operating loss.............. (2,640) (3,636) (9,069) (6,047) (12,699)
Other income (expense):
Gain on sale of
investment................ -- -- 8,405 8,405 --
Interest income........... 39 199 5,976 4,319 7,951
Interest expense and fees. (3,321) (6,088) (28,377) (20,759) (35,934)
------- -------- -------- --------- ---------
Loss before income taxes and
equity in net loss of joint
ventures .................. (5,922) (9,525) (23,065) (14,082) (40,682)
Income tax benefit
(expense)................... 29 197 (259) 180 --
------- -------- -------- --------- ---------
Loss before equity in net
loss of joint ventures .... (5,893) (9,328) (23,324) (13,902) (40,682)
Equity in net loss of joint
ventures.................... (1,799) (4,292) (7,223) (5,143) (9,284)
------- -------- -------- --------- ---------
Net loss.................... (7,692) (13,620) (30,547) (19,045) (49,966)
Dividend requirements
applicable to preferred
stock...................... -- -- -- -- (5,794)
------- -------- -------- --------- ---------
Net loss applicable to
common stockholders........ $(7,692) $(13,620) $(30,547) $(19,045) $(55,760)
======= ======== ======== ========= =========
Net loss per weighted
average share of
common stock............... $ (0.24) $ (0.42) $ (0.89) $ (0.55) $ (1.60)
======= ======== ======== ========= =========
Weighted average shares of
common stock outstanding... 32,500 32,500 34,421 34,398 34,889
======= ======== ======== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCK AND
OTHER STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS B
CLASS A CLASS B ADDITIONAL COMMON
COMMON COMMON PAID-IN STOCK LOANS TO ACCUMULATED
STOCK STOCK CAPITAL WARRANTS STOCKHOLDERS DEFICIT TOTAL
------- ------- ---------- -------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994 $-- $325 $-- $ -- $ -- $ (6,336) $ (6,011)
Net loss.............. -- -- -- -- -- (7,692) (7,692)
---- ---- ---- ------- ------- --------- ---------
Balance, March 31, 1995 -- 325 -- -- -- (14,028) (13,703)
Net loss.............. -- -- -- -- -- (13,620) (13,620)
---- ---- ---- ------- ------- --------- ---------
Balance, March 31, 1996. -- 325 -- -- -- (27,648) (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 .. 3 -- 153 -- -- -- 156
Net loss ............. -- -- -- -- -- (30,547) (30,547)
---- ---- ---- ------- ------- --------- ---------
Balance, March 31, 1997
....................... 3 325 153 11,087 (3,000) (58,822) (50,254)
Issuance of Class A
Common Stock bonus
(unaudited).......... 1 -- 26 -- -- -- 27
Net loss (unaudited).. -- -- -- -- -- (49,966) (49,966)
Dividend requirements
applicable to pre-
ferred stock (unau-
dited) .............. -- -- -- -- -- (5,794) (5,794)
Other (unaudited) .... -- -- -- -- -- (194) (194)
---- ---- ---- ------- ------- --------- ---------
Balance, December 31,
1997
(unaudited)............ $ 4 $325 $179 $11,087 $(3,000) $(114,776) $(106,181)
==== ==== ==== ======= ======= ========= =========
</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>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31,
---------------------------- --------------------
1995 1996 1997 1996 1997
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................. $ (7,692) $(13,620) $(30,547) $ (19,045) $ (49,966)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation........... 397 1,061 2,604 1,555 5,269
Amortization........... 66 123 1,341 1,028 1,758
Equity in net loss of
joint ventures........ 1,799 4,292 7,223 5,143 9,284
Non-cash interest
expense............... 3,321 6,088 23,467 17,123 24,680
Deferred income taxes.. (37) (206) 257 (180) --
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
acquisitions:
Other assets--net.... (550) (227) (624) (1,019) (3,646)
Accounts payable and
other current
liabilities......... 566 1,656 (295) 1,208 10,985
-------- -------- -------- --------- ---------
Net cash used in operating
activities................ (2,130) (833) (4,823) (2,592) (1,609)
-------- -------- -------- --------- ---------
Cash flows from investing
activities:
Net cash used for
acquisitions........... -- -- (5,040) (5,040) (7,638)
Expenditures for
property, plant
and equipment.......... (2,850) (6,084) (24,627) (14,950) (34,834)
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) (23,398) (46,119)
Investment in U. S.
government securities--
pledged................ -- -- -- -- (83,400)
-------- -------- -------- --------- ---------
Net cash used in investing
activities................ (10,376) (18,899) (72,818) (31,770) (171,991)
-------- -------- -------- --------- ---------
Cash flows from financing
activities:
Proceeds from issuance
of preferred stock..... -- -- -- -- 194,733
Proceeds from debt...... -- -- 163,705 163,705 250,000
Proceeds from sale and
leaseback of equipment. -- -- -- -- 14,876
Proceeds from issuance
of Class B Common Stock
warrants............... -- -- 11,087 11,087 --
Costs associated with
debt financing......... -- -- (6,555) (6,374) (12,496)
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....... -- -- -- -- (402)
Advances from (to)
affiliates............. 254 10,506 (2,782) (9,678) (62)
-------- -------- -------- --------- ---------
Net cash provided by
financing activities...... 12,506 19,732 137,455 130,740 446,649
-------- -------- -------- --------- ---------
Net increase in cash and
cash equivalents.......... -- -- 59,814 96,378 273,049
Cash and cash equivalents,
beginning of period....... -- -- -- -- 59,814
-------- -------- -------- --------- ---------
Cash and cash equivalents,
end of period............. $ -- $ -- $ 59,814 $ 96,378 $ 332,863
======== ======== ======== ========= =========
</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 NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 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, based on
outstanding common stock, is an 88% owned subsidiary of Adelphia
Communications Corporation ("Adelphia"). The remaining 12% outstanding on
December 31, 1997, 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 switch, 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 NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 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 Class B Common
Stock Warrants outstanding during the year. Diluted net loss per common share
is not presented because the MCI Warrant discussed in Note 11 had an
antidilutive effect for the periods presented; however, the MCI Warrant could
have a dilutive effect on earnings per share in future periods.
All references in the accompanying consolidated financial statements to the
number of shares of common stock have been retroactively restated to reflect
the stock splits (See Note 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
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 NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1)THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
Noncash Financing Activities
Capital leases entered into during the nine months ended December 31, 1997
totalled $24,500. (See Note 5).
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 Company adopted SFAS No. 128 during the nine months ended December 31,
1997.
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 December 31, 1997 and for the nine months ended December 31,
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
nine months ended December 31, 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 December 31, 1997 presentation.
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 NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(2)PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------- DECEMBER 31,
1996 1997 1997
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Telecommunications networks.................... $ 6,312 $12,236 $25,526
Network monitoring and switching equipment..... 5,267 19,301 60,517
Fiber asset under construction (Note 3)........ -- 11,500 11,500
Construction in process........................ 2,245 14,978 26,731
Other.......................................... 388 1,131 4,260
------- ------- --------
14,212 59,146 128,534
Less accumulated depreciation.................. (1,651) (5,225) (15,651)
------- ------- --------
Total........................................ $12,561 $53,921 $112,883
======= ======= ========
</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. Pursuant to these
agreements and in consideration of a payment of $20,000, the Company received
a $20,000 Senior Secured note (the "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.
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 NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(4)INVESTMENTS, CONTINUED
The Company's nonconsolidated investments are as follows:
<TABLE>
<CAPTION>
MARCH 31,
OWNERSHIP ----------------- DECEMBER 31,
PERCENTAGE 1996 1997 1997
---------- ------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
MediaOne Fiber Technologies
(Jacksonville)................. 20.0% $ 4,701 $ 7,330 $ 7,979
Multimedia Hyperion
Telecommunications (Wichita)... 49.9% 2,620 3,306 3,744
Louisville Lightwave........... 50.0%(1)(7) 996 4,683 10,518
NewChannels Hyperion
Telecommunications (Albany).... -- %(2) 999 924 --
NewChannels Hyperion
Telecommunications
(Binghamton)................... -- %(2) 504 504 --
NHT Partnership (Buffalo)...... 60.0%(1)(3) 2,457 4,717 --
NewChannels Hyperion
Telecommunications (Syracuse).. 100.0%(4) 3,140 4,215 --
Hyperion of Harrisburg......... 50.0%(1) 1,600 5,246 15,615
Hyperion of Tennessee
(Nashville).................... 25.0%(5) 1,345 -- --
MediaOne of Virginia
(Richmond)..................... 37.0% 3,406 7,018 7,212
New Jersey Fiber Technologies
(New Brunswick and Morristown). 19.7%(1) 956 3,340 8,185
TCG of South Florida........... 15.7%(6) 4,679 -- --
PECO-Hyperion (Philadelphia) .. 50.0% -- 10,750 19,400
PECO-Hyperion (Allentown,
Bethlehem, Easton, Reading)... 50.0% -- -- 511
Lexington Lightwave ........... 50.0%(1) -- 2,311 5,498
Hyperion of York............... 50.0% -- 1,402 3,000
Entergy Hyperion
Telecommunications of
Louisiana...................... 50.0% -- -- 2,900
Entergy Hyperion
Telecommunications of
Mississippi.................... 50.0% -- -- 3,150
Entergy Hyperion
Telecommunications of Arkansas. 50.0% -- -- 3,400
Other ......................... Various 497 949 1,360
------- -------- --------
27,900 56,695 92,472
Cumulative equity in net (6,813) (12,010) (18,514)
losses......................... ------- -------- --------
Total Investments.............. $21,087 $ 44,685 $ 73,958
======= ======== ========
</TABLE>
- --------
(1) As discussed below, the Company increased its ownership to 100% in these
networks on February 12, 1998.
(2) As discussed below, the Company consummated an agreement which eliminated
its interest in these networks. The previous ownership percentages in
the Albany and Binghamton networks were 50% and 20% respectively.
(3) As discussed below, the Company consummated an agreement which increased
its ownership in the Buffalo network to 60% from 40% and accordingly has
consolidated this investment effective September 12, 1997.
(4) As discussed below, the Company consummated an agreement which increased
its ownership in the Syracuse network to 100% from 50% and accordingly
has consolidated this investment effective September 12, 1997.
(5) 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.
(6) As discussed below, the Company sold its interest in TCG of South Florida
on May 16, 1996.
(7) The Company increased its ownership in this partnership on May 8, 1996
from 20% to 50%.
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 NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 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 the entities involved in the Time Warner Entertainment--Advance
Newhouse ("TWEAN") agreement (Albany, Binghamton, Buffalo, and Syracuse
networks) and TCG of South Florida and Hyperion of Tennessee (all discussed
below) as of and for the periods presented, is as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------- DECEMBER 31,
1996 1997 1997
-------- -------- ------------
<S> <C> <C> <C>
Current assets................................ $ 1,517 $ 3,843 $ 7,477
Non-current assets............................ 57,169 134,680 201,692
Current liabilities........................... 4,762 5,629 14,198
Non-current liabilities....................... 13,908 43,974 57,040
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
-------------------------- ------------------
1995 1996 1997 1996 1997
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues..................... $ 1,514 $ 3,238 $ 8,078 $ 5,403 $ 10,086
Net loss..................... (3,001) (5,926) (14,841) (10,168) (20,212)
</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%.
Accordingly, the results of operations of Hyperion of Tennessee have been
included in the Company's consolidated operating results effective August 1,
1996.
On September 12, 1997, the Company consummated an agreement with TWEAN to
exchange interests in four New York CLEC networks. As a result of the
transaction, the Company paid TWEAN $7,638 and increased its ownership in the
networks serving Buffalo and Syracuse, New York to 60% and 100%, respectively,
and eliminated its interest in the Albany and Binghamton networks, which
became wholly owned by TWEAN. Accordingly, the results of operations of the
Buffalo and Syracuse networks have been included in the Company's consolidated
operating results effective September 12, 1997.
On February 12, 1998, the Company purchased additional partnership interests
in Louisville Lightwave (Louisville and Lexington), NHT Partnership (Buffalo),
New Jersey Fiber Technologies and Hyperion of Harrisburg, as a result, the
Company's ownership in these networks increased to 100%. The aggregate
purchase price was comprised of approximately $45,000 in cash and a warrant
for 731,624 shares of the Company's Class A Common Stock.
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 NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(4)INVESTMENTS, CONTINUED
The following unaudited financial information of the Company assumes that
the August 1, 1996, September 12, 1997, and February 12, 1998 transactions had
occurred on April 1, 1995.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
---------------------- ------------------
1996 1997 1996 1997
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Revenues........................ $ 5,701 $ 8,710 $ 5,739 $ 12,435
Net loss........................ (20,579) (37,923) (23,971) (57,055)
Net loss applicable to common
stockholders.................... (20,579) (37,923) (23,971) (62,849)
Net loss per weighted average
share of common stock........... $ (0.62) $ (1.08) $ (0.68) $ (1.76)
</TABLE>
On December 1, 1997, the Company announced that it had entered into a
partnership agreement with Allegheny Energy to provide CLEC services.
Allegheny Energy has agreed to construct fiber optic networks for Hyperion
through one of its affiliates which will partner with Hyperion in most, if not
all, of the contemplated networks. Allegheny Energy is an investor owned
utility providing electricity in portions of Maryland, Ohio, Pennsylvania,
Virginia and West Virginia.
(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 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 converted to additional subordinated note principal from the
inception of the note on April 15, 1996 through December 31, 1997 has totaled
$8,599.
Upon the consummation of the contemplated offering of the Company's Class A
Common Stock, Adelphia will contribute to the Company the Note payable--
Adelphia and certain affiliate payables in exchange for shares of the
Company's Class A Common Stock.
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 1,993,638
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
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 NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(5)FINANCING ARRANGEMENTS, CONTINUED
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 principal 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 $0.00308 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.
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.
12 1/4% Senior Secured Notes
On August 27, 1997, the Company issued $250,000 aggregate principal amount
of 12 1/4% Senior Secured Notes due September 1, 2004 (the "Senior Secured
Notes"), in a private placement. The Senior Secured Notes are collateralized
through the pledge of the common stock of certain of its wholly-owned
subsidiaries. Of the proceeds to the Company of approximately $244,000, net of
commissions and other transaction costs, $83,400 was invested in U.S.
government securities and placed in an escrow account for payment in full when
due of the first six scheduled semi-annual interest payments on the Senior
Secured Notes as required by the Indenture. The
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 NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(5)FINANCING ARRANGEMENTS, CONTINUED
remainder of such proceeds 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.
Interest is payable semi-annually commencing March 1, 1998. The Senior
Secured Notes rank pari passu in right of payment with all existing and future
senior Indebtedness (as defined in the Indenture) of the Company and will rank
senior in right of payment to future subordinated Indebtedness of the Company.
On or before September 1, 2000 and subject to certain restrictions, the
Company may redeem, at its option, up to 25% of the aggregate principal amount
of the Senior Secured Notes at a price of 112.25% of principal with the net
proceeds of one or more Qualified Equity Offerings (as defined in the
Indenture). On or after September 1, 2001, the Company may redeem, at its
option, all or a portion of the Senior Secured Notes at 106.125% of principal
which declines to par in 2003, plus accrued interest.
The holders of the Senior Secured Notes may put them to the Company at any
time at a price of 101% of principal upon the occurrence of a Change of
Control (as defined in the Indenture). The Indenture stipulates, among other
things, limitations on additional borrowings, payment of dividends and other
distributions, repurchase of equity interests, transactions with affiliates
and the sale of assets.
In accordance with a registration rights agreement, the Company filed a
registration statement offering to exchange the Senior Secured Notes for
Series B Senior Secured Notes registered under the Securities Act. Terms of
the Series B Senior Secured Notes are substantially the same as the Senior
Secured Notes. The above exchange was consummated within the time periods
stipulated in the agreement.
If the Senior Secured Notes had been issued on April 1, 1996, interest
expense would have been approximately $59,002, $43,728 and $48,269 for the
year ended March 31, 1997 and the nine months ended December 31, 1996 and
1997, respectively.
12 7/8% Senior Exchangeable Redeemable Preferred Stock
On October 9, 1997, the Company issued $200,000 aggregate liquidation
preference of 12 7/8% Senior Exchangeable Redeemable Preferred Stock due
October 15, 2007 (the "Preferred Stock"), in a private placement. Proceeds to
the Company, net of commissions and other transaction costs, were
approximately $194,700. Such proceeds 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.
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 October 15, 2002, dividends are payable in
cash. The Preferred Stock will rank junior in right of payment to all
indebtedness and other obligations of the Company, its Subsidiaries and Joint
Ventures. On or before October 15, 2000, and subject to certain restrictions,
the Company may redeem, at its option, up to 35% of the initial aggregate
liquidation preference of the Preferred Stock originally issued with the net
cash proceeds of one or more Qualified Equity Offerings (as defined in the
Certificate of Designation) at a redemption price equal to 112.875% of the
liquidation preference per share of the Preferred Stock, plus, without
duplication, accumulated and unpaid dividends to the date of redemption;
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 NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(5)FINANCING ARRANGEMENTS, CONTINUED
provided that, after any such redemption, there are remaining outstanding
shares of Preferred Stock having an aggregate liquidation preference of at
least 65% of the initial aggregate liquidation preference of the Preferred
Stock originally issued. On or after October 15, 2002, the Company may redeem,
at its option, all or a portion of the Preferred Stock at 106.438% of the
liquidation preference thereof declining to par in 2005, plus accrued
interest. The Company is required to redeem all of the shares of Preferred
Stock outstanding on October 15, 2007 at a redemption price equal to 100% of
the liquidation preference thereof, plus, without duplication, accumulated and
unpaid dividends to the date of redemption.
The holders of the Preferred Stock may put the Preferred Stock to the
Company at any time at a price of 101% of the liquidation preference thereof
upon the occurrence of a Change of Control (as defined in the Certification of
Designation) The Certificate of Designation stipulates, among other things,
limitations on additional borrowings, payment of dividends and other
distributions, transactions with affiliates and the sale of assets.
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.
In accordance with a registration rights agreement, the Company filed a
registration statement offering to exchange the Preferred Stock for Series B
Senior Exchangeable Redeemable Preferred Stock registered under the Securities
Act. Terms of the Series B Senior Exchangeable Redeemable Preferred Stock are
substantially the same as the Preferred Stock. The above exchange was
consummated within the time periods stipulated in the agreement.
If the Preferred Stock had been issued on April 1, 1996, dividend
requirements applicable to preferred stock would have been approximately
$27,000, $19,900 and $22,600 for the year ended March 31, 1997 and the nine
months ended December 31, 1996 and 1997, respectively.
Long Term Lease Facility
On December 31, 1997, the Company consummated an agreement for a $24,500
long term lease facility with AT&T Capital Corporation. The lease facility
provides financing for certain of the Operating Companies' switching
equipment. Included in the lease facility is the sale and leaseback of certain
switch equipment for which the Company received $14,876.
Other Debt
Other debt consists primarily of capital leases entered into in connection
with the acquisition of fiber leases for use in the telecommunications
networks and the long term lease facility discussed above. The interest rate
on such debt ranges from 11.25% to 15.0%.
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 NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(5) FINANCING ARRANGEMENTS, CONTINUED
The following table sets forth the mandatory reductions in principal under
all debt agreements and redeemable preferred stock for each of the next four
years and three months based upon amounts outstanding at December 31, 1997:
<TABLE>
<S> <C>
Three months ending March 31, 1998.............................. $ 718
Year ending March 31, 1999...................................... 3,094
Year ending March 31, 2000...................................... 3,465
Year ending March 31, 2001...................................... 3,387
Year ending March 31, 2002...................................... 3,558
</TABLE>
(6)COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY (DEFICIENCY)
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.
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
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 NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(6) COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY (DEFICIENCY), CONTINUED
Common Stock, (ii) authorize 300,000,000 shares of a second class of common
stock (Class A Common Stock), and (iii) reclassify each previously authorized
and outstanding share of Common Stock as Class B Common Stock. Holders of the
Class A Common Stock and Class B Common Stock vote as a single class on all
matters submitted to a vote of the stockholders, with each share of Class A
Common Stock entitled to one vote and each share of Class B Common Stock
entitled to ten votes. In addition, each share of Class B Common Stock is
automatically convertible into one share of Class A Common Stock. In the event
a cash dividend is paid, the holders of the Class A Common Stock and the Class
B Common Stock will be paid an equal amount.
On April 8, 1998, the Board of Directors of the Company approved a 3.25-for-
one stock split of its Class A and Class B Common Stock payable to
stockholders of record on April 28, 1998. The stock split was effected in the
form of a dividend of 2.25 shares for every outstanding share of common stock.
All references in the accompanying consolidated financial statements to the
number of shares of common stock and the par value have been retroactively
restated to reflect the stock splits, the par value reduction and the other
actions taken by the Board of Directors on March 19 and October 3, 1996, and
April 28, 1998.
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 5,687,500. 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 8,125,000 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 338,000 and 58,500 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.
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 NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(7)COMMITMENTS AND CONTINGENCIES, CONTINUED
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.................................................................... $ 35
1999.................................................................... 112
2000.................................................................... 62
2001.................................................................... 26
2002.................................................................... 11
Thereafter.............................................................. 3
</TABLE>
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 contingent obligation under this commitment at December 31, 1997 was
approximately $3,895. 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 telecommunications industry and Hyperion are 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. Management of
Hyperion is unable to predict the effect that the Telecommunications Act,
related rulemaking proceedings or other future rulemaking proceedings will
have on its business and results of operations in future periods.
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 NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 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>
NINE MONTHS
ENDED
MARCH 31, DECEMBER 31,
-------------------- -------------
1995 1996 1997 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Management fees........................ $1,045 $1,950 $2,600 $1,854 $3,001
Network monitoring fees................ 217 446 604 447 808
Special access fees.................... 189 651 540 540 500
------ ------ ------ ------ ------
Total.................................. $1,451 $3,047 $3,744 $2,841 $4,309
====== ====== ====== ====== ======
EXPENSES:
Interest expense and fees.............. $3,321 $6,088 $4,731 $3,521 $3,935
Allocated corporate costs.............. 511 417 1,199 874 1,272
Fiber leases........................... 303 1,022 738 621 92
------ ------ ------ ------ ------
Total.................................. $4,135 $7,527 $6,668 $5,016 $5,299
====== ====== ====== ====== ======
</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, $81, and $353 for the years ended March 31,
1995, 1996, and 1997, and the nine months ended December 31, 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-20
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 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>
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>
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 NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(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........... $ (0.10) $ (0.09) $ (0.12) $ (0.12)
======= ======= ======= =======
Weighted average shares of common
stock
outstanding (in thousands)...... 32,500 32,500 32,500 32,500
======= ======= ======= =======
</TABLE>
F-22
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997, AND THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997
(INFORMATION AS TO THE NINE MONTHS ENDED DECEMBER 31, 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................. $ 0.02 $ (0.24) $ (0.33) $ (0.33)
======= ======= ======== ========
Weighted average shares of common
stock
outstanding (in thousands)...... 34,207 34,492 34,492 34,492
======= ======= ======== ========
</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 913,380 shares of Class
A Common Stock to MCI (the "MCI Warrant") 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-23
<PAGE>
ANNEX A
GLOSSARY
Access Charges--The fees paid by long distance carriers to LECs for
originating and terminating long distance calls over the LECs' local networks.
Access Line Equivalents--The number of access lines represented by a trunk
line, estimated for purposes of this Prospectus as six access lines per trunk
line.
ATM (Asynchronous Transfer Mode)--A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits
of a standard fifty-three bit-long packet or cell. ATM-based packet transport
was specifically developed to allow switching and transmission of mixed voice,
data and video (sometimes referred to as "multi-media" information) at varying
rates. The ATM format can be used by many different information systems,
including LANs.
Broadband--Broadband communications systems can transmit large quantities of
voice, data and video by way of digital or analog signals. Examples of
broadband communication systems include DS-3 fiber optic systems, which can
transmit 672 simultaneous voice conversations, or a broadcast television
station signal, that transmits high resolution audio and video signals into
the home. Broadband connectivity is also an essential element for interactive
multimedia applications.
CAP (Competitive Access Provider)--A company that provides its customers
with an alternative to the incumbent local telephone company for local
transport of private line, special access and interstate transport of switched
access telecommunications services. CAPs are also referred to in the industry
as alternative local telecommunications service providers (ALTs), metropolitan
area network providers (MANs) and alternative access vendors (AAVs).
Central Offices or LEC-COs--The switching centers or central switching
facilities of the LECs or CLECs.
Centrex--Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except that 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 which may utilize
a variety of rates).
Digital--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission and switching technologies
employ a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. Digital transmission and switching
technologies offer a threefold improvement in speed and capacity over analog
techniques, allowing much more efficient and cost-effective transmission of
voice, video and data.
A-1
<PAGE>
Dialing Parity--Dialing parity exists when a customer calling to or from the
network of a CLEC is not required to dial any more digits than for a
comparable call originating and terminating on the incumbent LEC's network.
Diverse Access Routing--A telecommunications network configuration in which
signals are transported simultaneously along two different paths so that if
one cable is cut, traffic can continue in the other direction without
interruption to its destination. The Company's networks generally provide
diverse access routing.
DS-0, DS-1, DS-3--Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit rate of up to 64
kilobits per second. DS-1 service has a bit rate of 1.544 megabits per second
and DS-3 service has a bit rate of 45 megabits per second.
FCC--Federal Communications Commission
Fiber Mile--The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route mile" below.
Fiber Optics--Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission. Fiber optic technology involves sending laser light pulses
across glass strands in order to transmit digital information. A strand of
fiber optic cable is as thick as a human hair yet is said to have more
bandwidth capacity than copper cable the size of a telephone pole.
Fiber Optic Ring Network--Most CAPs have built their networks in ring
configurations in order to ensure that, if one segment of a network is damaged
or cut, the traffic is simply re-routed and sent to its destination in the
opposite direction. The Company uses a "self-healing" optical fiber ring
architecture known as SONET.
Frame Relay--Frame relay is a high speed data packet switching service used
to transmit data between computers. Frame relay supports data units of
variable lengths at access speeds ranging from 56 kilobits to 1.5 megabits.
This service is appropriate for connecting LANs, but is not appropriate for
voice and video applications due to the variable delays which can occur. Frame
relay was designed to operate at higher speeds on modern fiber optic networks.
Frame Relay Service--Data communications service that functions as a fast
packet transport service of variable length data packets between customer
designated locations and supports the establishment of software defined
logical connections and circuits that act as private facilities on a public
platform.
Hubs--Collection centers located centrally in an area where
telecommunications traffic can be aggregated at a central point for transport
and distribution.
Interconnection Decisions--Rulings by the FCC announced in September 1992
and August 1993, which require the RBOCs and most other LECs to provide
interconnection in LEC-COs to any CAP, IXC or end user seeking such
interconnection for the provision of interstate special access and switched
access transport services.
InterLATA Calls--InterLATA calls are calls that pass from one LATA to
another. Typically, these calls are referred to as long distance calls. The
Telecommunications Act establishes procedures under which the RBOCs can
receive authority to provide interLATA services.
