<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
HYPERION TELECOMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
Notes:
<PAGE>
HYPERION TELECOMMUNICATIONS, INC.
MAIN AT WATER STREET
COUDERSPORT, PENNSYLVANIA 16915
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 6, 1998
----------------
To the Stockholders of
Hyperion Telecommunications, Inc.:
The Annual Meeting of Stockholders of Hyperion Telecommunications, Inc. will
be held at the Coudersport Theater, Main Street, Coudersport, Pennsylvania on
Tuesday, October 6, 1998, at 11:00 a.m., for the following purposes:
1. To elect nine (9) Directors by vote of the holders of Class A Common
Stock, Class B Common Stock and Preferred Stock, voting together.
2. To consider and act upon such other matters as may properly come before
the meeting.
The Board of Directors has fixed the close of business on August 19, 1998,
as the record date for determination of stockholders entitled to notice of and
to vote at the Annual Meeting.
IF YOU ARE UNABLE TO ATTEND THE MEETING AND YOU WISH TO VOTE YOUR STOCK, IT
IS REQUESTED THAT YOU COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT
AS PROMPTLY AS POSSIBLE IN THE ENCLOSED ENVELOPE.
BY ORDER OF THE BOARD OF DIRECTORS
Daniel R. Milliard
President, Chief Operating Officer
and Secretary
September 14, 1998
<PAGE>
HYPERION TELECOMMUNICATIONS, INC.
MAIN AT WATER STREET
COUDERSPORT, PENNSYLVANIA 16915
----------------
PROXY STATEMENT FOR ANNUAL MEETING
OF STOCKHOLDERS
OCTOBER 6, 1998
----------------
This proxy statement is being furnished to the stockholders of Hyperion
Telecommunications, Inc., a Delaware corporation (the "Company"), in
connection with the solicitation by the Board of Directors of the Company of
proxies to be voted at the annual meeting of stockholders (the "Annual
Meeting") scheduled to be held on Tuesday, October 6, 1998, at the Coudersport
Theater, Main Street, Coudersport, Pennsylvania. The address of the principal
executive offices of the Company is Main at Water Street, Coudersport,
Pennsylvania 16915, and the date this proxy statement was first mailed to
stockholders was on or about September 14, 1998. A copy of the Annual Report
to Stockholders for the fiscal year ended March 31, 1998 is being furnished
with this proxy statement.
Only stockholders of record as of the close of business on August 19, 1998
are entitled to notice of and to vote at the Annual Meeting and any
adjournment thereof. The outstanding capital stock of the Company on that date
consisted of 22,114,719 shares of Class A Common Stock, $.01 par value ("Class
A Common Stock"), 32,576,113 shares of Class B Common Stock, $.01 par value
("Class B Common Stock") and 220,390 shares of 12 7/8% Senior Exchangeable
Redeemable Preferred Stock due 2007 ("Preferred Stock"). With respect to the
matters described in this proxy statement, the holders of Class A Common
Stock, Class B Common Stock and of Preferred Stock vote together as a single
class, and each holder of Class A Common Stock is entitled to cast one (1)
vote for each share of Class A Common Stock standing in their name on the
books of the Company, each holder of Class B Common Stock is entitled to cast
ten (10) votes for each share of Class B Common Stock standing in their name
on the books of the Company, and each holder of Preferred Stock is entitled to
cast one (1) vote for each share of Preferred Stock standing in their name on
the books of the Company. A majority of the votes cast at the Annual Meeting
are required for the adoption of the proposals described below.
All shares represented by valid proxies received by the Company prior to the
Annual Meeting will be voted at the Annual Meeting as specified in the proxy,
unless such proxies previously have been revoked. If no specification is made,
the shares will be voted FOR the election of each of the Board's nominees to
the Board of Directors. Unless otherwise indicated by the stockholder, the
proxy card also confers discretionary authority on the Board-appointed proxies
to vote the shares represented by the proxy on any matter that is properly
presented for action at the Annual Meeting. A stockholder giving a proxy has
the power to revoke it any time prior to its exercise by delivering to the
Secretary of the Company a written revocation or a duly executed proxy bearing
a later date, or by attendance at the meeting and voting his shares in person.
Abstentions and broker non-votes on any matter submitted to the stockholders
for approval have no effect on the vote on such matter since the affirmative
vote of at least a majority of the votes cast by shareholders at the meeting,
in person or by proxy, is necessary for adoption of the proposals described
below. Broker non-votes as to any matter are shares held by nominees of
beneficial owners which are present and voted at the meeting on matters as to
which the nominee has discretionary authority but which are not voted on the
matter in question because the nominee does not have discretionary voting
authority as to such matter.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company recommends a vote FOR each of the
nominees named below for election as directors.
1
<PAGE>
ELECTION OF DIRECTORS
DESCRIPTION OF BOARD OF DIRECTORS
The Certificate of Incorporation of the Company provides for the Board of
Directors to be elected by a majority of the votes cast by holders of Class A
Common Stock, holders of Class B Common Stock and holders of Preferred Stock,
voting together as a single class, with each share of Class A Common Stock
entitled to one (1) vote, each share of Class B Common Stock entitled to ten
(10) votes and each share of Preferred Stock entitled to one (1) vote.
Stockholders of the Company are not entitled to cumulate their votes in the
election of directors.
The Bylaws of the Company provide that the Board of Directors shall
establish the number of directors which shall not be less than seven (7) nor
more than twenty-one (21). The Board currently consists of nine (9) directors,
all of whom are also nominees for director.
Each director is to hold office until the next annual meeting of
stockholders and until his successor is duly elected and qualified, subject to
the right of the stockholders to remove any director as provided in the
Bylaws. Any vacancy in the office of a director elected by the holders of
Class A Common Stock, the holders of Class B Common Stock and the holders of
Preferred Stock voting as a single class may be filled by such holders voting
as a single class. In the absence of a stockholder vote, a vacancy on the
Board of Directors may be filled by the remaining directors then in office,
even if less than a quorum, or by the sole remaining director. Any director
elected by the Board of Directors to fill a vacancy shall serve until the next
annual meeting of stockholders and until his successor has been elected and
has qualified. If the Board of Directors increases the number of directors,
any vacancy so created may be filled by the Board of Directors.
The persons named as proxies in the enclosed form of proxy were selected by
the Board of Directors and have advised the Board of Directors that, unless
authority is withheld, they intend to vote the shares represented by them at
the Annual Meeting for the election of John J. Rigas, James P. Rigas, Michael
J. Rigas, Timothy J. Rigas, Daniel R. Milliard, Charles R. Drenning, Randolph
S. Fowler, Pete J. Metros and James L. Gray on behalf of all of the
stockholders of the Company. All nominees except Mr. Metros and Mr. Gray were
first elected or appointed as directors of the Company in 1991. Mr. Metros and
Mr. Gray were first elected as directors of the Company in 1997.
The Board of Directors knows of no reason why any nominee for director would
be unable to serve as director. If at the time of the Annual Meeting any of
the named nominees are unable or unwilling to serve as directors of the
Company, the persons named in the proxy intend to vote for such substitutes as
may be nominated by the Board of Directors.
The following sets forth certain information concerning each nominee for
election as a director of the Company. Each of the current directors of the
Company is a nominee for reelection as a director.
NOMINEES FOR ELECTION OF DIRECTORS
John J. Rigas
Age 73
John J. Rigas has been Chairman of the Board of the Company since its
formation in 1991. He is also founder, Chairman, Chief Executive Officer and
President of Adelphia Communications Corporation ("Adelphia"), the seventh
largest cable television operator in the U.S. and a majority shareholder of
the Company, and is President of most of Adelphia's subsidiaries. Mr. Rigas
has served as President or general partner of most of the constituent entities
which became wholly-owned subsidiaries of Adelphia upon its formation in 1986,
as well as the cable television operating companies acquired by Adelphia which
were wholly or partially owned by members of the Rigas family. Mr. Rigas has
owned and operated cable television systems
2
<PAGE>
since 1952. Among his business and community service activities, Mr. Rigas is
Chairman of the Board of Directors of Citizens Bancorp., 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 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
Age 40
James P. Rigas is Vice Chairman and Chief Executive Officer of the Company,
and is Executive Vice President, Strategic Planning of Adelphia and a Vice
President of Adelphia's subsidiaries. Mr. Rigas has served as Chief Executive
Officer of the Company since October 1996, and before that was Executive Vice
President of the Company since 1991. Since February 1986, Mr. Rigas has served
as a Senior Vice President, Vice President or other officer of the constituent
entities which became wholly-owned subsidiaries of Adelphia upon its formation
in 1986, as well as the cable television operating companies acquired by
Adelphia which were wholly or partially owned by members of the Rigas family.
Among his business activities, Mr. Rigas is a member of the Board of Directors
of Cable Labs. 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
Age 44
Michael J. Rigas is Vice Chairman of the Company, and is Executive Vice
President, Operations of Adelphia and a Vice President of Adelphia's
subsidiaries. Since 1981, Mr. Rigas has served as a Senior Vice President,
Vice President, general partner or other officer of the constituent entities
which became wholly- owned subsidiaries of Adelphia upon its formation in
1986, as well as the cable television operating companies acquired by Adelphia
which were wholly or partially owned by members of the Rigas family. 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
Age 42
Timothy J. Rigas has been Vice Chairman, Chief Financial Officer and
Treasurer of the Company since 1991. He is also Executive Vice President,
Chief Financial Officer, Chief Accounting Officer and Treasurer of Adelphia
and its subsidiaries. Since 1979, Mr. Rigas has served as Senior Vice
President, Vice President, general partner or other officer of the constituent
entities which became wholly-owned subsidiaries of Adelphia upon its formation
in 1986, as well as the cable television operating companies acquired by
Adelphia which were wholly or partially owned by members of the Rigas family.
Mr. Rigas graduated from the University of Pennsylvania, Wharton School, with
a B.S. degree in Economics (cum laude) in 1978.
Daniel R. Milliard
Age 51
Daniel R. Milliard is President, Chief Operating Officer and Secretary of
the Company, and is Senior Vice President and Secretary of Adelphia and its
subsidiaries. Since 1982, Mr. Milliard served as Vice President, Secretary
and/or General Counsel of Adelphia and the constituent entities which became
wholly-owned
3
<PAGE>
subsidiaries of Adelphia, as well as the cable television operating companies
acquired by Adelphia which were wholly or partially owned by members of the
Rigas family. He served as outside general counsel to Adelphia's predecessors
from 1979 to 1982. Mr. Milliard graduated from American University in 1970
with a Bachelor of Science degree in Business Administration. He received an
M.A. degree in Business from Central Missouri State University in 1971, where
he was an Instructor in the Department of Finance, School of Business and
Economics, from 1971-1973, and received a Juris Doctor degree from the
University of Tulsa School of Law in 1976. He is a director of Citizens
Bancorp., Inc. in Coudersport, Pennsylvania and is a member of the Board of
Directors of the Charles Cole Memorial Hospital.
