SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______________ to
_____________
Commission File Number: 000-21605
HYPERION TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1669404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Main at Water Street
Coudersport, PA 16915-1141
(Address of principal (Zip code)
executive offices)
814-274-9830
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At November 13, 1998, 22,376,071 shares of Class A Common Stock, par
value $0.01 per share, and 32,314,761 shares of Class B Common Stock,
par value $0.01 per share, of the registrant were outstanding.
<PAGE>
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HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
Page Number
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1998 and September 30, 1998....................3
Condensed Consolidated Statements of Operations - Three and six months ended
September 30, 1997 and 1998....................................................................4
Condensed Consolidated Statements of Cash Flows - Six months ended
September 30, 1997 and 1998....................................................................5
Notes to Condensed Consolidated Financial Statements.............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................23
Item 2. Changes in Securities and Use of Proceeds......................................................23
Item 3. Defaults Upon Senior Securities................................................................23
Item 4. Submission of Matters to a Vote of Security Holders............................................23
Item 5. Other Information..............................................................................23
Item 6. Exhibits and Reports on Form 8-K...............................................................23
SIGNATURES..............................................................................................25
INDEX TO EXHIBITS.......................................................................................26
</TABLE>
<PAGE>
Item 1. Financial Statements
<TABLE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except share amounts)
<S> <C> <C>
March 31, September 30,
1998 1998
--------------- -----------------
ASSETS:
Current assets:
Cash and cash equivalents $ 230,750 $ 126,587
Due from parent - net -- 212,300
Due from affiliates - net 5,099 5,633
Other current assets 4,434 10,998
--------------- -----------------
Total current assets 240,283 355,518
U.S. government securities - pledged 70,535 57,201
Investments 50,116 57,638
Property, plant and equipment - net 250,633 349,380
Other assets - net 28,425 27,243
--------------- -----------------
Total $ 639,992 $ 846,980
=============== =================
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND (DEFICIENCY):
OTHER STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 11,775 $ 17,506
Due to parent - net 6,541 --
Accrued interest and other current liabilities 4,687 7,282
-------------- -----------------
Total current liabilities 23,003 24,788
13% Senior Discount Notes due 2003 215,213 213,124
12 1/4% Senior Secured Notes due 2004 250,000 250,000
Note payable - Adelphia 35,876 --
Other debt 27,687 26,691
-------------- -----------------
Total liabilities 551,779 514,603
-------------- -----------------
12 7/8% Senior exchangeable redeemable preferred stock 207,204 221,251
-------------- -----------------
Commitments and contingencies (Note 3)
Common stock and other stockholders' equity (deficiency):
Class A common stock, $0.01 par value, 300,000,000
shares authorized, 396,500 and 22,175,682 shares
outstanding, respectively 4 222
Class B common stock, $0.01 par value, 150,000,000
shares authorized, 32,500,000 and 32,515,150 shares
outstanding, respectively 325 325
Additional paid in capital 179 294,260
Class A common stock warrants 13,000 --
Class B common stock warrants 11,087 4,483
Loans to stockholders (3,000) --
Accumulated deficit (140,586) (188,164)
-------------- -----------------
Total common stock and other stockholders' equity (deficiency) (118,991) 111,126
-------------- -----------------
Total $ 639,992 $ 846,980
============== =================
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except per share amounts)
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- ---------------------------
1997 1998 1997 1998
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 2,187 $ 12,098 $ 3,707 $ 19,733
------------- ------------ ------------- -------------
Operating expenses:
Network operations 1,426 7,056 2,606 12,045
Selling, general and administrative 2,879 10,391 5,259 18,823
Depreciation and amortization 2,311 9,843 3,683 15,963
------------- ------------ ------------- -------------
Total 6,616 27,290 11,548 46,831
------------- ------------ ------------- -------------
Operating loss (4,429) (15,192) (7,841) (27,098)
Other income (expense):
Interest income 1,372 4,169 2,043 8,404
Interest income - affiliate 91 2,995 183 4,819
Interest expense (11,087) (12,535) (19,164) (26,239)
Other income -- 113 -- 1,113
------------- ------------ ------------- -------------
Loss before income taxes and
equity in net loss of joint ventures (14,053) (20,450) (24,779) (39,001)
Income tax expense -- -- -- --
------------- ------------ ------------- -------------
Loss before equity in net loss
of joint ventures (14,053) (20,450) (24,779) (39,001)
Equity in net loss of joint ventures (3,886) (2,614) (6,426) (5,804)
------------- ------------ ------------- -------------
Loss before extraordinary gain (17,939) (23,064) (31,205) (44,805)
Extraordinary gain on repurchase of debt -- 237 -- 237
------------- ------------ ------------- -------------
Net loss (17,939) (22,827) (31,205) (44,568)
Dividend requirements applicable to preferred stock -- (7,026) -- (13,833)
------------- ------------ ------------- -------------
Net loss applicable to common stockholders $ (17,939) $ (29,853) $ (31,205) $ (58,401)
============= ============ ============= =============
Basic and diluted net loss per weighted average
share of common stock $ (0.51) $ (0.54) $ (0.89) $ (1.13)
============= ============ ============= =============
Weighted average shares of
common stock outstanding 34,890 55,497 34,890 51,804
============= ============ ============= =============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six months
Ended September 30,
--------------------------------
<S> <C> <C>
1997 1998
--------------- ---------------
Cash flows from operating activities:
Net loss $ (31,205) $ (44,568)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 2,776 14,103
Amortization 907 1,860
Noncash interest expense 16,101 16,197
Equity in net loss of joint ventures 6,426 5,804
Issuance of Class A common stock bonus 27 761
Extraordinary gain on repurchase of debt -- (237)
Change in operating assets and liabilities net of effects of acquisitions:
Other assets - net (1,206) (9,287)
Accounts payable 5,673 6,982
Accrued interest and other -- 1,533
--------------- ---------------
Net cash used in operating activities (501) (6,852)
--------------- ---------------
Cash flows from investing activities:
Expenditures for property, plant and equipment (26,231) (111,695)
Investments in joint ventures (26,640) (13,516)
Net cash used for acquisitions (7,638) --
Investment in U. S. government securities - pledged (83,849) --
Sale of U.S. government securities - pledged -- 15,312
--------------- ---------------
Cash used in investing activities (144,358) (109,899)
--------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of Class A common stock -- 255,462
Costs associated with issuance of Class A common stock -- (14,688)
Proceeds from debt 250,000 --
Costs associated with debt financing (12,305) --
Repayment of debt (317) (19,465)
Advances from (to) related parties 1,567 (211,721)
Repayment of loans to stockholders -- 3,000
--------------- ---------------
Net cash provided by financing activities 238,945 12,588
--------------- ---------------
Increase (decrease) in cash and cash equivalents 94,086 (104,163)
Cash and cash equivalents, beginning of period 59,814 230,750
--------------- ---------------
Cash and cash equivalents, end of period $ 153,900 $ 126,587
=============== ===============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
Hyperion Telecommunications, Inc. is a majority owned subsidiary of
Adelphia Communications Corporation ("Adelphia"). The accompanying unaudited
condensed consolidated financial statements of Hyperion Telecommunications, Inc.
and its majority owned subsidiaries ("Hyperion" or the "Company") have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission.
In the opinion of management, all adjustments, consisting of only
normal recurring accruals necessary for a fair presentation of Hyperion at
September 30, 1998 and the unaudited results of operations for the three and six
months ended September 30, 1997 and 1998, have been included. These condensed
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements included in its Annual Report on
Form 10-K for the fiscal year ended March 31, 1998. The results of operations
for the three and six months ended September 30, 1998, are not necessarily
indicative of the results to be expected for the fiscal year ending March 31,
1999.
1. Significant Events Subsequent to March 31, 1998:
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 (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 (or an aggregate of approximately $49,900) and (ii)
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 a related
transaction, 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. These transactions increased the Company's
equity by approximately $285,000, while raising approximately $241,000 of net
proceeds to continue the expansion of the Company's existing markets and to
build new markets.