IntraLATA Calls--IntraLATA calls, also known as short haul calls, are those
calls that originate and terminate within the same LATA. All states allow
intraLATA competition, but dialing parity still does not exist in most states
and very little LEC intraLATA revenue has been won by competitors.
A-2
<PAGE>
IXC (Interexchange or Long Distance Carriers)--Usually referred to as long
distance carriers. There are many facilities-based IXCs, including AT&T, MCI,
WorldCom and Sprint, as well as a few CAPs that provide interexchange service.
Kilobit--One thousand bits of information. The information-carrying capacity
(i.e., bandwidth of a circuit may be measured in "kilobits per second.")
LANs (Local Area Networks)--The interconnection of computers and/or other
peripherals for the purpose of sharing files, programs and various devices
such as work stations, printers and high-speed modems. LANs may include
dedicated computers or file servers that provide a centralized source of
shared files and programs.
LATAs--The geographically defined Local Access and Transport Areas in which
LECs are authorized by the MFJ to provide local exchange services. These LATAs
roughly reflect the population density of their respective states (for example
California has 11 LATAs while Wyoming has one). There are 164 LATAs in the
United States.
LEC (Local Exchange Carrier)--A company providing local telephone services.
LEC-CO--Local Exchange Carrier's Central Office.
Local Exchange Areas--A geographic area determined by the appropriate state
regulatory authority in which local calls generally are transmitted without
toll charges to the calling or called party.
LSO--Local Serving Office of the incumbent LEC.
Megabit--One million bits of information. The information-carrying capacity
(i.e., bandwidth) of a circuit may be measured in "megabits per second."
MFJ (Modified Final Judgment)--The MFJ was a consent decree entered into in
1982 between AT&T and the Department of Justice which forced the breakup of
the old Bell System through the divestiture of the seven separate Regional
Bell Operating Companies (RBOCs) from AT&T. Divestiture resulted in two
distinct segments of the telecommunications service market: local and long
distance. This laid the groundwork for intense competition in the long
distance industry, but essentially created seven separate regionally-based
local exchange service monopolies. The Telecommunications Act removes most MFJ
restrictions on a prospective basis from AT&T and the RBOCs.
Network Systems Integration--Involves the creation of a turnkey
telecommunications network including (i) route and site selection and
obtaining rights of way and legal authorizations to install the network; (ii)
design and engineering of the system, including technology and vendor
assessment and selection, determining fiber optic circuit capacity, and
establishing reliability/flexibility standards; and (iii) project and
construction management, including contract negotiations, purchasing and
logistics, installation as well as testing and construction management.
Number Portability--The ability of an end user to change local exchange
carriers while retaining the same telephone number.
Off-Net--A customer that is not physically connected to one of the Company's
networks but who is accessed through interconnection with a LEC network.
On-Net--A customer that is physically connected to one of the Company's
networks.
Overlash--An aerial cable construction technique that involves the
attachment of a new cable to an existing cable by placing the new cable beside
the existing cable, and lashing (or binding) the two cables together by
A-3
<PAGE>
means of a lashing wire that is wrapped around both cables. This technique
allows for the addition of new cable facilities utilizing existing pole
attachments without the requirement for additional space on the pole.
PCS (Personal Communications Service)--A type of wireless telephone system
that uses light, inexpensive handheld sets and communicates via low power
antennas.
PBX--A Private Branch Exchange is a switching system within an office
building which allows calls from outside to be routed directly to the
individual or through a central number. A PBX also allows for calling within
an office by way of four digit extensions. Centrex is a service which can
simulate this service from an outside switching source, thereby eliminating
the need for a large capital expenditure on a PBX.
Physical Collocation--Physical Collocation occurs when a CAP places its own
network connection equipment inside the LEC-CO. The Telecommunications Act
gives the FCC authority to mandate physical collocation. See Virtual
Collocation.
POPs (Points of Presence)--Locations where an IXC has installed transmission
equipment in a service area that serves as, or relays calls to, a network
switching center of that IXC.
Private Line--A private, dedicated telecommunications connection between
different end user locations (excluding IXC POPs).
Private Line Data Interconnect Service--A data transport service utilizing
data products and private line facilities that are packaged together with data
products.
Public Switched Network--That portion of a LEC's network available to all
users generally on a shared basis (i.e., not dedicated to a particular user).
Public Utility Commission--A state regulatory body which regulates
utilities, including telephone companies providing intrastate services. In
some states this regulatory body may have a different name, such as public
service commission.
RBOCs (Regional Bell Operating Companies)--The seven local telephone
companies established by the MFJ. The RBOCs were prohibited from providing
interLATA services and from manufacturing telecommunications equipment under
the MFJ, but the Telecommunications Act of 1996 establishes procedures for
lifting these restrictions.
Reciprocal Compensation--The compensation paid by a local carrier for
termination of a local call on the network of a competing carrier which is
obligated to pay a comparable charge to terminate traffic on the network of
the first carrier. Reciprocal compensation is distinct from the one way access
charges by which the IXCs compensate LEC's for originating or terminating
traffic.
Redundant Electronics--A telecommunications facility using two separate
electronic devices to transmit a telecommunications signal so that if one
device malfunctions, the signal may continue without interruption.
Remote Modules (or Remote Switching Modules)--Telephone switching units that
are attached to a host switch (usually via DS1 lines) in a different
geographic location. Remote modules provide the capability of offering
switching functionality to areas that will not economically support a host
switch.
Rights of Way--Rights of certain entities (usually utility, cable TV or
telephone companies and local government agencies) to "pass over" or place
facilities on, over, or underneath property. This includes the ability to
place cable on poles, in conduit, and to bury cable underground.
Route Miles--The number of miles of the telecommunications path in which
fiber optic cables are installed as it would appear on a network map.
A-4
<PAGE>
Second and Third Tier Markets--Metropolitan markets in the United States
with population bases ranging from 250,000 to two million.
Special Access Services--The lease of private, dedicated telecommunications
lines or "circuits" along the network of a LEC or a CAP, which lines or
circuits run to or from the IXC POPs. Examples of special access services are
telecommunications lines running between POPs of a single IXC, from one IXC
POP to the POP of another IXC or from an end user to its IXC POP. Special
access services do not require the use of switches.
SONET (Synchronous Optical Network)--SONET is the electronics and network
architecture which enable the 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 DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO
WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE
SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
PAGE
<TABLE>
<S> <C>
Prospectus Summary.......................................................... 1
Risk Factors................................................................ 10
Use of Proceeds............................................................. 20
Capitalization.............................................................. 21
Dividend Policy............................................................. 22
Dilution.................................................................... 23
Selected Consolidated Financial Data ....................................... 24
Summary Operating Data...................................................... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................. 26
Business.................................................................... 35
Competition................................................................. 49
Regulation.................................................................. 50
Management.................................................................. 60
Certain Relationships and Transactions...................................... 66
Principal Stockholders...................................................... 69
Description of Capital Stock................................................ 70
Certain United States Tax Consequences to
Non-United States Holders.................................................. 74
Shares Eligible for Future Sale............................................. 76
Underwriting................................................................ 78
Legal Matters............................................................... 80
Experts..................................................................... 81
Additional Information...................................................... 81
Index to Financial Statements............................................... F-1
Glossary.................................................................... A-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERINGS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10,000,000 SHARES
HYPERION TELECOMMUNICATIONS, INC.
CLASS A COMMON STOCK
LOGO
HYPERION TELECOMMUNICATIONS, INC.
-------
PROSPECTUS
, 1998
-------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
NATIONSBANC MONTGOMERY
SECURITIES LLC
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[INTERNATIONAL PROSPECTUS ALTERNATE PAGE]
SUBJECT TO COMPLETION, DATED APRIL 30, 1998
P R O S P E C T U S
LOGO
HYPERION TELECOMMUNICATIONS, INC.
10,000,000 Shares
Hyperion Telecommunications, Inc.
Class A Common Stock
-------
Of the 10,000,000 shares of Class A Common Stock, par value $.01 per share
(the "Class A Common Stock"), of Hyperion Telecommunications, Inc. ("Hyperion"
or the "Company") offered hereby, 8,000,000 shares are being offered in the
United States and Canada (the "U.S. Offering") and 2,000,000 shares are being
offered in a concurrent international offering outside of the United States and
Canada (the "International Offering" and, together with the U.S. Offering, the
"Offerings"). The initial public offering price and the aggregate underwriting
discount per share will be identical for both Offerings. See "Underwriting."
The Company expects to enter into an agreement with Adelphia Communications
Corporation ("Adelphia") and/or certain affiliates of Adelphia pursuant to
which, upon the consummation of the Offerings (i) Adelphia or such affiliates
will agree to purchase in cash an estimated 3,555,556 shares of Class A Common
Stock from the Company (based on $15.00 per share, the midpoint of the range
per share set forth below) at a price equal to the public offering price less
the underwriting discount, or an aggregate of $50.0 million (the "Adelphia
Share Purchase") and (ii) in connection with the contribution to the Company by
Adelphia of certain of the Company's indebtedness and payables owed to Adelphia
(the "Adelphia Note Contribution"), the Company will issue an estimated
3,875,556 shares of Class A Common Stock to Adelphia (based on $15.00 per
share, the midpoint of the range per share set forth below) at a price equal to
the public offering price less the underwriting discount, or an aggregate of
$54.5 million. After giving effect to the shares issued pursuant to the
Adelphia Share Purchase and the Adelphia Note Contribution, (together, the
"Adelphia New Shares") and to the Offerings, Adelphia will own approximately
69.7% of the outstanding Common Stock (as defined) and 82.2% of the total
voting power of the Company. See "Prospectus Summary--The Offerings."
Prior to the Offerings, there has not been a public market for the Class A
Common Stock of the Company. It is currently estimated that the initial public
offering price per share will be between $14.00 and $16.00. See "Underwriting"
for information relating to the factors considered in determining the initial
public offering price. Application has been made for quotation of the Class A
Common Stock on the Nasdaq National Market under the symbol "HYPT."
The Company has two classes of common stock, Class A Common Stock and Class B
Common Stock, par value $.01 per share (the "Class B Common Stock" and,
together with the Class A Common Stock, the "Common Stock"). The Class A Common
Stock and Class B Common Stock are substantially identical, except that holders
of Class A Common Stock are entitled to one vote per share and holders of Class
B Common Stock are entitled to 10 votes per share on all matters submitted to a
vote of stockholders. Immediately following the consummation of the Offerings
(assuming no exercise of the over-allotment option granted to the
Underwriters), the holders of the Class B Common Stock will have approximately
94.4% of the combined voting power of the outstanding Class A Common Stock and
Class B Common Stock. See "Description of Capital Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- -----------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -----------------------------------------------
Total(4) $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The total Price to Public excludes the total proceeds to Hyperion from the
Adelphia Share Purchase. See "Underwriting."
(2) For information regarding indemnification of the Underwriters, see
"Underwriting."
(3) Before deducting expenses estimated at $ payable by the Company. The
Company will also receive $50.0 million from the issuance of shares of
Class A Common Stock to Adelphia in connection with the Adelphia Share
Purchase. The sale of Class A Common Stock to Adelphia by the Company will
be at a per share price of $14.06 (the total Price to the Public less the
underwriting discount).
(4) The Company has granted the U.S. Underwriters and the Managers an option,
exercisable within 30 days of the date hereof, to purchase up to an
aggregate of 1,500,000 shares of Class A Common Stock on the same terms and
conditions as set forth above, for the purpose of covering over-allotments,
if any. If such over-allotment option is exercised in full, the total Price
to the Public, Underwriting Discount and Commissions and Proceeds to the
Company will be $ , $ , and $ , respectively. See "Underwriting."
-------
The shares of Class A Common Stock are being offered severally by the
Managers named herein, subject to prior sale, when, as and if accepted by them
and subject to certain other conditions. It is expected that certificates for
the shares of the Class A Common Stock offered hereby will be made available
for delivery on or about 1998, at the office of Smith Barney Inc., 333
West 34th Street, New York, New York 10001.
-------
Salomon Smith Barney International
Credit Suisse First Boston
NationsBanc Montgomery Securities LLC
, 1998.
<PAGE>
[INTERNATIONAL PROSPECTUS ALTERNATE PAGE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO
WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE
SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
PAGE
<TABLE>
<S> <C>
Prospectus Summary.......................................................... 1
Risk Factors................................................................ 10
Use of Proceeds............................................................. 20
Capitalization.............................................................. 21
Dividend Policy............................................................. 22
Dilution.................................................................... 23
Selected Consolidated Financial Data ....................................... 24
Summary Operating Data...................................................... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................. 26
Business.................................................................... 35
Competition................................................................. 49
Regulation.................................................................. 50
Management.................................................................. 60
Certain Relationships and Transactions...................................... 66
Principal Stockholders...................................................... 69
Description of Capital Stock................................................ 70
Certain United States Tax Consequences to
Non-United States Holders.................................................. 74
Shares Eligible for Future Sale............................................. 76
Underwriting................................................................ 78
Legal Matters............................................................... 80
Experts..................................................................... 81
Additional Information...................................................... 81
Index to Financial Statements............................................... F-1
Glossary.................................................................... A-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERINGS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10,000,000 SHARES
HYPERION TELECOMMUNICATIONS, INC.
CLASS A COMMON STOCK
LOGO
HYPERION TELECOMMUNICATIONS, INC.
-------
PROSPECTUS
, 1998
-------
SALOMON SMITH BARNEY INTERNATIONAL
CREDIT SUISSE FIRST BOSTON
NATIONSBANC MONTGOMERY
SECURITIES LLC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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................................................ $ 85,403
Legal fees and expenses....................................... 250,000
NASD filing fees and expenses................................. 18,900
Nasdaq National Market application fee........................ 95,000
Printing and engraving fees................................... 300,000
Accounting fees and expenses.................................. 110,000
Blue sky legal fees, filing fees and expenses................. 20,000
Transfer agent and registrar fees............................. 3,500
Miscellaneous expense......................................... 117,197
----------
Total....................................................... $1,000,000
==========
</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
Share amounts that follow are adjusted for a 3.25-for-1 share split to be
effected on the Company's common stock in the form of a share dividend of 2.25
shares for every outstanding share of common stock.
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 1,993,638 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
II-1
<PAGE>
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, April 1, 1997 and April 1, 1998, the Company issued
338,000 shares, 58,500 shares and 58,500 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 913,380 shares of Class A
Common Stock of the Company, which expires June 13, 2000, at the lower of (i)
$6.15 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. 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 $194.7 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.
On February 12, 1998, the Company issued a warrant to acquire 731,624 shares
of its Class A Common Stock to Lenfest Telephony, Inc. in exchange for the
acquisition of Lenfest's 50% partnership interest in Hyperion of Harrisburg.
The warrant was issued in reliance upon the exemption from registration under
Section 4(2) of the Securities Act.
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>
1.1 **Form of U.S. Underwriting Agreement.
1.2 **Form of International Underwriting Agreement
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.)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.1 Indenture, dated as of April 15, 1996, between the Registrant and
Bank of Montreal Trust Company. (Incorporated herein by reference
is Exhibit 4.1 to Registration Statement No. 333-06957 on Form S-
4.)
4.2 First Supplemental Indenture, dated as of September 11, 1996,
between, the Registrant and Bank of Montreal Trust Company.
(Incorporated herein by reference is Exhibit 4.2 to Registration
Statement No. 333-12619 on Form S-4.)
4.3 Form of 13% Senior Discount Note. (Incorporated herein by
reference is Exhibit 4.3 to Registration Statement No. 333-12619
on Form S-4.)
4.4 Registration Rights Agreement dated as of April 15, 1996, between
the Registrant and the Initial Purchasers. (Incorporated herein by
reference is Exhibit 4.3 to Registration Statement No. 333-06957
on Form S-4.)
4.5 Subordinated Note dated April 15, 1996 by the Company in favor of
Adelphia. (Incorporated herein by reference is Exhibit 4.3 to
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996 (File No. 0-21605).)
4.6 Form of Class A Common Stock Certificate. (Incorporated herein by
reference is Exhibit 4.1 to Registrant's Registration Statement on
Form 8-A, dated October 23, 1996.)
4.7 Indenture, dated as of August 27, 1997, with respect to the
Registrant's 12 1/4% Senior Secured Notes due 2004, between the
Registrant and the Bank of Montreal Trust Company. (Incorporated
herein by reference is Exhibit 4.01 to Form 8-K dated August 27,
1997 (File No. 0-21605).)
4.8 Form of 12 1/4% Senior Secured Note due 2004 (contained in Exhibit
4.7)
4.9 Pledge Agreement between the Registrant and the Bank of Montreal
Trust Company as Collateral Agent, dated as of August 27, 1997.
(Incorporated herein by reference is Exhibit 4.03 to Form 8-K
dated August 27, 1997 (File No. 0-21605).)
4.10 Registration Rights Agreement between the Registrant and the
Initial Purchasers, dated August 27, 1997, regarding the 12 1/4%
Senior Secured Notes due 2004. (Incorporated herein by reference
is Exhibit 4.04 to Form 8-K dated August 27, 1997 (File No. 0-
21605).)
4.11 Pledge, Escrow and Disbursement Agreement, between the Registrant
and the Bank of Montreal Trust Company, dated as of August 27,
1997. (Incorporated herein by reference is Exhibit 4.05 to Form 8-
K dated August 27, 1997 (File No. 0-21605).)
4.12 Second Supplemental Indenture, dated as of August 27, 1997,
between the Registrant and the Bank of Montreal Trust Company,
regarding the Registrant's 13% Senior Discount Notes due 2003.
(Incorporated herein by reference is Exhibit 4.06 to Form 8-K
dated August 27, 1997 (File No. 0-21605).)
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.)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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.)
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.)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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).)
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.)
10.23 **Management Services Agreement dated as of April 10, 1998,
between Adelphia Communications Corporation and the Registrant
10.24 **Letter Agreement dated April 10, 1998, among the Registrant,
Adelphia Communications Corporation and MCImetro Access
Transmission Services, Inc.
10.25 **Amendment to Registration Rights Agreement dated as of April 15,
1998, between the Registrant and Adelphia Communications
Corporation
10.26 **Letter Agreement dated as of April 9, 1998, between the
Registrant and Adelphia Communications Corporation regarding the
purchase of Class A Common Stock
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>
- --------
*Previously filed.
**Filed herewith.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS
(A) RULE 415 OFFERING
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b), if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
Provided, however, that paragraphs (1)(i) and (1)(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.
(2) 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.
(3) 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.
(H) REQUEST FOR ACCELERATION OF EFFECTIVE DATE
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-6
<PAGE>
(I) RULE 430A
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in the form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities Act
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 that time shall be deemed to be the initial bona fide offering
thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Coudersport, Commonwealth of Pennsylvania, on the 30th day of April, 1998.
HYPERION TELECOMMUNICATIONS, INC.
/s/ Daniel R. Milliard
By: ________________________________
Daniel R. Milliard
President and Chief Operating
Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act, this Amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
SIGNATURE TITLE
DATE
Chairman and Director April 30, 1998
*
- -------------------------
John J. Rigas
* Vice Chairman and Director April 30, 1998
- -------------------------
Michael J. Rigas
* Vice Chairman, Treasurer, Chief April 30, 1998
- ------------------------- Financial Officer and Director
Timothy J. Rigas
* Vice Chairman, Chief Executive April 30, 1998
- ------------------------- Officer and Director
James P. Rigas
/s/ Daniel R. Milliard President, Secretary, Chief April 30, 1998
- ------------------------- Operating Officer and Director
Daniel R. Milliard
Senior Vice President and April 30, 1998
* Director
- -------------------------
Charles R. Drenning
* Senior Vice President and April 30, 1998
- ------------------------- Director
Paul D. Fajerski
* Senior Vice President and April 30, 1998
- ------------------------- Director
Randolph S. Fowler
* Director April 30, 1998
- -------------------------
James L. Gray
* Director April 30, 1998
- -------------------------
Pete Metros
Vice President and Chief April 30, 1998
* Accounting Officer
- -------------------------
Edward E. Babcock
April 30, 1998
*/s/ Daniel R. Milliard
- -------------------------
Daniel R. Milliard,
as attorney-in-fact
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 **Form of U.S. Underwriting Agreement.
1.2 **Form of International Underwriting Agreement.
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).)
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.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.23 **Management Services Agreement dated as of April 10, 1998,
between Adelphia Communications Corporation and the Registrant
10.24 **Letter Agreement dated April 10, 1998, among the Registrant,
Adelphia Communications Corporation and MCImetro Access
Transmission Services, Inc.
10.25 **Amendment to Registration Rights Agreement dated as of April 15,
1998, between the Registrant and Adelphia Communications
Corporation
10.26 **Letter Agreement dated as of April 9, 1998, between the
Registrant an Adelphia Communications Corporation regarding the
purchase of Class A Common Stock
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>
- --------
*Previously filed.
**Filed herewith.
<PAGE>
8,000,000 Shares
Hyperion Telecommunications, Inc.
Class A Common Stock
U.S. UNDERWRITING AGREEMENT
---------------------------
May ___, 1998
SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
As Representatives of the U.S. Underwriters
c/o Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies & Gentlemen:
Hyperion Telecommunications, Inc., a Delaware corporation (the "Company"),
-------
proposes to issue and sell in the United States and Canada an aggregate of
8,000,000 shares (the "Firm Shares") of its Class A Common Stock, $.01 par value
-----------
per share (the "Class A Common Stock"), to the several Underwriters named in
--------------------
Schedule I hereto (the "U.S. Underwriters"), for whom Smith Barney Inc., Credit
-----------------
Suisse First Boston and NationsBanc Montgomery Securities LLC are acting as
representatives (the "Representatives"). The Company also proposes to sell to
---------------
the U.S. Underwriters, upon the terms and conditions set forth in Section 2
hereof, up to an additional 1,500,000 shares (the "Additional Shares") of Class
-----------------
A Common Stock. The Firm Shares and the Additional Shares are hereinafter
collectively referred to as the "Shares."
------
It is understood that the Company is concurrently entering into an
International Underwriting Agreement, dated the date hereof (the "International
-------------
Underwriting Agreement"), providing for the sale of 2,000,000 shares (the "Firm
- ---------------------- ----
International Shares") of the Class A Common Stock through arrangements with
- --------------------
certain underwriters outside the United States and Canada (the "Managers"), for
--------
whom Smith Barney Inc., Credit Suisse First Boston (Europe) Limited and
NationsBanc Montgomery Securities LLC are acting as lead managers (the "Lead
----
Managers"). The Firm International Shares and the Shares, collectively, are
- --------
herein called the "Underwritten Shares."
-------------------
The Company also understands that the Representatives and the Lead Managers
have entered into an agreement (the "Agreement Between U.S. Underwriters and
---------------------------------------
Managers") contemplating the coordination of certain transactions between the
- --------
U.S. Underwriters and the Managers and that, pursuant thereto and subject to the
conditions set forth therein, the U.S. Underwriters may purchase from the
Managers a portion of the Firm International Shares or sell to the Managers a
portion of the Shares. The Company understands that any such purchases and
sales between the U.S. Underwriters and the Managers shall be governed by the
<PAGE>
Agreement Between U.S. Underwriters and Managers and shall not be governed by
the terms of this Agreement or the International Underwriting Agreement.
The Company wishes to confirm as follows its agreement with you (the
"Representatives") and the other several U.S. Underwriters on whose behalf you
---------------
are acting, in connection with the several purchases of the Shares by the U.S.
Underwriters.
1. Registration Statement and Prospectuses. The Company has prepared and
---------------------------------------
filed with the Securities and Exchange Commission (the "Commission") in
----------
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1 (File No. 333-48209) under the Act,
---
including prospectuses subject to completion, relating to the Underwritten
Shares. The term "Registration Statement" as used in this Agreement means the
----------------------
registration statement (including all financial schedules and exhibits), as
amended at the time it becomes effective, and as thereafter amended by post-
effective amendment. The term "Prospectuses" as used in this Agreement means
------------
the prospectuses in the forms included in the Registration Statement or, if the
prospectuses included in the Registration Statement omit information in reliance
on Rule 430A under the Act and such information is included in prospectuses
filed with the Commission pursuant to Rule 424(b) under the Act, the term
"Prospectuses" as used in this Agreement means the prospectuses in the forms
------------
included in the Registration Statement as supplemented by the addition of the
Rule 430A information contained in the prospectuses filed with the Commission
pursuant to Rule 424(b). The term "Prepricing Prospectuses" as used in this
-----------------------
Agreement means the prospectuses subject to completion in the forms included in
the Registration Statement at the time of the initial filing of the Registration
Statement with the Commission, and as such prospectuses shall have been amended
from time to time prior to the date of the Prospectuses.
It is understood that two forms of Prepricing Prospectus and two forms of
Prospectus are to be used in connection with the offering and sale of the
Underwritten Shares: a Prepricing Prospectus and a Prospectus relating to the
Shares that are to be offered and sold in the United States or Canada to U.S. or
Canadian Persons (the "U.S. Prepricing Prospectus" and the "U.S. Prospectus,"
-------------------------- ---------------
respectively), and a Prepricing Prospectus and a Prospectus relating to the Firm
International Shares that are to be offered and sold outside the United States
or Canada to persons other than U.S. or Canadian Persons (the "International
-------------
Prepricing Prospectus" and the "International Prospectus," respectively). The
- --------------------- ------------------------
U.S. Prospectus and the International Prospectus are herein collectively
referred to as the "Prospectuses," and the U.S. Prepricing Prospectus and the
------------
International Prepricing Prospectus are herein called the "Prepricing
----------
Prospectuses." For purposes of this Agreement: "Rules and Regulations" means
- ------------ ---------------------
the rules and regulations adopted by the Commission under either the Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable;
------------
"U.S. or Canadian Person" means any resident or national of the United States or
-----------------------
Canada, any corporation, partnership or other entity created or organized in or
under the laws of the United States or Canada or any estate or trust the income
of which is subject to United States or Canadian income taxation regardless of
the source of its income (other than the foreign branch of any U.S. or Canadian
Person), and includes any United States or Canadian branch of a person other
than a U.S. or Canadian Person; "United States" means the United States of
-------------
America (including the states thereof and the District of Columbia) and its
territories, its possessions and other areas subject to its jurisdiction; and
"Canada" means Canada and its territories, its possessions and other areas
------
subject to its jurisdiction.
2. Agreements to Sell and Purchase. The Company hereby agrees, subject
-------------------------------
to all the terms and conditions set forth herein, to issue and sell to each U.S.
Underwriter and, upon the basis of the representations, warranties and
agreements of the Company herein contained and subject to all the terms and
conditions set forth herein, each U.S. Underwriter agrees, severally and not
jointly, to purchase from the
2
<PAGE>
Company, at a purchase price of $_____ per Share (the "purchase price per
------------------
share"), the number of Firm Shares set forth opposite the name of such U.S.
- ------
Underwriter in Schedule I hereto (or such number of Firm Shares increased as set
forth in Section 10 hereof).