Charles R. Drenning
Age 53
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. He is a member of the Pennsylvania Technical Institute
and IEEE.
Randolph S. Fowler
Age 47
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.
Pete J. Metros
Age 58
Pete J. Metros became a director of the Company 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
Adelphia and Borroughs Corporation of Kalamazoo, Michigan. Mr. Metros received
a B.S. degree from the Georgia Institute of Technology in 1962.
4
<PAGE>
James L. Gray
Age 63
James L. Gray became a director of Hyperion on April 1, 1997. Mr. Gray has
been chairman and 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.
AUDIT AND COMPENSATION COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
In April 1998, the Board of Directors established a Compensation Committee,
consisting of James L. Gray and Pete J. Metros, which reviews and has
authority to approve the compensation of the key officers and employees of the
Company. The Compensation Committee did not meet during fiscal 1998 and all
compensation decisions during fiscal 1998 were made by the full Board of
Directors of the Company. The Board also has an Audit Committee, comprised of
James L. Gray, Pete J. Metros and Timothy J. Rigas, which is responsible for
monitoring the financial reporting of the Company on behalf of the Board and
the investing public. The Audit Committee met once to review the Company's
fiscal 1998 financial condition and results of operations. 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 the 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 Board of Directors met or acted by written
consent in lieu of meeting nine (9) times in fiscal 1998. Each director
attended at least 75% of the meetings of the Board and the respective
committees of which each is a member.
5
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid by the Company for services rendered during the Company's last three
fiscal years in the period ended March 31, 1998 to the Company's Chief
Executive Officer and the four most highly compensated executive officers
whose compensation exceeded $100,000 in salary and bonus during fiscal 1998:
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
NAME AND PRINCIPAL FISCAL RESTRICTED ALL OTHER
POSITION(A) YEAR SALARY BONUS STOCK AWARDS COMPENSATION(E)
------------------ ------ -------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Daniel R. Milliard(b).... 1998 $229,810 $ -- $ 27,000(c) $ 5,340(f)
President, Chief
Operating Officer and
Secretary 1997 238,863 75,000 156,000(d) 5,340(f)
1996 207,474 -- -- 5,350(f)
Charles R. Drenning...... 1998 $167,712 $30,000 -- 93,000(g)
Senior Vice President 1997 167,712 12,500 -- 46,475(g)
1996 139,982 25,000 -- --
Paul D. Fajerski......... 1998 $167,712 $30,000 -- 93,000(g)
Senior Vice President 1997 167,712 12,500 -- 46,475(g)
1996 139,982 25,000 -- --
Randolph S. Fowler....... 1998 $167,712 $30,000 -- 93,000(g)
Senior Vice President 1997 167,712 12,500 -- 46,475(g)
1996 139,982 25,000 -- --
</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 the services
they provide to the Company, although the Company does make payments for
shared corporate overhead services to Adelphia pursuant to a Management
Services Agreement.
(b) During the periods presented through March 4, 1997, 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. On March 4, 1997, the Company entered into an employment
agreement with Mr. Milliard.
(c) Mr. Milliard was granted a restricted stock bonus award under the 1996
plan for 58,500 shares of Class A Common Stock pursuant to his employment
agreement on April 1, 1997. The 58,500 shares are not subject to vesting,
will participate in any dividends, and had a value of approximately
$27,000 as of April 1, 1997.
(d) 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. The 338,000 shares are not subject to vesting,
will participate in any dividends, and had a value of approximately
$156,000 as of March 4, 1997.
(e) Does not include the value of certain non-cash compensation to the named
individuals which did not exceed the lesser of $50,000 or 10% of such
individuals' total annual salary shown in the table.
(f) Fiscal 1998, 1997 and 1996 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 1998 and fiscal 1997 and $4,600 during
fiscal 1996, 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 1998, 1997 and 1996.
(g) Amounts represent interest accrued during fiscal 1998 and fiscal 1997 in
connection with certain loans with the Company which were repaid by the
named individuals in May 1998. See "Certain Transactions."
6
<PAGE>
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 all 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. Through April 1,
1998, 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, the Company also
authorized the granting of certain stock awards and stock options to certain
executive officers of the Company. See "Certain Transactions."
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 April 1 of each fiscal year through fiscal 2001 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
canceled 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, noncompetition and nonsolicitation 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 and Fowler 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 of them that are comparable to industry average
base pay and bonuses paid by comparable companies for comparable positions.
7
<PAGE>
BOARD OF DIRECTORS 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.
8
<PAGE>
COMPENSATION REPORT OF THE BOARD OF DIRECTORS
All executive compensation decisions made after April 1998 will be addressed
by the recently established Compensation Committee of the Board of Directors
(see "Election of Directors--Audit and Compensation Committees and Meetings of
the Board of Directors"). The Compensation Committee did not make any
decisions affecting the compensation of executive officers during fiscal 1998.
Prior to the establishment of the Compensation Committee, compensation of
the executive officers was established by the Board of Directors of the
Company. The Board of Directors determined the salary ranges for each of the
named executive officers of the Company pursuant to their respective
employment agreements with the Company, based upon a number of subjective
factors, including the level and scope of the responsibilities of their
respective offices and the executive officer's contribution to the overall
performance of the Company, with some attention to the pay levels of similarly
positioned executive officers in comparable telecommunications industry
companies, as well as a recognition of the equity interests in the Company
already held by such named executive officers. No specific weight was given to
any of these factors because each of the factors was considered significant
and the relevance of some of the factors varied among the named executive
officers. The employment agreements for each of the named executive officers
other than Mr. Milliard also provide for bonuses to be paid to each of them
that are comparable to industry average base pay and bonuses paid by
comparable companies for comparable positions, and the Board of Directors
believes that the bonuses awarded to such executive officers during fiscal
1998 complied with this standard.
During fiscal 1998, the Company did not grant any options or stock bonuses
to the named executive officers, other than to Mr. Milliard, but it may in its
discretion grant such compensation under its 1996 Long-Term Incentive
Compensation Plan, from time to time, as it deems appropriate. In light of the
historically significant equity interests of the named executive officers, the
Board of Directors judged it unnecessary to offer such compensation in order
to align the interests of such executive officers other than Mr. Milliard with
those of its other stockholders at the time.
The Company has granted 455,000 shares of Class A Common Stock to Mr.
Milliard pursuant to his employment agreement, 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. The non-salary
compensation of Mr. Milliard reflected in the employment agreement was
determined by the Board of Directors based upon additional subjective factors,
such as Mr. Milliard's role in cultivating the Company's then current stage of
development, the interest of the Company in providing incentives to Mr.
Milliard to meet both long-term and short-term Company objectives and the
Company's desire to further align Mr. Milliard's interests with those of the
Company's stockholders. Other than these stock grants, Mr. Milliard did not
receive additional bonus compensation during fiscal 1998.
The Chief Executive Officer of the Company, James P. Rigas, was not directly
compensated by the Company during fiscal 1998. His services, as well as the
services of certain other executive officers of the Company and other
employees of Adelphia Communications Corporation ("Adelphia") were paid for
directly by Adelphia. Adelphia has historically charged the Company for the
provision of shared corporate overhead services, but has not charged the
Company for the actual cost of compensating Mr. Rigas or other executive
officers of the Company who are Adelphia employees.
BOARD OF DIRECTORS
John J. Rigas
James P. Rigas
Michael J. Rigas
Timothy J. Rigas
Daniel R. Milliard
Charles R. Drenning
Randolph S. Fowler
Pete J. Metros
James L. Gray
9
<PAGE>
BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Daniel R. Milliard, Charles R. Drenning and Randolph S. Fowler, each of them
named executive officers of the Company, served on the Board of Directors of
the Company during fiscal year 1998. Paul D. Fajerski, formerly an executive
officer of the Company, also served on the Board of Directors of the Company
during fiscal 1998.
Each of John J. Rigas, James P. Rigas, Michael J. Rigas and Timothy J. Rigas
are executive officers, directors and beneficial holders of more than a ten
percent equity interest in Adelphia, and served as executive officers and
directors of the Company during fiscal 1998. Daniel R. Milliard is an
executive officer of the Company, an executive officer and director of
Adelphia, and served on the Board of Directors of the Company during fiscal
1998. Pete J. Metros served as a director of Adelphia and a director of the
Company during fiscal 1998.
CERTAIN TRANSACTIONS
During fiscal 1998, the Company had outstanding to Adelphia an unsecured
subordinated note due April 16, 2003 (the "Adelphia Note") that accrued
interest at an annual rate of 16.5% and was subordinated to the senior notes
of the Company. Interest on the Adelphia Note was payable quarterly in cash,
through the issuance of identical subordinated notes or in any combination
thereof, at the option of the Company. Interest expense payable to Adelphia
during fiscal 1998 was approximately $6.0 million. On March 31, 1998,
approximately $35.9 million in principal and accrued interest on the Adelphia
Note was outstanding.
Messrs. Drenning, Fajerski and Fowler (the "Management Stockholders")
together held approximately 11% of the Company's outstanding Common Stock
prior to the Company's initial public offering (the "IPO") on May 8, 1998, and
were parties to a shareholder agreement, as amended ("Shareholder Agreement")
with Adelphia. The Shareholder Agreement provided, 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 Shareholder
Agreement terminated upon the completion of the Company's IPO on May 8, 1998.
Adelphia has also agreed to vote its shares in the Company to elect each
Management Stockholder to the Board of Directors of the Company so long as
such person is both an employee and a stockholder of the Company.
The Company 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 borrowed $1 million from the Company.
Each of these loans accrued 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 matured upon the completion of the
Company's IPO. Each Loan Agreement also provided 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. On May 8, 1998, the Management Stockholders each repaid
their loan through proceeds from the sale of 66,667 shares of Class B Common
Stock to Adelphia.
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 IPO and terminated upon the earlier of (i) the
sale or disposition of all of such Common Stock, (ii) the date on which all
such shares of Common Stock become freely tradable pursuant to Rule 144 or
(iii) twelve months after the effectiveness of the demand registration
statement.