In connection with the IPO, Adelphia purchased all warrants, including
any antidilutive provisions, issued to MCI in connection with a previous
agreement which designated the Company as MCI's preferred provider of end use
dedicated access for all new MCI customers and of end user dedicated access
circuits resulting from conversions from incumbent LECs in the Company's
markets. Furthermore, in consideration of the obligations undertaken by Adelphia
to facilitate the agreements between MCI and the Company, the Company paid to
Adelphia a fee of $500 and issued a warrant to Adelphia to purchase 200,000
shares of Hyperion's Class A Common Stock at an exercise price equal to the IPO
price.
Through September 30, 1998, 195,965 Class B warrants were exercised and
converted into 1,187,541 shares of Class B Common Stock. Of the 1,187,541 shares
issued, 1,172,391 shares had been converted into Class A Common Stock as of
September 30, 1998. The Company received $3 in consideration for the exercise of
the Class B warrants.
On May 15, 1998, Lenfest Telephony, Inc. ("Lenfest") exercised its
warrant to receive 731,624 shares of Hyperion's Class A Common Stock. The
warrant related to the purchase by Hyperion of Lenfest's partnership interest in
the Harrisburg, Pennsylvania network on February 12, 1998. The Company received
no additional consideration for the exercise of the warrant.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
Since April 1, 1998, Hyperion entered into a series of agreements with
Qwest Communications, Williams Communications and several other fiber optic
network providers that will allow the Company to significantly increase its
presence in the eastern half of the United States. These agreements, totaling
$107,000 to be paid by Hyperion over the next two years, provide the Company
with ownership or an indefeasible right of use (IRU) to over 8,100 route miles
of fiber optic cable. Through September 30, 1998, the Company has paid $38,239
of the total due under the agreements, which was included in the property, plant
and equipment of the Company. The Company believes this will allow Hyperion to
expand its business strategy to include on-net provisioning of regional long
distance, internet and data communications and to cost-effectively further
interconnect most of its existing networks with each other and with
approximately 25 new first- and second-tier markets and 25 new third-tier
markets by the end of 2001.
During the quarter ended September 30, 1998, Hyperion paid $17,313 to
repurchase a portion of the 13% Senior Discount Notes due 2003 which had a face
value of $25,160 and a carrying value of $17,550. The notes were retired upon
repurchase which resulted in a $237 gain.
On March 24, 1998, the Federal Communications Commission ("FCC")
completed the bidding in the auction of licenses for Local Multipoint
Distribution Service ("LMDS") in which the Company, through Baker Creek
Communications, participated. In connection with the related review of bids and
final granting of licenses by the FCC, it was concluded in October 1998 that the
Company would acquire the entire interest in 195 31-GHz licenses, which cover
approximately 30% of the nation's population (in excess of 83 million people in
the eastern half of the United States) for a cost of approximately $44,605. The
Company has funded the entire license purchase price through October 26, 1998.
The Company is committed to constructing and developing associated facilities
for the use of such LMDS spectrum.
LMDS is a fixed broadband point-to-multipoint service which the FCC
anticipates will be used for the deployment of wireless local loop, high speed
data transfer and video broadcasting services. The Company currently plans to
use such spectrum for "last-mile" connectivity in certain of its markets, and
believes the spectrum to be highly complementary to its fiber-based systems. The
Company is in the process of further refining its plans for utilization of the
LMDS spectrum, which could involve substantial additional funds. There can be no
assurances that the Company will develop and implement a successful and
profitable LMDS strategy or that the LMDS spectrum will provide a cost-effective
means to connect to end user locations.
The Company has made demand advances to Adelphia which totaled $211,000
as of September 30, 1998. The Company received interest on the advances at a
rate of 6.305%.
On November 4, 1998, the Company entered into purchase agreements with
subsidiaries of MediaOne of Colorado, Inc. ("MediaOne"), its local partners in
the Jacksonville, FL and Richmond, VA networks, whereby MediaOne will receive
approximately $82,751 in cash for MediaOne's ownership interests in these
networks. In addition, the Company will be responsible for the payment of fiber
lease liabilities due to MediaOne in the amount of approximately $14,500 which
are generally payable over the next ten years. Upon consummation of this
transaction, which is subject to normal closing conditions and receipt of
regulatory approvals, the Company's ownership interest in each of these networks
will increase to 100%.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
2. Investments:
The equity method of accounting is used to account for investments in
joint ventures in which the Company holds less than a majority interest. Under
this method, the Company's initial investment is recorded at cost and
subsequently adjusted for the amount of its equity in the net income or losses
of its joint ventures. Dividends or other distributions are recorded as a
reduction of the Company's investment. Investments in joint ventures accounted
for using the equity method reflect the Company's equity in their underlying net
assets.
The Company's nonconsolidated investments are as follows:
<TABLE>
<S> <C> <C> <C>
Ownership March 31, September 30,
Percentage 1998 1998
--------------- ------------ ----------------
MediaOne Fiber Technologies (Jacksonville) 20.0 % $ 7,979 $ 7,979
Multimedia Hyperion Telecommunications (Wichita) 49.9 3,900 4,668
MediaOne of Virginia (Richmond) 37.0 7,212 7,212
PECO-Hyperion (Philadelphia) 50.0 21,150 27,775
PECO-Hyperion (Allentown, Bethlehem, Easton, Reading) 50.0 1,750 3,550
Hyperion of York 50.0 3,500 5,127
Allegheny Hyperion Telecommunications 50.0 -- 1,475
Entergy Hyperion Telecommunications of Louisiana 50.0 3,000 4,922
Entergy Hyperion Telecommunications of Mississippi 50.0 3,275 5,346
Entergy Hyperion Telecommunications of Arkansas 50.0 3,550 5,631
Baker Creek Communications 49.9 (1) 10,009 5,154
Other Various 1,323 1,325
------------ ----------------
66,648 80,164
Cumulative equity in net losses (16,532) (22,526)
------------ ----------------
Total $ 50,116 $ 57,638
============ ================
<FN>
(1) 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 195 31-Ghz licenses, which cover approximately 30%
of the nation's population - in excess of million people in the eastern
half of the United States. The Company funded $10,000 of such purchase in
January 1998, a portion of which was refunded. In connection with the FCC's
full review of all bids and the granting of final licenses it was concluded
that the Company, through Baker Creek Communications, would acquire the
entire interest in the 195 licenses for a total cost of approximately
$44,605, all of which was paid as of October 26, 1998. See Note 1 of the
Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
Summarized combined unaudited financial information for the Company's
nonconsolidated investments being investments listed above being accounted for
using the equity method of accounting as of September 30, 1998 for the periods
ended, is as follows:
March 31, September 30,
1998 1998
----------- ---------------
Current assets $ 7,476 $ 7,072
Property, plant and equipment -net 153,495 177,597
Other non-current assets 13,454 3,382
Current liabilities 13,422 10,237
Non-current liabilities 58,004 51,153
Six months ended September 30,
1997 1998
----------- ---------------
Revenues $ 5,152 $ 13,194
Net loss (8,272) (12,966)
3. Commitments and Contingencies:
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations for a discussion of material commitments and
contingencies.
4. Net Loss Per Weighted Average Share of Common Stock:
Net loss per weighted average share of common stock is computed based on
the weighted average number of common shares outstanding after giving effect to
dividend requirements on the Company's preferred stock. Diluted net loss per
common share is equal to basic net loss per common share because additional
warrants outstanding had an anti-dilutive effect for the periods presented;
however, these warrants could have a dilutive effect on earnings per share in
the future.
5. Supplemental Financial Information:
For the six months ended September 30, 1998, the Company paid interest
of $15,312. For the six months ended September 30, 1997, no cash was paid for
interest.
Accumulated depreciation of property, plant and equipment amounted to
$14,251 and $28,354 at March 31, 1998 and September 30, 1998, respectively.