The Company also agrees, subject to all the terms and conditions set forth
herein, to sell to the U.S. Underwriters, and, upon the basis of the
representations, warranties and agreements of the Company herein contained and
subject to all the terms and conditions set forth herein, the U.S. Underwriters
shall have the right to purchase from the Company, at the purchase price per
share, pursuant to an option (the "over-allotment option") which may be
---------------------
exercised at any time and from time to time prior to 5:00 P.M., New York City
time, on the 30th day after the date of the U.S. Prospectus (or, if such 30th
day shall be a Saturday or Sunday or a holiday, on the next business day
thereafter when the Nasdaq National Market is open for trading), up to an
aggregate of 1,500,000 Additional Shares. Additional Shares may be purchased
only for the purpose of covering over-allotments made in connection with the
offering of the Firm Shares. Upon any exercise of the over-allotment option,
each U.S. Underwriter, severally and not jointly, agrees to purchase from the
Company the number of Additional Shares (subject to such adjustments as you may
determine in order to avoid fractional shares) that bears the same proportion to
the number of Additional Shares to be purchased by the U.S. Underwriters as the
number of Firm Shares set forth opposite the name of such U.S. Underwriter in
Schedule I hereto (or such number of Firm Shares increased as provided for in
Section 10 hereof) bears to the aggregate number of Firm Shares.
3. Terms of Public Offering. The Company has been advised by you that
------------------------
the U.S. Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable and initially
to offer the Shares upon the terms set forth in the U.S. Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the U.S.
-------------------------------------------
Underwriters of and payment for the Firm Shares shall be made at the office of
Latham and Watkins, 885 Third Avenue, New York, New York 10022 at 10:00 A.M.,
New York City time, on _____ ____, 1998 (the "Closing Date"). The place of
------------
closing for the Firm Shares and the Closing Date may be varied by agreement
between you and the Company.
Delivery to the U.S. Underwriters of and payment for any Additional Shares
to be purchased by the U.S. Underwriters shall be made at the aforementioned
office of Latham & Watkins at such time on such date (the "Option Closing
--------------
Date"), which may be the same as the Closing Date but shall in no event be
- ----
earlier than the Closing Date nor earlier than two nor later than ten business
days after the giving of the notice hereinafter referred to, as shall be
specified in a written notice from you on behalf of the U.S. Underwriters to the
Company of the U.S. Underwriters' determination to purchase a number, specified
in such notice, of Additional Shares. The place of closing for any Additional
Shares and the Option Closing Date for such Shares may be varied by agreement
between you and the Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 9:30 A.M., New York City time, on the second
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you in New York City for
inspection and packaging not later than 9:30 A.M., New York City time, on the
business day next preceding the Closing Date or the Option Closing Date, as the
case may be. The certificates evidencing the Firm Shares and any Additional
Shares to be purchased hereunder shall be delivered to you on the Closing Date
or the Option Closing Date, as the case may be, against payment of the purchase
price therefor in immediately available funds.
3
<PAGE>
5. Agreements of the Company. The Company agrees with the several U.S.
-------------------------
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
Company will endeavor to cause the Registration Statement or such post-effective
amendment to become effective as soon as possible and will advise you promptly
and, if requested by you, will confirm such advice in writing, when the
Registration Statement or such post-effective amendment has become effective.
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, the Prepricing
Prospectuses or the Prospectuses or for additional information; (ii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of the happening of any event which makes any statement of a material
fact made in the Registration Statement or the Prospectuses untrue or which
requires the making of any additions to or changes in the Registration Statement
or the Prospectuses in order to state a material fact required by the Act or the
regulations thereunder to be stated therein or necessary in order to make the
statements therein not misleading, or of the necessity to amend or supplement
the Prospectuses to comply with the Act or any other law. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to obtain
the withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge, four signed
copies of the Registration Statement as originally filed with the Commission and
of each amendment thereto, including financial statements and all exhibits
thereto, and will also furnish to you, without charge, such number of conformed
copies of the Registration Statement as originally filed and of each amendment
thereto, but without exhibits, as you may request.
(d) The Company will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectuses of which you
shall not previously have been advised or to which you shall object after being
so advised or (ii) so long as, in the written opinion of counsel for the U.S.
Underwriters, a prospectus is required to be delivered in connection with sales
by any U.S. Underwriter or dealer, file any information, documents or reports
pursuant to the Exchange Act, without delivering a copy of such information,
documents or reports to you, as Representatives of the U.S. Underwriters, prior
to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the Company
has delivered to you, without charge, in such quantities as you have requested,
copies of each form of the U.S. Prepricing Prospectus. The Company consents to
the use, in accordance with the provisions of the Act and with the securities or
Blue Sky laws of the jurisdictions in which the Shares are offered by the
several U.S. Underwriters and by dealers, prior to the date of the U.S.
Prospectus, of each U.S. Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the written
opinion of counsel for the U.S. Underwriters a prospectus is required by the Act
to be delivered in connection with sales by any U.S. Underwriter or dealer,
4
<PAGE>
the Company will expeditiously deliver to each U.S. Underwriter and each dealer,
without charge, as many copies of the U.S. Prospectus as you may request. The
Company consents to the use of the U.S. Prospectus in accordance with the
provisions of the Act and with the securities or Blue Sky laws of the
jurisdictions in which the Shares are offered by the several U.S. Underwriters
and by all dealers to whom Shares may be sold, both in connection with the
offering and sale of the Shares and for such period of time thereafter as the
U.S. Prospectus is required by the Act to be delivered in connection with sales
by any U.S. Underwriter or dealer. If during such period of time any event shall
occur that in the judgment of the Company or in the opinion of counsel for the
U.S. Underwriters is required to be set forth in the U.S. Prospectus or should
be set forth therein in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, or if it is
necessary to supplement or amend the U.S. Prospectus to comply with the Act or
any other law, the Company will forthwith prepare and, subject to the provisions
of paragraph (d) above, file with the Commission an appropriate supplement or
amendment thereto and will expeditiously furnish to the U.S. Underwriters and
dealers a reasonable number of copies thereof.
(g) The Company will cooperate with you and with counsel for the U.S.
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several U.S. Underwriters and by dealers under the
securities or Blue Sky laws of such jurisdictions as you may designate and will
file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided that
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Shares, in any jurisdiction where it is not now so
subject.
(h) The Company will make generally available to its security holders
a consolidated earnings statement, which need not be audited, covering a twelve-
month period commencing after the effective date of the Registration Statement
and ending not later than 15 months thereafter, as soon as practicable after the
end of such period, which consolidated earnings statement shall satisfy the
provisions of Section 11(a) of the Act.
(i) During the period of five years after the date of this Agreement,
the Company will (i) make generally available a copy of each report of the
Company mailed to stockholders or filed with the Commission or the Nasdaq
National Market and will promptly notify you of such mailing or filing and (ii)
furnish to you from time to time such other information concerning the Company
and its Subsidiaries as you may request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 hereof or by notice given by you terminating this
Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement
shall be terminated by the U.S. Underwriters because of any failure or refusal
on the part of the Company to comply with the terms or fulfill any of the
conditions of this Agreement, the Company agrees to reimburse the
Representatives for all out-of-pocket expenses (including fees and expenses of
counsel for the U.S. Underwriters) incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of the
Shares substantially in accordance with the description set forth in the
Prospectuses.
(l) If Rule 430A of the Act is employed, the Company will timely file
the Prospectuses pursuant to Rule 424(b) under the Act and will advise you of
the time and manner of such filing.
5
<PAGE>
(m) For a period of 180 days after the date hereof (the "Lock-up
-------
Period"), the Company will not, without the prior written consent of Smith
- ------
Barney Inc., offer, sell, contract to sell or otherwise dispose of any Common
Stock (or any securities convertible into or exchangeable for Common Stock) or
grant any options or warrants to purchase Common Stock, except for (i) sales to
the U.S. Underwriters pursuant to this Agreement and the Managers pursuant to
the International Underwriting Agreement, (ii) the issuance of shares to
Adelphia Communications Corporation (the "Parent") in connection with the
Adelphia Note Contribution (as defined in the Prospectuses) and (iii) the
issuance of shares to the Parent in connection with the Adelphia Share Purchase
(as defined in the Prospectuses); (iv) the issuance of options or grants under
the Company's Long-Term Incentive Compensation Plan; (v) the issuance of the
Adelphia Warrant (as defined in the Prospectuses); (vi) the issuance of the
Additional MCI Warrants (as defined in the Prospectuses) required to be issued
by the Company in accordance with the Company's agreement with MCImetro Access
Transmission Services, Inc.; (vii) the issuance of shares pursuant to the
exercise of warrants and options described in clauses (vi), (v) and (vi), the
MCI Warrant (as defined in the Prospectuses) and the Lenfest Warrant (as defined
in the Prospectuses); (viii) the issuance of Class B Common Stock upon the
exercise of outstanding Class B Warrants (as defined in the Prospectuses); and
(ix) the issuance of shares upon the conversion of Class B Common Stock.
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by the Parent and
each of the Company's stockholders set forth on Schedule II hereto.
(o) Except as stated in this Agreement and in the International
Underwriting Agreement and in the Prepricing Prospectuses and Prospectuses, the
Company has not taken, nor will it take, directly or indirectly, any action
designed to or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.
(p) The Company will use its best efforts to have the Common Stock
listed, subject to notice of issuance, on the Nasdaq National Market
concurrently with the effectiveness of the Registration Statement.
6. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to each U.S. Underwriter that:
(a) Each U.S. Prepricing Prospectus included as part of the
Registration Statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied when
so filed in all material respects with the provisions of the Act; except that
this representation and warranty does not apply to statements in or omissions
from such U.S. Prepricing Prospectus made in reliance upon and in conformity
with information relating to any U.S. Underwriter or Manager furnished to the
Company in writing by a U.S. Underwriter through the Representatives or by a
Manager through the Lead Managers expressly for use therein. The Commission has
not issued any order preventing or suspending the use of any Prepricing
Prospectus.
(b) The Registration Statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectuses and any supplement
or amendment thereto when filed with the Commission under Rule 424(b) under the
Act, complied or will comply in all material respects with the provisions of the
Act and did not or will not at any such times contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; except that this
representation and warranty does not apply to statements in or omissions from
the Registration Statement or
6
<PAGE>
the Prospectuses made in reliance upon and in conformity with information
relating to any U.S. Underwriter or Manager furnished to the Company in writing
by a U.S. Underwriter through the Representatives or by a Manager through the
Lead Managers expressly for use therein.
(c) All the outstanding shares of Common Stock of the Company have
been duly authorized and validly issued, are fully paid and nonassessable and
are free of any preemptive or similar rights; the Shares have been duly
authorized and, when issued and delivered to the U.S. Underwriters against
payment therefor in accordance with the terms hereof, will be validly issued,
fully paid and nonassessable and free of any preemptive or similar rights; and
the capital stock of the Company conforms to the description thereof in the
Registration Statement and the Prospectuses.
(d) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby, including, without limitation,
the corporate power and authority to issue, sell and deliver the Shares as
provided herein.
(e) Each of this Agreement and the International Underwriting
Agreement has been duly and validly authorized, executed and delivered by the
Company and is the legal, valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except insofar as
indemnification and contribution provisions may be limited by applicable law or
public policy or equitable principles and subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization or similar laws affecting the
rights of creditors generally and subject to general principles of equity.
(f) Each of the Company and its Subsidiaries (as defined) (A) has been
duly organized, is validly existing as a corporation or limited liability
company, as applicable, in good standing under the laws of its respective
jurisdiction of formation, (B) has all requisite corporate or limited liability
company power and authority to carry on its business as it is currently being
conducted and as described in the Registration Statement and the Prospectuses
and to own, lease and operate its properties and (C) is duly qualified and in
good standing as a foreign corporation or limited liability company, as
applicable, and is authorized to do business in each jurisdiction in which the
nature of its business or its ownership or leasing of property requires such
qualification except, with respect to this clause (C), where the failure of the
Company and its Subsidiaries to be so qualified or in good standing does not and
could not reasonably be expected to (x) individually or in the aggregate, result
in a material adverse effect on the assets, liabilities, business, results of
operations, condition (financial or otherwise), cash flows, affairs or prospects
of the Company and the Subsidiaries, taken as a whole, (y) interfere with or
adversely affect the issuance or marketability of the Common Stock or (z) in any
manner draw into question the validity of this Agreement or the ability to
conduct its business in the manner set forth in the Registration Statements and
the Prospectuses (any of the events set forth in clauses (x), (y) or (z), a
"Material Adverse Effect"). The Company has no direct or indirect subsidiaries
- ------------------------
as of the Closing Date other than those set forth on Schedule III hereto
(referred to herein collectively as "Subsidiaries" and individually as a
------------
"Subsidiary").
- -----------
(g) Each of the Joint Ventures (as defined) (A) has been duly formed
as a partnership, limited liability company or corporation, as applicable, under
the laws of its respective jurisdiction of formation, (B) has all requisite
partnership, limited liability company or corporate power and authority, as
applicable, to carry on its business as it is currently being conducted and as
described in the Registration Statement and the Prospectuses and to own, lease
and operate its properties and (C) is duly qualified and in good standing as a
foreign partnership, limited liability company or corporation, as applicable,
authorized to do business in each jurisdiction in which the nature of its
business or its ownership or leasing of property
7
<PAGE>
requires such qualification except, with respect to this clause (C), where the
failure to be so qualified or in good standing does not and could not reasonably
be expected to result in a Material Adverse Effect. Neither the Company nor its
Subsidiaries has any ownership interest in any Joint Venture other than those
set forth on Schedule IV hereto (referred to herein collectively as "Joint
-----
Ventures" and individually a "Joint Venture").
- -------- -------------
(h) All of the outstanding capital stock of each Subsidiary is owned
by the Company, free and clear of any security interest, claim, lien,
limitations on voting rights or other charge or encumbrance, other than security
interests, claims, liens, limitation on voting rights or other charges or
encumbrances arising from the pledge of the capital stock of ______, ______,
______, and _____, as security for the Company's 12 1/4% Senior Secured Notes
due 2004. Except as disclosed in the Prospectuses, there are not currently, and
will not be as a result of the transactions contemplated hereby, any outstanding
subscriptions, rights, warrants, calls, commitments of sale or options to
acquire, or instruments convertible into or exchangeable for, any capital stock
or other equity interest of the Company, any Subsidiary or any Joint Venture.
(i) None of the Company, the Subsidiaries or the Joint Ventures is
and, after giving effect to the transactions contemplated hereby will be (A) in
violation of its charter, bylaws, partnership agreement or operating agreement,
as applicable, (B) in default in the performance of any bond, debenture, note,
indenture, mortgage, deed of trust or other agreement or instrument to which it
is a party or by which it is bound or to which any of its properties is subject,
or (C) in violation of any local, state or Federal law, statute, ordinance,
rule, regulation, requirement, judgment or court decree (including, without
limitation, the Communications Act of 1934, as amended by the Telecommunications
Act of 1996 (the "Telecommunications Act"), and the rules and regulations of the
----------------------
Federal Communications Commission (the "FCC") and environmental laws, statutes,
---
ordinances, rules, regulations, judgments or court decrees) applicable to the
Company, any Subsidiary, any Joint Venture or any of their respective assets or
properties (whether owned or leased) other than, in the case of clauses (B) and
(C), any default or violation that could not reasonably be expected to have a
Material Adverse Effect. There exists no condition that, with notice, the
passage of time or otherwise, would constitute a default under any such document
or instrument that could reasonably be expected to have a Material Adverse
Effect.
(j) There is (i) no action, suit or proceeding before or by any court,
arbitrator or governmental agency, body or official, domestic or foreign, now
pending or threatened or contemplated to which the Company, any of the
Subsidiaries or any of the Joint Ventures is or may be a party or to which the
business or property of the Company, any Subsidiary or any Joint Venture is
subject, (ii) no local, state or Federal law, statute, ordinance, rule,
regulation, requirement, judgment or court decree (including, without
limitation, the Telecommunications Act and the rules and regulations of the FCC)
or order that has been enacted, adopted or issued by any governmental agency or,
to the best of the Company's knowledge, that has been proposed by any
governmental body or (iii) no injunction, restraining order or order of any
nature by a federal or state court or foreign court of competent jurisdiction to
which the Company, any Subsidiary or any Joint Venture is or could reasonably be
expected to be subject or to which the business, assets, or property of the
Company, any Subsidiary or any Joint Venture are could reasonably be expected to
be subject, that, in the case of clauses (i), (ii) and (iii) above, (y) is
required to be disclosed in the Registration Statement or the Prospectuses and
that is not so disclosed, or (z) could reasonably be expected to individually or
in the aggregate, result in a Material Adverse Effect.
(k) Neither the issuance and sale of the Shares, the execution,
delivery or performance by the Company of this Agreement or the International
Underwriting Agreement by the Company, or the consummation by the Company of the
transactions contemplated hereby and thereby violate, conflict with
8
<PAGE>
or constitute a breach of any of the terms or provisions of, or a default under
(or an event that with notice or the lapse of time, or both, would constitute a
default), or require consent under, or result in the imposition of a lien or
encumbrance on any properties of the Company, any Subsidiary or any Joint
Venture, or an acceleration of any indebtedness of the Company, any Subsidiary
or any Joint Venture pursuant to, (i) the charter or bylaws of the Company or
any Subsidiary or the partnership agreement or operating agreement governing any
Joint Venture, (ii) any bond, debenture, note, indenture, mortgage, deed of
trust or other agreement or instrument to which the Company, any Subsidiary or
any Joint Venture is a party or by which any of them or their property is or may
be bound, (iii) any local, state or Federal law, statute, ordinance, rule,
regulation or requirement (including, without limitation, the Telecommunications
Act and the rules and regulations of the FCC and environmental laws, statutes,
ordinances, rules or regulations) applicable to the Company, any Subsidiary, any
Joint Venture or any of their respective assets or properties or (iv) any
judgment, order or decree of any court or governmental agency or authority
having jurisdiction over the Company, the Subsidiaries, the Joint Ventures or
any of their assets or properties, except in the case of clauses (ii), (iii) and
(iv) for such violations conflicts, breaches, defaults, consents, impositions of
liens or accelerations that would not singly, or in the aggregate, have a
Material Adverse Effect. Other than as described in the Prospectuses, no
consent, approval, authorization or order of, or filing, registration,
qualification, license or permit of or with, (A) any court or governmental
agency, body or administrative agency (including, without limitation, the FCC)
or (B) any other person is required for (1) the execution, delivery and
performance by the Company of this Agreement or the International Underwriting
Agreement or (2) the issuance and sale of the Shares and the transactions
contemplated hereby and thereby, except (x) such as have been obtained and made
under the Act and state securities or Blue Sky laws and regulations or such as
may be required by the NASD or (y) where the failure to obtain any such consent,
approval, authorization or order of, or filing registration, qualification,
license or permit would not reasonably be expected to result in a Material
Adverse Effect.
(l) The accountants who have certified or shall certify the financial
statements included in the Registration Statement and the Prospectuses are
independent public accountants as required by the Act. The historical financial
statements of the Company and each of the Subsidiaries comply as to form in all
material respects with the requirements applicable to registration statements on
Form S-1 under the Act and present fairly in all material respects the financial
position and results of operations of the Company and each of its Subsidiaries,
at the respective dates and for the respective periods indicated. Such
financial statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
presented. The other financial information and data included in the
Registration Statement and Prospectuses, historical and pro forma, are
accurately presented in all material respects and prepared on a basis consistent
with the financial statements, historical and pro forma, included in the
Prospectuses and the books and records of the Company, each of its Subsidiaries
and each of its Joint Ventures, as applicable. The statistical information and
data included in the Prospectuses are accurately presented in all material
respects.
(m) The financial statements, together with related schedules and
notes, included in the Registration Statement and the Prospectuses, present
fairly the consolidated financial position, results of operations and changes in
financial position of the Company and the Subsidiaries on the basis stated in
the Registration Statement at the respective dates or for the respective periods
to which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data included
in the Registration Statement and the Prospectuses are accurately presented and
prepared on a basis consistent with such financial statements and the books and
records of the Company and the Subsidiaries.
9
<PAGE>
(n) Except as disclosed in the Registration Statement and the
Prospectuses, subsequent to the respective dates as of which such information is
given in the Registration Statement and the Prospectuses, (i) none of the
Company, any Subsidiary or any Joint Venture has incurred any liabilities or
obligations, direct or contingent, which are material, individually or in the
aggregate, to the Company, the Subsidiaries and the Joint Ventures taken as a
whole, not entered into any transaction not in the ordinary course of business,
(ii) there has not been, singly or in the aggregate, any change or development
which could reasonably be expected to result in a Material Adverse Effect, (iii)
there has been no dividend or distribution of any kind declared, paid or made by
the Company or its Subsidiaries on any class of capital stock and (iv) there has
been no distribution of profits or return of capital contribution by any Joint
Venture.
(o) The Company has not distributed and, prior to the later to occur
of (i) the Closing Date and (ii) completion of the distribution of the Shares,
will not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, the Prepricing
Prospectuses, the Prospectuses or other materials, if any, permitted by the Act.
(p) There is (i) no unfair labor practice complaint pending against
the Company, or any Joint Venture or threatened, before the National Labor
Relations Board, any state or local labor relations board or any foreign labor
relations board, and no significant grievance or significant arbitration
proceeding arising out of or under any collective bargaining agreement is so
pending or threatened against the Company, any Subsidiary or any Joint Venture,
(ii) no significant strike, labor dispute, slowdown or stoppage pending against
the Company, any Subsidiary or any Joint Venture threatened against the Company,
any Subsidiary or the Joint Venture and (iii) no union representation question
existing with respect to the employees of the Company, any Subsidiary or any
Joint Venture that, in the case of clauses (i), (ii) or (iii), could reasonably
be expected to result in a Material Adverse Effect. To the best of the
Company's knowledge, no collective bargaining organizing activities are taking
place with respect to the Company, the Subsidiaries or the Joint Ventures. None
of the Company, any Subsidiary or any Joint Venture has violated (A) any
federal, state or local law or foreign law relating to discrimination in hiring,
promotion or pay of employees, (B) any applicable wage or hour laws or (C) any
provision of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or the rules and regulations thereunder, which in the case of clause
-----
(A), (B) or (C) above could reasonably be expected to result in a Material
Adverse Effect.
(q) None of the Company, any Subsidiary or any Joint Venture has
violated any environmental, safety or similar law or regulation applicable to it
or its business or property relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes, pollutants
or contaminants ("Environmental Laws"), lacks any permit, license or other
------------------
approval required of it under applicable Environmental Laws is violating any
term or condition of such permit, license or approval which could reasonably be
expected to, either individually or in the aggregate, have a Material Adverse
Effect.
(r) Each of the Company, the Subsidiaries and the Joint Ventures has
(i) good and marketable title to all of the properties and assets described in
the Prospectuses as owned by it, free and clear of all liens, charges,
encumbrances and restrictions, except such as are described in the Prospectuses
or as would not have a Material Adverse Effect, (ii) peaceful and undisturbed
possession under all leases to which any of them is a party as lessee, (iii) all
licenses, certificates, permits, authorizations, approvals, franchises and other
rights from, and has made all declarations and filings with, all federal, state
and local authorities (including, without limitation, the FCC), all self-
regulatory authorities and all courts and other tribunals (each an
"Authorization") necessary to engage in the business as presently conducted by
-------------
any of them in the manner described in the Prospectuses, except as described in
the Prospectuses or where failure
10
<PAGE>
to hold such Authorizations would not, individually or in the aggregate, have a
Material Adverse Effect and (iv) no reason to believe that any governmental body
or agency is considering limiting, suspending or revoking any such
Authorization. Except where the failure to be in full force and effect would not
have a Material Adverse Effect, all such Authorizations are valid and in full
force and effect and each of the Company, the Subsidiaries and the Joint
Ventures is in compliance with the terms and conditions of all such
Authorizations and with the rules and regulations of the regulatory authorities
having jurisdiction with respect thereto. All leases to which the Company, the
Subsidiaries and the Joint Ventures is a party are valid and binding and no
default by the Company, any Subsidiary or any Joint Venture has occurred and is
continuing thereunder and no defaults by the landlord are existing under any
such lease that could reasonably be expected to result in a Material Adverse
Effect.
(s) Each of the Company, the Subsidiaries and the Joint Ventures owns,
possesses or has the right to employ all patents, patent rights, licenses
(including all FCC, state, local or other jurisdictional regulatory licenses),
inventions, copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, software, systems
or procedures), trademarks, service marks and trade names, inventions, computer
programs, technical data and information (collectively, the "Intellectual
------------
Property") presently employed by the Company, its Subsidiaries or the Joint
- --------
Ventures in connection with the businesses now operated by it or which are
proposed to be operated by the Company, its Subsidiaries or the Joint Ventures
free and clear of and without violating any right, claimed right, charge,
encumbrance, pledge, security interest, restriction or lien of any kind of any
other person and none of the Company, any Subsidiary or any Joint Venture has
received any notice of infringement of or conflict with asserted rights of
others with respect to any of the foregoing except as could not reasonably be
expected to have a Material Adverse Effect. The use of the Intellectual
Property in connection with the business and operations of the Company, the
Subsidiaries and the Joint Ventures does not infringe on the rights of any
person, except would not have a Material Adverse Effect.
(t) None of the Company, any Subsidiary, any Joint Venture or any of
their respective officers, directors, partners, employees, agents or affiliates
or any other person acting on behalf of the Company, any Subsidiary or any Joint
Venture, as the case may be, has, directly or indirectly, given or agreed to
give any money, gift or similar benefit (other than legal price concessions to
customers in the ordinary course of business) to any customer, supplier,
employee or agent of a customer or supplier, official or employee of any
governmental agency (domestic or foreign), instrumentality of any government
(domestic or foreign) or any political party or candidate for office (domestic
or foreign) or other person who was, is or may be in a position to help or
hinder the business of the Company, any Subsidiary or any Joint Venture (or
assist the Company, any Subsidiary or any Joint Venture in connection with any
actual or proposed transaction) which (i) might subject the Company, any
Subsidiary or any Joint Venture, or any other individual or entity to any damage
or penalty in any civil, criminal or governmental litigation or proceeding
(domestic or foreign), (ii) if not given in the past, could reasonably be
expected to have had a Material Adverse Effect on the assets, business or
operations of the Company, any Subsidiary or any Joint Venture or (iii) if not
continued in the future, could reasonably be expected to have a Material Adverse
Effect.
(u) All tax returns required to be filed by the Company, each of the
Subsidiaries and each of the Joint Ventures in all jurisdictions have been so
filed. All taxes, including withholding taxes, penalties and interest,
assessments, fees and other charges due or claimed to be due from such entities
or that are due and payable have been paid, other than those being contested in
good faith and for which adequate reserves have been provided or those currently
payable without penalty or interest. There are no proposed additional tax
assessments against the Company, any Subsidiary, any Joint Venture or the assets
or property of the Company, any Subsidiary or any Joint Venture.
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(v) None of the Company, the Subsidiaries or the Joint Ventures is
now, and after sale of the Shares to be sold by the Company hereunder and
application of the net proceeds from such sale as described in the Prospectuses
under the caption "Use of Proceeds" will not be (i) an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act"), or
----------------------
(ii) a "holding company" or a "subsidiary company" or an "affiliate" of a
holding company within the meaning of the Public Utility Holding Company Act of
1935, as amended (the "PUC Act").