10
<PAGE>
The Company and Adelphia have entered into a registration rights agreement,
as amended whereby the Company has agreed to provide to Adelphia and certain
permitted transferees, with respect to Common Stock owned by them, 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.
During fiscal 1998, the Company incurred charges from Adelphia of
approximately $1.7 million for the provision to the Company of shared
corporate overhead services in areas such as personnel, payroll, management
information services, shared use of office, aircraft and network facilities
and support equipment. The Company expects that charges for the provision of
similar services by Adelphia to the Company, or by the Company to Adelphia,
will continue to be incurred or charged by the Company in the future. The
transactions related to the provision of these services have been based on
allocation of Adelphia's incremental costs incurred for these services, and do
not necessarily represent the actual costs that would be incurred if the
Company was 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 between the Company and Adelphia dated April 10, 1998, with respect
to shared corporate overhead service. During fiscal 1998, the Company paid
Adelphia or certain of Adelphia's affiliates, fiber lease payments of
approximately $0.05 million.
On May 8, 1998, in connection with the IPO, the Company (i) issued and sold
an additional 3,324,001 shares of Class A Common Stock to Adelphia at a
purchase price of $15.00 per share (the public offering price less the
underwriting discount, or an aggregate of approximately $49.9 million) and
(ii) issued 3,642,666 shares of Class A Common Stock to Adelphia in exchange
for certain of the Company's indebtedness (including the Adelphia Note at fair
market value) and payables owed to Adelphia at a purchase price of $15.00 per
share (the public offering price less the underwriting discount, or an
aggregate of $54.6 million). Also on May 8, 1998, in connection with the
resolution of the number of warrants to be issued to MCImetro Access
Transmission Services, Inc. ("MCI") pursuant to a prior agreement between MCI
and the Company, (i) Adelphia purchased from MCI warrants with a three-year
term to purchase an aggregate of 1,421,501 shares of Class A Common Stock at
$6.15 per share, at a purchase price per share paid by Adelphia to MCI of
$8.85 per share (of which warrants to purchase 8,975 of such shares were
issued on June 5, 1998), (ii) the Company issued a three-year warrant to
Adelphia to acquire 200,000 shares of Class A Common Stock at $16.00 per
share, and (iii) the Company paid Adelphia a fee of $0.5 million.
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 IPO
and (ii) phantom stock awards 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 employee or director). Also in April 1998, pursuant to an
existing agreement, the Company authorized the issuance under the 1996 Plan to
each of Messrs. Drenning, Fajerski and Fowler of stock options covering 13,047
shares of Class A Common Stock with exercise price and vesting terms identical
to the Rigas Options.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act requires the Company's
directors, executive officers and persons who beneficially own more than ten
percent of a class of the Company's registered equity securities to file with
the Securities and Exchange Commission and deliver to the Company initial
reports of ownership and reports of changes in ownership of such registered
equity securities. No such reports were required to be filed by the Company's
directors, executive officers or more than ten percent stockholders during
fiscal 1998.
11
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Company's
Class A Common Stock and Class B Common Stock as of August 19, 1998 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. As of August 19, 1998, there were 22,114,719 shares of Class A Common
Sock outstanding and 32,576,113 shares of Class B Common Stock outstanding.
<TABLE>
<CAPTION>
TOTAL
CLASS A CLASS B COMMON STOCK
COMMON STOCK COMMON STOCK (%)
------------ ------------ ------------
<S> <C> <C> <C>
Adelphia Communications
Corporation (a).................. 6,966,667(b)(c) 29,125,066 66.0%
John J. Rigas (a)................. -- -- --
James P. Rigas (a)................ -- -- --
Michael J. Rigas (a).............. -- -- --
Timothy J. Rigas (a).............. -- -- --
Daniel R. Milliard................ 465,000(d) -- 0.8%
Charles R. Drenning (e)........... (b)(c) 1,124,978 2.1%
Paul D. Fajerski (e).............. (b)(c) 1,106,375 2.0%
Randolph S. Fowler (e)............ (b)(c) 1,124,978 2.1%
Pete J. Metros.................... 300 -- --
James L. Gray..................... 1,500 -- --
All executive officers and
directors as a group
(ten persons)(a)................. 7,433,467(f) 32,481,397(f) 73.0%
</TABLE>
- --------
(a) The business address of Adelphia Communications Corporation is Main at
Water Street, Coudersport, PA 16915. In their capacity as executive
officers of Adelphia, the following persons share or may be deemed to
share voting and dispositive power over the shares of Common Stock owned
by Adelphia, subject to the discretion of the Board of Directors of
Adelphia: John J. Rigas, Michael J. Rigas, Timothy J. Rigas, James P.
Rigas and Daniel R. Milliard.
(b) Each share of Class B Common Stock is convertible at any time at the
option of the holder into an equal number of shares of Class A Common
Stock. Holders of Class A Common Stock are entitled to one vote per share
and holders of Class B Common Stock are entitled to 10 votes per share on
all matters submitted to a vote of stockholders.
(c) The information presented reflects only shares of Class A Common Stock
held directly by Adelphia and does not include (i) shares of Class B
Common Stock convertible into Class A Common Stock or (ii) 1,621,501
shares of Class A Common Stock issuable under warrants held by Adelphia.
Assuming the conversion of all Class B Common Stock held by Adelphia into
Class A Common Stock and the exercise of all such warrants, Adelphia would
beneficially own 72.0% of the Class A Common Stock as of such date.
(d) Mr. Milliard shares voting and investment power over 10,000 of such shares
with his spouse.
(e) 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.
(f) The information presented includes 6,966,667 shares of Class A Common
Stock and 29,125,066 shares of Class B Common Stock held by Adelphia, for
which the following executive officers and directors of the Company share
or may be deemed to share voting and dispositive power over the shares,
subject to the discretion of the Board of Directors of Adelphia: John J.
Rigas, Michael J. Rigas, Timothy J. Rigas, James P. Rigas and Daniel R.
Milliard. The information presented excludes 1,621,501 shares of Class A
Common Stock issuable under warrants held by Adelphia.
12
<PAGE>
FORM 10-K ANNUAL REPORT TO THE SECURITIES
AND EXCHANGE COMMISSION
A COPY OF THE ANNUAL REPORT ON FORM 10-K (EXCLUDING EXHIBITS) OF THE COMPANY
FOR THE FISCAL YEAR ENDED MARCH 31, 1998, AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, WILL BE FURNISHED FREE OF CHARGE, UPON WRITTEN REQUEST,
TO STOCKHOLDERS WHO HAVE NOT PREVIOUSLY RECEIVED A COPY FROM THE COMPANY.
WRITTEN REQUESTS MAY BE DIRECTED TO THE SECRETARY, HYPERION TELECOM-
MUNICATIONS, INC., MAIN AT WATER STREET, COUDERSPORT, PENNSYLVANIA 16915.
OTHER MATTERS
The Company knows of no other matters to be presented for action at the
meeting. If any other matters should properly come before the meeting,
however, it is intended that votes will be cast pursuant to the proxy in
respect thereto in accordance with the best judgment of the persons acting as
proxies.
The Company will pay the expense in connection with the printing, assembling
and mailing to the holders of capital stock of the Company the notice of
meeting, this proxy statement and the accompanying form of proxy. In addition
to the use of the mails, proxies may be solicited by directors, officers or
regular employees of the Company personally or by telephone or telegraph. The
Company may request the persons holding stock in their names, or in the names
of their nominees, to send proxy material to and obtain proxies from their
principals, and will reimburse such persons for their expense in so doing.
The Company's certified public accountants during fiscal 1998 were, and for
fiscal 1999 will be, Deloitte & Touche LLP. Such accountants are not expected
to attend the Annual Meeting.
STOCKHOLDER PROPOSALS
Stockholders who intend to submit a proposal at the Annual Meeting of the
stockholders of the Company expected to be held in October 1999 must submit
such proposal to the attention of the Secretary of the Company at the address
of its executive offices no later than May 1, 1999.
13
<PAGE>
APPENDIX A
TABLE OF CONTENTS
<TABLE>
<S> <C>
Selected Financial Data................................................... A-2
Management's Discussion and Analysis of Financial Condition and Results of
Operations .............................................................. A-5
Independent Auditors' Report ............................................. A-12
Consolidated Balance Sheets, March 31, 1997 and 1998 ..................... A-13
Consolidated Statements of Operations, Years Ended March 31, 1996, 1997
and 1998 ................................................................ A-14
Consolidated Statements of Common Stock and Other Stockholders'
Equity (Deficiency), Years Ended March 31, 1996, 1997 and 1998 .......... A-15
Consolidated Statements of Cash Flows, Years Ended March 31, 1996, 1997
and 1998 ................................................................ A-16
Notes to Consolidated Financial Statements ............................... A-17
Market for the Company's Common Equity and Related Stockholder Matters ... A-34
</TABLE>
A-1
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for each of the
five years in the period ended March 31, 1998 have been derived from the
audited consolidated financial statements of the Company and the related notes
thereto. 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, 1998 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Proxy Statement. The balance sheet data as of March 31, 1994, 1995 and 1996
and the statement of operations data and the other Company data with respect
to the fiscal years ended March 31, 1994 and 1995 have been derived from
audited consolidated financial statements of the Company not included herein.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- -------- ---------
STATEMENT OF OPERATIONS DATA
(A): (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues.................... $ 417 $ 1,729 $ 3,322 $ 5,088 $ 13,510
Operating expenses:
Network operations......... 330 1,382 2,690 3,432 7,804
Selling, general and
administrative............ 2,045 2,524 3,084 6,780 14,314
Depreciation and
amortization.............. 189 463 1,184 3,945 11,477
------- -------- -------- -------- ---------
Operating loss.............. (2,147) (2,640) (3,636) (9,069) (20,085)
Gain on sale of investment.. -- -- -- 8,405 --
Interest income............. 17 39 199 5,976 13,304
Interest expense and fees... (2,164) (3,321) (6,088) (28,377) (49,334)
Equity in net loss of joint
ventures................... (528) (1,799) (4,292) (7,223) (12,967)
Net loss.................... (4,725) (7,692) (13,620) (30,547) (69,082)
Dividend requirements
applicable to preferred
stock...................... -- -- -- -- (12,409)
Net loss applicable to
common stockholders........ (4,725) (7,692) (13,620) (30,547) (81,491)
Basic and diluted net loss
per weighted average share
of common stock............ $ (0.15) $ (0.24) $ (0.42) $ (0.89) $ (2.33)
Common stock dividends...... -- -- -- -- --
OTHER COMPANY DATA (A):
EBITDA (b).................. $(1,958) $ (2,177) $ (2,452) $ (5,124) $ (8,608)
Capital expenditures and
Company investments (c).... 8,607 10,376 18,899 79,396 132,889
Cash used in operating
activities................. (2,121) (2,130) (833) (4,823) (6,333)
Cash used in investing
activities................. (8,607) (10,376) (18,899) (72,818) (266,604)
Cash provided by financing
activities................. 10,609 12,506 19,732 137,455 443,873
<CAPTION>
AS OF MARCH 31,
------------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- -------- ---------
BALANCE SHEET DATA (A): (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents... $ -- $ -- $ -- $ 59,814 $ 230,750
Total assets................ 14,765 23,212 35,269 174,601 634,893
Long term debt and
exchangeable redeemable
preferred stock............ 19,968 35,541 50,855 215,675 735,980
Common stock and other
stockholders' equity
(deficiency)............... (6,011) (13,703) (27,323) (50,254) (118,991)
</TABLE>
- --------
(a) The data presented represents financial information for the Company and
its consolidated subsidiaries. As of March 31, 1998, 10 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) 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) For the fiscal years ended March 31, 1994, 1995, 1996 1997 and 1998 the
Company's capital expenditures (including capital expenditures relating to
its wholly owned Operating Companies) were $3.1, $2.9, $6.1, $24.6, and
$68.6 million, respectively, and the Company's investments in its less
than wholly owned Operating Companies were $5.5, $7.5, $12.8, $34.8, and
$64.3 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.