6. Recent Accounting Pronouncements:
Statement of Financial Accounting Standards ("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 established
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
assets or liabilities in the statement of financial position and measure those
instruments at fair market value. Management of the Company has not evaluated
the impact of SFAS No. 133.
-------------------------------------------------
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction
with the Company's unaudited Condensed Consolidated Financial Statements and the
Notes thereto appearing elsewhere in this Form 10-Q and the Company's audited
Consolidated Financial Statements and Notes thereto filed on Form 10-K for the
fiscal year ended March 31, 1998.
Overview
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-Q, including Management's Discussion and Analysis of Financial Condition
and Results of Operations, is forward-looking, such as information relating to
the effects of future regulation, future capital commitments and the effects of
competition. Such forward-looking information involves important risks and
uncertainties that could significantly affect expected results in the future
from those expressed in any forward-looking statements made by, or on behalf of,
the Company. These risks and uncertainties include, but are not limited to,
uncertainties relating to economic conditions, acquisitions and divestitures,
government and regulatory policies, the pricing and availability of equipment,
materials, and inventories, technological developments, year 2000 issues,
actions of competitors and changes in the competitive environment in which the
Company operates. Unless otherwise stated, the information contained in this
Form 10-Q is as of and for the six months ended September 30, 1997 and 1998.
The "Company" or "Hyperion" means Hyperion Telecommunications, Inc.
together with its majority-owned subsidiaries, except where the context
otherwise requires. Unless the context otherwise requires, references herein to
the "networks" or the "Company's networks" mean the (a) 22 telecommunications
networks in operation or under construction (the "Existing Networks") owned as
of September 30, 1998 by 20 Operating Companies (which, as defined herein, are
(i) wholly and majority owned subsidiaries of the Company or (ii) joint venture
partnerships and corporations managed by the Company and in which the Company
holds less than a majority equity interest with one or more other partners) and
(b) additional networks planned for development (the "New Networks") as of such
date.
The Company, through its Operating Companies, provides a competitive
alternative to the telecommunications services offered by the incumbent local
exchange carriers ("LECs") in its markets. The Operating Companies' customers
are principally small, medium and large businesses and government and
educational end users as well as Interexchange or Long Distance Carriers
("IXCs") and other telecommunications providers. 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 September 30, 1998, the Company's Operating Companies are made up
of ten wholly-owned subsidiaries (through which the Company has an interest in
11 networks), one partnership in which it is a majority owner and nine joint
venture investments (through which the Company has an interest in ten networks)
in which the Company owns 50% or less. Results of the wholly and majority owned
subsidiaries and partnerships 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 and results of operations utilizing the equity method of accounting.
Correspondingly, the Company's initial investments in these Operating Companies
have been carried at cost, and subsequently have been adjusted for the Company's
pro rata share of the Operating Companies' net losses, additional capital
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
contributions to the Operating Companies, and distributions from the Operating
Companies to the Company. Hyperion's weighted average ownership in these
Operating Companies is 79%, based upon gross property plant and equipment.
The Company initiated its switched services deployment plan in 1997 and
currently provides switched services in 20 markets, one of which was placed in
operation during the three month period ended September 30, 1998. Switches for
the remaining markets are expected to be operational during 1998. In the
Existing Networks, the Company estimates that there are approximately 13.2
million business access lines in service. With the expansion of the Company's
business into the New Networks, the Company anticipates that its total
addressable market will exceed $40 billion annually or 20 million access lines.
The Company has experienced initial success in the sale of business access lines
with approximately 93,960 access lines sold as of September 30, 1998, of which
approximately 77,134 lines are installed. As of September 30, 1998,
approximately 66% of these access lines are provisioned entirely on the
Company's network ("on-net lines") with the remainder being a combination of
unbundled loops or total service resale from LEC networks.
Recent Developments
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 (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 (or an aggregate of approximately $49,900) and (ii)
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 a related
transaction, 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. These transactions increased the Company's
equity by approximately $285,000, while raising approximately $241,000 of net
proceeds to continue the expansion of the Company's existing markets and to
build new markets.
In connection with the IPO, Adelphia purchased all warrants, including
any antidilutive provisions, issued to MCI in connection with a previous
agreement which designated the Company as MCI's preferred provider of end use
dedicated access for all new MCI customers and of end user dedicated access
circuits resulting from conversions from incumbent LECs in the Company's
markets. Furthermore, in consideration of the obligations undertaken by Adelphia
to facilitate the agreements between MCI and the Company, the Company paid to
Adelphia a fee of $500 and issued a warrant to Adelphia to purchase 200,000
shares of Hyperion's Class A Common Stock at an exercise price equal to the IPO
price.
Through September 30, 1998, 195,965 Class B warrants were exercised and
converted into 1,187,541 shares of Class B Common Stock. Of the 1,187,541 shares
issued, 1,172,391 shares had been converted into Class A Common Stock as of
September 30, 1998. The Company received $3 in consideration for the exercise of
the Class B warrants.
On May 15, 1998, Lenfest Telephony, Inc. ("Lenfest") exercised its
warrant to receive 731,624 shares of Hyperion's Class A Common Stock. The
warrant related to the purchase by Hyperion of Lenfest's partnership interest in
the Harrisburg, Pennsylvania network on February 12, 1998. The Company received
no additional consideration for the exercise of the warrant.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
Since April 1, 1998, Hyperion entered into a series of agreements with
Qwest Communications, Williams Communications and several other fiber optic
network providers that will allow Hyperion to significantly increase its
presence in the eastern half of the United States. These agreements, totaling
$107,000 to be paid by Hyperion over the next two years, provide Hyperion with
ownership or an indefeasible right of use to over 8,100 route miles of fiber
optic cable. Through September 30, 1998, the Company has paid $38,239 of the
total due under the agreements, which was included in the property, plant and
equipment of the Company. The Company believes this will allow Hyperion to
expand its business strategy to include on-net provisioning of regional long
distance, internet and data communications and to cost effectively further
interconnect most of its existing networks with each other and with New Networks
serving approximately 25 new first- and second-tier markets and 25 new
third-tier markets by the end of 2001.
During the quarter ended September 30, 1998, Hyperion paid $17,313 to
repurchase a portion of the 13% Senior Discount Notes due 2003 which had a face
value of $25,160 and a carrying value of $17,550. The notes were retired upon
repurchase which resulted in a $237 gain.
On March 24, 1998, the Federal Communications Commission ("FCC")
completed the bidding in the auction of licenses for Local Multipoint
Distribution Service ("LMDS") in which the Company, through Baker Creek
Communications, participated. In connection with the related review of bids and
final granting of licenses by the FCC, it was concluded in October 1998 that the
Company would acquire the entire interest in 195 31-GHz licenses, which cover
approximately 30% of the nation's population (in excess of 83 million people in
the eastern half of the United States) for a cost of approximately $44,605. The
Company has funded the entire license purchase price through October 26, 1998.
The Company is committed to constructing and developing associated facilities
for the use of such LMDS spectrum.
LMDS is a fixed broadband point-to-multipoint service which the FCC
anticipates will be used for the deployment of wireless local loop, high speed
data transfer and video broadcasting services. The Company currently plans to
use such spectrum for "last-mile" connectivity in certain of its markets, and
believes the spectrum to be highly complementary to its fiber-based systems. The
Company is in the process of further refining its plans for utilization of the
LMDS spectrum, which could involve substantial additional funds. There can be no
assurances that the Company will develop and implement a successful and
profitable LMDS strategy or that the LMDS spectrum will provide a cost-effective
means to connect to end user locations.