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(w) Except as disclosed in the Prospectuses, there are no holders of
securities of the Company, the Subsidiaries or the Joint Ventures who, by reason
of the filing of the Registration Statement or consummation of the transactions
contemplated by this Agreement or the International Underwriting Agreement, have
the right to request or demand that the Company, any of the Subsidiaries or any
of the Joint Ventures register any of its securities (including, without
limitation, Class A Common Stock and Class B Common Stock) under the Act. No
such rights with respect to any shares of Class A Common Stock were exercised
and will not be exercised in connection with the sale of the Shares for a period
of 180 days after the date hereof.
(x) Each of the Company, the Subsidiaries and the Joint Ventures
maintains a system of internal accounting controls sufficient to provide
reasonable assurance that: (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with management's
general or specific authorization and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect thereto.
(y) Each of the Company, the Subsidiaries and the Joint Ventures
maintains insurance covering its properties, operations, personnel and
businesses. Such insurance insures against such losses and risks as are
adequate in accordance with customary industry practice to protect the Company,
the Subsidiaries, the Joint Ventures and their respective businesses. None of
the Company, any Subsidiary or any Joint Venture has received notice from any
insurer or agent of such insurer that substantial capital improvements or other
expenditures will have to be made in order to continue such insurance. All such
insurance is outstanding and duly in force on the date hereof.
(z) None of the Company, any Subsidiary or any Joint Venture has (i)
taken, directly or indirectly, any action designed to, or that might reasonably
be expected to, cause or result in stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Class A
Common Stock, (ii) since the date of the Prospectuses, (A) sold, bid for,
purchased or paid any person any compensation for soliciting purchases of the
Common Stock or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.
(aa) Set forth on Exhibit A hereto is a list of each employee pension
---------
or benefit plan with respect to which the Company or any corporation considered
an affiliate of the Company within the meaning of Section 407(d)(7) of ERISA (an
"ERISA Affiliate") is a party in interest or disqualified person. The execution
---------------
and delivery of this Agreement and the issuance and sale of the Shares will not
involve any prohibited transaction within the meaning of Section 406 of ERISA or
Section 4975 of the Internal Revenue Code of 1986, as amended.
12
<PAGE>
(bb) None of (A) the execution, delivery and performance of this
Agreement or the International Underwriting Agreement, (B) the issuance and sale
of the Shares, (C) the application of the proceeds from the issuance and sale of
the Shares or (D) the consummation of the transactions contemplated in
connection with any of the foregoing as set forth in the Prospectuses, will
violate Regulations G, T, U or X promulgated by the Board of Governors of the
Federal Reserve System or analogous foreign laws and regulations.
(cc) Except pursuant to this Agreement, there are no contracts,
agreements or understandings between the Company, any of its Subsidiaries or any
of its Joint Ventures and any other person that would give rise to a valid claim
against the Company or any of the U.S. Underwriters for a brokerage commission,
finder's fee or like payment in connection with the issuance, purchase and sale
of the Common Stock.
(dd) The Company has filed in a timely manner each document or report
required to be filed by it pursuant to the Exchange Act and the rules and
regulations thereunder; each such document or report at the time it was filed
conformed to the requirements of the Exchange Act and the rules and regulations
thereunder; and none or such documents or reports contained an untrue statement
of any material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
(ee) Each of the Company, the Subsidiaries and the Joint Ventures has
complied with all provisions of Section 517.075, Florida Statutes, relating to
doing business with the Government of Cuba or with any affiliate located in
Cuba.
(ff) Except as disclosed in the Prospectuses, there are no business
relationships or related party transactions required to be disclosed therein
pursuant to Item 404 of Regulation S-K of the Commission.
The Company acknowledges that the U.S. Underwriters and, for purposes
of the opinions to be delivered to the U.S. Underwriters pursuant to Section
8(e), (f) and (g) hereof, counsel to the Company and counsel to the U.S.
Underwriters, will rely upon the accuracy and truth of the foregoing
representations and hereby consents to such reliance.
7. Indemnification and Contribution. (a) The Company agrees to indemnify
--------------------------------
and hold harmless each of you and each other U.S. Underwriter and each person,
if any, who controls any U.S. Underwriter within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act from and against any and all
losses, claims, damages, liabilities and expenses (including reasonable costs of
investigation) arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any U.S. Prepricing Prospectus
or in the Registration Statement or the U.S. Prospectus or in any amendment or
supplement thereto, or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or expenses arise out of or are based upon
any untrue statement or omission or alleged untrue statement or omission which
has been made therein or omitted therefrom in reliance upon and in conformity
with the information relating to such U.S. Underwriter or Manager furnished in
writing to the Company by any U.S. Underwriter through the Representatives and
by any Manager through the Lead Managers expressly for use in connection
therewith; provided, however, that the indemnification contained in this
paragraph (a) with respect to any U.S. Prepricing Prospectus shall not inure to
the benefit of any U.S. Underwriter (or to the benefit of any person controlling
such U.S. Underwriter) on account of any such loss, claim, damage, liability or
expense arising
13
<PAGE>
from the sale of the Shares by such U.S. Underwriter to any person if a copy of
the U.S. Prospectus shall not have been delivered or sent to such person within
the time required by the Act and the regulations thereunder, and the untrue
statement or alleged untrue statement or omission or alleged omission of a
material fact contained in such U.S. Prepricing Prospectus was corrected in the
U.S. Prospectus, provided that the Company has delivered the U.S. Prospectus to
the several U.S. Underwriters in requisite quantity on a timely basis to permit
such delivery or sending. The foregoing indemnity agreement shall be in addition
to any liability which the Company may otherwise have.
(b) If any action, suit or proceeding shall be brought against any U.S.
Underwriter or any person controlling any U.S. Underwriter in respect of which
indemnity may be sought against the Company, such U.S. Underwriter or such
controlling person shall promptly notify the Company, and the Company shall
assume the defense thereof, including the employment of counsel and payment of
all fees and expenses. Such U.S. Underwriter or any such controlling person
shall have the right to employ separate counsel in any such action, suit or
proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such U.S. Underwriter or such
controlling person unless (i) the Company has agreed in writing to pay such fees
and expenses, (ii) the Company has failed to assume the defense and employ
counsel, or (iii) the named parties to any such action, suit or proceeding
(including any impleaded parties) include both such U.S. Underwriter or such
controlling person, and the Company and such U.S. Underwriter or such
controlling person shall have been advised by its counsel that representation of
such indemnified party and the Company by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or not
such representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the Company shall not
have the right to assume the defense of such action, suit or proceeding on
behalf of such U.S. Underwriter or such controlling person). It is understood,
however, that the Company shall, in connection with any one such action, suit or
proceeding or separate but substantially similar or related actions, suits or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys (in addition to any local counsel) at any time for
all such U.S. Underwriters and controlling persons not having actual or
potential differing interests with you or among themselves, which firm shall be
designated in writing by Smith Barney Inc., and that all such fees and expenses
shall be reimbursed as they are incurred. The Company shall not be liable for
any settlement of any such action, suit or proceeding effected without its
written consent, but if settled with such written consent, or if there be a
final judgment for the plaintiff in any such action, suit or proceeding, the
Company agrees to indemnify and hold harmless any U.S. Underwriter, to the
extent provided in the preceding paragraph, and any such controlling person from
and against any loss, claim, damage, liability or expense by reason of such
settlement or judgment.
(c) Each U.S. Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, and any person who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the
same extent as the foregoing indemnity from the Company to each U.S.
Underwriter, but only with respect to information relating to such U.S.
Underwriter furnished in writing by or on behalf of such U.S. Underwriter
through the Representatives expressly for use in the Registration Statement, the
U.S. Prospectus or any U.S. Prepricing Prospectus, or any amendment or
supplement thereto. If any action, suit or proceeding shall be brought against
the Company, any of its directors, any such officer, or any such controlling
person based on the Registration Statement, the U.S. Prospectus or any U.S.
Prepricing Prospectus, or any amendment or supplement thereto, and in respect of
which indemnity may be sought against any U.S. Underwriter pursuant to this
paragraph (c), such U.S. Underwriter shall have the rights and duties given to
the Company by paragraph (b) above (except that if the Company shall have
assumed the defense thereof such U.S. Underwriter shall not be required to do
so, but may employ separate counsel therein and participate in the
14
<PAGE>
defense thereof, but the fees and expenses of such counsel shall be at such U.S.
Underwriter's expense), and the Company, its directors, any such officer, and
any such controlling person shall have the rights and duties given to the U.S.
Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be
in addition to any liability which the U.S. Underwriters may otherwise have.
(d) If the indemnification provided for in this Section 7 is unavailable to
an indemnified party under paragraphs (a) or (c) hereof in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then an
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company on
the one hand and the U.S. Underwriters on the other hand from the offering of
the Shares, or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company on the one hand and the U.S. Underwriters on the other in
connection with the statements or omissions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the U.S. Underwriters on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the U.S. Underwriters, in each case as set forth in the
table on the cover page of the U.S. Prospectus. The relative fault of the
Company on the one hand and the U.S. Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or by the U.S. Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(e) The Company and the U.S. Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by a
pro rata allocation (even if the U.S. Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (d) above. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in paragraph (d) above
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 7, no U.S.
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price of the Shares underwritten by it and distributed to the
public exceeds the amount of any damages which such U.S. Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The U.S. Underwriters' obligations to contribute pursuant to
this Section 7 are several in proportion to the respective numbers of Firm
Shares set forth opposite their names in Schedule I hereto (or such numbers of
Firm Shares increased as set forth in Section 10 hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
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<PAGE>
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any U.S. Underwriter or any person
controlling any U.S. Underwriter, the Company, its directors or officers, or any
person controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any U.S. Underwriter or any person controlling any U.S. Underwriter, or to the
Company, its directors or officers, or any person controlling the Company, shall
be entitled to the benefits of the indemnity, contribution, and reimbursement
agreements contained in this Section 7.
8. Conditions of U.S. Underwriters' Obligations. The several obligations
--------------------------------------------
of the U.S. Underwriters to purchase the Firm Shares hereunder are subject to
the following conditions:
(a) All of the representations and warranties of the Company contained
in this Agreement shall be true and correct on the Closing Date with the same
force and effect as if made on and as of the Closing Date.
(b) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
(including pursuant to Rule 462(b)) to be declared effective before the offering
of the Shares may commence, the Registration Statement or such post-effective
amendment shall have become effective not later than 5:30 P.M., New York City
time, on the date hereof, or at such later date and time as shall be consented
to in writing by you, and all filings, if any, required by Rules 424 and 430A
under the Act shall have been timely made; no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been instituted or, to the knowledge of
the Company or any U.S. Underwriter, threatened by the Commission, and any
request of the Commission for additional information (to be included in the
Registration Statement or the Prospectuses or otherwise) shall have been
complied with to your satisfaction.
(c) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a prospective
change, that would have a Material Adverse Effect on the Company, the
Subsidiaries and the Joint Ventures, taken as a whole, not contemplated by the
Prospectuses, which in your opinion, as Representatives of the several U.S.
Underwriters, would materially adversely affect the market for the Shares, or
(ii) any event or development relating to or involving the Company, the
Subsidiaries, the Joint Ventures or any officer or director of the Company which
makes any statement made in the Prospectuses untrue or which, in the opinion of
the Company and its counsel or the U.S. Underwriters and their counsel, requires
the making of any addition to or change in the Prospectuses in order to state a
material fact required by the Act or any other law to be stated therein or
necessary in order to make the statements therein not misleading, if amending or
supplementing the Prospectuses to reflect such event or development would, in
your opinion, as Representatives of the several U.S. Underwriters, materially
adversely affect the market for the Shares.
(d) You shall have received a certificate, dated the Closing Date,
signed on behalf of the Company by (i) the President or a Vice Chairman and (ii)
a Vice President, Vice Chairman, Secretary or Assistant Secretary, in form and
substance reasonably satisfactory to you, confirming, as of the Closing Date,
the matters set forth in paragraphs (a), (b), and (c) of this Section 8, certain
incumbency matters and that, as of the Closing Date, the obligations of the
Company to be performed hereunder on or prior thereto have been duly performed.
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(e) You shall have received on the Closing Date, an opinion, dated the
Closing Date, in form and substance satisfactory to you, of Buchanan Ingersoll,
counsel for the Company, to the effect set forth in Exhibit B hereto.
---------
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, in form and substance satisfactory to you, of Swidler & Berlin,
special regulatory counsel to the Company, to the effect set forth in Exhibit C
---------
hereto.
(g) You shall have received an opinion, dated the Closing Date, in
form and substance reasonably satisfactory to you, of Latham & Watkins, counsel
to the Representatives of the Underwriters, covering such matters as are
customarily covered in such opinions.
(h) At the time this Agreement is executed and at the Closing Date,
you shall have received from Deloitte & Touche, independent public accountants
for the Company dated as of the date of this Agreement and of the Closing Date,
respectively, a customary comfort letter addressed to the you and in form and
substance satisfactory to you with respect to the financial statements and
certain financial information of the Company, the Subsidiaries and the Joint
Ventures contained in the Registration Statement and the Prospectuses.
(i)(i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been taken or, to the knowledge of the Company, shall be contemplated by the
Commission at or prior to the Closing Date; (ii) there shall not have been any
change in the capital stock of the Company nor any material increase in the
short-term or long-term debt of the Company (other than in the ordinary course
of business) from that set forth or contemplated in the Registration Statement
or the Prospectuses; (iii) there shall not have been, since the respective dates
as of which information is given in the Registration Statement and the
Prospectuses, except as may otherwise be stated in the Registration Statement
and, any material adverse change in the condition (financial or other),
business, prospects, properties, net worth or results of operations of the
Company and the Subsidiaries taken as a whole; and (iv) the Company and the
Subsidiaries shall not have any liabilities or obligations, direct or contingent
(whether or not in the ordinary course of business), that are material to the
Company and the Subsidiaries, taken as a whole, other than those reflected in
the Registration Statement or the Prospectuses.
(j) The Company shall not have failed at or prior to the Closing Date
to have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
(k) Latham & Watkins shall have been furnished with such documents, in
addition to those set forth above, as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in this
Section 8 and in order to evidence the accuracy, completeness or satisfaction in
all material respects of any of the representations, warranties or conditions
herein contained.
(l) The Shares shall have been listed or approved for listing upon
notice of issuance on the Nasdaq National Market.
(m) The closing under the International Underwriting Agreement shall
have occurred concurrently with the closing hereunder on the Closing Date.
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(n) The Adelphia Share Purchase shall have occurred in accordance with
the terms and conditions set forth in the letter agreement by which the Parent
and the Company have agreed to effectuate the Adelphia Share Purchase (the
"Adelphia Share Purchase Agreement") and the Adelphia Note Contribution shall
have occurred in accordance with the terms and conditions set forth in the
letter agreement by which the Parent and the Company have agreed to effectuate
the Adelphia Note Contribution (the "Adelphia Note Contribution Agreement").
(o) As set forth in that certain letter of understanding dated April
___, 1998, among the Company, the Parent and MCI (the "MCI Agreement"): (i) the
MCI Warrant (as defined in the Prospectuses) and the Additional MCI Warrants
shall been issued to MCI (as defined in the Prospectuses), (ii) the MCI Warrant
and the Additional MCI Warrants shall have been purchased from MCI by the Parent
and (iii) the Company shall have issued the Adelphia Warrant (as defined in the
Prospectuses) to the Parent.
(p) Prior to the Closing Date, the Company, the Subsidiaries and the
Joint Ventures shall have furnished or caused to be furnished to you such
further certificates and documents as you shall have requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and your counsel.
Any certificate or document signed by any officer of the Company and
delivered to you, as Representatives of the U.S. Underwriters, or to counsel for
the U.S. Underwriters, shall be deemed a representation and warranty by the
Company to each U.S. Underwriter as to the statements made therein.
The several obligations of the U.S. Underwriters to purchase Additional
Shares hereunder are subject to delivery to you on the applicable Option Closing
Date of such documents as you may reasonably request with respect to the good
standing of the Company, the Subsidiaries and the Joint Ventures, the due
authorization and issuance of such Additional Shares and other matters related
to the issuance of such Additional Shares.
9. Expenses. The Company agrees to pay the following costs and
--------
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the Registration Statement (including financial
statements and exhibits thereto), the Prepricing Prospectuses, the Prospectuses,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the Registration Statement, the
Prepricing Prospectuses, the Prospectuses, and all amendments or supplements to
any of them as may be reasonably requested for use in connection with the
offering and sale of the Shares; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Shares, including
any stamp taxes in connection with the original issuance and sale of the Shares;
(iv) the printing (or reproduction) and delivery of this Agreement, the Blue Sky
Memorandum and all other agreements or documents printed (or reproduced) and
delivered in connection with the offering of the Shares; (v) the registration of
the Class A Common Stock under the Exchange Act and the listing of the Shares on
the Nasdaq National Market; (vi) the registration or qualification of the Shares
for offer and sale under the securities or Blue Sky laws of the several states
as provided in Section 5(g) hereof (including the reasonable fees, expenses and
disbursements of counsel for the U.S. Underwriters relating to the preparation,
printing or reproduction, and delivery of the Blue Sky Memorandum and such
registration and qualification); (vii) the filing fees and the fees and expenses
of counsel for the U.S. Underwriters in connection with any filings required to
be made with the National Association of Securities Dealers, Inc.; (viii) the
transportation and other expenses incurred by or
18
<PAGE>
on behalf of Company representatives in connection with presentations to
prospective purchasers of the Shares; (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company.
10. Effective Date of Agreement. This Agreement shall become
---------------------------
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the Registration Statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the Registration Statement or such post-
effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Company,
by notifying you, or by you, as Representatives of the several U.S.
Underwriters, by notifying the Company.
If any one or more of the U.S. Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase hereunder on the
Closing Date, and the aggregate number of Shares which such defaulting U.S.
Underwriter or U.S. Underwriters are obligated but fail or refuse to purchase is
not more than one-tenth of the aggregate number of Shares which the U.S.
Underwriters are obligated to purchase on the Closing Date, each non-defaulting
U.S. Underwriter shall be obligated, severally, in the proportion which the
number of Firm Shares set forth opposite its name in Schedule I hereto bears to
the aggregate number of Firm Shares set forth opposite the names of all non-
defaulting U.S. Underwriters or in such other proportion as you may specify in
accordance with Section 20 of the Master Agreement Among U.S. Underwriters of
Smith Barney Inc., to purchase the Shares which such defaulting U.S. Underwriter
or U.S. Underwriters are obligated, but fail or refuse, to purchase. If any one
or more of the U.S. Underwriters shall fail or refuse to purchase Shares which
it or they are obligated to purchase on the Closing Date and the aggregate
number of Shares with respect to which such default occurs is more than one-
tenth of the aggregate number of Shares which the U.S. Underwriters are
obligated to purchase on the Closing Date and arrangements satisfactory to you
and the Company for the purchase of such Shares by one or more non-defaulting
U.S. Underwriters or other party or parties approved by you and the Company are
not made within 36 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting U.S. Underwriter or the
Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under
this paragraph shall not relieve any defaulting U.S. Underwriter from liability
in respect of any such default of any such U.S. Underwriter under this
Agreement. The term "U.S. Underwriter" as used in this Agreement includes, for
all purposes of this Agreement, any party not listed in Schedule I hereto who,
with your approval and the approval of the Company, purchases Shares which a
defaulting U.S. Underwriter is obligated, but fails or refuses, to purchase.
Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
11. Termination of Agreement. This Agreement shall be subject to
------------------------
termination in your absolute discretion, without liability on the part of any
U.S. Underwriter to the Company, by notice to the Company, if prior to the
Closing Date or any Option Closing Date (if different from the Closing Date and
then only as to the Additional Shares), as the case may be, (i) trading in
securities generally on the New York Stock Exchange, the American Stock Exchange
or the Nasdaq National Market shall have been suspended or materially limited,
(ii) a general moratorium on commercial banking activities in New York or
Philadelphia shall have been declared by either federal or state authorities, or
(iii) there shall have occurred any outbreak or escalation of hostilities or
other international or domestic calamity, crisis or change in
19
<PAGE>
political, financial or economic conditions, the effect of which on the
financial markets of the United States is such as to make it, in your judgment,
impracticable or inadvisable to commence or continue the offering of the Shares
at the offering price to the public set forth on the cover page of the U.S.
Prospectus or to enforce contracts for the resale of the Shares by the U.S.
Underwriters. Notice of such termination may be given to the Company by
telegram, telecopy or telephone and shall be subsequently confirmed by letter.
12. Information Furnished by the U.S. Underwriters. The statements set
----------------------------------------------
forth in the last paragraph on the cover page, the stabilization legend on the
inside cover page, and the statements in the first, third, seventh, eighth,
ninth and fifteenth paragraphs under the caption "Underwriting" in any U.S.
Prepricing Prospectus and in the U.S. Prospectus, constitute the only
information furnished by or on behalf of the U.S. Underwriters through you as
such information is referred to in Sections 6(b) and 7 hereof.
13. Miscellaneous. Except as otherwise provided in Sections 5, 10 and
-------------
11 hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, at the office of the
Company at Hyperion Telecommunications, Inc., Main at Water Street, Coudersport,
Pennsylvania 16915, Attention: Edward E. Babcock, Jr., Vice President, Finance;
or (ii) if to you, as Representatives of the several U.S. Underwriters, care of
Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention:
Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the
several U.S. Underwriters, the Company, its directors and officers, and the
other controlling persons referred to in Section 7 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the
term "successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any U.S. Underwriter of any of the Shares in his
status as such purchaser.
14. Applicable Law; Counterparts. This Agreement shall be governed by
----------------------------
and construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
20
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several U.S. Underwriters.
Very truly yours,
HYPERION TELECOMMUNICATIONS, INC.
By:
-------------------------------------------
Name:
Title:
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
U.S. Underwriters named in Schedule I
hereto.
SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
As Representatives of the Several U.S. Underwriters
By SMITH BARNEY INC.
By:
-------------------------------------------
Name:
Title:
21
<PAGE>
SCHEDULE I
HYPERION TELECOMMUNICATIONS INC.
U.S. Underwriter Number of Firm Shares
- ---------------- ---------------------
Smith Barney Inc.
Credit Suisse First Boston Corporation
NationsBanc Montgomery Securities LLC ________________
TOTAL
22
<PAGE>
SCHEDULE II
Daniel R. Milliard
Charles R Drenning
Paul D. Fajerski
Randolph S. Fowler
23
<PAGE>
SCHEDULE III
------------
SUBSIDIARIES
------------
24
<PAGE>
SCHEDULE IV
------------
JOINT VENTURES
--------------
25
<PAGE>
EXHIBIT A
---------
LIST OF EMPLOYEE PENSION AND BENEFIT
------------------------------------
PLANS OF HYPERION TELECOMMUNICATIONS, INC.
------------------------------------------
AND ITS SUBSIDIARIES
--------------------
26
<PAGE>
EXHIBIT B
---------
FORM OF OPINION OF BUCHANAN INGERSOLL
-------------------------------------
1. Each of the Company and the Subsidiaries is duly organized and validly
existing as a corporation or limited liability company in good standing under
the laws of its jurisdiction of formation, as applicable, and has all requisite
corporate or limited liability company power and authority to carry on its
business as it is being conducted and as described in the Registration Statement
and the Prospectuses and to own, lease and operate its properties, and is duly
qualified and in good standing as a foreign corporation or limited liability
company, as applicable, authorized to do business in each jurisdiction in which
the nature of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not, singly or
in the aggregate, have a material adverse effect on the business, financial
condition or results of operations of the Company and the Subsidiaries, taken as
a whole (a "Material Adverse Effect").
2. Each of the Joint Ventures has been duly incorporated or formed as a
corporation, general partnership, limited partnership or limited liability
company under the laws of its jurisdiction of incorporation or formation, as
applicable, and has all requisite corporate, partnership or limited liability
company power and authority to own, lease, and operate its properties and to
conduct its business as described in the Prospectuses, and is duly qualified to
transact business as a foreign corporation, general partnership, limited
partnership or limited liability company, as applicable, in each jurisdiction in
which the character of the business being conducted by it or the location of the
property owned by it makes such qualification necessary, except where the
failure to so qualify, singly or in the aggregate, would not have a Material
Adverse Effect. Each Joint Venture that is a corporation, limited partnership
or limited liability company is validly existing and is in good standing under
the laws of its jurisdiction of incorporation or formation, as applicable.
3. All of the outstanding shares of capital stock of the Company have been
duly authorized, validly issued, and are fully paid and nonassessable and were
not issued in violation of any preemptive or similar rights. All of the
outstanding shares of capital stock of the Company is as set forth in the
Prospectuses under the caption "Capitalization." The authorized capital stock
of the Company conforms in all material respects as to legal matters to the
description thereof contained in the Prospectuses under the caption "Description
of Capital Stock."
4. All the shares of capital stock of the Company outstanding prior to the
issuance of the Shares to be issued and sold by the Company pursuant to the
Underwriting Agreements have been duly authorized and validly issued, and are
fully paid and nonassessable.
5. The Underwritten Shares to be issued and sold to the U.S. Underwriters and
Managers by the Company under the U.S. Underwriting Agreement and the
International Underwriting Agreement have been duly authorized and when issued
and delivered to the U.S. Underwriters and Managers against payment therefor in
accordance with the terms of the U.S. Underwriting Agreement and the
International Underwriting Agreement, will be validly issued, fully paid and
nonassessable and free of any (A) preemptive rights or (B) to the best knowledge
of such counsel after reasonable inquiry, similar rights that entitle or will
entitle any person to acquire any Class A Common Stock upon the issuance thereof
by the Company.
6. The Adelphia New Shares (as defined in the Prospectuses) have been duly
authorized and when issued and delivered to the Parent against payment therefor
in accordance with the
27
<PAGE>
terms of the Adelphia Share Purchase Agreement or the Adelphia Note Contribution
Agreement, as the case may be, will be validly issued, fully paid and
nonassessable and free of (A) preemptive rights or (B) to the best knowledge of
such counsel after reasonable inquiry, similar rights that entitle or will
entitle any person to acquire any shares of Class A Common Stock upon the
issuance thereof by the Company.
7. The Additional MCI Warrants (as defined in the Prospectuses) have been
duly authorized and, when executed and delivered pursuant to the terms of the
Warrant Agreement (the "MCI Warrant Agreement"), dated June 13, 1997, between
the Company and MCImetro Access Transmission Services, Inc. ("MCI"), will be
valid and binding obligations of the Company, enforceable against the Company in
accordance with their terms, except as enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws
affecting the enforceability of creditors' rights generally and by general
principles of equity (whether arising under a proceeding at law or in equity).
8. The maximum number of Shares issuable upon exercise of the Additional MCI
Warrants has been duly authorized and reserved for issuance by the Company at
the time and in the manner required by the MCI Warrant Agreement and, upon (i)
due exercise of the Additional MCI Warrants and (ii) delivery of Shares upon
such exercise, in each case, in accordance with the terms of the Additional MCI
Warrants and the MCI Warrant Agreement, such Shares will be validly issued,
fully paid and nonassessable.