A-2
<PAGE>
SUPPLEMENTAL PROPORTIONATE SHARE OPERATING COMPANY FINANCIAL AND OPERATING
DATA
The following supplemental unaudited financial results and network operating
data of Hyperion and its Operating Companies is derived from Company
information. All financial results are presented on a proportionate share
basis (see note (a) below). 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 or
results of operations.
OPERATING COMPANY PROPORTIONATE SHARE FINANCIAL DATA
(unaudited)(a):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Revenue...................... $ 4,149 $ 7,760 $ 17,498
Direct operating expenses.............. 3,081 4,494 9,119
--------- --------- ---------
Gross margin........................... 1,068 3,266 8,379
Selling, general and administrative
expenses.............................. 5,369 11,003 23,664
Depreciation and amortization expense.. 4,545 10,829 22,434
--------- --------- ---------
Operating loss......................... (8,846) (18,566) (37,719)
Interest income........................ 286 6,005 13,313
Interest expense....................... (7,362) (30,428) (53,012)
Other (expense) income................. (160) 8,706 10
--------- --------- ---------
Net loss............................... (16,082) (34,283) (77,408)
Dividend requirements applicable to
preferred stock....................... -- -- (12,409)
--------- --------- ---------
Net loss applicable to common
stockholders.......................... $ (16,082) $(34,283) $ (89,817)
========= ========= =========
Basic and diluted net loss per weighted
average share of common stock......... $ (0.49) $(1.00) $ (2.57)
========= ========= =========
Weighted average shares of common stock
outstanding (in thousands)............ 32,500 34,421 34,986
========= ========= =========
OTHER OPERATING DATA:
EBITDA (b)............................ $ (4,301) $ (7,737) $ (15,285)
Capital Expenditures.................. $ 30,581 $ 99,751 $ 137,901
<CAPTION>
AS OF MARCH 31,
----------------------------------------
1996 1997 1998
--------- --------- ---------
ASSET AND LIABILITY DATA: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gross property, plant & equipment (c). $ 61,209 $ 145,522 $ 336,473
Capital lease obligations (d)......... 11,076 32,646 49,691
OTHER NETWORK DATA:
Networks (e).......................... 17 21 22
Cities served (f)..................... 19 33 46
Route miles (f)....................... 2,210 3,461 5,363
Fiber miles (f)....................... 106,080 166,131 249,672
Buildings connected................... 822 1,270 1,909
LEC central offices collocated........ 44 104 113
Access lines sold..................... 0 7,000 41,500
Access lines installed................ 0 1,450 23,200
Switches installed (g)................ 5 7 17
Employees (h)......................... 155 261 571
</TABLE>
- --------
(a) Unless otherwise stated, the proportionate share financial data presented
represents the collective sum of Hyperion and Hyperion's economic interest
in each of the Operating Companies it owns and manages at Hyperion's
ownership percentage as of March 31, 1998. All historical results of
operations are presented as if Hyperion's current ownership percentage of
its Operating Companies were in
A-3
<PAGE>
place during the entire period presented. While this presentation format is
not in accordance with generally accepted accounting principles ("GAAP"),
management of Hyperion believes that this format depicts the operational
progress, and the associated economic effect on Hyperion, of the Company's
results of operations. 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 proportionate share property, plant and equipment (before
accumulated depreciation) of the networks, the NOCC and the Company based
upon Hyperion's ownership percentage as of March 31, 1998 in the Operating
Companies.
(d) Represents fiber lease financings with the respective Local Partners for
each network and other capital leases.
(e) Includes networks under construction.
(f) Data as of March 31, 1996 and 1997 excludes networks under construction.
Data as of March 31, 1998 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.
A-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company, through its Operating Companies, provides a competitive
alternative to the telecommunications services offered by the incumbent LECs
in its markets. Since its inception in October 1991 through March 31, 1998,
the Company experienced substantial growth, building from its original two
partnerships covering two networks to 20 Operating Companies and 22 networks.
At March 31, 1998, 18 of these 22 networks were operational. The Operating
Companies' customers are principally small, medium and large businesses and
government and educational end users and resellers, including IXCs and ISPs.
The Company believes that its strategy of utilizing Local Partners to develop
its networks has allowed the Company to build networks with greater coverage,
lower upfront and ongoing costs and superior service and reliability.
As of March 31, 1998, the Company's Operating Companies were made up of ten
wholly owned subsidiaries (through which the Company has an interest in 11
networks), one majority-owned company and 9 joint ventures (through which the
Company has an interest in 10 networks) where the Company owns 50% or less of
the aggregate equity interests in such Operating Companies. Results of
majority-owned subsidiaries are consolidated into the Company's financial
statements. The Company's pro rata share of the results of the Operating
Companies where the Company owns 50% or less 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 monitoring services. Management fees, which are generally based on the
Company's costs of providing such services, are determined by Local Partner
Agreements and vary depending upon the market. Management fees from non-
consolidated subsidiaries are accounted for as revenues of the Company.
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, the Company's
networks had approximately 5,363 route miles, approximately 249,672 fiber
miles and were connected to approximately 1,909 buildings in 18 operating
networks. As of March 31, 1998, the Operating Companies had installed 17
switches or remote modules, all of which were operational at March 31, 1998.
The Company expects to offer switched services in all of its markets during
1998. The Company's NOCC in Coudersport, Pennsylvania provides for remote
control, monitoring and diagnosis of all Operating Company networks. Funding
for the development of the Operating Companies has come from investments by
the Company and the Local Partners as well as from Fiber Lease Financings
which enable the Company to finance the building of fiber optic plant through
long-term leases. 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 have
required a substantially greater level of capital investment.
In the markets where the Company's Existing Networks are currently operating
or are under construction, the Company believes it has an addressable market
of approximately $13.3 billion annually, substantially all of which is
currently provided by the incumbent LECs. This addressable market estimate
does not include the market for enhanced data services, wireless resale,
internet access or long distance services, which the Company has the ability
to enter at its option.
Over the next eighteen months, the Company plans to complete the 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
A-5
<PAGE>
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
Fiscal 1998 in comparison with Fiscal 1997
Revenues increased 166% to $13.5 million for the fiscal year ended March 31,
1998 ("Fiscal 1998") from $5.1 million in the prior fiscal year. Growth in
revenues of $8.4 million resulted primarily from majority and wholly-owned
Operating Companies' revenues which increased approximately $6.8 million as
compared to the prior fiscal year due to increases in the customer base and
the impact of consolidation of the Buffalo, Syracuse, New Jersey, Louisville,
Lexington and Harrisburg Operating Companies. Management fees for non-
consolidated Operating Companies increased $1.6 million over the prior fiscal
year due to a full year of operations in Philadelphia and the commencement of
operations in the markets served in partnership with Entergy.
Network operations expense increased 127% to $7.8 million in Fiscal 1998
from $3.4 million in the prior fiscal year. The increase was attributable to
the expansion of operations at the NOCC, the increased number and size of the
Operating Companies which resulted in increased employee related costs and
equipment maintenance costs and the impact of consolidation of the Buffalo,
Syracuse, New Jersey, Louisville, Lexington and Harrisburg Operating
Companies.
Selling, general and administrative expense increased 111% to $14.3 million
in Fiscal 1998 from $6.8 million in the prior fiscal year. The increase was
due to an increase in the sales force required to support the existing
networks, corporate and NOCC overhead cost increases to accommodate the growth
in the number and size of the Operating Companies and the consolidation of the
Buffalo, Syracuse, New Jersey, Louisville, Lexington and Harrisburg Operating
Companies.
Depreciation and amortization expense increased 191% to $11.5 million during
Fiscal 1998 from $3.9 million in the prior fiscal year primarily as a result
of increased depreciation resulting from higher capital expenditures at the
NOCC and the consolidated Operating Companies and the amortization of costs
incurred in connection with the issuance of the 12 1/4% Senior Secured Notes.
Gain on sale of investment for Fiscal 1997was due to the sale of the
Company's 15.7% partnership interest in TCG of South Florida to Teleport
Communications Group Inc. on May 16, 1996 for an aggregate sale price of
approximately $11.6 million. This sale resulted in a gain of $8.4 million. No
such sale occurred during Fiscal 1998.
Interest income for Fiscal 1998 increased to $13.3 million from $6.0 million
in the prior fiscal year as a result of interest income earned on investment
of the proceeds of the 12 1/4% Senior Secured Notes and the 12 7/8% Senior
Exchangeable Redeemable Preferred Stock.
Interest expense and fees increased 74% to $49.3 million during Fiscal 1998
from $28.4 million in the prior fiscal year. The increase was attributable to
incremental non-cash interest expense associated with the 13% Senior Discount
Notes and interest expense associated with the 12 1/4% Senior Secured Notes.
Equity in net loss of joint ventures increased by 80% to $13.0 million
during Fiscal 1998 from $7.2 million in the prior fiscal year as more
nonconsolidated Operating Companies began operations. The net losses of the
nonconsolidated Operating Companies for Fiscal 1998 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 nonconsolidated 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.