On November 4, 1998, the Company entered into purchase agreements with
subsidiaries of MediaOne of Colorado, Inc. ("MediaOne"), its local partners in
the Jacksonville, FL and Richmond, VA networks, whereby MediaOne will receive
approximately $82,751 in cash for MediaOne's ownership interests in these
networks. In addition, the Company will be responsible for the payment of fiber
lease liabilities due to MediaOne in the amount of approximately $14,500 which
are generally payable over the next ten years. Upon consummation of this
transaction, which is subject to normal closing conditions and receipt of
regulatory approvals, the Company's ownership interest in each of these networks
will increase to 100%.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
Results of Operations
Three Months Ended September 30, 1998 in Comparison with Three Months Ended
September 30, 1997
Revenues increased 453% to $12,098 for the three months ended September
30, 1998, from $2,187 for the same quarter in the prior fiscal year. Growth in
revenues of $9,911 resulted from an increase in revenues from majority and
wholly-owned Operating Companies of approximately $9,828 as compared to the same
period in the prior fiscal year due to the continued expansion of the Company's
customer base, its success in the roll out of switched services as a result of
the retail end user strategy adopted by the Company and the consolidation of the
Buffalo, Syracuse, New Jersey, Louisville, Lexington and Harrisburg networks.
Network operations expense increased 395% to $7,056 for the three
months ended September 30, 1998 from $1,426 for the same quarter in the prior
fiscal year. The increase was attributable to the expansion of operations at the
NOCC, and the increased number and size of the operations of the Operating
Companies which resulted in increased employee related costs and equipment
maintenance costs and the consolidation of the Buffalo, Syracuse, New Jersey,
Louisville, Lexington and Harrisburg networks.
Selling, general and administrative expense increased 261% to $10,391
for the three months ended September 30, 1998 from $2,879 for the same quarter
in the prior fiscal year. The increase was due primarily to an increase in the
sales force in the Existing Networks and an increase in corporate overhead costs
to accommodate the growth in the number, size and operations of Operating
Companies managed and monitored by the Company, as well as the consolidation of
the Buffalo, Syracuse, New Jersey, Louisville, Lexington and Harrisburg
networks.
Depreciation and amortization expense increased 326% to $9,843 during
the three months ended September 30, 1998 from $2,311 for the same quarter in
the prior fiscal year primarily as a result of increased amortization of
deferred financing costs and increased depreciation resulting from the higher
depreciable asset base at the NOCC and the majority and wholly owned Operating
Companies and the consolidation of the Buffalo, Syracuse, New Jersey,
Louisville, Lexington and Harrisburg networks.
Interest income for the three months ended September 30, 1998 increased
204% to $4,169 from $1,372 for the same quarter in the prior fiscal year as a
result of increased cash and cash equivalents and U.S. Government securities due
to the investment of the proceeds of the 12 1/4% Senior Secured Notes, the 12
7/8% Senior Exchangeable Redeemable Preferred Stock and the IPO.
Interest income - affiliate for the three months ended September 30,
1998 increased to $2,995 from $91 as a result of demand advances made to
Adelphia during the current period.
Interest expense increased 13% to $12,535 during the three months ended
September 30, 1998 from $11,087 for the same period in the prior fiscal year.
The increase was attributable to higher interest expense associated with the
accretion of the 13% Senior Discount Notes and interest on the 12 1/4% Senior
Secured Notes, partially offset by the reduction of interest expense associated
with the reduced amounts payable to Adelphia.
Equity in net loss of joint ventures decreased by 33% to $2,614 during
the three months ended September 30, 1998 from $3,886 for the same quarter in
the prior fiscal year. The net losses of the nonconsolidated Operating Companies
for the three months ended September 30, 1998 were primarily the result of
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
increased revenues only partially offsetting startup and other costs and
expenses associated with design, construction, operation and management of the
networks of the Operating Companies, and the effect of the typical lag time
between the incurrence of such costs and expenses and the subsequent generation
of revenues by a network. The decrease was also due to the consolidation of the
Buffalo, Syracuse, New Jersey, Louisville, Lexington and Harrisburg networks for
the current period.
The number of nonconsolidated Operating Companies paying management
fees to the Company decreased from 12 at September 30, 1997 to 8 at September
30, 1998 due to the Company's increased ownership in certain Operating
Companies. These Operating Companies and networks under construction paid
management and monitoring fees to the Company, which are included in revenues,
aggregating approximately $917 for the three months ended September 30, 1998, as
compared with $839 for the same quarter in the prior fiscal year. The
nonconsolidated Operating Companies' net losses, including networks under
construction, for the three months ended September 30, 1997 and 1998 aggregated
approximately $4,645 and $6,101 respectively.
Preferred stock dividends for the three months ended September 30, 1998
of $7,026 related to the 12 7/8% Senior Exchangeable Redeemable Preferred Stock.
For the same quarter in the prior fiscal year, the Company had not issued any
preferred stock.
Six Months Ended September 30, 1998 in Comparison with Six Months Ended
September 30, 1997
Revenues increased 432% to $19,733 for the six months ended September
30, 1998, from $3,707 for the same period in the prior fiscal year. Growth in
revenues of $16,026 resulted from an increase in revenues from majority and
wholly-owned Operating Companies of approximately $16,029 as compared to the
same period in the prior fiscal year due to the continued expansion of the
Company's customer base, its success in the roll out of switched services as a
result of the retail ended user strategy adopted by the Company and the
consolidation of the Buffalo, Syracuse, New Jersey, Louisville, Lexington and
Harrisburg networks.
Network operations expense increased 362% to $12,045 for the six months
ended September 30, 1998 from $2,606 for the same period in the prior fiscal
year. The increase was attributable to the expansion of operations at the NOCC,
and the increased number and size of the operations of the Operating Companies
which resulted in increased employee related costs and equipment maintenance
costs and the consolidation of the Buffalo, Syracuse, New Jersey, Louisville,
Lexington and Harrisburg networks.
Selling, general and administrative expense increased 258% to $18,823
for the six months ended September 30, 1998 from $5,259 for the same period in
the prior fiscal year. The increase was due primarily to an increase in the
sales force in the Existing Networks and an increase in corporate overhead costs
to accommodate the growth in the number, size and operations of Operating
Companies managed and monitored by the Company, as well as the consolidation of
the Buffalo, Syracuse, New Jersey, Louisville, Lexington and Harrisburg
networks.
Depreciation and amortization expense increased 333% to $15,963 during
the six months ended September 30, 1998 from $3,683 for the same period in the
prior fiscal year primarily as a result of increased amortization of deferred
financing costs and increased depreciation resulting from the higher depreciable
asset base at the NOCC and the majority and wholly owned Operating Companies and
the consolidation of the Buffalo, Syracuse, New Jersey, Louisville, Lexington
and Harrisburg networks.
Interest income for the six months ended September 30, 1998 increased
311% to $8,404 from $2,043 for the same period in the prior fiscal year as a
result of increased cash and cash equivalents and U.S. Government securities due
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
to the investment of the proceeds of the 12 1/4% Senior Secured Notes, the 12
7/8% Senior Exchangeable Redeemable Preferred Stock and the IPO.
Interest income - affiliate for the six months ended September 30, 1998
increased to $4,819 from $183 as a result of demand advances made to Adelphia
during the current period.
Interest expense increased 37% to $26,239 during the six months ended
September 30, 1998 from $19,164 for the same period in the prior fiscal year.
The increase was attributable to higher interest expense associated with the
accretion of the 13% Senior Discount Notes and interest on the 12 1/4% Senior
Secured Notes, partially offset by the reduction of interest expense associated
with the reduced amounts payable to Adelphia.
Equity in net loss of joint ventures decreased by 10% to $5,804 during
the six months ended September 30, 1998 from $6,426 for the same period in the
prior fiscal year. The net losses of the nonconsolidated Operating Companies for
the six months ended September 30, 1998 were primarily the result of increased
revenues only partially offsetting startup and other costs and expenses
associated with design, construction, operation and management of the networks
of the Operating Companies, and the effect of the typical lag time between the
incurrence of such costs and expenses and the subsequent generation of revenues
by a network. The decrease was also due to the consolidation of the Buffalo,
Syracuse, New Jersey, Louisville, Lexington and Harrisburg networks for the
current period.