9. Upon due issuance of the Additional MCI Warrants, the Company will have
satisfied its obligation to issue "Additional Initial Warrants" (as such term is
defined in the MCI Warrant Agreement) under Section 2.2 of the MCI Warrant
-----------
Agreement.
10. The Adelphia Warrant (as defined in the Prospectuses) has been duly
authorized and, when executed and delivered pursuant to the terms of the MCI
Agreement, will be valid and binding obligations of the Company, enforceable
against the Company in accordance with its terms, except as enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws affecting the enforceability of creditors' rights generally
and by general principles of equity (whether arising under a proceeding at law
or in equity).
11. The maximum number of Shares issuable upon exercise of the Adelphia
Warrant has been duly authorized and reserved for issuance by the Company and,
upon (i) due exercise of the Adelphia Warrant and (ii) delivery of Shares upon
such exercise, in each case, in accordance with the terms of the Adelphia
Warrant, such Shares will be validly issued, fully paid and nonassessable.
12. The form of certificates for the Underwritten Shares and the Adelphia New
Shares conforms to the requirements of the Nasdaq National Market and the
Delaware General Corporation Law.
13. The Registration Statement and all post-effective amendments, if any,
have become effective under the Act and, to the best knowledge of such counsel
after reasonable inquiry, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose are
pending before or contemplated by the Commission; and any required filing of the
Prospectuses pursuant to Rule 424(b) has been made in accordance with Rule
424(b).
14. The Company has the corporate power and authority to enter into the U.S.
Underwriting Agreement and the International Underwriting Agreement and to
issue, sell and deliver the Shares to be sold by it to the U.S. Underwriters and
Managers as provided therein, and each of the U.S. Underwriting Agreement and
the International Underwriting Agreement have been duly authorized, executed and
delivered by the Company and is a legal, valid and binding agreement of the
Company,
28
<PAGE>
enforceable against the Company in accordance with its terms, except that (A)
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws not or hereafter in effect relating to
creditors' rights generally, (B) the remedy of specific performance and other
forms of equitable relief may be subject to certain equitable defenses and to
the discretion of the court before which the proceedings may be brought and (C)
rights to indemnity and contribution thereunder may be limited by Federal or
state securities laws or the public policy underlying such laws.
15. All of the Joint Venture's limited partnership and limited liability
company interests owned by each Subsidiary have been duly authorized and validly
issued and, except for matters referenced by the Prospectuses, all of the
partnership and limited liability company interests owned in the Joint Ventures
which are owned of record by each respective Subsidiary are, to the best of our
knowledge, owned free and clear of any security interest, lien or other
encumbrance.
16. All of the outstanding capital stock of each Subsidiary is owned by the
Company, free and clear of any security interest, claim, lien, limitation on
voting rights or encumbrance. There are not, to our knowledge, other than as
set forth in the Prospectuses, currently, and will not be following the issuance
and sale of the Shares, any outstanding subscriptions, rights, warrants, calls,
commitments of sale or options to acquire, or instruments convertible into or
exchangeable for, any capital stock or other equity interest of the Company or
any Subsidiary.
17. The Registration Statement and the Prospectuses and any supplements or
amendments thereto (except for the financial statements, schedules, and notes
thereto and other financial and statistical data included therein, as to which
such counsel need not express any opinion) comply as to form in all material
respects with the requirements of the Act.
18. Neither the issuance, sale or delivery of the Underwritten Shares, nor
the execution, delivery or performance of the U.S. Underwriting Agreement or the
International Underwriting Agreement, or compliance by the Company with all
provisions of the U.S. Agreement and the International Underwriting Agreement,
nor consummation by the Company of the transactions contemplated hereby or by
the International Underwriting Agreement violates, conflicts with or constitutes
a breach of any of the terms or provisions of, or a default under (or an event
that with notice or the lapse of time, or both, would constitute a default), or
require consent under, or result in the imposition of a lien or encumbrance on
any properties of the Company or any Subsidiary, or an acceleration of any
indebtedness of the Company or any Subsidiary pursuant to, (i) the charter or
bylaws of the Company or any Subsidiary, (ii) any bond, debenture, note,
indenture, mortgage, deed of trust or other agreement or instrument to which the
Company or any Subsidiary is a party or by which it or its property is or may be
bound identified to such counsel as material (assuming all of such agreements
are governed by Pennsylvania law), (iii) any local, state or Federal law,
statute, ordinance, requirement, administrative statute, rule or regulation
applicable to the Company or any Subsidiary or its assets or properties (except
with respect to the matters set forth in the opinion of Swidler & Berlin, as to
which no opinion need be expressed) or (iv) any judgment, order or decree of any
court or governmental agency or authority having jurisdiction over the Company
or any Subsidiary or its assets or properties known to such counsel, except in
the case of clauses (ii), (iii) and (iv) for such violations, conflicts,
breaches, defaults, consents, impositions of liens or accelerations that (x)
would not, singly or in the aggregate, have a Material Adverse Effect or (y) are
disclosed in the Prospectuses. Assuming compliance with applicable state
securities and Blue Sky laws, as to which such counsel need express no opinion,
and except for the filing of a registration statement under the Act, no consent,
approval, authorization or order of, or filing, registration, qualification,
license or permit of or with, any court or governmental agency, body or
administrative agency is required for (1) the execution, delivery and
performance by the Company of the U.S. Underwriting Agreement and the
International Underwriting
29
<PAGE>
Agreement, (2) the issuance and sale of the Shares or (3) consummation by the
Company, the Subsidiaries and the Joint Ventures of the transactions described
in the Prospectuses, except such as have been obtained and made or have been
disclosed in the Prospectuses, and except where the failure to obtain such
consents or waivers would not, singly or in the aggregate, have a Material
Adverse Effect. To the best of such counsel's knowledge, no consents or waivers
from any other person are required for the execution, delivery and performance
by the Company of the U.S. Underwriting Agreement and the International
Underwriting Agreement or the issuance and sale of the Underwritten Shares,
other than such consents and waivers as have been obtained.
19. None of the Company, its Subsidiaries or the Joint Ventures is (i) an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended, or (ii) a
"holding company" or a "subsidiary company" or an "affiliate" of a holding
company within the meaning of the Public Utility Holding Company Act of 1935, as
amended.
20. Except as set forth in the Prospectuses, there are no holders of
securities of the Company who, by reason of the execution by the Company of the
U.S. Underwriting Agreement or the International Underwriting Agreement or the
consummation by the Company of the transactions contemplated thereby, have the
right to request or demand that the Company register under the Act securities
held by them.
21. None of (A) the execution, delivery and performance of the U.S.
Underwriting Agreement or the International Underwriting Agreement, (B) the
issuance and sale of the Shares and the application of the proceeds from the
issuance and sale of the Shares or (C) the consummation of the transactions
contemplated in connection with any of the foregoing as set forth in the
Prospectuses, will violate Regulations G, T, U or X promulgated by the Board of
Governors of the Federal Reserve System.
22. To the knowledge of such counsel, there is (i) no action, suit,
investigation or proceeding before or by any court, arbitrator or governmental
agency, body or official, domestic or foreign, now pending, or threatened or
contemplated to which any of the Company or any Subsidiary is or may be a party
or to which the business or property of any of the Company or any Subsidiary is
or may be subject, (ii) no statute, rule, regulation or order that has been
enacted, adopted or issued by any governmental agency, or (iii) no injunction,
restraining order or order of any nature by a federal or state court of
competent jurisdiction to which any of the Company or any Subsidiary is or may
be subject has been issued that, in the case of clauses (i), (ii) and (iii)
above, (x) is required to be disclosed in the Prospectuses and that is not so
disclosed and, (y) could reasonably be expected to have, either individually or
in the aggregate, a Material Adverse Effect, it being understood that for
purposes of this opinion, such counsel need express no opinion with respect to
(i) actions, suits investigation or proceedings before the FCC or any similar
state regulatory commission or body, (ii) statutes, rules, regulations or orders
by any FCC or any similar state regulatory commission or (iii) injunctions,
restraining orders or other orders by the FCC or any similar state regulatory
commission or body.
Although we have not undertaken, except as otherwise indicated in our opinion,
to determine independently, and do not assume any responsibility for, the
accuracy, completeness or fairness of the statements in the Registration
Statement, we have participated in the preparation of the Registration Statement
and the Prospectuses, including general review and discussion of the contents
thereof but have made no independent check or verification thereof, and no facts
have come to our attention that would lead us to believe that the Registration
Statement at the time the Registration Statement became effective, or the
Prospectuses, as of their respective dates and as of the Closing Date or the
Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact required to be
30
<PAGE>
stated in the Prospectuses or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading or that
any amendment or supplement to the Prospectuses, as of their respective dates,
and as of the Closing Date and the Option Closing Date, as the case may be,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated in the Prospectuses or necessary in order to make the
statements in the Prospectuses, in the light of the circumstances under which
they were made, not misleading (it being understood that such counsel need
express no opinion with respect to the financial statements, schedules, pro
forma financial statements and the notes thereto and other financial data
included in the Registration Statement and the Prospectuses.
31
<PAGE>
EXHIBIT C
---------
FORM OF OPINION OF REGULATORY COUNSEL
-------------------------------------
1. Each of the Company, the Subsidiaries and the Joint Ventures has all of
the licenses, permits and authorizations, if any, required by the FCC and the
State Regulatory Agencies for the provision of telecommunications services
except where the failure to obtain or hold such license, permit or authority
would not have a Material Adverse Effect on the Company, the Subsidiaries and
the Joint Ventures, taken as a whole.
2. Neither the Company, any Subsidiaries nor any Joint Ventures is subject to
any pending complaint or investigation before the FCC or, to the best knowledge
of counsel, to any threatened complaint or investigation before the FCC, or, any
pending or threatened complaint or investigation before any State Regulatory
Agencies based on any alleged violation by the Company, the Subsidiaries or the
Joint Ventures in connection with their provision of or failure to provide
telecommunications services.
3. The statements in the Prospectuses under the heading of "Risk Factors -
Regulation" and "Regulation" fairly and accurately summarize the matters therein
described.
4. The Company, the Subsidiaries and the Joint Ventures have the consents,
approvals, authorizations, licenses, certificates, permits, or orders of the FCC
or any State Regulatory Agency if any, for the consummation of the transactions
contemplated in the Underwriting Agreements except where the failure to obtain
the consents, approvals, authorizations, licenses, certificates, permits or
orders would not have a Material Adverse Effect on the Company, the Subsidiaries
and the Joint Ventures, taken as a whole.
5. Neither the execution and delivery of the Underwriting Agreements nor the
issuance of the Shares will conflict with or result in a violation of any order
or regulation of the FCC or any State Regulatory Agency applicable to the
Company, its Subsidiaries or the Joint Ventures except where the conflict with
or the violation of which would not have a material adverse impact on the
Company, the Subsidiaries and the Joint Ventures, taken as a whole.
32
<PAGE>
2,000,000 Shares
Hyperion Telecommunications, Inc.
Class A Common Stock
INTERNATIONAL UNDERWRITING AGREEMENT
------------------------------------
May ___, 1998
SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED
NATIONSBANC MONTGOMERY SECURITIES LLC
As Lead Managers for the Several Managers
c/o Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies & Gentlemen:
Hyperion Telecommunications, Inc., a Delaware corporation (the "Company"),
-------
proposes to issue and sell outside the United States and Canada an aggregate of
2,000,000 shares (the "Shares") of its Class A Common Stock, $.01 par value per
------
share (the "Class A Common Stock"), to the several underwriters named in
--------------------
Schedule I hereto (the "Managers"), for whom Smith Barney Inc., Credit Suisse
--------
First Boston (Europe) Limited and NationsBanc Montgomery Securities LLC are
acting as representatives (the "Lead Managers").
-------------
It is understood that the Company is concurrently entering into a U.S.
Underwriting Agreement, dated the date hereof (the "U.S. Underwriting
-----------------
Agreement"), providing for the sale of 8,000,000 shares (the "Firm U.S.
- --------- ---------
Shares") of the Class A Common Stock (plus an option granted to purchase up to
- ------
an additional 1,500,000 shares of Class A Common Stock (the "Additional U.S.
---------------
Shares")) solely for the purpose of covering over-allotments) through
- ------
arrangements with certain underwriters in the United States and Canada (the
"U.S. Underwriters"), for whom Smith Barney Inc., Credit Suisse First Boston
-----------------
Corporation and NationsBanc Montgomery Securities LLC are acting as
representatives (the "Representatives"). All shares of Class A Common Stock
---------------
proposed to be offered to the U.S Underwriters pursuant to the U.S. Underwriting
Agreement, including the Firm U.S. Shares and the Additional U.S. Shares, are
herein called the "U.S. Shares"; the U.S. Shares and the Shares, collectively,
-----------
are herein called the "Underwritten Shares."
-------------------
The Company also understands that the Lead Managers and the Representatives
have entered into an agreement (the "Agreement Between U.S. Underwriters and
---------------------------------------
Managers") contemplating the coordination of certain transactions between the
- --------
Managers and the U.S. Underwriters and that, pursuant thereto and subject to the
conditions set forth therein, the Managers may purchase from the U.S.
Underwriters a portion of the U.S. Shares or sell to the U.S. Underwriters a
portion of the Shares. The Company understands that any such purchases and
sales between the Managers and the U.S. Underwriters shall be governed by the
Agreement Between Managers and U.S. Underwriters and shall not be governed by
the terms of this Agreement or the U.S. Underwriting Agreement.
<PAGE>
The Company wishes to confirm as follows its agreement with you and the
other several Managers on whose behalf you are acting, in connection with the
several purchases of the Shares by the Managers.
1. Registration Statement and Prospectuses. The Company has prepared and
---------------------------------------
filed with the Securities and Exchange Commission (the "Commission") in
----------
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1 (File No. 333-48209) under the Act,
---
including prospectuses subject to completion, relating to the Underwritten
Shares. The term "Registration Statement" as used in this Agreement means the
----------------------
registration statement (including all financial schedules and exhibits), as
amended at the time it becomes effective, and as thereafter amended by post-
effective amendment. The term "Prospectuses" as used in this Agreement means
------------
the prospectuses in the forms included in the Registration Statement or, if the
prospectuses included in the Registration Statement omit information in reliance
on Rule 430A under the Act and such information is included in prospectuses
filed with the Commission pursuant to Rule 424(b) under the Act, the term
"Prospectuses" as used in this Agreement means the prospectuses in the forms
- -------------
included in the Registration Statement as supplemented by the addition of the
Rule 430A information contained in the prospectuses filed with the Commission
pursuant to Rule 424(b). The term "Prepricing Prospectuses" as used in this
-----------------------
Agreement means the prospectuses subject to completion in the forms included in
the Registration Statement at the time of the initial filing of the Registration
Statement with the Commission, and as such prospectuses shall have been amended
from time to time prior to the date of the Prospectuses.
It is understood that two forms of Prepricing Prospectus and two forms of
Prospectus are to be used in connection with the offering and sale of the
Underwritten Shares: a Prepricing Prospectus and a Prospectus relating to the
U.S. Shares that are to be offered and sold in the United States or Canada to
U.S. or Canadian Persons (the "U.S. Prepricing Prospectus" and the "U.S.
-------------------------- ----
Prospectus," respectively), and a Prepricing Prospectus and a Prospectus
- ----------
relating to the Shares that are to be offered and sold outside the United States
or Canada to persons other than U.S. or Canadian Persons (the "International
-------------
Prepricing Prospectus" and the "International Prospectus," respectively). The
- --------------------- ------------------------
U.S. Prospectus and the International Prospectus are herein collectively
referred to as the "Prospectuses," and the U.S. Prepricing Prospectus and the
------------
International Prepricing Prospectus are herein called the "Prepricing
----------
Prospectuses." For purposes of this Agreement: "Rules and Regulations" means
- ------------ ---------------------
the rules and regulations adopted by the Commission under either the Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable;
------------
"U.S. or Canadian Person" means any resident or national of the United States or
-----------------------
Canada, any corporation, partnership or other entity created or organized in or
under the laws of the United States or Canada or any estate or trust the income
of which is subject to United States or Canadian income taxation regardless of
the source of its income (other than the foreign branch of any U.S. or Canadian
Person), and includes any United States or Canadian branch of a person other
than a U.S. or Canadian Person; "United States" means the United States of
-------------
America (including the states thereof and the District of Columbia) and its
territories, its possessions and other areas subject to its jurisdiction; and
"Canada" means Canada and its territories, its possessions and other areas
- -------
subject to its jurisdiction.
2. Agreements to Sell and Purchase. The Company hereby agrees, subject
-------------------------------
to all the terms and conditions set forth herein, to issue and sell to each
Manager and, upon the basis of the representations, warranties and agreements of
the Company herein contained and subject to all the terms and conditions set
forth herein, each Manager agrees, severally and not jointly, to purchase from
the Company, at a purchase price of $ per Share (the "purchase price per
----- ------------------
share"), the number of Shares set forth opposite the name of such Manager in
- -----
Schedule I hereto (or such number of Shares increased as set forth in Section 10
hereof).
2
<PAGE>
3. Terms of Public Offering. The Company has been advised by you that
------------------------
the Managers propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the International Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the Managers
-------------------------------------------
of and payment for the Shares shall be made at the office of Latham and Watkins,
885 Third Avenue, New York, New York 10022 at 10:00 A.M., New York City time, on
, 1998 (the "Closing Date"). The place of closing for the Shares and
- ----- ---- ------------
the Closing Date may be varied by agreement between you and the Company.
Certificates for the Shares to be purchased hereunder shall be registered in
such names and in such denominations as you shall request prior to 9:30 A.M.,
New York City time, on the second business day preceding the Closing Date. Such
certificates shall be made available to you in New York City for inspection and
packaging not later than 9:30 A.M., New York City time, on the business day next
preceding the Closing Date. The certificates evidencing the Shares to be
purchased hereunder shall be delivered to you on the Closing Date, against
payment of the purchase price therefor in immediately available funds.
5. Agreements of the Company. The Company agrees with the several
-------------------------
Managers as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
Company will endeavor to cause the Registration Statement or such post-effective
amendment to become effective as soon as possible and will advise you promptly
and, if requested by you, will confirm such advice in writing, when the
Registration Statement or such post-effective amendment has become effective.
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, the Prepricing
Prospectuses or the Prospectuses or for additional information; (ii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of the happening of any event which makes any statement of a material
fact made in the Registration Statement or the Prospectuses untrue or which
requires the making of any additions to or changes in the Registration Statement
or the Prospectuses in order to state a material fact required by the Act or the
regulations thereunder to be stated therein or necessary in order to make the
statements therein not misleading, or of the necessity to amend or supplement
the Prospectuses to comply with the Act or any other law. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to obtain
the withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge, four signed
copies of the Registration Statement as originally filed with the Commission and
of each amendment thereto, including financial statements and all exhibits
thereto, and will also furnish to you, without charge, such number of conformed
copies of the Registration Statement as originally filed and of each amendment
thereto, but without exhibits, as you may request.
(d) The Company will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectuses of which you
shall not previously have been
3
<PAGE>
advised or to which you shall object after being so advised or (ii) so long as,
in the written opinion of counsel for the Managers, a prospectus is required to
be delivered in connection with sales by any Manager or dealer, file any
information, documents or reports pursuant to the Exchange Act, without
delivering a copy of such information, documents or reports to you, as Lead
Managers for the Managers, prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the Company
has delivered to you, without charge, in such quantities as you have requested,
copies of each form of the International Prepricing Prospectus. The Company
consents to the use, in accordance with the provisions of the Act and with the
securities or Blue Sky laws of the jurisdictions in which the Shares are offered
by the several Managers and by dealers, prior to the date of the International
Prospectus, of each International Prepricing Prospectus so furnished by the
Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the written
opinion of counsel for the Managers a prospectus is required by the Act to be
delivered in connection with sales by any Manager or dealer, the Company will
expeditiously deliver to each Manager and each dealer, without charge, as many
copies of the International Prospectus as you may request. The Company consents
to the use of the International Prospectus in accordance with the provisions of
the Act and with the securities or Blue Sky laws of the jurisdictions in which
the Shares are offered by the several Managers and by all dealers to whom Shares
may be sold, both in connection with the offering and sale of the Shares and for
such period of time thereafter as the International Prospectus is required by
the Act to be delivered in connection with sales by any Manager or dealer. If
during such period of time any event shall occur that in the judgment of the
Company or in the opinion of counsel for the Managers is required to be set
forth in the International Prospectus or should be set forth therein in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it is necessary to supplement or amend the
International Prospectus to comply with the Act or any other law, the Company
will forthwith prepare and, subject to the provisions of paragraph (d) above,
file with the Commission an appropriate supplement or amendment thereto and will
expeditiously furnish to the Managers and dealers a reasonable number of copies
thereof.
(g) The Company will cooperate with you and with counsel for the
Managers in connection with the registration or qualification of the Shares for
offering and sale by the several Managers and by dealers under the securities or
Blue Sky laws of such jurisdictions as you may designate and will file such
consents to service of process or other documents necessary or appropriate in
order to effect such registration or qualification; provided that in no event
shall the Company be obligated to qualify to do business in any jurisdiction
where it is not now so qualified or to take any action which would subject it to
service of process in suits, other than those arising out of the offering or
sale of the Shares, in any jurisdiction where it is not now so subject.
(h) The Company will make generally available to its security holders
a consolidated earnings statement, which need not be audited, covering a twelve-
month period commencing after the effective date of the Registration Statement
and ending not later than 15 months thereafter, as soon as practicable after the
end of such period, which consolidated earnings statement shall satisfy the
provisions of Section 11(a) of the Act.
(i) During the period of five years after the date of this Agreement,
the Company will (i) make generally available a copy of each report of the
Company mailed to stockholders or filed with the Commission or the Nasdaq
National Market and will promptly notify you of such mailing or filing and (ii)
4
<PAGE>
furnish to you from time to time such other information concerning the Company
and its Subsidiaries as you may request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 hereof or by notice given by you terminating this
Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement
shall be terminated by the Managers because of any failure or refusal on the
part of the Company to comply with the terms or fulfill any of the conditions of
this Agreement, the Company agrees to reimburse the Lead Managers for all out-
of-pocket expenses (including fees and expenses of counsel for the Managers)
incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of the
Shares substantially in accordance with the description set forth in the
Prospectuses.
(l) If Rule 430A of the Act is employed, the Company will timely file
the Prospectuses pursuant to Rule 424(b) under the Act and will advise you of
the time and manner of such filing.
(m) For a period of 180 days after the date hereof (the "Lock-up
-------
Period"), the Company will not, without the prior written consent of Smith
- ------
Barney Inc., offer, sell, contract to sell or otherwise dispose of any Common
Stock (or any securities convertible into or exchangeable for Common Stock) or
grant any options or warrants to purchase Common Stock, except for (i) sales to
the Managers pursuant to this Agreement and the U.S. Underwriters pursuant to
the U.S. Underwriting Agreement, (ii) the issuance of shares to Adelphia
Communications Corporation (the "Parent") in connection with the Adelphia Note
Contribution (as defined in the Prospectuses) and (iii) the issuance of shares
to the Parent in connection with the Adelphia Share Purchase (as defined in the
Prospectuses); (iv) the issuance of options or grants under the Company's Long-
Term Incentive Compensation Plan; (v) the issuance of the Adelphia Warrant (as
defined in the Prospectuses); (vi) the issuance of the Additional MCI Warrants
(as defined in the Prospectuses) required to be issued by the Company in
accordance with the Company's agreement with MCImetro Access Transmission
Services, Inc.; (vii) the issuance of shares pursuant to the exercise of
warrants and options described in clauses (vi), (v) and (vi), the MCI Warrant
(as defined in the Prospectuses) and the Lenfest Warrant (as defined in the
Prospectuses); (viii) the issuance of Class B Common Stock upon the exercise of
outstanding Class B Warrants (as defined in the Prospectuses); and (ix) the
issuance of shares upon the conversion of Class B Common Stock.
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by the Parent and
each of the Company's stockholders set forth on Schedule II hereto.
(o) Except as stated in this Agreement and in the U.S. Underwriting
Agreement and in the Prepricing Prospectuses and Prospectuses, the Company has
not taken, nor will it take, directly or indirectly, any action designed to or
that might reasonably be expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Shares.
(p) The Company will use its best efforts to have the Common Stock
listed, subject to notice of issuance, on the Nasdaq National Market
concurrently with the effectiveness of the Registration Statement.
6. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to each Manager that:
5
<PAGE>
(a) Each International Prepricing Prospectus included as part of the
Registration Statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied when
so filed in all material respects with the provisions of the Act; except that
this representation and warranty does not apply to statements in or omissions
from such International Prepricing Prospectus made in reliance upon and in
conformity with information relating to any Manager or Manager furnished to the
Company in writing by a Manager through the Representatives or by a Manager
through the Lead Managers expressly for use therein. The Commission has not
issued any order preventing or suspending the use of any Prepricing Prospectus.
(b) The Registration Statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectuses and any supplement
or amendment thereto when filed with the Commission under Rule 424(b) under the
Act, complied or will comply in all material respects with the provisions of the
Act and did not or will not at any such times contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; except that this
representation and warranty does not apply to statements in or omissions from
the Registration Statement or the Prospectuses made in reliance upon and in
conformity with information relating to any Manager or Manager furnished to the
Company in writing by a Manager through the Representatives or by a Manager
through the Lead Managers expressly for use therein.
(c) All the outstanding shares of Common Stock of the Company have
been duly authorized and validly issued, are fully paid and nonassessable and
are free of any preemptive or similar rights; the Shares have been duly
authorized and, when issued and delivered to the Managers against payment
therefor in accordance with the terms hereof, will be validly issued, fully paid
and nonassessable and free of any preemptive or similar rights; and the capital
stock of the Company conforms to the description thereof in the Registration
Statement and the Prospectuses.
(d) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby, including, without limitation,
the corporate power and authority to issue, sell and deliver the Shares as
provided herein.
(e) Each of this Agreement and the U.S. Underwriting Agreement has
been duly and validly authorized, executed and delivered by the Company and is
the legal, valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms, except insofar as indemnification and
contribution provisions may be limited by applicable law or public policy or
equitable principles and subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization or similar laws affecting the rights of
creditors generally and subject to general principles of equity.
(f) Each of the Company and its Subsidiaries (as defined) (A) has been
duly organized, is validly existing as a corporation or limited liability
company, as applicable, in good standing under the laws of its respective
jurisdiction of formation, (B) has all requisite corporate or limited liability
company power and authority to carry on its business as it is currently being
conducted and as described in the Registration Statement and the Prospectuses
and to own, lease and operate its properties and (C) is duly qualified and in
good standing as a foreign corporation or limited liability company, as
applicable, authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification except, with respect to this clause (C), where the failure of the
Company and its Subsidiaries to be so qualified or in good standing does not and
could not reasonably be
6
<PAGE>
expected to (x) individually or in the aggregate, result in a material adverse
effect on the assets, liabilities, business, results of operations, condition
(financial or otherwise), cash flows, affairs or prospects of the Company and
the Subsidiaries, taken as a whole, (y) interfere with or adversely affect the
issuance or marketability of the Common Stock or (z) in any manner draw into
question the validity of this Agreement or the ability to conduct its business
in the manner set forth in the Registration Statements and the Prospectuses (any
of the events set forth in clauses (x), (y) or (z), a "Material Adverse
----------------
Effect"). The Company has no direct or indirect subsidiaries
- -------
as of the Closing Date other than those set forth on Schedule III hereto
(referred to herein collectively as "Subsidiaries" and individually as a
------------
"Subsidiary").