A-6
<PAGE>
The number of nonconsolidated networks paying management fees to the Company
decreased from 12 at March 31, 1997 to 8 at March 31, 1998. These networks
paid management and monitoring fees to the Company, which are included in
revenues, aggregating approximately $4.8 million for Fiscal 1998, an increase
of approximately $1.6 million over the prior fiscal year. The nonconsolidated
networks' net losses, including networks under construction, for Fiscal 1998
aggregated approximately $19.9 million.
Dividend requirements applicable to preferred stock during the year ended
March 31, 1998 resulted from the 12 7/8% Senior Exchangeable Redeemable
Preferred Stock issued in October 1997.
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 $0.8
million of the $3.7 million increase was due to an increase in the amount of
allocated costs from Adelphia. These costs include charges for office space,
senior management support and shared services such as finance activities,
information systems, computer services, investor relation activities, payroll
and taxation. Such costs were estimated by Adelphia and do not necessarily
represent the actual costs that would be incurred if the Company was to secure
such services on its own. In addition, $0.7 million of the increase was due to
a write off of costs in connection with the postponement of the Company's
contemplated initial public offering in November 1996. The remainder of the
increase was due to increased administrative and sales and marketing efforts
as well as corporate and NOCC overhead cost increases due to growth in the
number of Operating Companies managed and monitored by the Company.
Depreciation and amortization expense increased 233% to $3.9 million during
Fiscal 1997 from $1.2 million in the prior fiscal year primarily as a result
of the amortization of costs incurred in connection with the issuance of the
13% Senior Discount Notes and increased depreciation resulting from higher
capital expenditures at the NOCC and the majority and wholly owned Operating
Companies.
Gain on sale of investment is due to the sale of the Company's 15.7%
partnership interest in TCG of South Florida to Teleport Communications Group
Inc. on May 16, 1996 for an aggregate sales price of approximately $11.6
million. This sale resulted in a gain of $8.4 million.
Interest income for Fiscal 1997 increased to $6.0 million from $0.2 million
in the prior fiscal year as a result of interest income earned on investment
of the proceeds of the 13% Senior Discount Notes and Warrants.
Interest expense and fees increased 366% to $28.4 million during Fiscal 1997
from $6.1 million in the prior fiscal year. The increase was attributable to
$23.5 million of non-cash interest expense associated with the 13% Senior
Discount Notes partially reduced by lower affiliate interest expense due to
decreased borrowings from Adelphia.
Equity in net loss of joint ventures increased by 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
A-7
<PAGE>
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 nonconsolidated 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.
SUPPLEMENTARY PROPORTIONATE SHARE OPERATING COMPANY FINANCIAL ANALYSIS
The Company believes that working with Local Partners to develop markets
enables the Company to build larger networks in a rapid and cost effective
manner. In pursuit of this strategy, the Company currently has joint ventures
with Local Partners where the Company owns 50% or less of each partnership or
corporation. As a result of the Company's ownership position in these joint
ventures, a substantial portion of the Operating Companies' results are
reported by the Company on the equity method of accounting for investments
which only reflects the Company's pro rata share of net income or loss of the
Operating Companies. Because all of the assets, liabilities and results of
operations of the Operating Companies are not presented in the Company's
consolidated financial statements, financial analysis of these Operating
Companies based upon the Company's results does not represent a complete
measure of the growth or operations of the Operating Companies.
In order to provide an additional measure of the growth and performance of
the Company and its Operating Companies, management of the Company analyzes
financial information of the Operating Companies on a proportionate share
presentation basis. Proportionate share presentation reflects the collective
sum of Hyperion and Hyperion's economic interest in each of the Operating
Companies at Hyperion's current ownership percentage as of March 31, 1998. All
historical results of operations are presented as if Hyperion's current
ownership percentage as of March 31, 1998 of its Operating Companies were in
place during the entire period presented. While this presentation format is
not in accordance with generally accepted accounting principles ("GAAP"),
management of Hyperion believes that this format better depicts the
operational progress, and the associated economic effect on Hyperion, of the
Company's results of operations during the period. This financial information,
however, is not indicative of the Company's overall financial position or
results of operations.
For the Fiscal 1998, proportionate revenue increased 125% to $17.5 million
as compared to $7.8 million in the prior fiscal year. The increase in revenues
for the fiscal year resulted primarily from increases in the customer base,
five new markets becoming operational during fiscal 1998 and the commencement
of switched services in the current fiscal year. During Fiscal 1998, the
Company successfully launched switched services in 13 of its markets, bringing
the total number of markets offering switched services to 17 at the end of
Fiscal 1998. During Fiscal 1998, the Operating Companies sold 34,500
additional access lines, bringing total sales to 41,500 access lines as of
March 31, 1998.
Fiscal 1998 proportionate EBITDA (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) loss was
$15.3 million as compared to $7.7 million for the prior fiscal year. 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. The increase in
proportionate EBITDA loss for Fiscal 1998 was due primarily to increased
selling, general, and administrative expenses as a result of the ramp up in
direct sales and marketing distribution channels as the Company has
aggressively moved to an
A-8
<PAGE>
end-user strategy over the past year, focusing on medium to large business
customers, governmental and educational end-user and other telecommunications
service providers. As of March 31, 1998, the Company had a direct sales force
of 128 professionals focused on selling the Company's portfolio of service
offerings, up from approximately 35 sales professionals one year ago.
Fiscal 1998 proportionate net loss applicable to common stockholders was
$89.8 million as compared to $34.3 million for the prior fiscal year. The
increase in proportionate net loss applicable to common stockholders for
Fiscal 1998 was due primarily to the above mentioned increase in selling,
general and administrative expenses, increased depreciation and amortization
and increased interest expense and preferred stock dividends associated with
the Company's financing activities. Also, in Fiscal 1997 the Company
recognized a one time gain of approximately $8.4 million associated with the
sale of its partnership interest in a network in South Florida.
During Fiscal 1998, the Company and its Operating Companies invested $176.4
million in capital expenditures, of which Hyperion's proportionate share was
$137.9 million. As of March 31, 1998, total gross property plant and equipment
of the Company and its Operating Companies was $441.7 million, of which
Hyperion's proportionate share is $336.5 million.
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 $6.1 million, $24.6 million and $68.6 million for Fiscal 1996, Fiscal
1997 and Fiscal 1998, respectively. Further, investments made by the Company
in its nonconsolidated Operating Companies, the South Florida Partnership and
the partnerships included in the Rollups were $12.8 million, $34.8 million and
$64.3 million in Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively. Also,
during Fiscal 1997, the Company invested $20.0 million in fiber assets and a
senior secured note in furtherance of its strategy to interconnect its
networks in the northeastern United States. The Company expects that it will
continue to have substantial capital and investment requirements. The Company
also expects to have to continue to fund operating losses as the Company
develops and grows its business.
On September 12, 1997 and February 12, 1998, 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 $52 million and certain other consideration. As a result of
these transactions, the Company's weighted average ownership in its networks,
based upon gross property plant and equipment, increased to 77% as of March
31, 1998. 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.
During Fiscal 1998, the Company issued $250 million aggregate principal
amount of 12 1/4% Senior Secured Notes due 2004 and $200 million aggregate
liquidation preference 12 7/8% Senior Exchangeable Redeemable Preferred Stock
due 2007. In addition, during May 1998, the Company successfully completed the
IPO. (See Notes 1 and 5 to the Consolidated Financial Statements.)
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, 1996, 1997 and 1998 cash used in operating activities totaled $0.8
million, $4.8 million, and $6.3 million respectively, cash used in investing
activities totaled $18.9 million, $72.8 million and $266.6 million
respectively, and cash provided by financing activities totaled $19.7 million,
$137.5 million and $443.9 million respectively. Prior to April 15, 1996,
funding of the Company's
A-9
<PAGE>
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 2000.
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 IPO, 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, 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, that the Company
will not accelerate its capital expenditures program, or that the application
of existing cash and net proceeds from the IPO will not otherwise vary
significantly from the Company's plans.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("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.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," has been issued and is effective for fiscal quarters beginning
after June 15, 1999. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value. Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," has been issued and is effective for fiscal years beginning after
December 15, 1998. SOP 98-5 provides guidance on the financial reporting of
start up costs and organization costs. It requires such costs to be expensed
as incurred. Management of the Company has not evaluated the impact of SFAS
133 or SOP 98-5.
A-10
<PAGE>
YEAR 2000 ISSUES
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 time-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 recently completed the planning stage of a project that
addresses the Year 2000 data processing issues relating to modifications of
its mainframe computer applications. Internal and external resources are being
used to make the required modifications and perform the necessary tests, all
of which is expected to be completed by June 1999. The financial impact of
these modifications is not expected to be significant to the Company's
financial statements.
In addition, the Company has begun communicating with others whom it does
significant business with to determine their Year 2000 compliance readiness
and the extent to which the Company is vulnerable to any third party Year 2000
issues. However, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted, or that a
failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes thereto and
independent auditors report follow.
A-11
<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, 1997 and 1998, and
the related consolidated statements of operations, of common stock and other
stockholders' equity (deficiency) and of cash flows for each of the three
years in the period ended March 31, 1998. 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, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
June 10, 1998
A-12
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 59,814 $230,750
Other current assets...................................... 768 4,434
-------- --------
Total current assets.................................... 60,582 235,184
U.S. government securities--pledged......................... -- 70,535
Investments................................................. 44,685 50,116
Property, plant and equipment--net.......................... 53,921 250,633
Other assets--net........................................... 15,413 28,425
-------- --------
Total................................................... $174,601 $634,893
======== ========
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND OTHER
STOCKHOLDERS' EQUITY (DEFICIENCY):
</TABLE>
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable........................................ $ 2,342 $ 11,775
Due to affiliates--net.................................. 6,081 1,442
Other current liabilities............................... 757 4,687
-------- ---------
Total current liabilities............................. 9,180 17,904
13% Senior Discount Notes due 2003........................ 187,173 215,213
12 1/4% Senior Secured Notes due 2004..................... -- 250,000
Note payable--Adelphia.................................... 25,855 35,876
Other debt................................................ 2,647 27,687
-------- ---------
Total liabilities..................................... 224,855 546,680
-------- ---------
12 7/8% Senior Exchangeable Redeemable Preferred Stock.... -- 207,204
-------- ---------
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, 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
Additional paid in capital.............................. 153 179
Class A Common Stock Warrant............................ -- 13,000
Class B Common Stock Warrants........................... 11,087 11,087
Loans to stockholders................................... (3,000) (3,000)
Accumulated deficit..................................... (58,822) (140,586)
-------- ---------
Total common stock and other stockholders' equity
(deficiency)......................................... (50,254) (118,991)
-------- ---------
Total................................................. $174,601 $ 634,893
======== =========
</TABLE>
See notes to consolidated financial statements.