The number of nonconsolidated Operating Companies paying management
fees to the Company decreased from 12 at September 30, 1997 to 8 at September
30, 1998 due to the Company's increased ownership in certain operating
companies. These Operating Companies and networks under construction paid
management and monitoring fees to the Company, which are included in revenues,
aggregating approximately $1,659 for the six months ended September 30, 1998, as
compared with $1,669 for the same period in the prior fiscal year. The
nonconsolidated Operating Companies' net losses, including networks under
construction, for the six months ended September 30, 1997 and 1998 aggregated
approximately $8,272 and $12,966 respectively.
Preferred stock dividends for the six months ended September 30, 1998
of $13,833 related to the 12 7/8% Senior Exchangeable Redeemable Preferred
Stock. For the same period in the prior fiscal year, the Company had not issued
any preferred stock.
Supplementary Proportionate Share Operating Company Financial Analysis
The Company believes that working with Local Partners to develop
markets has enabled the Company to build larger networks in a rapid and cost
effective manner. 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.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
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 ownership percentage as of September 30, 1998. All historical
results of operations are presented as if Hyperion's ownership percentage as of
September 30, 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.
<TABLE>
Summary proportionate share information:
Three Months Ended Six Month Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1997 1998 1997 1998
-------------- ------------ ------------ ------------
Proportionate revenue $ 3,745 $ 14,248 $ 6,543 $ 23,090
Proportionate EBITDA (3,629) (6,259) (7,094) (13,225)
Proportionate operating loss (9,013) (17,925) (16,245) (32,907)
Proportionate net loss applicable to common stockholders (20,001) (30,466) (35,245) (59,367)
Proportionate capital expenditures 18,537 80,121 58,076 128,277
Proportionate gross property, plant and equipment 220,850 464,742 220,850 464,742
</TABLE>
For the three months ended September 30, 1998, proportionate revenue
increased 280% to $14,248 as compared to $3,745 for the same quarter in the
prior fiscal year. The increase in revenues resulted from the continued
expansion of the Company's customer base and its success in the roll out of
switched services as a result of the retail end user strategy adopted by the
Company. During the September, 1998 quarter, the Company initiated switched
services in one of its markets, bringing the total number of markets offering
switched services to 20. During the three months ended September 30, 1998, the
Operating Companies installed 30,057 additional access lines, bringing total
installed access lines to 77,134 with total sales of 93,960 access lines as of
September 30, 1998.
For the three months ended September 30, 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 $6,259 as compared to $3,629 for the
same quarter in 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
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
EBITDA loss for three months ended September 30, 1998 was due primarily to
increased selling, general, and administrative expenses as a result of the
increase in direct sales and marketing distribution channels as the Company has
aggressively moved to an end-user strategy over the past year, focusing on
medium to large business customers, governmental and educational end-user and
other telecommunications service providers.
For the three months ended September 30, 1998, proportionate operating
loss was $17,925 as compared to $9,013 for the same quarter in the prior fiscal
year. The increase in proportionate operating loss was due primarily to the
above mentioned increase in selling, general and administrative expenses and
increased depreciation and amortization expense resulting from a higher
depreciable asset base.
For the three months ended September 30, 1998 proportionate net loss
applicable to common stockholders was $30,466 as compared to $20,001 for the
same quarter in the prior fiscal year. The increase in proportionate net loss
applicable to common stockholders 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.
During the three months ended September 30, 1998, the Company and its
Operating Companies invested $92,157 in capital expenditures, of which
Hyperion's proportionate share was $80,121. As of September 30, 1998, total
gross property plant and equipment of the Company and its Operating Companies
was $587,850, of which Hyperion's proportionate share is $464,742 or 79%.
For the six months ended September 30, 1998, proportionate revenue
increased 253% to $23,090 as compared to $6,543 for the same period in the prior
fiscal year. The increase in revenues resulted from the continued expansion of
the Company's customer base and its success in the roll out of switched services
as a result of the retail end user strategy adopted by the Company.
For the six months ended September 30, 1998, proportionate EBITDA loss
was $13,225 as compared to $7,094 for the same period in the prior fiscal year.
The increase in proportionate EBITDA loss for six months ended September 30,
1998 was due primarily to increased selling, general, and administrative
expenses as a result of the increase in direct sales and marketing distribution
channels as the Company has aggressively moved to an end-user strategy over the
past year, focusing on medium to large business customers, governmental and
educational end-user and other telecommunications service providers.
For the six months ended September 30, 1998, proportionate operating
loss was $32,907 as compared to $16,245 for the same period in the prior fiscal
year. The increase in proportionate operating loss was due primarily to the
above mentioned increase in selling, general and administrative expenses and
increased depreciation and amortization expense resulting from a higher
depreciable asset base.
For the six months ended September 30, 1998 proportionate net loss
applicable to common stockholders was $59,367 as compared to $35,245 for the
same period in the prior fiscal year. The increase in proportionate net loss
applicable to common stockholders 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.
During the six months ended September 30, 1998, the Company and its
Operating Companies invested $146,152 in capital expenditures, of which
Hyperion's proportionate share was $128,277.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
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 $26,231 and $111,695 for the six months ended September 30, 1997 and 1998,
respectively. Further, investments made by the Company in nonconsolidated
Operating Companies were $26,640 and $13,516 for the six months ended September
30, 1997 and 1998, respectively. The significant increase in capital
expenditures for the six months ended September 30, 1998 as compared with the
same period in the prior fiscal year is largely attributable to the capital
expenditures necessary in the markets in which the Company purchased its local
partners' interests, the capital expenditures necessary to develop new and
existing markets and payments that were required relating to the fiber purchases
previously discussed. The Company expects that it will continue to have
substantial capital and investment commitments. The Company also expects to
continue to fund operating losses as the Company develops and grows its
business. For information regarding recent transactions affecting the Company's
liquidity and capital resources, see "Recent Developments."
The Company has experienced negative operating cash flow since its
inception. A combination of operating losses, substantial capital investments
required to build the Company's networks and its state-of-the-art NOCC, and
incremental investments in the Operating Companies has resulted in substantial
negative cash flow.
The competitive local telecommunications 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 Network Operating Control Central ("NOCC") and
Existing Networks, (iii) the design, construction and development of new
networks and (iv) the acquisition of additional ownership interests in Existing
Networks or new networks. The Company estimates that it will require
approximately $460 million to fund anticipated capital expenditures, working
capital requirements and operating losses of the Company, to increase its
ownership interest in existing networks and to invest in its existing and its
planned new Operating Companies from October 1, 1998 through the end of calendar
1999. Expansion of the Company's networks will include the geographic expansion
of the Company's Existing Networks and the construction of new networks over the
next several years. The Company expects to build these new networks in
additional markets, which in some cases may include additional partnerships with
utility partners. Also, in the future, the Company may increase its ownership
interests in Existing Networks. The expectations of required future capital
expenditures are based on the Company's current estimate. The Company may, at
its option, significantly reduce its capital spending on both new and existing
networks which may have a material adverse impact on the Company's future
anticipated growth. Correspondingly, 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 will not otherwise very significantly from the Company's plans. In
addition to the foregoing, the Company, through Baker Creek Communications, paid
$39,451 on October 26, 1998 for the purchase of LMDS spectrum in the LMDS
Auction.
The Company currently expects that its existing cash balance, demand
advances to Adelphia, internally generated funds and future financing sources
will be sufficient to fund the Company's capital expenditures, operating losses
and pro rata investments in the Operating Companies through the end of fiscal
2000. There can be no assurance, however, as to the availability of funds from
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
internal cash flow, Local Partner investments or from the private or public
equity or debt markets. Also, the indentures relating to the 13% Senior Discount
Notes (the "Senior Notes") and the 12 1/4% Senior Secured Notes (the "Senior
Secured Notes") and the Certificate of Designation for the 12 7/8% Senior
Exchangeable Redeemable Preferred Stock provide certain restrictions upon the
Company's ability to incur additional indebtedness. The Company's inability to
fund its capital expenditures, operating losses or pro rata investment in the
Operating Companies could have a material adverse effect upon the Company and/or
the Operating Companies.