----------
(g) Each of the Joint Ventures (as defined) (A) has been duly formed
as a partnership, limited liability company or corporation, as applicable, under
the laws of its respective jurisdiction of formation, (B) has all requisite
partnership, limited liability company or corporate power and authority, as
applicable, to carry on its business as it is currently being conducted and as
described in the Registration Statement and the Prospectuses and to own, lease
and operate its properties and (C) is duly qualified and in good standing as a
foreign partnership, limited liability company or corporation, as applicable,
authorized to do business in each jurisdiction in which the nature of its
business or its ownership or leasing of property requires such qualification
except, with respect to this clause (C), where the failure to be so qualified or
in good standing does not and could not reasonably be expected to result in a
Material Adverse Effect. Neither the Company nor its Subsidiaries has any
ownership interest in any Joint Venture other than those set forth on Schedule
IV hereto (referred to herein collectively as "Joint Ventures" and individually
--------------
a "Joint Venture").
-------------
(h) All of the outstanding capital stock of each Subsidiary is owned
by the Company, free and clear of any security interest, claim, lien,
limitations on voting rights or other charge or encumbrance, other than security
interests, claims, liens, limitation on voting rights or other charges or
encumbrances arising from the pledge of the capital stock of , ,
------ ------
, and , as security for the Company's 12 1/4% Senior Secured Notes
- ------ -----
due 2004. Except as disclosed in the Prospectuses, there are not currently, and
will not be as a result of the transactions contemplated hereby, any outstanding
subscriptions, rights, warrants, calls, commitments of sale or options to
acquire, or instruments convertible into or exchangeable for, any capital stock
or other equity interest of the Company, any Subsidiary or any Joint Venture.
(i) None of the Company, the Subsidiaries or the Joint Ventures is
and, after giving effect to the transactions contemplated hereby will be (A) in
violation of its charter and bylaws, partnership agreement, or operating
agreement as applicable, (B) in default in the performance of any bond,
debenture, note, indenture, mortgage, deed of trust or other agreement or
instrument to which it is a party or by which it is bound or to which any of its
properties is subject, or (C) in violation of any local, state or Federal law,
statute, ordinance, rule, regulation, requirement, judgment or court decree
(including, without limitation, the Communications Act of 1934, as amended by
the Telecommunications Act of 1996 (the "Telecommunications Act"), and the rules
----------------------
and regulations of the Federal Communications Commission (the "FCC") and
---
environmental laws, statutes, ordinances, rules, regulations, judgments or court
decrees) applicable to the Company, any Subsidiary, any Joint Venture or any of
their respective assets or properties (whether owned or leased) other than, in
the case of clauses (B) and (C), any default or violation that could not
reasonably be expected to have a Material Adverse Effect. There exists no
condition that, with notice, the passage of time or otherwise, would constitute
a default under any such document or instrument that could reasonably be
expected to have a Material Adverse Effect.
(j) There is (i) no action, suit or proceeding before or by any court,
arbitrator or governmental agency, body or official, domestic or foreign, now
pending or threatened or contemplated to
7
<PAGE>
which the Company, any of the Subsidiaries or any of the Joint Ventures is or
may be a party or to which the business or property of the Company, any
Subsidiary or any Joint Venture is subject, (ii) no local, state or Federal law,
statute, ordinance, rule, regulation, requirement, judgment or court decree
(including, without limitation, the Telecommunications Act and the rules and
regulations of the FCC) or order that has been enacted, adopted or issued by any
governmental agency or, to the best of the Company's knowledge, that has been
proposed by any governmental body or (iii) no injunction, restraining order or
order of any nature by a federal or state court or foreign court of competent
jurisdiction to which the Company, any Subsidiary or any Joint Venture is or
could reasonably be expected to be subject or to which the business, assets, or
property of the Company, any Subsidiary or any Joint Venture are could
reasonably be expected to be subject, that, in the case of clauses (i), (ii) and
(iii) above, (y) is required to be disclosed in the Registration Statement or
the Prospectuses and that is not so disclosed, or (z) could reasonably be
expected to individually or in the aggregate, result in a Material Adverse
Effect.
(k) Neither the issuance and sale of the Shares, the execution,
delivery or performance by the Company of this Agreement or the U.S.
Underwriting Agreement by the Company, or the consummation by the Company of the
transactions contemplated hereby and thereby violate, conflict with or
constitute a breach of any of the terms or provisions of, or a default under (or
an event that with notice or the lapse of time, or both, would constitute a
default), or require consent under, or result in the imposition of a lien or
encumbrance on any properties of the Company, any Subsidiary or any Joint
Venture, or an acceleration of any indebtedness of the Company, any Subsidiary
or any Joint Venture pursuant to, (i) the charter or bylaws of the Company or
any Subsidiary or the partnership agreement or operating agreement governing any
Joint Venture, (ii) any bond, debenture, note, indenture, mortgage, deed of
trust or other agreement or instrument to which the Company, any Subsidiary or
any Joint Venture is a party or by which any of them or their property is or may
be bound, (iii) any local, state or Federal law, statute, ordinance, rule,
regulation or requirement (including, without limitation, the Telecommunications
Act and the rules and regulations of the FCC and environmental laws, statutes,
ordinances, rules or regulations) applicable to the Company, any Subsidiary, any
Joint Venture or any of their respective assets or properties or (iv) any
judgment, order or decree of any court or governmental agency or authority
having jurisdiction over the Company, the Subsidiaries, the Joint Ventures or
any of their assets or properties, except in the case of clauses (ii), (iii) and
(iv) for such violations conflicts, breaches, defaults, consents, impositions
of liens or accelerations that would not singly, or in the aggregate, have a
Material Adverse Effect. Other than as described in the Prospectuses, no
consent, approval, authorization or order of, or filing, registration,
qualification, license or permit of or with, (A) any court or governmental
agency, body or administrative agency (including, without limitation, the FCC)
or (B) any other person is required for (1) the execution, delivery and
performance by the Company of this Agreement or the U.S. Underwriting Agreement
or (2) the issuance and sale of the Shares and the transactions contemplated
hereby and thereby, except (x) such as have been obtained and made under the Act
and state securities or Blue Sky laws and regulations or such as may be required
by the NASD or (y) where the failure to obtain any such consent, approval,
authorization or order of, or filing registration, qualification, license or
permit would not reasonably be expected to result in a Material Adverse Effect.
(l) The accountants who have certified or shall certify the financial
statements included in the Registration Statement and the Prospectuses are
independent public accountants as required by the Act. The historical financial
statements of the Company and each of the Subsidiaries comply as to form in all
material respects with the requirements applicable to registration statements on
Form S-1 under the Act and present fairly in all material respects the financial
position and results of operations of the Company and each of its Subsidiaries,
at the respective dates and for the respective periods indicated. Such
financial statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
presented. The other financial information and data included in the
8
<PAGE>
Registration Statement and Prospectuses, historical and pro forma, are
accurately presented in all material respects and prepared on a basis consistent
with the financial statements, historical and pro forma, included in the
Prospectuses and the books and records of the Company, each of its Subsidiaries
and each of its Joint Ventures, as applicable. The statistical information and
data included in the Prospectuses are accurately presented in all material
respects.
(m) The financial statements, together with related schedules and
notes, included in the Registration Statement and the Prospectuses, present
fairly the consolidated financial position, results of operations and changes in
financial position of the Company and the Subsidiaries on the basis stated in
the Registration Statement at the respective dates or for the respective periods
to which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data included
in the Registration Statement and the Prospectuses are accurately presented and
prepared on a basis consistent with such financial statements and the books and
records of the Company and the Subsidiaries.
(n) Except as disclosed in the Registration Statement and the
Prospectuses, subsequent to the respective dates as of which such information is
given in the Registration Statement and the Prospectuses, (i) none of the
Company, any Subsidiary or any Joint Venture has incurred any liabilities or
obligations, direct or contingent, which are material, individually or in the
aggregate, to the Company, the Subsidiaries and the Joint Ventures taken as a
whole, not entered into any transaction not in the ordinary course of business,
(ii) there has not been, singly or in the aggregate, any change or development
which could reasonably be expected to result in a Material Adverse Effect, (iii)
there has been no dividend or distribution of any kind declared, paid or made by
the Company or its Subsidiaries on any class of capital stock and (iv) there has
been no distribution of profits or return of capital contribution by any Joint
Venture.
(o) The Company has not distributed and, prior to the later to occur
of (i) the Closing Date and (ii) completion of the distribution of the Shares,
will not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, the Prepricing
Prospectuses, the Prospectuses or other materials, if any, permitted by the Act.
(p) There is (i) no unfair labor practice complaint pending against
the Company, or any Joint Venture or threatened, before the National Labor
Relations Board, any state or local labor relations board or any foreign labor
relations board, and no significant grievance or significant arbitration
proceeding arising out of or under any collective bargaining agreement is so
pending or threatened against the Company, any Subsidiary or any Joint Venture,
(ii) no significant strike, labor dispute, slowdown or stoppage pending against
the Company, any Subsidiary or any Joint Venture threatened against the Company,
any Subsidiary or the Joint Venture and (iii) no union representation question
existing with respect to the employees of the Company, any Subsidiary or any
Joint Venture that, in the case of clauses (i), (ii) or (iii), could reasonably
be expected to result in a Material Adverse Effect. To the best of the
Company's knowledge, no collective bargaining organizing activities are taking
place with respect to the Company, the Subsidiaries or the Joint Ventures. None
of the Company, any Subsidiary or any Joint Venture has violated (A) any
federal, state or local law or foreign law relating to discrimination in hiring,
promotion or pay of employees, (B) any applicable wage or hour laws or (C) any
provision of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or the rules and regulations thereunder, which in the case of clause
-----
(A), (B) or (C) above could reasonably be expected to result in a Material
Adverse Effect.
9
<PAGE>
(q) None of the Company, any Subsidiary or any Joint Venture has
violated any environmental, safety or similar law or regulation applicable to it
or its business or property relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes, pollutants
or contaminants ("Environmental Laws"), lacks any permit, license or other
------------------
approval required of it under applicable Environmental Laws is violating any
term or condition of such permit, license or approval which could reasonably be
expected to, either individually or in the aggregate, have a Material Adverse
Effect.
(r) Each of the Company, the Subsidiaries and the Joint Ventures has
(i) good and marketable title to all of the properties and assets described in
the Prospectuses as owned by it, free and clear of all liens, charges,
encumbrances and restrictions, except such as are described in the Prospectuses
or as would not have a Material Adverse Effect, (ii) peaceful and undisturbed
possession under all leases to which any of them is a party as lessee, (iii) all
licenses, certificates, permits, authorizations, approvals, franchises and other
rights from, and has made all declarations and filings with, all federal, state
and local authorities (including, without limitation, the FCC), all self-
regulatory authorities and all courts and other tribunals (each an
"Authorization") necessary to engage in the business as presently conducted by
-------------
any of them in the manner described in the Prospectuses, except as described in
the Prospectuses or where failure to hold such Authorizations would not,
individually or in the aggregate, have a Material Adverse Effect and (iv) no
reason to believe that any governmental body or agency is considering limiting,
suspending or revoking any such Authorization. Except where the failure to be
in full force and effect would not have a Material Adverse Effect, all such
Authorizations are valid and in full force and effect and each of the Company,
the Subsidiaries and the Joint Ventures is in compliance with the terms and
conditions of all such Authorizations and with the rules and regulations of the
regulatory authorities having jurisdiction with respect thereto. All leases to
which the Company, the Subsidiaries and the Joint Ventures is a party are valid
and binding and no default by the Company, any Subsidiary or any Joint Venture
has occurred and is continuing thereunder and no defaults by the landlord are
existing under any such lease that could reasonably be expected to result in a
Material Adverse Effect.
(s) Each of the Company, the Subsidiaries and the Joint Ventures owns,
possesses or has the right to employ all patents, patent rights, licenses
(including all FCC, state, local or other jurisdictional regulatory licenses),
inventions, copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, software, systems
or procedures), trademarks, service marks and trade names, inventions, computer
programs, technical data and information (collectively, the "Intellectual
------------
Property") presently employed by the Company, its Subsidiaries or the Joint
- --------
Ventures in connection with the businesses now operated by it or which are
proposed to be operated by the Company, its Subsidiaries or the Joint Ventures
free and clear of and without violating any right, claimed right, charge,
encumbrance, pledge, security interest, restriction or lien of any kind of any
other person and none of the Company, any Subsidiary or any Joint Venture has
received any notice of infringement of or conflict with asserted rights of
others with respect to any of the foregoing except as could not reasonably be
expected to have a Material Adverse Effect. The use of the Intellectual
Property in connection with the business and operations of the Company, the
Subsidiaries and the Joint Ventures does not infringe on the rights of any
person, except would not have a Material Adverse Effect.
(t) None of the Company, any Subsidiary, any Joint Venture or any of
their respective officers, directors, partners, employees, agents or affiliates
or any other person acting on behalf of the Company, any Subsidiary or any Joint
Venture, as the case may be, has, directly or indirectly, given or agreed to
give any money, gift or similar benefit (other than legal price concessions to
customers in the ordinary course of business) to any customer, supplier,
employee or agent of a customer or supplier, official or employee of any
governmental agency (domestic or foreign), instrumentality of any government
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(domestic or foreign) or any political party or candidate for office (domestic
or foreign) or other person who was, is or may be in a position to help or
hinder the business of the Company, any Subsidiary or any Joint Venture (or
assist the Company, any Subsidiary or any Joint Venture in connection with any
actual or proposed transaction) which (i) might subject the Company, any
Subsidiary or any Joint Venture, or any other individual or entity to any damage
or penalty in any civil, criminal or governmental litigation or proceeding
(domestic or foreign), (ii) if not given in the past, could reasonably be
expected to have had a Material Adverse Effect on the assets, business or
operations of the Company, any Subsidiary or any Joint Venture or (iii) if not
continued in the future, could reasonably be expected to have a Material Adverse
Effect.
(u) All tax returns required to be filed by the Company, each of the
Subsidiaries and each of the Joint Ventures in all jurisdictions have been so
filed. All taxes, including withholding taxes, penalties and interest,
assessments, fees and other charges due or claimed to be due from such entities
or that are due and payable have been paid, other than those being contested in
good faith and for which adequate reserves have been provided or those currently
payable without penalty or interest. There are no proposed additional tax
assessments against the Company, any Subsidiary, any Joint Venture or the assets
or property of the Company, any Subsidiary or any Joint Venture.
(v) None of the Company, the Subsidiaries or the Joint Ventures is
now, and after sale of the Shares to be sold by the Company hereunder and
application of the net proceeds from such sale as described in the Prospectuses
under the caption "Use of Proceeds" will not be (i) an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act"), or
----------------------
(ii) a "holding company" or a "subsidiary company" or an "affiliate" of a
holding company within the meaning of the Public Utility Holding Company Act of
1935, as amended (the "PUHC Act").
--------
(w) Except as disclosed in the Prospectuses, there are no holders of
securities of the Company, the Subsidiaries or the Joint Ventures who, by reason
of the filing of the Registration Statement or consummation of the transactions
contemplated by this Agreement or the U.S. Underwriting Agreement, have the
right to request or demand that the Company, any of the Subsidiaries or any of
the Joint Ventures register any of its securities (including, without
limitation, Class A Common Stock and Class B Common Stock) under the Act. No
such rights with respect to any shares of Class A Common Stock were exercised
and will not be exercised in connection with the sale of the Shares for a period
of 180 days after the date hereof.
(x) Each of the Company, the Subsidiaries and the Joint Ventures
maintains a system of internal accounting controls sufficient to provide
reasonable assurance that: (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with management's
general or specific authorization and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect thereto.
(y) Each of the Company, the Subsidiaries and the Joint Ventures
maintains insurance covering its properties, operations, personnel and
businesses. Such insurance insures against such losses and risks as are
adequate in accordance with customary industry practice to protect the Company,
the Subsidiaries, the Joint Ventures and their respective businesses. None of
the Company, any Subsidiary or any Joint Venture has received notice from any
insurer or agent of such insurer that substantial capital
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<PAGE>
improvements or other expenditures will have to be made in order to continue
such insurance. All such insurance is outstanding and duly in force on the date
hereof.
(z) None of the Company, any Subsidiary or any Joint Venture has (i)
taken, directly or indirectly, any action designed to, or that might reasonably
be expected to, cause or result in stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Class A
Common Stock, (ii) since the date of the Prospectuses, (A) sold, bid for,
purchased or paid any person any compensation for soliciting purchases of the
Common Stock or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.
(aa) Set forth on Exhibit A hereto is a list of each employee pension
---------
or benefit plan with respect to which the Company or any corporation considered
an affiliate of the Company within the meaning of Section 407(d)(7) of ERISA (an
"ERISA Affiliate") is a party in interest or disqualified person. The execution
---------------
and delivery of this Agreement and the issuance and sale of the Shares will not
involve any prohibited transaction within the meaning of Section 406 of ERISA or
Section 4975 of the Internal Revenue Code of 1986, as amended.
(bb) None of (A) the execution, delivery and performance of this
Agreement or the U.S. Underwriting Agreement, (B) the issuance and sale of the
Shares, (C) the application of the proceeds from the issuance and sale of the
Shares or (D) the consummation of the transactions contemplated in connection
with any of the foregoing as set forth in the Prospectuses, will violate
Regulations G, T, U or X promulgated by the Board of Governors of the Federal
Reserve System or analogous foreign laws and regulations.
(cc) Except pursuant to this Agreement, there are no contracts,
agreements or understandings between the Company, any of its Subsidiaries or any
of its Joint Ventures and any other person that would give rise to a valid claim
against the Company or any of the Managers for a brokerage commission, finder's
fee or like payment in connection with the issuance, purchase and sale of the
Common Stock.
(dd) The Company has filed in a timely manner each document or report
required to be filed by it pursuant to the Exchange Act and the rules and
regulations thereunder; each such document or report at the time it was filed
conformed to the requirements of the Exchange Act and the rules and regulations
thereunder; and none or such documents or reports contained an untrue statement
of any material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
(ee) Each of the Company, the Subsidiaries and the Joint Ventures has
complied with all provisions of Section 517.075, Florida Statutes, relating to
doing business with the Government of Cuba or with any affiliate located in
Cuba.
(ff) Except as disclosed in the Prospectuses, there are no business
relationships or related party transactions required to be disclosed therein
pursuant to Item 404 of Regulation S-K of the Commission.
The Company acknowledges that the Managers and, for purposes of the
opinions to be delivered to the Managers pursuant to Section 8(e), (f) and (g)
hereof, counsel to the Company and counsel to the Managers, will rely upon the
accuracy and truth of the foregoing representations and hereby consents to such
reliance.
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7. Indemnification and Contribution. (a) The Company agrees to indemnify
--------------------------------
and hold harmless each of you and each other Manager and each person, if any,
who controls any Manager within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation) arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact contained in any International Prepricing Prospectus or in the
Registration Statement or the International Prospectus or in any amendment or
supplement thereto, or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or expenses arise out of or are based upon
any untrue statement or omission or alleged untrue statement or omission which
has been made therein or omitted therefrom in reliance upon and in conformity
with the information relating to such Manager furnished in writing to the
Company by any Manager through the Lead Managers expressly for use in connection
therewith; provided, however, that the indemnification contained in this
paragraph (a) with respect to any International Prepricing Prospectus shall not
inure to the benefit of any Manager (or to the benefit of any person controlling
such Manager) on account of any such loss, claim, damage, liability or expense
arising from the sale of the Shares by such Manager to any person if a copy of
the International Prospectus shall not have been delivered or sent to such
person within the time required by the Act and the regulations thereunder, and
the untrue statement or alleged untrue statement or omission or alleged omission
of a material fact contained in such International Prepricing Prospectus was
corrected in the International Prospectus, provided that the Company has
delivered the International Prospectus to the several Managers in requisite
quantity on a timely basis to permit such delivery or sending. The foregoing
indemnity agreement shall be in addition to any liability which the Company may
otherwise have.
(b) If any action, suit or proceeding shall be brought against any Manager
or any person controlling any Manager in respect of which indemnity may be
sought against the Company, such Manager or such controlling person shall
promptly notify the Company, and the Company shall assume the defense thereof,
including the employment of counsel and payment of all fees and expenses. Such
Manager or any such controlling person shall have the right to employ separate
counsel in any such action, suit or proceeding and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Manager or such controlling person unless (i) the Company has agreed in
writing to pay such fees and expenses, (ii) the Company has failed to assume the
defense and employ counsel, or (iii) the named parties to any such action, suit
or proceeding (including any impleaded parties) include both such Manager or
such controlling person, and the Company and such Manager or such controlling
person shall have been advised by its counsel that representation of such
indemnified party and the Company by the same counsel would be inappropriate
under applicable standards of professional conduct (whether or not such
representation by the same counsel has been proposed) due to actual or potential
differing interests between them (in which case the Company shall not have the
right to assume the defense of such action, suit or proceeding on behalf of such
Manager or such controlling person). It is understood, however, that the
Company shall, in connection with any one such action, suit or proceeding or
separate but substantially similar or related actions, suits or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys (in addition to any local counsel) at any time for
all such Managers and controlling persons not having actual or potential
differing interests with you or among themselves, which firm shall be designated
in writing by Smith Barney Inc., and that all such fees and expenses shall be
reimbursed as they are incurred. The Company shall not be liable for any
settlement of any such action, suit or proceeding effected without its written
consent, but if settled with such written consent, or if there be a final
judgment for the plaintiff in any such action, suit or proceeding, the Company
agrees to indemnify and hold harmless any Manager, to the extent provided in the
preceding paragraph, and any such controlling person from and against any loss,
claim, damage, liability or expense by reason of such settlement or judgment.
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<PAGE>
(c) Each Manager agrees, severally and not jointly, to indemnify and hold
harmless the Company, its directors, its officers who sign the Registration
Statement, and any person who controls the Company within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the
foregoing indemnity from the Company to each Manager, but only with respect to
information relating to such Manager furnished in writing by or on behalf of
such Manager through the Lead Managers expressly for use in the Registration
Statement, the International Prospectus or any International Prepricing
Prospectus, or any amendment or supplement thereto. If any action, suit or
proceeding shall be brought against the Company, any of its directors, any such
officer, or any such controlling person based on the Registration Statement, the
International Prospectus or any International Prepricing Prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be sought
against any Manager pursuant to this paragraph (c), such Manager shall have the
rights and duties given to the Company by paragraph (b) above (except that if
the Company shall have assumed the defense thereof such Manager shall not be
required to do so, but may employ separate counsel therein and participate in
the defense thereof, but the fees and expenses of such counsel shall be at such
Manager's expense), and the Company, its directors, any such officer, and any
such controlling person shall have the rights and duties given to the Managers
by paragraph (b) above. The foregoing indemnity agreement shall be in addition
to any liability which the Managers may otherwise have.
(d) If the indemnification provided for in this Section 7 is unavailable to
an indemnified party under paragraphs (a) or (c) hereof in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then an
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company on
the one hand and the Managers on the other hand from the offering of the Shares,
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Managers on the other in connection with the
statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the Managers
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Managers, in each case as set forth in the table on the cover page of the
International Prospectus. The relative fault of the Company on the one hand and
the Managers on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or by the Managers on the other hand and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
(e) The Company and the Managers agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by a pro
rata allocation (even if the Managers were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in paragraph (d) above. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
liabilities and expenses referred to in paragraph (d) above shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
any claim or defending any such action, suit or proceeding. Notwithstanding the
provisions of this Section 7, no Manager shall be required to contribute any
amount in excess of the amount by which the total price of the Shares
underwritten by it and distributed to the public exceeds the amount of any
damages which such Manager has otherwise been
14
<PAGE>
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Managers' obligations to contribute pursuant to this Section 7 are several in
proportion to the respective numbers of Shares set forth opposite their names in
Schedule I hereto (or such numbers of Shares increased as set forth in Section
10 hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Manager or any person controlling any
Manager, the Company, its directors or officers, or any person controlling the
Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii)
any termination of this Agreement. A successor to any Manager or any person
controlling any Manager, or to the Company, its directors or officers, or any
person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution, and reimbursement agreements contained in this Section
7.
8. Conditions of Managers' Obligations. The several obligations of the
-----------------------------------
Managers to purchase the Shares hereunder are subject to the following
conditions:
(a) All of the representations and warranties of the Company contained
in this Agreement shall be true and correct on the Closing Date with the same
force and effect as if made on and as of the Closing Date.
(b) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
(including pursuant to Rule 462(b)) to be declared effective before the offering
of the Shares may commence, the Registration Statement or such post-effective
amendment shall have become effective not later than 5:30 P.M., New York City
time, on the date hereof, or at such later date and time as shall be consented
to in writing by you, and all filings, if any, required by Rules 424 and 430A
under the Act shall have been timely made; no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been instituted or, to the knowledge of
the Company or any Manager, threatened by the Commission, and any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectuses or otherwise) shall have been complied with to
your satisfaction.
(c) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a prospective
change, that would have a Material Adverse Effect on the Company, the
Subsidiaries and the Joint Ventures, taken as a whole, not contemplated by the
Prospectuses, which in your opinion, as Lead Managers for the several Managers,
would materially adversely affect the market for the Shares, or (ii) any event
or development relating to or involving the Company, the Subsidiaries, the Joint
Ventures or any officer or director of the Company which makes any
15
<PAGE>
statement made in the Prospectuses untrue or which, in the opinion of the
Company and its counsel or the Managers and their counsel, requires the making
of any addition to or change in the Prospectuses in order to state a material
fact required by the Act or any other law to be stated therein or necessary in
order to make the statements therein not misleading, if amending or
supplementing the Prospectuses to reflect such event or development would, in
your opinion, as Lead Managers for the several Managers, materially adversely
affect the market for the Shares.
(d) You shall have received a certificate, dated the Closing Date,
signed on behalf of the Company by (i) the President or a Vice Chairman and (ii)
a Vice President, Vice Chairman, Secretary or Assistant Secretary, in form and
substance reasonably satisfactory to you, confirming, as of the Closing Date,
the matters set forth in paragraphs (a), (b), and (c) of this Section 8, certain
incumbency matters and that, as of the Closing Date, the obligations of the
Company to be performed hereunder on or prior thereto have been duly performed.
(e) You shall have received on the Closing Date, an opinion, dated the
Closing Date, in form and substance satisfactory to you, of Buchanan Ingersoll,
counsel for the Company, to the effect set forth in Exhibit B hereto.