A-13
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues......................................... $ 3,322 $ 5,088 $ 13,510
-------- -------- --------
Operating expenses:
Network operations............................. 2,690 3,432 7,804
Selling, general and administrative............ 3,084 6,780 14,314
Depreciation and amortization.................. 1,184 3,945 11,477
-------- -------- --------
Total........................................ 6,958 14,157 33,595
-------- -------- --------
Operating loss................................... (3,636) (9,069) (20,085)
Other income (expense):
Gain on sale of investment..................... -- 8,405 --
Interest income................................ 199 5,976 13,304
Interest expense and fees...................... (6,088) (28,377) (49,334)
-------- -------- --------
Loss before income taxes and equity in net loss
of joint ventures............................... (9,525) (23,065) (56,115)
Income tax benefit (expense)..................... 197 (259) --
-------- -------- --------
Loss before equity in net loss of joint ventures. (9,328) (23,324) (56,115)
Equity in net loss of joint ventures............. (4,292) (7,223) (12,967)
-------- -------- --------
Net loss......................................... (13,620) (30,547) (69,082)
Dividend requirements applicable to preferred
stock........................................... -- -- (12,409)
-------- -------- --------
Net loss applicable to common stockholders....... $(13,620) $(30,547) $(81,491)
======== ======== ========
Basic and diluted net loss per weighted average
share of common stock........................... $ (0.42) $ (0.89) $ (2.33)
======== ======== ========
Weighted average shares of common stock
outstanding..................................... 32,500 34,421 34,986
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
A-14
<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 A CLASS B
CLASS A CLASS B ADDITIONAL COMMON COMMON
COMMON COMMON PAID-IN STOCK STOCK LOANS TO ACCUMULATED
STOCK STOCK CAPITAL WARRANTS WARRANTS STOCKHOLDERS DEFICIT TOTAL
------- ------- ---------- -------- -------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 Warrant.. -- -- -- 13,000 -- -- -- 13,000
Dividend requirements
applicable to
preferred Stock....... -- -- -- -- -- -- (12,409) (12,409)
Other.................. -- -- -- -- -- -- (273) (273)
Issuance of Class A
Common Stock Bonus.... 1 -- 26 -- -- -- -- 27
Net loss................ -- -- -- -- -- -- (69,082) (69,082)
--- ---- ---- ------- ------- ------- --------- ---------
Balance, March 31, 1998. $ 4 $325 $179 $13,000 $11,087 $(3,000) $(140,586) $(118,991)
=== ==== ==== ======= ======= ======= ========= =========
</TABLE>
See notes to consolidated financial statements.
A-15
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(13,620) $(30,547) $ (69,082)
Adjustments to reconcile net loss to net cash
used in operating Activities:
Depreciation................................ 1,061 2,604 9,038
Amortization................................ 123 1,341 2,439
Equity in net loss of joint ventures........ 4,292 7,223 12,967
Non-cash interest expense................... 6,088 23,467 34,038
Deferred income taxes....................... (206) 257 --
Gain on sale of investment.................. -- (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......................... (227) (624) (5,302)
Accounts payable and other liabilities--
net...................................... 1,656 (295) 9,542
-------- -------- ---------
Net cash used in operating activities........... (833) (4,823) (6,333)
-------- -------- ---------
Cash flows from investing activities:
Net cash used for acquisitions................ -- (5,040) (65,968)
Expenditures for property, plant and
equipment.................................... (6,084) (24,627) (68,629)
Investment in fiber asset and senior secured
note......................................... -- (20,000) --
Proceeds from sale of investment.............. -- 11,618 --
Investments in joint ventures................. (12,815) (34,769) (64,260)
Investments in U.S. government securities--
pledged...................................... -- -- (83,400)
Sale of U.S. government securities--pledged... -- -- 15,653
-------- -------- ---------
Net cash used in investing activities........... (18,899) (72,818) (266,604)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of preferred stock..... -- -- 194,522
Proceeds from sale and leaseback of equipment. -- -- 14,876
Proceeds from debt............................ -- 163,705 250,000
Repayments of debt............................ -- -- (2,326)
Proceeds from issuance of Class B Common Stock
warrants..................................... -- 11,087 --
Costs associated with debt financing.......... -- (6,555) (12,664)
Loans to stockholders......................... -- (3,000) --
Borrowings on (repayment of) note payable--
Adelphia..................................... 9,226 (25,000) --
Advances from (to) affiliates................. 10,506 (2,782) (535)
-------- -------- ---------
Net cash provided by financing activities....... 19,732 137,455 443,873
-------- -------- ---------
Net increase in cash and cash equivalents....... -- 59,814 170,936
Cash and cash equivalents, beginning of year.... -- -- 59,814
-------- -------- ---------
Cash and cash equivalents, end of year.......... $ -- $ 59,814 $ 230,750
======== ======== =========
</TABLE>
See notes to consolidated financial statements.
A-16
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(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
("Hyperion" or 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 as of March 31, 1998, was an 88%
owned subsidiary of Adelphia Communications Corporation ("Adelphia"). The
remaining 12% outstanding on March 31, 1998 was owned by certain key Company
officers.
On May 8, 1998, the Company issued and sold 12,500,000 shares of Class A
Common Stock at a price to the public of $16.00 per share (the "IPO").
Simultaneously with the closing of the IPO, the Company issued and sold an
additional 3,324,001 shares of Class A Common Stock to Adelphia at a purchase
price of $15.00 per share (or an aggregate of approximately $49,900). In
addition, at such closing, the Company issued 3,642,666 shares of Class A
Common Stock to Adelphia in exchange for certain of the Company's indebtedness
and payables owed to Adelphia at a purchase price of $15.00 per share (or an
aggregate of $54,600). In addition, on June 5, 1998, the Company issued and
sold 350,000 shares of Class A Common Stock at the $16.00 IPO price pursuant
to the underwriters' over-allotment option in the IPO. Subsequent to the IPO
and related transactions, Adelphia owns approximately 66% of the Hyperion
outstanding common stock and approximately 85% of the total voting power.
The Company provides telecommunications service through its subsidiaries and
joint ventures, in which it has less than a majority ownership interest. The
Company's efforts have been directed primarily toward becoming an owner and
manager of competitive local exchange carrier ("CLEC") business
telecommunications services in selected mid-sized cities. The Company
generally partners with a local cable television or utility company, whose
fiber facilities are located in the market areas, to build competitive access
fiber optic networks. The Company then operates the networks for a management
fee. Each network provides local special access, carrier-to-carrier, and
point-to-point telecommunications services to major businesses and government
customers. The Company's revenues are derived from a combination of direct
business telecommunication services provided by its subsidiaries and
management fees from its unconsolidated joint ventures.
Joint ventures in which the Company does not have a majority interest are
accounted for under the equity method of accounting.
Cash and cash equivalents
Cash and cash equivalents consist of highly liquid instruments with an
initial maturity date of three months or less.
U.S. Government Securities--Pledged
U.S. Government Securities--Pledged consist of highly liquid investments
which will be used to pay the first six semi-annual interest payments of the
12 1/4% Senior Secured Notes. Such investments are classified as held-to-
maturity and the carrying value approximates market value.
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.
A-17
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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.
Significant Customers
During Fiscal 1998, sales to Hyperion's two largest customers, AT&T and MCI,
represented 18.3% and 14.5% of total revenues, respectively.
Net Loss Per Weighted Average Share of Common Stock
The computation of basic net loss per weighted average share of common stock
is based upon the weighted average number of common shares and warrants
outstanding during the year. Diluted net loss per common share is equal to
basic net loss per common share because the MCI Warrant discussed in Note 6
had an antidilutive effect for the periods presented; however, the MCI Warrant
could have a dilutive effort on earnings per share in future periods. A
warrant to purchase 731,624 shares of Class A Common Stock and Class B Common
Stock Warrants to purchase 1,993,638 shares of Class B Common Stock have been
included as shares outstanding for purposes of the calculation of both basic
and diluted loss per share. All references in the accompanying consolidated
financial statements to the number of shares of common stock have been
retroactively restated to reflect the stock split (See Note 6).
Income Taxes
Deferred income taxes are recognized for the tax effects of temporary
differences between financial statement and income tax bases of assets and
liabilities and for loss carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance is established
to reduce deferred tax assets to the net amount that management believes will
more likely than not be realized.
Other Assets
Costs incurred in developing new networks or expanding existing networks,
including network design, negotiating rights-of-way and obtaining
legal/regulatory authorizations are deferred and amortized over five years.
Pre-operating costs, included in other assets, represent certain
nondevelopment costs incurred during the pre-operating phase of a newly
constructed network and are amortized over five-year periods commencing with
A-18
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
the start of operations. Deferred debt financing costs, included in other
assets, are amortized over the term of the related debt. The unamortized
amounts of deferred debt financing costs at March 31, 1997 and 1998 were
$6,033 and $16,566, respectively. Also included in other assets at March 31,
1997 and 1998 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 Notes, Senior Discount Notes and Redeemable
Preferred Stock. The carrying value of the Note payable--Adelphia approximated
its fair value at March 31, 1997. The fair value of the Note payable--Adelphia
exceeded the carrying value by $11,443 at March 31, 1998. The fair value of
the Senior Secured Notes exceeded carrying value by approximately $31,250 at
March 31, 1998. The fair value of the Redeemable Preferred Stock exceeded the
carrying value by approximately $15,688 at March 31, 1998. The fair value of
the Senior Discount Notes exceeded the carrying value by approximately $3,647
and $35,649 at March 31, 1997 and 1998, respectively. The fair value of the
Note payable--Adelphia was estimated based upon the terms in comparison with
other similar instruments. The fair value of the Senior Discount Notes, the
Senior Secured Notes and the Redeemable Preferred Stock were based upon quoted
market prices.
Non-cash Financing and Investing Activities
Capital leases entered into during the fiscal year ended March 31, 1998
totaled $24,500 (See Note 5). Dividend requirements applicable to preferred
stock were satisfied by the issuance of an additional 6,860 shares of such
preferred stock in January 1998 (See Note 5). See Note 4 for discussion of
non-cash investing activities.