Year 2000 Issues
The year 2000 issue refers to the inability of computerized systems and
technologies to recognize and process dates beyond December 31, 1999. The
Company is evaluating the impact of the year 2000 issue on its business
applications and its products and services. The evaluation includes a review of
the Company's information technology systems, telephony equipment and other
embedded technologies. A significant portion of the Company's computerized
systems and technologies have been developed, installed or upgraded in recent
years and are generally more likely to be year 2000 ready. The Company is also
evaluating the potential impact as a result of its reliance on third-party
systems that may have year 2000 issues.
Computerized business applications that could be adversely affected by
the year 2000 issue include:
information processing and financial reporting systems
customer billing systems
customer service systems
telecommunication transmission and reception systems
facility systems
System failure or miscalculation could result in an inability to
process transactions, send invoices, accept customer orders or provide customers
with products and services. Customers could also experience a temporary
inability to receive or use the Company's products and services.
The Company has developed a program to assess and address the year 2000
issue. This program consists of the following phases:
inventorying and assessing the impact on affected technology and
systems
developing solutions for affected technology and systems
modifying or replacing affected technology and systems
testing and verifying solutions
implementing solutions
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
developing contingency plans
The Company has substantially completed inventorying and assessing the
affected computerized systems and technologies. The Company is in various stages
of its year 2000 compliance program with respect to the remaining phases as it
relates to the affected systems and technologies.
The Company has engaged a consulting firm familiar with its financial
reporting systems. This firm has developed and tested year 2000 solutions that
the Company is in the process of implementing. The Company expects its financial
reporting systems to be year 2000 compliant by June 1999.
A third-party billing vendor currently facilitates customer billing.
The Company is currently in the process of testing an in-house service ordering,
provisioning, maintenance and billing system that would replace the third-party
billing vendor. The Company expects to have this new system implemented by June
1999. On a contingency basis, the third-party vendor has provided a written
statement that it will certify it is fully year 2000 compliant by June 1999.
Telecommunication plant rebuilds and upgrades in recent years have
minimized the potential impact of the year 2000 issue on the Company's
facilities, customer service, telecommunication transmission and reception
systems. The Company is engaged in a comprehensive internal inventory and
assessment of all hardware components and component controlling software
throughout its telecommunication networks. The Company expects to implement any
hardware and software modifications, upgrades or replacements resulting from the
internal review by June 1999.
Costs incurred to date directly related to addressing the year 2000
issue have not been material. The Company has also redeployed internal resources
to meet the goals of its year 2000 program. The Company currently estimates the
total cost of its year 2000 remediation program to be approximately $500.
Although the Company will continue to incur substantial capital expenditures in
the ordinary course of meeting its telecommunications system upgrade goals
through the year 2000, it will not specifically accelerate its expenditures to
facilitate year 2000 readiness, and accordingly such expenditures are not
included in the above estimate.
The Company has begun communicating with others with whom it does
significant business to determine their year 2000 readiness and to determine the
extent to which the Company is vulnerable to year 2000 issues related to those
third parties. The Company purchases much of its technology from third parties.
There can be no assurance that the systems of other companies on which the
Company's systems rely will be year 2000 ready or timely converted into systems
compatible with the Company systems. The Company's failure or a third-party's
failure to become year 2000 ready or the Company's inability to become
compatible with third parties with which the Company has a material
relationship, may have a material adverse effect on the Company, including
significant service interruption or outages, however the Company can not
currently estimate the extent of any such adverse effects.
The Company is in the process of identifying secondary sources to
supply its systems or services in the event it becomes probable that any of its
systems will not be year 2000 ready prior to the end of 1999. The Company is
also in the process of identifying secondary vendors and service providers to
replace those vendors and service providers whose failure to be year 2000 ready
could lead to a significant delay in the company's ability to provide its
service to its customers.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
REGULATION
Telecommunications services provided by the Company and its networks
are subject to regulation by federal, state and local government agencies. At
the federal level, the FCC has jurisdiction over interstate and international
services. Jurisdictionally interstate services are communications that originate
in one state and terminate in another. Intrastate services are communications
that originate and terminate in a single state. State regulatory commissions
exercise jurisdiction over intrastate services. Additionally, municipalities and
other local government agencies may regulate limited aspects of the Company's
business, such as use of rights-of-way. Many of the regulations issued by these
regulatory bodies may be subject to judicial review, the result of which the
Company is unable to predict. The networks are also subject to numerous local
regulations such as building codes and licensing.
This section summarizes some of the more recent significant competitive
and regulatory developments in the telecommunications industry that could
potentially affect the Company, and does not purport to constitute an exhaustive
list of the legal and regulatory issues faced by the Company. For a more
detailed discussion of such legal and regulatory issues, please see the
Company's Annual Report on Form 10-K for the year ended March 31, 1998.
The Telecommunications Act of 1996 (the "Telecommunications Act")
establishes procedures under which an RBOC can enter the in-region interLATA
market upon satisfying a competitive checklist. RBOCs in the Company's operating
territories have filed applications with the FCC claiming that they have
satisfied the competitive checklist and are thus entitled to receive authority
to provide in-region interLATA services. Grant of such an application could have
a material adverse affect on the Company.
RBOCs have also recently filed petitions at the FCC requesting a waiver
of certain obligations imposed on incumbent LECs in the Telecommunications Act.
First, RBOCs have sought (with some degree of success) to provision high-speed
data services free of obligations to unbundle and offer for resale such
services. RBOCs are also seeking to provide such services on an interLATA basis
without complying with the market opening provisions of the competitive
checklist set forth in the Telecommunications Act, which otherwise would be
required of them. In addition, RBOCs have sought an FCC determination that they
need not compensate CLECs for traffic terminated to Internet Service Providers
who are customers of CLECs. If the FCC grants the RBOC petitions, such decision
could have a material adverse effect on the Company.
The FCC's Universal Service Order requires all telecommunications
carriers providing interstate telecommunications services, including the
Company, to contribute to the universal service fund. There can be no guarantee
of what effects, if any, changes in the universal service contribution factor,
which is calculated on a quarterly basis, will have on the telecommunications
industry generally, or on the Company specifically.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The attached Exhibit 99.1 provides certain financial and business
information of the Company for the three months ended September 30, 1998,
pursuant to Section 4.03(a)(iii) of the Indenture dated April 15, 1996 with
respect to the 13% Senior Discount Notes.
The attached Exhibit 99.2 provides certain financial and business
information of the Company for the three months ended September 30, 1998,
pursuant to Section 4.03(a)(iii) of the Indenture dated August 27, 1997 with
respect to the 12 1/4% Senior Secured Notes.
The attached Exhibit 99.3 provides certain financial and business
information of the Company for the three months ended September 30, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27.1 Financial Data Schedule (supplied for the information of
the Commission).
Exhibit 99.1 "Schedule E - Form of Financial Information and
Operating Data of the Subsidiaries and the Joint Ventures
Presented by Cluster".
Exhibit 99.2 "Schedule F - Form of Financial Information and
Operating Data of the Pledged Subsidiaries and the Joint
Ventures".
Exhibit 99.3 Press Release Dated November 4, 1998
<PAGE>
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYPERION TELECOMMUNICATIONS, INC.
(Registrant)
Date: November 16, 1998 By: /s/ Timothy J. Rigas
---------------------------------
Timothy J. Rigas
Vice Chairman, Chief Financial Officer
(authorized officer) and Treasurer
Date: November 16, 1998 By: /s/ Edward E. Babcock, Jr.
-------------------------------
Edward E. Babcock, Jr.