---------
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, in form and substance satisfactory to you, of Swidler & Berlin,
special regulatory counsel to the Company, to the effect set forth in Exhibit C
---------
hereto.
(g) You shall have received an opinion, dated the Closing Date, in
form and substance reasonably satisfactory to you, of Latham & Watkins, counsel
to the Lead Managers for the Managers, covering such matters as are customarily
covered in such opinions.
(h) At the time this Agreement is executed and at the Closing Date,
you shall have received from Deloitte & Touche, independent public accountants
for the Company dated as of the date of this Agreement and of the Closing Date,
respectively, a customary comfort letter addressed to the you and in form and
substance satisfactory to you with respect to the financial statements and
certain financial information of the Company, the Subsidiaries and the Joint
Ventures contained in the Registration Statement and the Prospectuses.
(i)(i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been taken or, to the knowledge of the Company, shall be contemplated by the
Commission at or prior to the Closing Date; (ii) there shall not have been any
change in the capital stock of the Company nor any material increase in the
short-term or long-term debt of the Company (other than in the ordinary course
of business) from that set forth or contemplated in the Registration Statement
or the Prospectuses; (iii) there shall not have been, since the respective dates
as of which information is given in the Registration Statement and the
Prospectuses, except as may otherwise be stated in the Registration Statement
and, any material adverse change in the condition (financial or other),
business, prospects, properties, net worth or results of operations of the
Company and the Subsidiaries taken as a whole; and (iv) the Company and the
Subsidiaries shall not have any liabilities or obligations, direct or contingent
(whether or not in the ordinary course of business), that are material to the
Company and the Subsidiaries, taken as a whole, other than those reflected in
the Registration Statement or the Prospectuses.
16
<PAGE>
(j) The Company shall not have failed at or prior to the Closing Date
to have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
(k) Latham & Watkins shall have been furnished with such documents, in
addition to those set forth above, as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in this
Section 8 and in order to evidence the accuracy, completeness or satisfaction in
all material respects of any of the representations, warranties or conditions
herein contained.
(l) The Shares shall have been listed or approved for listing upon
notice of issuance on the Nasdaq National Market.
(m) The closing under the U.S. Underwriting Agreement shall have
occurred concurrently with the closing hereunder on the Closing Date.
(n) The Adelphia Share Purchase shall have occurred in accordance with
the terms and conditions set forth in the letter agreement by which the Parent
and the Company have agreed to effectuate the Adelphia Share Purchase (the
"Adelphia Share Purchase Agreement") and the Adelphia Note Contribution shall
have occurred in accordance with the terms and conditions set forth in the
letter agreement by which the Parent and the Company have agreed to effectuate
the Adelphia Note Contribution (the "Adelphia Note Contribution Agreement").
(o) In accordance with that certain letter of understanding dated
April , 1998, among the Company, the Parent and MCI (the "MCI Agreement"):
---
(i) the MCI Warrant (as defined in the Prospectuses) and the Additional MCI
Warrants shall been issued to MCI (as defined in the Prospectuses), (ii) the MCI
Warrant and the Additional MCI Warrants shall have been purchased from MCI by
the Parent and (iii) the Company shall have issued the Adelphia Warrant (as
defined in the Prospectuses) to the Parent.
(p) Prior to the Closing Date, the Company, the Subsidiaries and the
Joint Ventures shall have furnished or caused to be furnished to you such
further certificates and documents as you shall have requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and your counsel.
Any certificate or document signed by any officer of the Company and
delivered to you, as Lead Managers for the Managers, or to counsel for the
Managers, shall be deemed a representation and warranty by the Company to each
Manager as to the statements made therein.
9. Expenses. The Company agrees to pay the following costs and
--------
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the Registration Statement (including financial
statements and exhibits thereto), the Prepricing Prospectuses, the Prospectuses,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the Registration Statement, the
Prepricing Prospectuses, the Prospectuses, and all amendments or supplements to
any of them as may be reasonably requested for use in connection with the
offering and sale of the Shares; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Shares, including
any stamp taxes in
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connection with the original issuance and sale of the Shares; (iv) the
printing (or reproduction) and delivery of this Agreement, the U.S. Underwriting
Agreement, the Supplemental Agreement Among U.S. Underwriters, the Agreement
Among Managers, the Agreement Between U.S. Underwriters and Managers, the
International Selling Agreement, the Managers' Questionnaire, the Blue Sky
Memorandum and all other agreements or documents printed (or reproduced) and
delivered in connection with the offering of the Shares; (v) the registration of
the Class A Common Stock under the Exchange Act and the listing of the Shares on
the Nasdaq National Market; (vi) the registration or qualification of the Shares
for offer and sale under the securities or Blue Sky laws of the several states
as provided in Section 5(g) hereof (including the reasonable fees, expenses and
disbursements of counsel for the U.S. Underwriters and Managers relating to the
preparation, printing or reproduction, and delivery of the Blue Sky Memorandum
and such registration and qualification); (vii) the filing fees and the fees and
expenses of counsel for the U.S. Underwriters and Managers in connection with
any filings required to be made with the National Association of Securities
Dealers, Inc.; (viii) the transportation and other expenses incurred by or on
behalf of Company Lead Managers in connection with presentations to prospective
purchasers of the Shares; (ix) the fees and expenses of the Company's
accountants and the fees and expenses of counsel (including local and special
counsel) for the Company.
10. Effective Date of Agreement. This Agreement shall become
---------------------------
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the Registration Statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the Registration Statement or such post-
effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Company,
by notifying you, or by you, as Lead Managers for the several Managers, by
notifying the Company.
If any one or more of the Managers shall fail or refuse to purchase
Shares which it or they are obligated to purchase hereunder on the Closing Date,
and the aggregate number of Shares which such defaulting Manager or Managers are
obligated but fail or refuse to purchase is not more than one-tenth of the
aggregate number of Shares which the Managers are obligated to purchase on the
Closing Date, each non-defaulting Manager shall be obligated, severally, in the
proportion which the number of Shares set forth opposite its name in Schedule I
hereto bears to the aggregate number of Shares set forth opposite the names of
all non-defaulting Managers or in such other proportion as you may specify in
accordance with Section 20 of the Master Agreement Among Underwriters of Smith
Barney Inc., to purchase the Shares which such defaulting Manager or Managers
are obligated, but fail or refuse, to purchase. If any one or more of the
Managers shall fail or refuse to purchase Shares which it or they are obligated
to purchase on the Closing Date and the aggregate number of Shares with respect
to which such default occurs is more than one-tenth of the aggregate number of
Shares which the Managers are obligated to purchase on the Closing Date and
arrangements satisfactory to you and the Company for the purchase of such Shares
by one or more non-defaulting Managers or other party or parties approved by you
and the Company are not made within 36 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting Manager or
the Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under
this paragraph shall not relieve any defaulting Manager from liability in
respect of any such default of any such Manager under this Agreement. The term
"Manager" as used in this Agreement includes, for all purposes of this
Agreement, any party not listed in Schedule I hereto who, with your approval and
the approval of the Company, purchases Shares which a defaulting Manager is
obligated, but fails or refuses, to purchase.
18
<PAGE>
Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
11. Termination of Agreement. This Agreement shall be subject to
------------------------
termination in your absolute discretion, without liability on the part of any
Manager to the Company, by notice to the Company, if prior to the Closing Date,
(i) trading in securities generally on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq National Market shall have been suspended or
materially limited, (ii) a general moratorium on commercial banking activities
in New York or Philadelphia shall have been declared by either federal or state
authorities, or (iii) there shall have occurred any outbreak or escalation of
hostilities or other U.S. or domestic calamity, crisis or change in political,
financial or economic conditions, the effect of which on the financial markets
of the United States is such as to make it, in your judgment, impracticable or
inadvisable to commence or continue the offering of the Shares at the offering
price to the public set forth on the cover page of the International Prospectus
or to enforce contracts for the resale of the Shares by the Managers. Notice of
such termination may be given to the Company by telegram, telecopy or telephone
and shall be subsequently confirmed by letter.
12. Information Furnished by the Managers. The statements set forth in
-------------------------------------
the last paragraph on the cover page, the stabilization legend on the inside
cover page, and the statements in the first, third, seventh, eighth, ninth and
fifteenth paragraphs under the caption "Underwriting" in any International
Prepricing Prospectus and in the International Prospectus, constitute the only
information furnished by or on behalf of the Managers through you as such
information is referred to in Sections 6(b) and 7 hereof.
13. Miscellaneous. Except as otherwise provided in Sections 5, 10 and
-------------
11 hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, at the office of the
Company at Hyperion Telecommunications, Inc., Main at Water Street, Coudersport,
Pennsylvania 16915, Attention: Edward E. Babcock, Jr., Vice President, Finance;
or (ii) if to you, as Lead Managers for the several Managers, care of Smith
Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager,
Investment Banking Division.
This Agreement has been and is made solely for the benefit of the
several Managers, the Company, its directors and officers, and the other
controlling persons referred to in Section 7 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the
term "successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Manager of any of the Shares in his status as
such purchaser.
14. Applicable Law; Counterparts. This Agreement shall be governed by
----------------------------
and construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
19
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Managers.
Very truly yours,
HYPERION TELECOMMUNICATIONS, INC.
By:
-----------------------------------------
Name:
Title:
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Managers named in Schedule I
hereto.
SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED
NATIONSBANC MONTGOMERY SECURITIES LLC
As Lead Managers for the Several Managers
By: SMITH BARNEY INC.
By:
-----------------------------------------
Name:
Title:
20
<PAGE>
SCHEDULE I
HYPERION TELECOMMUNICATIONS INC.
Manager Number of Shares
- ------- ----------------
Smith Barney Inc.
Credit Suisse First Boston (Europe) Limited
NationsBanc Montgomery Securities LLC ________________
TOTAL
21
<PAGE>
SCHEDULE II
Daniel R. Milliard
Charles R Drenning
Paul D. Fajerski
Randolph S. Fowler
22
<PAGE>
SCHEDULE III
------------
SUBSIDIARIES
------------
23
<PAGE>
SCHEDULE IV
------------
JOINT VENTURES
--------------
24
<PAGE>
EXHIBIT A
---------
LIST OF EMPLOYEE PENSION AND BENEFIT
------------------------------------
PLANS OF HYPERION TELECOMMUNICATIONS, INC.
------------------------------------------
AND ITS SUBSIDIARIES
--------------------
25
<PAGE>
EXHIBIT B
---------
FORM OF OPINION OF BUCHANAN INGERSOLL
-------------------------------------
1. Each of the Company and the Subsidiaries is duly organized and validly
existing as a corporation or a limited liability company in good standing under
the laws of its jurisdiction of formation, as applicable, and has all requisite
corporate power and authority to carry on its business as it is being conducted
and as described in the Registration Statement and the Prospectuses and to own,
lease and operate its properties, and is duly qualified and in good standing as
a foreign corporation or limited liability company, as applicable, authorized to
do business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except where the
failure to be so qualified would not, singly or in the aggregate, have a
material adverse effect on the business, financial condition or results of
operations of the Company and the Subsidiaries, taken as a whole (a "Material
Adverse Effect").
2. Each of the Joint Ventures has been duly incorporated or formed as a
corporation, general partnership, limited partnership or limited liability
company under the laws of its jurisdiction of incorporation or formation, as
applicable, and has all requisite power and authority to own, lease, and operate
its properties and to conduct its business as described in the Prospectuses, and
is duly qualified to transact business as a foreign corporation, general
partnership, limited partnership or limited liability company, as applicable, in
each jurisdiction in which the character of the business being conducted by it
or the location of the property owned by it makes such qualification necessary,
except where the failure to so qualify, singly or in the aggregate, would not
have a Material Adverse Effect. Each Joint Venture that is a corporation,
limited partnership or limited liability company is validly existing and is in
good standing under the laws of its jurisdiction of incorporation or formation,
as applicable.
3. All of the outstanding shares of capital stock of the Company have been
duly authorized, validly issued, and are fully paid and nonassessable and were
not issued in violation of any preemptive or similar rights. All of the
outstanding shares of capital stock of the Company is as set forth in the
Prospectuses under the caption "Capitalization." The authorized capital stock
of the Company conforms in all material respects as to legal matters to the
description thereof contained in the Prospectuses under the caption "Description
of Capital Stock."
4. All the shares of capital stock of the Company outstanding prior to the
issuance of the Shares to be issued and sold by the Company pursuant to the
Underwriting Agreements have been duly authorized and validly issued, and are
fully paid and nonassessable.
5. The Underwritten Shares to be issued and sold to the U.S. Underwriters and
Managers by the Company under the U.S. Underwriting Agreement and the
International Underwriting Agreement have been duly authorized and when issued
and delivered to the U.S. Underwriters and Managers against payment therefor in
accordance with the terms of the U.S. Underwriting Agreement and the
International Underwriting Agreement, will be validly issued, fully paid and
nonassessable and free of any (A) preemptive rights or (B) to the best knowledge
of such counsel after reasonable inquiry, similar rights that entitle or will
entitle any person to acquire any shares of Class A Common Stock upon the
issuance thereof by the Company.
6. The Adelphia New Shares (as defined in the Prospectuses) have been duly
authorized and when issued and delivered to the Parent against payment therefor
in accordance with the terms of the Adelphia Share Purchase Agreement or the
Adelphia Note Contribution Agreement, as the case may be, will be validly
issued, fully paid and nonassessable and free of (A) preemptive rights or (B) to
the
26
<PAGE>
best knowledge of such counsel after reasonable inquiry, similar rights that
entitle or will entitle any person to acquire any shares of Class A Common Stock
upon the issuance thereof by the Company.
7. The Additional MCI Warrants (as defined in the Prospectuses) have been
duly authorized and, when executed and delivered pursuant to the terms of the
Warrant Agreement (the "MCI Warrant Agreement"), dated June 13, 1997, between
the Company and MCImetro Access Transmission Services, Inc. ("MCI"), will be
valid and binding obligations of the Company, enforceable against the Company in
accordance with their terms, except as enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws
affecting the enforceability of creditors' rights generally and by general
principles of equity (whether arising under a proceeding at law or in equity).
8. The maximum number of Shares issuable upon exercise of the Additional MCI
Warrants has been duly authorized and reserved for issuance by the Company at
the time and in the manner required by the MCI Warrant Agreement and, upon (i)
due exercise of the Additional MCI Warrants and (ii) delivery of Shares upon
such exercise, in each case, in accordance with the terms of the Additional MCI
Warrants and the MCI Warrant Agreement, such Shares will be validly issued,
fully paid and nonassessable.
9. Upon due issuance of the Additional MCI Warrants, the Company will have
satisfied its obligation to issue "Additional Initial Warrants" (as such term is
defined in the MCI Warrant Agreement) under Section 2.2 of the MCI Warrant
-----------
Agreement.
10. The Adelphia Warrant (as defined in the Prospectuses) has been duly
authorized and, when executed and delivered pursuant to the terms of the MCI
Agreement, will be valid and binding obligations of the Company, enforceable
against the Company in accordance with its terms, except as enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws affecting the enforceability of creditors' rights generally
and by general principles of equity (whether arising under a proceeding at law
or in equity).
11. The maximum number of Shares issuable upon exercise of the Adelphia
Warrant has been duly authorized and reserved for issuance by the Company and,
upon (i) due exercise of the Adelphia Warrant and (ii) delivery of Shares upon
such exercise, in each case, in accordance with the terms of the Adelphia
Warrant, such Shares will be validly issued, fully paid and nonassessable.
12. The form of certificates for the Underwritten Shares and the Adelphia New
Shares conforms to the requirements of the Nasdaq National Market and the
Delaware General Corporation Law.
13. The Registration Statement and all post-effective amendments, if any,
have become effective under the Act and, to the best knowledge of such counsel
after reasonable inquiry, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose are
pending before or contemplated by the Commission; and any required filing of the
Prospectuses pursuant to Rule 424(b) has been made in accordance with Rule
424(b).
14. The Company has the corporate power and authority to enter into the U.S.
Underwriting Agreement and the International Underwriting Agreement and to
issue, sell and deliver the Shares to be sold by it to the U.S. Underwriters and
Managers as provided therein, and each of the U.S. Underwriting Agreement and
the International Underwriting Agreement have been duly authorized, executed and
delivered by the Company and is a legal, valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms, except
that (A) enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws not or hereafter in
27
<PAGE>
effect relating to creditors' rights generally, (B) the remedy of specific
performance and other forms of equitable relief may be subject to certain
equitable defenses and to the discretion of the court before which the
proceedings may be brought and (C) rights to indemnity and contribution
thereunder may be limited by Federal or state securities laws or the public
policy underlying such laws.
15. All of the Joint Venture's limited partnership and limited liability
company interests owned by each Subsidiary have been duly authorized and validly
issued and, except for matters referenced by the Prospectuses, all of the
partnership and limited liability company interests owned in the Joint Ventures
which are owned of record by each respective Subsidiary are, to the best of our
knowledge, owned free and clear of any security interest, lien or other
encumbrance.
16. All of the outstanding capital stock of each Subsidiary is owned by the
Company, free and clear of any security interest, claim, lien, limitation on
voting rights or encumbrance. There are not, to our knowledge, other than as
set forth in the Prospectuses, currently, and will not be following the issuance
and sale of the Shares, any outstanding subscriptions, rights, warrants, calls,
commitments of sale or options to acquire, or instruments convertible into or
exchangeable for, any capital stock or other equity interest of the Company or
any Subsidiary.
17. The Registration Statement and the Prospectuses and any supplements or
amendments thereto (except for the financial statements, schedules, and notes
thereto and other financial and statistical data included therein, as to which
such counsel need not express any opinion) comply as to form in all material
respects with the requirements of the Act.
18. Neither the issuance, sale or delivery of the Underwritten Shares, nor
the execution, delivery or performance of the U.S. Underwriting Agreement or the
International Underwriting Agreement, or compliance by the Company with all
provisions of the U.S. Agreement and the International Underwriting Agreement,
nor consummation by the Company of the transactions contemplated in the U.S.
Underwriting Agreement or by the International Underwriting Agreement violates,
conflicts with or constitutes a breach of any of the terms or provisions of, or
a default under (or an event that with notice or the lapse of time, or both,
would constitute a default), or require consent under, or result in the
imposition of a lien or encumbrance on any properties of the Company or any
Subsidiary, or an acceleration of any indebtedness of the Company or any
Subsidiary pursuant to, (i) the charter or bylaws of the Company or any
Subsidiary, (ii) any bond, debenture, note, indenture, mortgage, deed of trust
or other agreement or instrument to which the Company or any Subsidiary is a
party or by which it or its property is or may be bound identified to such
counsel as material (assuming all of such agreements are governed by
Pennsylvania law), (iii) any local, state or Federal law, statute, ordinance,
requirement, administrative statute, rule or regulation applicable to the
Company or any Subsidiary or its assets or properties (except with respect to
the matters set forth in the opinion of Swidler & Berlin, as to which no opinion
need be expressed) or (iv) any judgment, order or decree of any court or
governmental agency or authority having jurisdiction over the Company or any
Subsidiary or its assets or properties known to such counsel, except in the case
of clauses (ii), (iii) and (iv) for such violations, conflicts, breaches,
defaults, consents, impositions of liens or accelerations that (x) would not,
singly or in the aggregate, have a Material Adverse Effect or (y) are disclosed
in the Prospectuses. Assuming compliance with applicable state securities and
Blue Sky laws, as to which such counsel need express no opinion, and except for
the filing of a registration statement under the Act, no consent, approval,
authorization or order of, or filing, registration, qualification, license or
permit of or with, any court or governmental agency, body or administrative
agency is required for (1) the execution, delivery and performance by the
Company of the International Underwriting Agreement and the International
Underwriting Agreement, (2) the issuance and sale of the Shares or (3)
consummation by the Company, the Subsidiaries and the Joint Ventures of the
transactions described in the Prospectuses, except
28
<PAGE>
such as have been obtained and made or have been disclosed in the Prospectuses,
and except where the failure to obtain such consents or waivers would not,
singly or in the aggregate, have a Material Adverse Effect. To the best of such
counsel's knowledge, no consents or waivers from any other person are required
for the execution, delivery and performance by the Company of the International
Underwriting Agreement and the International Underwriting Agreement or the
issuance and sale of the Underwritten Shares, other than such consents and
waivers as have been obtained.
19. None of the Company, its Subsidiaries or the Joint Ventures is (i) an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended, or (ii) a
"holding company" or a "subsidiary company" or an "affiliate" of a holding
company within the meaning of the Public Utility Holding Company Act of 1935, as
amended.
20. Except as set forth in the Prospectuses, there are no holders of
securities of the Company who, by reason of the execution by the Company of the
International Underwriting Agreement or the International Underwriting Agreement
or the consummation by the Company of the transactions contemplated thereby,
have the right to request or demand that the Company register under the Act
securities held by them.
21. None of (A) the execution, delivery and performance of the International
Underwriting Agreement or the U.S. Underwriting Agreement, (B) the issuance and
sale of the Shares and the application of the proceeds from the issuance and
sale of the Shares or (C) the consummation of the transactions contemplated in
connection with any of the foregoing as set forth in the Prospectuses, will
violate Regulations G, T, U or X promulgated by the Board of Governors of the
Federal Reserve System.
22. To the knowledge of such counsel, there is (i) no action, suit,
investigation or proceeding before or by any court, arbitrator or governmental
agency, body or official, domestic or foreign, now pending, or threatened or
contemplated to which any of the Company or any Subsidiary is or may be a party
or to which the business or property of any of the Company or any Subsidiary is
or may be subject, (ii) no statute, rule, regulation or order that has been
enacted, adopted or issued by any governmental agency, or (iii) no injunction,
restraining order or order of any nature by a federal or state court of
competent jurisdiction to which any of the Company or any Subsidiary is or may
be subject has been issued that, in the case of clauses (i), (ii) and (iii)
above, (x) is required to be disclosed in the Prospectuses and that is not so
disclosed and, (y) could reasonably be expected to have, either individually or
in the aggregate, a Material Adverse Effect, it being understood that for
purposes of this opinion, such counsel need express no opinion with respect to
(i) actions, suits investigation or proceedings before the FCC or any similar
state regulatory commission or body, (ii) statutes, rules, regulations or orders
by any FCC or any similar state regulatory commission or (iii) injunctions,
restraining orders or other orders by the FCC or any similar state regulatory
commission or body.
Although we have not undertaken, except as otherwise indicated in our opinion,
to determine independently, and do not assume any responsibility for, the
accuracy, completeness or fairness of the statements in the Registration
Statement, we have participated in the preparation of the Registration Statement
and the Prospectuses, including general review and discussion of the contents
thereof but have made no independent check or verification thereof, and no facts
have come to our attention that would lead us to believe that the Registration
Statement at the time the Registration Statement became effective, or the
Prospectuses, as of their respective dates and as of the Closing Date, contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated in the Prospectuses or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading or that any amendment or supplement to the Prospectuses, as of their
respective dates, and as of the Closing
29
<PAGE>
Date, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated in the Prospectuses or necessary in order to
make the statements in the Prospectuses, in the light of the circumstances under
which they were made, not misleading (it being understood that such counsel need
express no opinion with respect to the financial statements, schedules, pro
forma financial statements and the notes thereto and other financial data
included in the Registration Statement and the Prospectuses.
30
<PAGE>
EXHIBIT C
---------
FORM OF OPINION OF REGULATORY COUNSEL
-------------------------------------
1. Each of the Company, the Subsidiaries and the Joint Ventures has all of
the licenses, permits and authorizations, if any, required by the FCC and the
State Regulatory Agencies for the provision of telecommunications services
except where the failure to obtain or hold such license, permit or authority
would not have a Material Adverse Effect on the Company, the Subsidiaries and
the Joint Ventures, taken as a whole.
2. Neither the Company, any Subsidiaries nor any Joint Ventures is subject to
any pending complaint or investigation before the FCC or, to the best knowledge
of counsel, to any threatened complaint or investigation before the FCC, or, any
pending or threatened complaint or investigation before any State Regulatory
Agencies based on any alleged violation by the Company, the Subsidiaries or the
Joint Ventures in connection with their provision of or failure to provide
telecommunications services.
3. The statements in the Prospectuses under the heading of "Risk Factors -
Regulation" and "Regulation" fairly and accurately summarize the matters therein
described.
4. The Company, the Subsidiaries and the Joint Ventures have the consents,
approvals, authorizations, licenses, certificates, permits, or orders of the FCC
or any State Regulatory Agency if any, for the consummation of the transactions
contemplated in the Underwriting Agreements except where the failure to obtain
the consents, approvals, authorizations, licenses, certificates, permits or
orders would not have a Material Adverse Effect on the Company, the Subsidiaries
and the Joint Ventures, taken as a whole.
5. Neither the execution and delivery of the Underwriting Agreements nor the
issuance of the Shares will conflict with or result in a violation of any order
or regulation of the FCC or any State Regulatory Agency applicable to the
Company, its Subsidiaries or the Joint Ventures except where the conflict with
or the violation of which would not have a material adverse impact on the
Company, the Subsidiaries and the Joint Ventures, taken as a whole.
31
<PAGE>
EXHIBIT 5.01
April 27, 1998
Hyperion Telecommunications, Inc.
Main at Water Street
Coudersport, PA 16915
Gentlemen:
In connection with the Registration Statement on Form S-1, as amended
(Registration No. 333-48209) (the "Registration Statement"), filed by Hyperion
Telecommunications, Inc, a Delaware corporation (the "Company"), under the
Securities Act of 1933, as amended, relating to the public offering of an
aggregate of up to $289,500,000 in aggregate offering amount of shares of the
Company's Class A Common Stock, par value $.01 per share, of which (a)
10,000,000 shares are currently contemplated to be purchased by the underwriters
from the Company, (b) up to 1,500,000 shares may be purchased by the
underwriters from the Company if the underwriters exercise the option granted to
them by the Company to cover over-allotments and (c) up to 8,000,000 shares are
currently contemplated to be purchased by Adelphia Communications Corporation
from the Company (collectively, the "Shares"), we have acted as counsel for the
Company and have examined such corporate records, certificates of public
officials, and other documents, records and questions of law as we have
considered necessary or appropriate for the purposes of this opinion. In the
examination of all documents we have assumed the genuineness of all signatures
and the authenticity of all documents submitted to us as originals and the
conformity to the original documents of all documents submitted to us as
certified of photostatic copies.
Upon the basis of such examination, we advise you that in our opinion the
Shares to be issued and sold by the Company have been duly and validly
authorized and, when sold in the manner contemplated by the Registration
Statement and the underwriting agreement (the "Underwriting Agreement") to be
filed as an exhibit to the Registration Statement and upon receipt by the
Company of payment therefor as provided in the Underwriting Agreement, will be
validly issued, fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and the reference to this firm under the caption "Legal Matters" in
the Prospectus contained therein.
Very truly yours,
/s/ Buchanan Ingersoll Professional Corporation
BUCHANAN INGERSOLL PROFESSIONAL CORPORATION
<PAGE>
EXHIBIT 10.23
MANAGEMENT SERVICES AGREEMENT
MANAGEMENT SERVICES AGREEMENT, dated as of April 10, 1998, (the
"Agreement"), between Adelphia Communications Corporation, a Delaware
corporation ("Adelphia"), and Hyperion Telecommunications, Inc., a Delaware
corporation (the "Hyperion").