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. 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
A-19
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," has been issued and is effective for fiscal quarters beginning
after June 15, 1999. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value. Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," has been issued and is effective for fiscal years beginning after
December 15, 1998. SOP 98-5 provides guidance on the financial reporting of
start up costs and organization costs. It requires such costs to be expensed
as incurred. Management of the Company has not evaluated the impact of SFAS
133 or SOP 98-5.
Reclassification
For the fiscal years ended March 31, 1996 and 1997, certain amounts have
been reclassified to conform with the March 31, 1998 presentation.
(2) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Telecommunications networks............................... $12,236 $ 50,421
Network monitoring and switching equipment................ 19,301 130,283
Fiber asset under construction (Note 3)................... 11,500 11,500
Construction in process................................... 14,978 66,075
Other..................................................... 1,131 6,605
------- --------
59,146 264,884
Less accumulated depreciation............................. (5,225) (14,251)
------- --------
Total..................................................... $53,921 $250,633
======= ========
</TABLE>
(3) INVESTMENT IN FIBER ASSET AND SENIOR SECURED NOTE
On February 20, 1997, the Company entered into several agreements regarding
the leasing of dark fiber in New York state in furtherance of its strategy to
interconnect its networks in the northeastern United States. Pursuant to these
agreements and in consideration of a payment of $20,000, the Company received
a $20,000 Senior Secured Note bearing interest at 22 1/2% (subject to
reduction upon early repayment of principal) due February 2002 (subject to
early redemption options), from Telergy, Inc. ("Telergy") and a fully prepaid
lease from a Telergy affiliate for an initial lease term of 25 years (with two
additional ten-year extensions) for 24 strands of dark fiber installed or to
be installed in a New York fiber optic telecommunications backbone network.
The Company has included $11,500 and $8,500 in Property, Plant and Equipment
and Other Assets, respectively, as the allocation of the $20,000 payment
between the fiber asset and the Senior Secured Note. The allocation reflects
the Company's estimate of the relative fair values of the assets acquired.
A-20
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
During Fiscal 1998, construction of the fiber has continued and no
repayments have been received on the Senior Secured Note. On April 16, 1998,
the Senior Secured Note was amended to mature on January 20, 1999.
(4) INVESTMENTS
The equity method of accounting is used to account for investments in joint
ventures in which the Company owns less than a majority interest. Under this
method, the Company's initial investment is recorded at cost and subsequently
adjusted for the amount of its equity in the net income or loss of its joint
ventures. Dividends or other distributions are recorded as a reduction of the
Company's investment. Investments in joint ventures accounted for using the
equity method reflect the Company's equity in their underlying net assets.
The Company's nonconsolidated investments are as follows:
<TABLE>
<CAPTION>
MARCH 31,
OWNERSHIP ------------------
PERCENTAGE 1997 1998
---------- -------- --------
<S> <C> <C> <C>
MediaOne Fiber Technologies (Jacksonville). 20.0% $ 7,330 $ 7,979
Multimedia Hyperion Telecommunications
(Wichita)................................. 49.9% 3,306 3,900
Louisville Lightwave....................... 100.0%(1) 4,683 --
NewChannels Hyperion Telecommunications
(Albany).................................. --%(2) 924 --
NewChannels Hyperion Telecommunications
(Binghamton).............................. --%(2) 504 --
NHT Partnership (Buffalo).................. 100.0%(1)(3) 4,717 --
NewChannels Hyperion Telecommunications
(Syracuse)................................ 100.0%(4) 4,215 --
Hyperion of Harrisburg..................... 100.0%(1) 5,246 --
MediaOne of Virginia (Richmond)............ 37.0% 7,018 7,212
New Jersey Fiber Technologies (New
Brunswick)................................ 100.0%(1) 3,340 --
PECO-Hyperion (Philadelphia)............... 50.0% 10,750 21,150
PECO-Hyperion (Allentown, Bethlehem,
Easton, Reading).......................... 50.0% -- 1,750
Lexington Lightwave........................ 100.0%(1) 2,311 --
Hyperion of York........................... 50.0% 1,402 3,500
Entergy Hyperion Telecommunications of
Louisiana................................. 50.0% -- 3,000
Entergy Hyperion Telecommunications of
Mississippi............................... 50.0% -- 3,275
Entergy Hyperion Telecommunications of
Arkansas.................................. 50.0% -- 3,550
Baker Creek Communications................. 49.9%(5) -- 10,009
Other...................................... Various 949 1,323
-------- --------
56,695 66,648
Cumulative equity in net losses............ (12,010) (16,532)
-------- --------
Total Investments.......................... $ 44,685 $ 50,116
======== ========
</TABLE>
- --------
(1) As discussed below, the Company consummated agreements on Feburary 12,
1998 which increased its ownership to 100% in these networks.
(2) As discussed below, the Company consummated an agreement effective
September 12, 1997 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) On March 24, 1998, the Federal Communications Commission ("FCC") completed
the auction of licenses for Local Multipoint Distribution Service. The
Company, through Baker Creek Communications, was the successful bidder at
a net cost of $25,600 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 $10,000 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.
A-21
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Summarized unaudited combined financial information for the Company's
investments accounted for using the equity method of accounting, excluding the
entities involved in the acquisition of the Company's partners' interests in
the Louisville, Buffalo, Syracuse, Harrisburg, New Jersey and Lexington
networks and the elimination of the Company's interest in the Albany and
Binghamton networks described below as of and for the periods presented, is as
follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------
1997 1998
------- --------
<S> <C> <C>
Current assets............................................. $ 3,442 $ 7,476
PP&E-net................................................... 95,372 153,495
Non-current assets......................................... 1,851 13,454
Current liabilities........................................ 3,668 13,422
Non-current liabilities.................................... 30,584 58,004
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Revenues......................................... $ 3,279 $ 7,251 $ 11,999
Net loss......................................... (4,238) (9,881) (19,923)
</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 $8,405. Amounts
related to TCG of South Florida included in the Company's equity in net loss
of joint ventures for the years ended March 31, 1996 and 1997 were $778 and
$221, respectively.
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%.
On September 12, 1997, the Company consummated an agreement with Time Warner
Entertainment--Advance/Newhouse ("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.
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. (See Note 6.) In
addition, Hyperion paid certain amounts related to fiber lease financings upon
consummation of the purchase of the additional partnership interests.
All of the acquisitions described above were accounted for using the
purchase method. Accordingly, the financial results of each acquisition have
been included in the Company's consolidated financial statements from the date
acquired.
A-22
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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>
YEAR ENDED MARCH 31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenues......................................... $ 5,701 $ 8,495 $17,919
Net loss......................................... (20,579) (38,744) (80,004)
Net loss applicable to common stockholders....... (20,579) (38,744) (92,413)
Net loss per weighted average share of common
stock........................................... (0.62) (1.10) (2.59)
</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 the Company
through one of its affiliates which will partner with the Company 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 "Senior Discount
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 accrued through March 31, 1998 on the amount outstanding to
Adelphia totaled $10,020 and is included in due to affiliates--net. On May 8,
1998, the Note--payable Adelphia and all accrued interest was converted into
shares of Class A Common Stock simultaneously with the closing of the IPO (See
Note 1).
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 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 Senior Discount Notes also included the repayment of amounts
related to capital expenditures, working capital requirements, operating
losses and pro-rata investments in joint ventures totaling $12,800 incurred
during the period from January 1, 1996 to April 15, 1996. These amounts had
been funded during the same time period through advances from Adelphia.
A-23
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Prior to April 15, 2001, interest on the Senior Discount Notes is not
payable in cash, but is added to principal. Thereafter, interest is payable
semi-annually commencing October 15, 2001. The Senior Discount 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 Senior Discount 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 Senior Discount
Notes at 106.5% which declines to par in 2002, plus accrued interest.
The holders of the Senior Discount Notes may put the Senior Discount 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 Senior Discount 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.
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. As of March 31, 1998, no warrants have
been exercised.
If the Senior Discount Notes 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"). 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 commission 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 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.
A-24
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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 borrowing, payment of dividends and other
distributions, repurchase of equity interests, transactions with affiliates
and the sale of assets.
If the Senior Secured Notes had been issued on April 1, 1996, interest
expense would have been approximately $59,002 and $61,754 for the years ended
March 31, 1997 and 1998, 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"). Proceeds to the Company, net of
commissions and other transaction costs, were approximately $194,500. 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 ranks 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; 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 100% of the liquidation preference 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.
If the Preferred Stock had been issued on April 1, 1996, dividend
requirements applicable to preferred stock would have been approximately
$27,000 and $30,671 for the years ended March 31, 1997 and 1998, respectively.
A-25
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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 described above. The interest rate
on such debt ranges from 7.5% to 15.0%.
Maturities of debt for the five years after March 31, 1998 are as follows:
<TABLE>
<S> <C>
1999.................................................................. $2,599
2000.................................................................. 2,980
2001.................................................................. 2,922
2002.................................................................. 2,142
2003.................................................................. 3,459
</TABLE>
(6) COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
Hyperion's authorized capital stock consists of 300,000,000 shares of Class
A Common Stock, par value $0.01 per share, 150,000,000 shares of Class B
Common Stock, par value $0.01 per share, and 5,000,000 shares of preferred
stock, par value $0.01 per share. On May 8, 1998, Hyperion completed the IPO
(See Note 1).
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. The Class B
Common Stock is convertible into one share of Class A Common Stock. In the
event a cash dividend is paid, the holders of the Class A and the Class B
Common Stock will be paid an equal amount.
Prior to the IPO, certain key company officers (the "Officers") were parties
to a stockholder agreement, as amended (the "Stockholder Agreement") with
Adelphia. The Stockholder Agreement provided, among other things, (i) that
upon the earlier of (a) the termination of employment of any of the officers
or (b) after October 7, 1998, such officers may put their 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 of
1933 (the "Securities Act") and (ii) for certain buy/sell and termination
rights and duties among Adelphia and the Officers. 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"). Adelphia also agreed to vote its shares in the
Company to elect each officer to the Board of Directors of the Company as long
as such person is both an employee and a stockholder of the Company.
The Company also entered into Term Loan and Stock Pledge Agreements ("Loan
Agreements") with each of the Officers. Pursuant to the Loan Agreements, each
Officer borrowed $1.0 million from the Company. Each
A-26
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
of these loans accrued interest at the average rate at which the Company could
invest cash on a short-term basis, was secured by a pledge of the borrower's
Common Stock in the Company, and would mature 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 Officers have the right to sell at least $1.0
million worth of their shares. Each Loan Agreement also provided that any
interest accruing on a loan from the date six months after the date of such
loan would be offset by a bonus payment when principal and interest thereon
are due and which would include additional amounts to pay income taxes
applicable to such bonus payment.