Vice President, Finance and
Chief Accounting Officer
<PAGE>
Exhibit Index
Exhibit 27.1 Financial Data Schedule (supplied for the information of
the Commission).
Exhibit 99.1 "Schedule E - Form of Financial Information and
Operating Data of the Subsidiaries and the Joint Ventures
Presented by Cluster".
Exhibit 99.2 "Schedule F - Form of Financial Information and
Operating Data of the Pledged Subsidiaries and the Joint
Ventures".
Exhibit 99.3 Press Release Dated November 4, 1998
<PAGE>
<TABLE>
Exhibit 99.1
SCHEDULE E
Hyperion Telecommunications, Inc.
Form of Financial Information and Operating Data
of the Subsidiaries and the Joint Ventures Presented by Cluster
Data presented for the quarter ended: 9/30/98
Unaudited ***
North East Mid-Atlantic Mid-South Other Networks Total
FINANCIAL DATA (dollars in thousands):
<S> <C> <C> <C> <C> <C>
Total Revenue $ 4,921.6 $ 6,953.9 $ 4,364.8 $ 3,329.7 $ 19,570.0
Total Capital Expenditures $ 3,822.6 $ 62,563.8 $ 13,744.3 $ 12,027.3 $ 92,158.0
Total EBITDA $ 1,314.7 $ (1,364.2) $ (1,788.7) $ 816.9 $ (1,021.3)
Gross PP&E $ 96,293.9 $ 275,680.1 $ 105,282.0 $ 110,593.6 $ 587,849.6
Proportional Revenue * $ 4,825.5 $ 4,583.4 $ 3,961.2 $ 868.9 $ 14,239.0
Proportional Capital Expenditures * $ 3,822.6 $ 55,239.6 $ 10,747.5 $ 10,310.9 $ 80,120.6
Proportional EBITDA * $ 1,431.0 $ (1,247.0) $ (1,302.5) $ 208.0 $ (910.5)
Proportional Gross PP&E * $ 96,293.9 $ 212,931.8 $ 86,211.4 $ 69,304.4 $ 464,741.5
STATISTICAL DATA
Increase for September 30, 1998
quarter:
Networks in Operation -- -- -- -- --
Route Miles 1 237 16 2 256
Fiber Miles 24 11,367 787 96 12,274
Buildings connected 18 47 40 4 109
LEC-COs collocated ** 2 2 3 -- 7
Voice Grade Equivalent Circuits -- -- -- -- --
As of June 30, 1998:
Networks in Operation 3 9 6 2 20
Route Miles 1,563 1,973 1,142 777 5,455
Fiber Miles 67,301 94,712 54,797 37,296 254,106
Buildings connected 372 644 594 424 2,034
LEC-COs collocated ** 14 62 22 18 116
Voice Grade Equivalent Circuits 173,544 496,032 209,352 267,072 1,146,000
As of September 30, 1998:
Networks in Operation 3 9 6 2 20
Route Miles 1,564 2,210 1,158 779 5,711
Fiber Miles 67,325 106,079 55,584 37,392 266,380
Buildings connected 390 691 634 428 2,143
LEC-COs collocated ** 16 64 25 18 123
Voice Grade Equivalent Circuits 173,544 496,032 209,352 267,072 1,146,000
Access Lines Sold 15,887 42,386 27,611 8,076 93,960
Access Lines Installed 13,577 34,629 23,085 5,843 77,134
<FN>
* Represents portion attributable to the Company.
** Local Exchange Carrier's central office
*** Other Network amounts includes Network Control Centers and Corporate Capital
Expenditures and Gross Property, Plant and Equipment
</FN>
</TABLE>
<PAGE>
Exhibit 99.2
<TABLE>
SCHEDULE F
Hyperion Telecommunications, Inc.
Form of Financial Information and Operating Data
of the Pledged Subsidiaries and the Joint Ventures
<S> <C>
Data presented for the quarter ended: 9/30/98
Unaudited
Total
FINANCIAL DATA (dollars in thousands)(a):
Total Revenue $ 8,990.8
Total Capital Expenditures $ 6,825.1
Total EBITDA $ 720.9
Gross Property, Plant & Equipment $ 170,169.9
STATISTICAL DATA(b):
As of September 30, 1998:
Networks in Operation
Route Miles 3,051
Fiber Miles 138,501
Buildings connected 1,164
LEC-COs collocated 54
Voice Grade Equivalent Circuits 583,872
Access Lines Sold 46,054
Access Lines Installed 38,097
(a) Financial Data represents 100% of the operations of all entities except
Hyperion of Florida, which is reflected at Hyperion's ownership in the
Jacksonville network, which is 20%.
(b) Statistical Data represents 100% of operating data for all entities
</TABLE>
<PAGE>
Exhibit 99.3
PRESS RELEASE
FOR RELEASE: IMMEDIATE
CONTACT: Ed Babcock, Vice President, Finance
(814) 274-9830
HYPERION TELECOMMUNICATIONS, INC. AND ITS OPERATING COMPANIES ANNOUNCE
SECOND QUARTER RESULTS
Coudersport, PA - November 4, 1998
John J. Rigas, Chairman of Adelphia Communications Corporation ("Adelphia")
(NASDAQ NNM: ADLAC) and Hyperion Telecommunications, Inc. ("Hyperion" or "the
Company") (NASDAQ NNM: HYPT) reported results of operations for Hyperion and its
Operating Companies (defined below) for the second quarter which ended on
September 30, 1998.
Due to the ownership structure of its Operating Companies, Hyperion's and its
Operating Companies' operating results are presented on both a proportionate
share presentation basis (Exhibit A below) and in accordance with generally
accepted accounting principles ("GAAP") (Exhibit B below). Proportionate share
presentation reflects 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 September 30, 1998. All proportionate share
historical results of operations are presented as if Hyperion's current
ownership percentage as of September 30, 1998 of its Operating Companies were in
place during the entire period presented. While this presentation format is not
in accordance with 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. The Company
will include operating results in accordance with GAAP in its Form 10-Q, which
will be filed with the SEC by November 16, 1998.
Second quarter results saw proportionate revenue increase 280% to $14,248,000
over the same quarter in the prior fiscal year and 61% versus the June 1998
quarter. The increase in revenues for the second quarter was primarily due to
the continued expansion of the Company's customer base and its success in the
roll out of switched services as a result of the retail end user strategy
adopted by the Company. During the second quarter, the Company successfully
launched switched services in one additional market, bringing the total number
of markets offering switched services to 20. During the September 1998 quarter,
the Operating Companies sold 29,948 additional access lines, bringing total
sales to 93,960 access lines as of September 30, 1998. (The Company counts
access lines on a one for one basis, irrespective of the number of telephone
sets in use through trunks into a PBX; that is, no multipliers are used.)
Installed lines also increased 30,057 during the September 1998 quarter,
bringing total installed access lines to 77,134 at September 30, 1998,
approximately 66% of which are provisioned completely on the Company's network
(on-net lines).
Second quarter proportionate EBITDA loss was $6,259,000 as compared to
$3,629,000 for the same quarter in the prior fiscal year and $6,966,000 in the
June 1998 quarter. The decrease in proportionate EBITDA loss for the second
quarter as compared with the June 1998 quarter was due primarily higher
revenues, better gross margins from on-net services offset by increased selling,
general, and administrative expenses as a result of the ramp up in direct sale
and marketing distribution channels.
<PAGE>
Second quarter proportionate net loss applicable to common stockholders was
$30,466,000 or ($0.55) per share as compared to $20,001,000 or ($0.57) per share
for the same quarter in the prior fiscal year and $28,901,000 or ($0.60) per
share for the June 1998 quarter. The increase in proportionate net loss for the
second quarter was due primarily to the above mentioned increase in selling,
general and administrative expenses, increased depreciation and amortization
expenses and increased interest expense and preferred stock dividends associated
with the Company's financing activities.