W I T N E S S E T H
-------------------
WHEREAS, Adelphia has provided and has agreed to continue to provide to
Hyperion and its subsidiaries services necessary for the management of the
businesses and operations of Hyperion and its subsidiaries, and Hyperion has
agreed to pay for such services from Adelphia; and
WHEREAS, Adelphia and Hyperion desire to make provision for certain ongoing
relationships among them regarding the services to be performed by Adelphia for
Hyperion.
NOW, THEREFORE, in consideration of the foregoing premises, and the mutual
promises of the parties hereinafter set forth, and intending to be legally bound
hereby, Adelphia and Hyperion hereby agree as follows:
SECTION 1. ENGAGEMENT.
1.1 Hyperion engages Adelphia to provide the services specified in Section
2 of this Agreement to its businesses, and Adelphia accepts this engagement, on
the terms and conditions set forth in this Agreement. For purposes of this
Agreement, services performed by Adelphia shall include services performed by
Adelphia and any of Adelphia's subsidiaries or affiliates (other than Hyperion).
SECTION 2. CERTAIN SERVICES RELATED TO MANAGEMENT.
2.1 Commencing on the date of this Agreement, and for the period provided
under Section 4 hereof, Adelphia shall make available to Hyperion or any of its
subsidiaries, upon the reasonable request by such party, management services,
including without limitation the following services (individually a "Service"
and collectively, the "Services"):
(a) The services of Adelphia's officers in management of Hyperion and the
subsidiaries of Hyperion.
(b) The services of Adelphia's officers in rendering general business
advice, including, without limitation, executive time and space, advice
regarding operations and production, distribution, marketing and the
acquisition, disposition and utilization of assets.
<PAGE>
(c) The services of Adelphia's officers for financial advice and services,
including, without limitation, assistance with respect to matters such as the
raising of additional capital, cash management, risk management, insurance,
treasury, financial controls, financial accounting, interest rate hedging,
financial statement preparation, accounts and trade payables and receivables,
payroll, credit and collection, investor relations, and internal audit.
(d) The services of Adelphia's general counsel and legal department for
legal services, contract review, and general legal advice and counsel.
(e) The services of Adelphia's officers for advice concerning foreign and
domestic taxes.
(f) The services of Adelphia's officers for personnel and human resource
advice and services, including, without limitation, administration and design of
insurance, pension and other employee benefit plans, hiring and termination of
employees, compensation, performance reviews and maintenance of personnel
records.
(g) The services of Adelphia's other staff, and the use of office
equipment, office space, network and other facilities, aircraft and support
equipment for such other advice and services related to the operation of the
business of Hyperion or any of its subsidiaries as Hyperion or any of its
subsidiaries may reasonably request from time to time.
(h) The services, systems and systems resources of Adelphia related to the
provisions of information systems services.
(i) Such other services as Adelphia and Hyperion shall mutually agree.
2.2 As reasonably requested by Hyperion, Adelphia will sell or otherwise
make available to Hyperion the products, supplies and equipment, at Adelphia's
actual cost thereof, which Adelphia purchases or acquires or has the opportunity
to purchase or acquire in the ordinary course of its business, for use by
Hyperion. This provision shall include, on a pro-rata basis, the purchase,
lease or other form of financing of the acquisition or use of any products,
supplies or equipment which are used jointly by Adelphia or its affiliates on
the one hand and Hyperion or its subsidiaries on the other hand.
2.3 Notwithstanding the provisions of subsection 2.1 hereof, Adelphia may
contract with third parties to perform any or all of the Services. Such third
parties will be engaged by Adelphia after consultation with Hyperion.
SECTION 3. PRICING.
3.1 For the Services, Hyperion shall pay to Adelphia an amount necessary
to pay a reasonable allocation of the compensation and allocable costs for the
employees of Adelphia and a reasonable allocation of the other direct and
indirect overhead expenses of Adelphia including, without limitation, its
allocable share of any space rented or owned by Adelphia. Such reasonable
compensation and other reasonable overhead expenses shall, unless otherwise
agreed,
-2-
<PAGE>
be based on a pro-rata share of the department expenses as agreed to by the
parties for the applicable Service.
3.2 In addition to the payments under Section 3.1, Hyperion shall, within
30 days after its receipt of an invoice from Adelphia, reimburse Adelphia for
its reasonable out-of-pocket expenses (including, without limitation, the
reasonable fees and disbursements of its outside legal counsel and accountants)
incurred by it in providing Services to Hyperion or any of its subsidiaries, as
set forth in the invoice.
SECTION 4. TERM OF AGREEMENT.
4.1 The initial term of this Agreement will be for one year commencing on
the Closing Date (the "Initial Term") and automatically renewed on each
anniversary of the end of the Initial Term, subject to earlier termination as
provided herein.
4.2 After the Initial Term, either party may terminate the Agreement upon
at least 60 days written notice to the other party.
SECTION 5. ACCESS TO INFORMATION.
5.1 Hyperion shall provide to Adelphia all information necessary for
Adelphia to provide the Services.
SECTION 6. NOTICE.
6.1 Any notice, request, instruction, consent, approval or other
communication provided for herein shall be in writing and shall be delivered
personally, sent by certified or registered mail, postage prepaid, sent by
facsimile transmission, and shall be deemed given when so delivered personally,
if sent by facsimile transmission when sent, or if mailed, two business days
after the date of deposit in the United States mails, as follows:
To Adelphia Adelphia Communications Corporation
Main at Water Street
Coudersport, PA 16915
Attention: Timothy J. Rigas
Facsimile No.: (814) 274-7098
To Hyperion Hyperion Telecommunications, Inc.
Main at Water Street
Coudersport, PA 16915
Attention: Edward E. Babcock, Jr.
Facsimile No.: (814) 274-9863
SECTION 7. INDEMNIFICATION.
-3-
<PAGE>
7.1 Adelphia does not by this Agreement assume any of the obligations,
liabilities or debts of Hyperion or any of its subsidiaries, except as otherwise
expressly provided herein, and shall not, by virtue of its performance
hereunder, assume or become liable for any such obligations, liabilities or
debts of Hyperion or its subsidiaries. Hyperion agrees to indemnify and hold
Adelphia harmless from and against any and all such obligations, liabilities and
debts not assumed hereunder or otherwise by Adelphia. In addition, to the
fullest extent permitted by the Delaware General Corporation Law, Hyperion shall
indemnify and hold harmless Adelphia and its affiliates (other than Hyperion and
its subsidiaries), the respective directors, officers, agents, employees and
legal representatives of Adelphia and its affiliates (other than Hyperion and
its subsidiaries) from and against any and all losses, claims, damages,
liabilities, joint or several (and all actions in respect thereof), caused by,
related to or arising out of Adelphia acting for, or providing Services to,
Hyperion or any of its subsidiaries pursuant to this Agreement (collectively,
the "Other Liabilities"), and to reimburse Adelphia and any other parties
entitled to be indemnified hereunder for all reasonable expenses (including
attorneys' fees) incurred by Adelphia or any such other indemnified party in
connection with investigating, preparing or defending any such action or claim,
except to the extent that such Other Liabilities arise from the gross negligence
or willful misconduct of such persons ("Excepted Other Liabilities").
7.2 Hyperion does not by this Agreement assume any of the obligations,
liabilities or debts of Adelphia, except as otherwise provided herein, and shall
not by virtue of its performance hereunder, assume or become liable for any such
obligations, liabilities or debts of Adelphia. Adelphia agrees to indemnify and
hold Hyperion harmless from and against any and all such obligations,
liabilities and debts of Adelphia not assumed hereunder or otherwise by Hyperion
and any and all claims, actions, liabilities or losses of any kind, including
reasonable attorneys fees, arising out of or in connection with Excepted Other
Liabilities.
SECTION 8. CONFLICT RESOLUTION
8.1 Any dispute, controversy or claim relating to this Agreement (a
"Dispute") shall initially be referred to the executive management of the
parties to the Dispute who shall attempt to resolve such Dispute in good faith.
In the event such executive management cannot come to an agreement to resolve a
particular Dispute, then the matter shall be submitted to final and binding
arbitration by three (3) arbitrators selected by Adelphia and the Hyperion.
Adelphia and the Hyperion will each select one (1) arbitrator and the third
arbitrator will be selected by mutual agreement of the two (2) previously
selected arbitrators (the "Board of Arbitration"). The Board of Arbitration
will meet in Pittsburgh, Pennsylvania, or such other place as the parties may
agree upon, and will reach and render a decision in writing concurred in by a
majority of the members of the Board of Arbitration. The Board of Arbitration
will adopt and follow such rules and procedures as a majority of the members of
the Board of Arbitration deems necessary or appropriate. To the extent
practical, the Board of Arbitration will render decisions no more than thirty
(30) days following the commencement of proceedings. Each party will bear its
own costs and expenses in relation thereto, and the fees and expenses of the
members of the Board of Arbitration shall be shared equally by the parties
hereto.
SECTION 9. EVENTS OF DEFAULT AND REMEDIES
-4-
<PAGE>
9.1 An "Event of Default" shall include a material breach of a material
representation, agreement or other obligation of either of the parties to this
Agreement (any such breach is herein referred to as a "Material Breach");
provided, the non-breaching party provides the breaching party with written
notice of such Material Breach which describes in reasonable detail the nature
of such Material Breach and the breaching party does not cure such Material
Breach within sixty (60) days after receipt of such notice.
9.2 Each of the parties hereto shall be liable to the other party for
damages arising out of or in connection with any breach of this Agreement, to
the extent permitted by law, subject to the duty of the non-breaching party to
take all reasonable actions in order to mitigate such damages. The parties
agree that in no event shall either party to this Agreement be liable to the
other party for any punitive, indirect, special or consequential damages arising
out of a breach of this Agreement. It is understood and agreed that monetary
damages may not be a sufficient remedy for an Event of Default. Accordingly,
the non-breaching party shall, to the extent permitted by law or equity, be
entitled to specific performance and injunctive or other equitable relief as a
remedy for any Event of Default. The remedies described in this Section 9.2
shall not be deemed to be the exclusive remedies for any breach of, or Event of
Default under, this Agreement, but shall be in addition to all other remedies
available to the parties at law or in equity, subject to the limitations with
respect to damages set forth above in this Section 9.2.
SECTION 10. MISCELLANEOUS PROVISIONS.
(a) Assignment. No party to this Agreement may assign its rights or,
expect as permitted hereby, delegate its obligations under this Agreement to any
person, without the prior written consent of the other party.
(b) Successors Bound. Subject to the provisions of paragraph 10(a) above,
this Agreement is binding on, and inures to the benefit of, parties' respective
successors and permitted assigns.
(c) Headings. The paragraph headings in this Agreement are for reference
purposes only and will not affect the interpretation of this Agreement.
(d) Entire Agreement. This Agreement records the final, complete and
entire agreement among the parties regarding engagement of Adelphia to provide
management and consulting services to Hyperion, and it supersedes all prior oral
and written agreements, commitments or understandings with respect to the
matters provided for herein.
(e) Counterparts. This Agreement may be executed in counterparts, each of
which will constitute an original document and all of them, together, will
constitute the same agreement.
(f) Governing Law. The validity, construction, enforcement of this
Agreement are governed by the laws of Delaware.
-5-
<PAGE>
(g) Modification. A waiver, amendment, or modification of any provision of
this Agreement will be valid and effective only if it is evidenced by a writing
signed by each party to this Agreement.
(h) No Agency. This Agreement shall not be deemed expressly or by
implication to create an agency, employee, or servant relationship between or
among any of the parties hereto, or any affiliates of the parties hereto for any
purpose whatsoever.
(i) Force Majeure. Neither party shall be liable for any failure of or
delay in the performance of this Agreement for the period that such failure or
delay is due to acts of God, public enemy, war, strikes or labor disputes, or
any other cause beyond the parties' reasonable control; it being understood that
lack of financial resources is not to be deemed a cause beyond a party's
control. Each party shall notify the other party promptly of the occurrence of
any such cause and carry out this Agreement as promptly as practicable after
such cause is terminated; provided, however, that the existence of any such
cause shall not extend the term of this Agreement.
(j) Adherence to Applicable Law. In connection with the performance of
their respective obligations and the exercise of their respective rights
hereunder, the parties agree to comply in all material respects with all
applicable state, federal and local laws and regulations.
IN WITNESS WHEREOF, the parties have set their hands effective as of the
date first above.
ADELPHIA COMMUNICATIONS CORPORATION
By: /s/ Timothy J. Rigas
--------------------
Name: Timothy J. Rigas
Title: Executive Vice President
HYPERION TELECOMMUNICATIONS, INC.
By: /s/ Daniel R. Milliard
----------------------
Name: Daniel R. Milliard
Title: President
-6-
<PAGE>
EXIHIBIT 10.24
MCImetro Access Transmission Services, Inc.
1801 Pennsylvania Avenue W, Suite 616
Washington DC 20006
Adelphia Communications Corporation
Main at Water Street
Coudersport PA 16915
Attention: Timothy J. Rigas
Gentlemen:
This letter of understanding (the "Letter") dated April 10, 1998, is by and
among Hyperion Telecommunications, Inc. a Delaware Corporation ("Hyperion"), MCI
Metro Access Transmission Services, Inc., a Delaware Corporation ("MCI") and
Adelphia Communications Corporation, a Delaware Corporation (together with its
affiliates "Adelphia"). Unless otherwise indicated, all capitalized terms
herewith have the meaning assigned to them in that certain Warrant Agreement
(the "Warrant Agreement"), dated as of June 13, 1997 by and between Hyperion and
MCI. Hyperion, MCI and Adelphia agree that the terms of this Letter shall be
binding obligations upon the parties.
On March 18, 1998, Hyperion filed a Form S-1 Equity Registration Statement
(the "S-1") in connection with its Initial Public Offering ("IPO") of Class A
Common Stock, a copy of which has been provided to MCI. It is currently
expected that the gross proceeds from the sale of Class A Common Stock (the "IPO
Stock") to the public in the IPO will be approximately $150 million (the
"Primary Proceeds"), plus up to an additional $22.5 million if the underwriters
exercise their over-allotment option (the "Over-allotment Proceeds"). Hyperion
expects the red herring price range to be $14 to $16 per share after issuance of
a 3.25 for 1 stock split to be issued in the form of a stock dividend just prior
to the IPO closing date. In addition, in a private placement of Class A Common
Stock to close on or about the date of the consummation of the IPO, Adelphia has
agreed to purchase for total consideration currently expected to be
approximately $104.5 million, (i) 3,875,556 shares of Class
MCImetro Access Transmission Services, Inc.
<PAGE>
Adelphia Communications Corporation
Page Two
_____________________________________
A Common Stock of Hyperion in connection with the Adelphia Note Contribution (as
defined in the S-1), currently estimated to be approximately $54.5 million at a
price per share equal to the IPO Price, less the underwriters' discount, and
(ii) 3,555,556 shares of Class A Common Stock of Hyperion in connection with the
Adelphia Share Purchase (as defined in the S-1), currently estimated to be
approximately $50 million at a price per share equal to the IPO Price, less the
underwriters' discount, (the shares of Class A Common Stock referred to in
clauses (i) and (ii) together to be known as the "Adelphia Stock"). "IPO Price"
shall have the same definition as clause (i) of the definition of Initial Public
Offering Price in the Warrant Agreement.
MCI and Hyperion are entering into this Letter to settle and resolve
disagreements they have under the Warrant Agreement, and Adelphia is entering
into this Letter to facilitate such settlement and resolution within the context
of the IPO.
In connection with the IPO, MCI has expressed a desire to sell, and
Adelphia has expressed a willingness to purchase any and all Initial Warrants
and all Additional Initial Warrants issued or issueable in accordance with the
Warrant Agreement at a mutually agreeable price as set forth below. Accordingly,
Hyperion, MCI and Adelphia each mutually agree to the following terms in
settlement of the matters set forth herein, and as an amendment to the Warrant
Agreement.
In connection with and immediately upon consummation of the (i) sale of the
IPO Stock relating to the Primary Proceeds (the "Primary Offering"), Hyperion
agrees to issue to MCI Additional Initial Warrants representing 2.5641% of the
IPO Stock shares sold in the Primary Offering in accordance with the terms set
forth in the Warrant Agreement, and (ii) the sale of the IPO Stock relating to
the Over-allotment Proceeds (the "Over-allotment Offering"), Hyperion agrees to
issue to MCI Additional Initial Warrants representing 2.5641% of the IPO Stock
shares sold in the Over-allotment Offering in accordance with and upon the terms
set forth in the Warrant Agreement. In addition, in connection with and
immediately upon the consummation of the Adelphia Note Contribution and the
Adelphia Share Purchase (collectively, the "Adelphia Stock Purchase"), Hyperion
agrees to issue to MCI Additional Initial Warrants representing 2.5641% of the
Adelphia Stock shares in accordance with the terms set forth in the Warrant
Agreement. Concurrently with the
MCImetro Access Transmission Services, Inc.
<PAGE>
Adelphia Communications Corporation
Page Three
_____________________________________
issuances of the Additional Initial Warrants relating to the Primary Offering
and relating to the Adelphia Stock Purchase, MCI shall sell to Adelphia and
Adelphia shall purchase from MCI all of its Initial Warrants and such Additional
Initial Warrants at a price (the "Warrant Purchase Price") equal to the number
of Class A Common Shares issueable under said Warrants times the IPO Price minus
the underwriting discount of no more than 6.25% thereon, less the adjusted
aggregate strike price of said Warrants as calculated in accordance with the
Warrant Agreement (the "Adelphia Warrant Purchase"). In addition, concurrently
with the issuance of the Additional Initial Warrants relating to the Over-
allotment Offering, MCI shall sell and Adelphia shall purchase from MCI all such
Additional Initial Warrants at a price equal to the Warrant Purchase Price (the
"Additional Adelphia Warrant Purchase").
Furthermore, concurrent with the Adelphia Warrant Purchase, Hyperion agrees
to pay to Adelphia, in consideration of the obligations undertaken by Adelphia
to facilitate the agreements between MCI and Hyperion hereunder, (A) a fee of
$500,000 and (B) a warrant (the "Adelphia Warrant") which expires three years
from its issuance, to purchase 200,000 shares of Class A Common Stock at an
exercise price equal to the IPO Price. In addition, Hyperion acknowledges and
agrees that upon exercise of the Adelphia Warrant, Hyperion shall issue to MCI
Adjustment Warrants in accordance with the terms set forth in the Warrant
Agreement.
Hyperion, MCI and Adelphia agree that the transaction described above
represents the entire transaction as it relates to the warrant issuances
required by the Warrant Agreement in connection with the equity issuances
described herein, and Hyperion shall not be obligated to issue any other
Warrants under the Warrant Agreement to MCI or Adelphia as a result of the IPO,
the Adelphia Note Contribution or the Adelphia Share Purchase. The issuance of
the Warrants to MCI and Adelphia, the Adelphia Warrant Purchase and the
Additional Adelphia Warrant Purchase and related transactions described herein
shall be conditioned upon, and shall become effective simultaneously with, the
closing of the IPO, and shall be subject to the execution of definitive
documentation reflecting the foregoing with customary representations and
warranties. MCI and Adelphia each mutually agree
<PAGE>
MCImetro Access Transmission Services, Inc.
Adelphia Communications Corporation
Page Four
_____________________________________
that, except as expressly set forth herein, the terms and conditions of the
Warrant Agreement, including the obligation of Hyperion to issue Adjustment
Warrants and Performance Warrants, shall remain in full force and effect.
Yours truly,
Hyperion Telecommunications, Inc.
By: /s/ Michael J. Rigas
--------------------
Intending to be legally bound hereby,
agreed to and accepted:
MCImetro Access Transmission Services, Inc.
By: /s/ Nate Davis
--------------
Adelphia Communications Corporation
By: /s/ Michael J. Rigas
--------------------
<PAGE>
EXHIBIT 10.25
HYPERION TELECOMMUNICATIONS, INC.
AMENDMENT TO
REGISTRATION RIGHTS AGREEMENT
THIS AMENDMENT TO REGISTRATION RIGHTS AGREEMENT ("AMENDMENT"), made as of
the 15th day of April, 1998, by and between ADELPHIA COMMUNICATIONS CORPORATION,
a Delaware corporation ("Adelphia") and HYPERION TELECOMMUNICATIONS, INC., a
Delaware corporation (the "Company").
WHEREAS, Adelphia is the record and beneficial holder of 8,900,020 shares
of the Company's Class B Common Stock, par value $.01 per share (the "Class B
Common Stock"), and is the holder of a majority in interest of the outstanding
Registrable Securities;
WHEREAS, Adelphia and the Company contemplate several transactions in
connection with the initial public offering of the Company whereby Adelphia will
be acquiring or have the right to acquire a significant number of additional
shares of the Class A Common Stock, par value $.01 per share (the "Class A
Common Stock"), but only on the condition that such shares and all future shares
of Class A or Class B Common Stock acquired by Adelphia be made subject to the
Registration Rights Agreement between the Company and Adelphia dated as of
October 25, 1996, as amended to date (the "Registration Rights Agreement"); and
WHEREAS, Adelphia and the Company desire to amend the Registration Rights
Agreement to provide that the shares held or to be held by Adelphia shall be
subject to the rights described herein and in the Registration Rights Agreement
as so amended.
NOW, therefore, in consideration of the mutual promises and covenants
contained herein and intending to be legally bound hereby, the parties hereto
agree as follows:
1. For purposes of this Amendment, all capitalized terms not defined
herein shall have the meanings ascribed to them in the Registration Rights
Agreement.
2. The definition of the term "Registrable Securities" in Section 1(c) of
the Registration Rights Agreement is amended in its entirety to read as follows:
(c) "The term "Registrable Securities" means (i) any Class B Common Stock
held by Holder, whether currently or in the future, (ii) any Class A Common
Stock held by Holder, whether currently or in the future, (iii) such
additional Class A or Class B Common Stock which may be issued as a
dividend or distribution on such Class A or Class B Common Stock and (iv)
any securities of the Company or a successor to the Company issued as a
dividend or other distribution with respect to, or in exchange or in
replacement of, such Class A Common Stock or Class B Common Stock.
Registrable Securities, if transferred pursuant to an exemption from
registration under the Act, will remain Registrable Securities."
<PAGE>
3. Except as amended hereby, the Registration Rights Agreement remains in
full force and effect.
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be
executed by a duly authorized representative as of the day first above written.
ADELPHIA:
ADELPHIA COMMUNICATIONS CORPORATION
By: /s/ Timothy J. Rigas
----------------------------
Name: Timothy J. Rigas
----------------------------
Title: Executive Vice President
----------------------------
COMPANY:
HYPERION TELECOMMUNICATIONS, INC.
By: /s/ Daniel R. Milliard
----------------------------
Name: Daniel R. Milliard
----------------------------
Title: President
----------------------------
<PAGE>
EXHIBIT 10.26
April 9, 1998
Hyperion Telecommunications, Inc.
Main and Water Street
Coudersport, PA 16915
Re: Purchase of Class A Common Stock
--------------------------------
Gentlemen:
The undersigned ("Adelphia") hereby agrees to contribute to Hyperion
Telecommunications, Inc. (the "Company") the Company's 16% Subordinated Note in
the original principal amount of $25,855,432.00, dated April 15, 1996, owed to
Adelphia (the "Note"), including accrued and unpaid interest thereon, at a price
equal to 131.897% of the principal and accrued and unpaid interest thereon as of
the date of the closing under this Agreement (which price the undersigned and
the Company hereby agree to be the fair market value of the Note as determined
in accordance with a fairness opinion letter dated April 9, 1998 by Smith Barney
Inc.). Such contribution shall be in consideration for the issuance by the
Company to Adelphia of an aggregate principal price amount of shares (the
"Shares") of the Class A Common Stock, par value $.01 per share (the "Class A
Common Stock") of the Company, at a price per Share equal to the purchase price
per share to the public (as described in the Underwriting Agreement) less the
underwriting discount per share paid to the Underwriters pursuant to such
Underwriting Agreement, all to be described on the cover page of the final
prospectus covering shares of Class A Common Stock sold to the public pursuant
to the Underwriting Agreement. No underwriting commissions or discounts shall
be paid to any underwriter for such purchase or sale of the Shares. Each
capitalized term used herein without being defined herein shall have the meaning
ascribed to it in that certain underwriting agreement to be entered into by and
among the Company and Smith Barney Inc., Credit Suisse First Boston Corporation
and NationsBanc Montgomery Securities LLC, with respect to the offering and sale
of shares of Class A Common Stock to the public by the Company pursuant to
Registration Statement No. 333-48209 (the "Underwriting Agreement").
The parties hereto agree that Adelphia is entitled to rely on the
representations and warranties made by the Company in the Underwriting
Agreement; provided, however, that Adelphia represents and warrants that such
representations and warranties are true and correct to the best of its
knowledge.
Adelphia hereby represents and warrants that the Note which it is
contributing to the Company pursuant to this letter is owned by Adelphia free
and clear of all charges, claims, community property interests, conditions,
equitable interests, liens, mechanics' or construction liens, options, pledges,
security interests, rights of first refusal, or restrictions of any kind,
<PAGE>
including any restriction on use, transfer, receipt of income, or exercise of
any other attribute of ownership.
The contribution of the Note and the purchase and sale of the Shares as
contemplated hereby shall take place on the Closing Date concurrently with the
closing on the Firm Shares. The Shares shall be purchased and shall be held for
investment.
The obligations of the parties hereto are conditioned upon the execution of
the Underwriting Agreement and the closing on the purchase and sale of the Firm
Shares as contemplated by the Underwriting Agreement. This agreement shall be
terminated without liability on the part of any party hereto in the event that
the Underwriting Agreement is not executed or the Underwriting Agreement or the
Registration Statement are terminated or withdrawn prior to the consummation of
the purchase and sale of the Firm Shares.
The Company and the undersigned hereby agree that the Shares shall be
deemed to be "Registrable Securities" for all purposes under paragraph 1(c)(i)
of the Registration Rights Agreement by and between the Company and the
undersigned, dated October 25, 1996.
This Agreement may be executed in one or more counterparts each of which,
taken together, shall constitute one and the same agreement.
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of New York without giving effect to the principles
of conflicts of law thereof.
Very truly yours,
ADELPHIA COMMUNICATIONS CORPORATION
By: /s/ Timothy J. Rigas
--------------------
Name: Timothy J. Rigas
Title: Executive Vice President
Agreed to and accepted by
HYPERION TELECOMMUNICATIONS, INC.
By: /s/ Daniel R. Milliard
----------------------
Name: Daniel R. Milliard
Title: President
<PAGE>
EXHIBIT NO. 23.02
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-48209 of Hyperion Telecommunications, Inc. of our report dated June 13, 1997
(April 28, 1998 as to the sixth paragraph of Note 6), 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.
/s/ DELOITTE & TOUCHE
Pittsburgh, Pennsylvania
April 30, 1998