Pursuant to agreements among the Company, Adelphia and the Officers,
simultaneous with the consummation of the IPO, (i) the Stockholder Agreement
and Loan Agreements terminated, (ii) the Officers each repaid the $1 million
borrowed from the Company pursuant to the Loan Agreements plus accrued
interest thereon by each selling 66,667 shares of Class B Common Stock to
Adelphia and using the proceeds therefrom to repay such loans and (iii) the
Company has paid or 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.
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 split on April 28, 1998.
WARRANTS
Class A Common Stock Warrant
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 was exercised during May 1998 for no additional
consideration.
Class B Common Stock Warrants
The Class B Common Stock warrants were issued on April 15, 1996 in
connection with the issuance of the Senior Discount Notes (See Note 5).
MCI Warrant
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 for $6.15 per share to MCI (the "MCI Warrant") representing
21/2% of the Common Stock of the Company on a fully diluted basis. MCI could
receive additional warrants to purchase up to an additional 6% of the shares
of the Company's
A-27
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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.
In connection with the IPO and the related over-allotment option, the
Company and MCI entered into an agreement that provides as follows with
respect to the MCI Warrant and MCI's right to receive additional MCI warrants
as a result of the IPO (the "Additional MCI Warrants"): (i) the Additional MCI
Warrants issued with respect to the shares sold to the public in the IPO, the
over-allotment option 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 IPO (the "IPO Price"), and (ii) Adelphia has agreed to
purchase from MCI the MCI Warrant and the Additional MCI Warrants 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.
LONG-TERM INCENTIVE COMPENSATION PLAN
On October 3, 1996, the Board of Directors and stockholders of the Company
approved the Company's 1996 Long-Term Incentive 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 was 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, April
1, 1997 and April 1, 1998, the Company issued 338,000 shares, 58,500 shares
and 58,500, respectively, of Class A Common Stock to Daniel R. Milliard
pursuant to his employment agreement with the Company. As of March 31, 1998,
no other stock options, stock awards, stock appreciation rights or phantom
stock units have been granted under the Plan.
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 IPO price 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
employee or director). Also in April 1998, pursuant to the then existing
Stockholder Agreement, the Company authorized the issuance under the 1996 Plan
to the Officers 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
A-28
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
to be issued to Daniel R. 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.
(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 $1,210, $1,103, and $1,236 for the years ended March 31, 1996, 1997
and 1998, respectively.
The minimum future lease obligations under the noncancelable operating
leases as of March 31, 1998 are approximately:
<TABLE>
<CAPTION>
PERIOD ENDING MARCH 31,
-----------------------
<S> <C>
1999................................................................. $112
2000................................................................. 60
2001................................................................. 23
2002................................................................. 11
2003................................................................. 2
Thereafter........................................................... --
</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 obligation under this commitment at March 31, 1998 was approximately
$4,252. 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.
A-29
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(8) RELATED PARTY TRANSACTIONS
The following table summarizes the Company's transactions with related
parties:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
REVENUES:
Management fees...................................... $1,950 $2,600 $3,809
Network monitoring fees.............................. 446 604 977
Special access fees.................................. 651 540 500
------ ------ ------
Total................................................ $3,047 $3,744 $5,286
====== ====== ======
EXPENSES:
Interest expense and fees............................ $6,088 $4,731 $5,997
Allocated corporate costs............................ 417 1,199 1,656
Fiber leases......................................... 1,022 738 47
------ ------ ------
Total................................................ $7,527 $6,668 $7,700
====== ====== ======
</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 $199, $230 and $617 for the periods ended March 31, 1996, 1997,
and 1998 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 historical 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.
A-30
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(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, 1998,
the Company had net operating loss carryforwards for federal income tax
purposes of $86,177 expiring through 2013.
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 included in other assets--net is
comprised of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Differences between book and tax basis of intangible
assets............................................... $ 197 $ 188
Net operating loss carryforwards...................... 11,539 33,918
Investment in partnerships............................ 2,793 --
Other................................................. 50 77
-------- --------
Total............................................... 14,579 34,183
Valuation allowance................................... (12,356) (17,379)
-------- --------
Total............................................... 2,223 16,804
-------- --------
DEFERRED TAX LIABILITIES:
Differences between book and tax basis of property,
plant and Equipment.................................. 2,186 12,959
Investment in partnerships............................ -- 3,808
-------- --------
Total............................................... 2,186 16,767
-------- --------
Net deferred tax asset................................ $ 37 $ 37
======== ========
</TABLE>
The net change in the valuation allowance for the years ended March 31, 1997
and 1998 was an increase of $1,897 and $5,023, respectively.
Income tax benefit (expense) for the years ended March 31, 1996, 1997 and
1998 is as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1996 1997 1998
---- ----- ----
<S> <C> <C> <C>
Current.................................................... $ (9) $ (2) $--
Deferred................................................... 206 (257) --
---- ----- ---
Total...................................................... $197 $(259) $--
==== ===== ===
</TABLE>
A-31
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
A reconciliation of the statutory federal income tax rate and the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Statutory federal income
tax rate............... 35.0 % 35.0 % 35.0 %
Change in valuation
allowance.............. (34.6) (34.6) (35.0)
State taxes, net of
federal benefit and
other.................. 1.0 (1.2) --
----- ----- -----
Income tax benefit
(expense).............. 1.4 % (0.8)% -- %
===== ===== =====
</TABLE>
(10) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables summarize the financial results of the Company for each
of the quarters in the years ended March 31, 1997 and 1998:
<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
ventures........................ (1,636) (1,362) (2,145) (2,080)
------- ------- -------- --------
Net income (loss)................ $ 551 $(8,257) $(11,339) $(11,500)
======= ======= ======== ========
Basic and diluted net 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)...... 34,206 34,492 34,492 34,492
======= ======= ======== ========
</TABLE>
A-32
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(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,
1997 1997 1997 1998
-------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues........................ $ 1,520 $ 2,187 $ 4,983 $ 4,820
-------- -------- -------- --------
Operating expenses:
Network operations............ 1,180 1,426 2,657 2,541
Selling, general and
administrative............... 2,380 2,879 3,840 5,215
Depreciation and amortization. 1,372 2,311 3,344 4,450
-------- -------- -------- --------
Total......................... 4,932 6,616 9,841 12,206
-------- -------- -------- --------
Operating loss.................. (3,412) (4,429) (4,858) (7,386)
Other income (expense):
Interest income............... 763 1,463 5,725 5,353
Interest expense and fees..... (8,077) (11,087) (16,770) (13,400)
-------- -------- -------- --------
Loss before income taxes and
equity in net loss of joint
ventures....................... (10,726) (14,053) (15,903) (15,433)
Income tax expense.............. -- -- -- --
-------- -------- -------- --------
Loss before equity in net loss
of joint ventures.............. (10,726) (14,053) (15,903) (15,433)
Equity in net loss of joint
ventures....................... (2,540) (3,886) (2,858) (3,683)
-------- -------- -------- --------
Net loss........................ (13,266) (17,939) (18,761) (19,116)
Dividend requirements applicable
to Preferred Stock............. -- -- (5,794) (6,615)
-------- -------- -------- --------
Net loss applicable to common
stockholders................... $(13,266) $(17,939) $(24,555) $(25,731)
======== ======== ======== ========
Basic and diluted net loss per
weighted average share of
common stock................... $ (0.38) $ (0.51) $ (0.70) $ (0.73)
======== ======== ======== ========
Weighted average shares of
common stock
Outstanding (in thousands)..... 34,890 34,890 34,890 35,272
======== ======== ======== ========
</TABLE>
A-33
<PAGE>
MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Class A Common Stock is listed for trading on the National
Association of Securities Dealers Automated Quotations System National Market
System (NASDAQ-NMS). Hyperion's NASDAQ-NMS symbol is "HYPT". There was no
established public trading market for the Company's Class A Common Stock until
the completion of its initial public offering in May 1998. There is no
established public trading market for the Company's Class B Common Stock.
Dividends
The Company has never declared any cash dividends on any of its respective
equity securities. Covenants in the indenture pursuant to which the Company's
Senior Discount Notes and Senior Secured Notes were issued restrict the
ability of the Company to pay cash dividends on its capital stock.
A-34
<PAGE>
PROXY
HYPERION TELECOMMUNICATIONS, INC.
This Proxy is Solicited On Behalf Of The Board of Directors Of The Company
The undersigned hereby appoints John J. Rigas, James P. Rigas and Daniel R.
Milliard, or any one or more of them, with power of substitution to each, as
proxies to represent and to vote as designated on the reverse all the shares of
Class A Common Stock, Class B Common Stock and Preferred Stock held of record at
the close of business on August 19, 1998 by the undersigned at the annual
meeting of the stockholders of Hyperion TeleCommunications, Inc. to be held at
the Coudersport Theater, Main Street, Coudersport, Pennsylvania on October 6,
1998 at 11:00 a.m. and at any adjournment thereof.
(Please sign on reverse side and return promptly)
<PAGE>
A [X] Please mark your
votes as in this
example
The Board of Directors recommends a vote "FOR" proposals numbered 1 and 2.
WITHHOLD
FOR AUTHORITY
all nominees to vote for all
listed at right nominees listed at right
1. Election of [ ] [ ]
Directors
(Instruction: To withhold authority to vote for any individual nominee, strike
a line through that nominee's name.)
Nominees:
John J. Rigas, James P. Rigas, Michael J. Rigas, Timothy J. Rigas, Daniel R.
Milliard, Charles R. Drenning, Randolph S. Fowler, Pete J. Metros, and James
L. Gray.
FOR AGAINST ABSTAIN
2. In their discretion vote upon such
other matters as may properly come
before the meeting or any adjournment
thereof. [ ] [ ] [ ]
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. Unless otherwise specified in the squares
provided, the proxies shall vote in the election of directors for the nominees
listed at left, and shall have discretionary power to vote upon such other
matters as may properly come before the meeting or any adjournment thereof.
A majority of such proxies who shall be present and shall act at the meeting
(or if only one shall be present and act, then that one) may exercise all
powers thereunder.
PLEASE FILL IN, DATE, SIGN AND MAIL THIS PROXY IN THE ENCLOSED POSTAGE-PAID
RETURN ENVELOPE.
Signature
----------------------------------
Signature Dated , 1998
---------------------------------- --------------------
IF HELD JOINTLY
NOTE: Stockholder sign here exactly as name appears hereon.