During the second quarter, the Company and its Operating Companies invested
$92,158,000 in capital expenditures, of which Hyperion's proportionate share was
$80,121,000. Included in this figure is $38,239,000 attributable to the
Company's inter-city long haul fiber purchases. As of September 30, 1998, total
gross property plant and equipment of the Company and its Operating Companies
was $587,850,000, of which Hyperion's proportionate share is $464,742,000, or
79%. As of September 30, 1998, the Operating Companies had approximately 5,711
route miles and 266,380 fiber miles and were connected to approximately 2,143
buildings. To date, 20 Lucent 5ESS switches or remote switching modules have
been installed to provide local telephone service.
Hyperion is a leading Competitive Local Exchange Carrier ("CLEC") that designs,
constructs, operates and manages state-of-the-art, fiber optic networks and
facilities. The Company operates one of the largest CLECs in the United States
based upon route miles and buildings connected. As of September 30, 1998 the
Company manages and operates 22 networks, 2 of which are under construction,
through (i) eight partnerships or limited liability companies with local
partners, encompassing nine networks, (ii) 10 wholly owned subsidiaries of the
Company, encompassing 11 networks, (iii) one corporation, encompassing one
network, in which the Company is a minority shareholder and (iv) one company,
encompassing one network, in which the Company is a majority equity holder
(collectively, the "Operating Companies").
Exhibit A that follows sets forth the proportionate share operating results for
Hyperion and its Operating Companies for the three and six months ended
September 30, 1997 and 1998, respectively.
Exhibit B that follows sets forth the operating results in accordance with GAAP
for Hyperion and its consolidated subsidiaries for the three and six months
ended September 30, 1997 and 1998, respectively.
<PAGE>
<TABLE>
EXHIBIT A
Hyperion Telecommunications, Inc. and its Operating Companies
Proportionate Share Operating Results (a)
Unaudited
Three Months Ended Six Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1997 1998 1997 1998
Operating Revenue $ 3,745,000 $ 14,248,000 $ 6,543,000 $ 23,090,000
Direct Operating Expenses 2,026,000 5,900,000 3,750,000 10,061,000
-------------------------------- ---------------------------
Gross Margin 1,719,000 8,348,000 2,793,000 13,029,000
Sales, General & Administrative Expenses 5,348,000 14,607,000 9,887,000 26,254,000
-------------------------------- ---------------------------
EBITDA (b) (3,629,000) (6,259,000) (7,094,000) (13,225,000)
Depreciation & Amortization Expense 5,384,000 11,666,000 9,151,000 19,682,000
-------------------------------- ---------------------------
Operating Loss (9,013,000) (17,925,000) (16,245,000) (32,907,000)
Interest Income 1,474,000 7,337,000 2,251,000 13,446,000
Interest Expense (12,462,000) (13,217,000) (21,254,000) (27,500,000)
Other Income -- 128,000 3,000 1,190,000
Extraordinary Gain on Repurchase of Debt -- 237,000 -- 237,000
-------------------------------- ---------------------------
Net Loss (20,001,000) (23,440,000) (35,245,000) (45,534,000)
-------------------------------- ---------------------------
Preferred Stock Dividends -- (7,026,000) -- (13,833,000)
-------------------------------- ---------------------------
Net Loss Applicable to Common Stockholders $(20,001,000) $(30,466,000) $(35,245,000)$(59,367,000)
================================ ===========================
Weighted Average Shares of Common Stock Outstanding 34,890,000 55,497,000 34,890,000 51,804,000
================================ ===========================
Basic and Diluted Net Loss per Weighted Average Share
of Common Stock $ (0.57) $ (0.55) $ (1.01)$ (1.15)
================================ ===========================
<FN>
(a) Proportionate share presentation reflects the collective sum of Hyperion's
economic interest in each of the Operating Companies it owns and manages at
Hyperion's ownership percentage as of September 30, 1998. All historical results
of operations are presented as if Hyperion's ownership percentage as of
September 30, 1998 of its Operating Companies was in place for the entire period
presented. While this presentation 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.
(b) Earnings before interest, income taxes, depreciation and amortization and
other income/expense ("EBITDA") and similar measures of cash flow are commonly
used in the telecommunications industry to analyze and compare
telecommunications companies on the basis of operating performance, leverage,
and liquidity. While EBITDA is not an alternative indicator of operating
performance or an alternative to cash flows from operating activities as a
measure of liquidity as defined by GAAP, and while EBITDA may not be comparable
to other similarly titled measures of other companies, management of the Company
believes that EBITDA is a meaningful measure of performance.
</FN>
</TABLE>
<PAGE>
<TABLE>
EXHIBIT B
Hyperion Telecommunications, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
Three Months Ended Six Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1997 1998 1997 1998
Revenues $ 2,187,000 $ 12,098,000 $ 3,707,000 $ 19,733,000
---------------------------------- -------------------------------
Operating Expenses
Network Operations 1,426,000 7,056,000 2,606,000 12,045,000
Selling, General & Administrative 2,879,000 10,391,000 5,259,000 18,823,000
Depreciation & Amortization Expense 2,311,000 9,843,000 3,683,000 15,963,000
---------------------------------- -------------------------------
Total 6,616,000 27,290,000 11,548,000 46,831,000
---------------------------------- -------------------------------
Operating Loss (4,429,000) (15,192,000) (7,841,000) (27,098,000)
Other Income (Expense)
Interest Income 1,372,000 4,169,000 2,043,000 8,404,000
Interest Income - Affiliate 91,000 2,995,000 183,000 4,819,000
Interest Expense (11,087,000) (12,535,000) (19,164,000) (26,239,000)
Other Income -- 113,000 -- 1,113,000
---------------------------------- -------------------------------
Loss Before Equity in Net Loss (14,053,000) (20,450,000) (24,779,000) (39,001,000)
of Joint Ventures
Equity in Net Loss of Joint Ventures (3,886,000) (2,614,000) (6,426,000) (5,804,000)
---------------------------------- -------------------------------
Loss before Extraordinary Gain on Repurchase of Debt (17,939,000) (23,064,000) (31,205,000) (44,805,000)
Extraordinary Gain on Repurchase of Debt -- 237,000 -- 237,000
---------------------------------- -------------------------------
Net Loss (17,939,000) (22,827,000) (31,205,000) (44,568,000)
Preferred Stock Dividends -- (7,026,000) -- (13,833,000)
---------------------------------- -------------------------------
Net Loss Applicable to Common Stockholders $ (17,939,000) $ (29,853,000) $(31,205,000) $(58,401,000)
================================== ===============================
Weighted Average Shares of Common
Stock Outstanding 34,890,000 55,497,000 34,890,000 51,804,000
================================== ===============================
Basic and Diluted Net Loss per Weighted Average
Share of Common Stock $ (0.51) $ (0.54) $ (0.89) $ (1.13)
================================== ===============================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE FOR HYPERION TELECMMUNICATIONS, INC. FOR THE SIX MONTHS
ENDED SEPTEMBER 31, 1998
</LEGEND>
<CIK> 0001017648
<NAME> HYPERION TELECOMMUNICATIONS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 126,587
<SECURITIES> 0
<RECEIVABLES> 217,933
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 349,380
<DEPRECIATION> 0
<TOTAL-ASSETS> 846,980
<CURRENT-LIABILITIES> 24,788
<BONDS> 489,815
0
221,251
<COMMON> 547
<OTHER-SE> 110,579
<TOTAL-LIABILITY-AND-EQUITY> 846,980
<SALES> 0
<TOTAL-REVENUES> 19,733
<CGS> 0
<TOTAL-COSTS> 46,831
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (26,239)
<INCOME-PRETAX> (39,001)
<INCOME-TAX> 0
<INCOME-CONTINUING> (39,001)
<DISCONTINUED> 0
<EXTRAORDINARY> 237
<CHANGES> 0
<NET-INCOME> (58,401)
<EPS-PRIMARY> (1.13)
<EPS-DILUTED> (1.13)
</TABLE>
