<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:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-b(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
HYPERION TELECOMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
JAMES P. RIGAS
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
[_] 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:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Note
<PAGE>
HYPERION TELECOMMUNICATIONS, INC.
One North Main Street
Coudersport, Pennsylvania 16915
Notice of Annual Meeting of Stockholders
to be held on October 25, 1999
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 Monday, October 25, 1999, at 11:00 a.m., for the following purposes:
1. To elect eight (8) Directors by vote of the holders of Class A Common
Stock, Class B Common Stock and Preferred Stock, voting together.
2. To approve a proposed amendment to Article I of the Amended and
Restated Certificate of Incorporation to change the name of Hyperion
Telecommunications, Inc. to "Adelphia Business Solutions, Inc."
3. To approve a proposed amendment to Article IV of the Amended and
Restated Certificate of Incorporation increasing the authorized number
of shares of capital stock from 455,000,000 to 1,250,000,000, the
authorized number of shares of Class A Common Stock from 300,000,000 to
800,000,000, the authorized number of shares of Class B Common Stock
from 150,000,000 to 400,000,000 and the authorized number of shares of
Preferred Stock from 5,000,000 to 50,000,000.
4. 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 September 14,
1999, 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
John J. Rigas
Chairman of the Board
October __, 1999
<PAGE>
HYPERION TELECOMMUNICATIONS, INC.
ONE NORTH MAIN STREET
Coudersport, Pennsylvania 16915
PROXY STATEMENT FOR ANNUAL MEETING
OF STOCKHOLDERS
October 25, 1999
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 Monday, October 25, 1999, at the Coudersport Theater, Main Street,
Coudersport, Pennsylvania. The address of the principal executive offices of
the Company is One North Main Street, Coudersport, Pennsylvania 16915, and the
date this proxy statement was first mailed to stockholders was on or about
October __, 1999. A copy of the Annual Report to Stockholders for the nine
months ended December 31, 1998 is being furnished with this proxy statement.
Only stockholders of record as of the close of business on September 14,
1999 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 23,512,785 shares of Class A Common Stock, $.01 par value (the
"Class A Common Stock"), 31,181,077 shares of Class B Common Stock, $.01 par
value (the "Class B Common Stock") and 250,165 shares of 12-7/8% Senior
Exchangeable Redeemable Preferred Stock due 2007 (the "Preferred Stock"). With
respect to the matters described in this proxy statement, the holders of Class A
Common Stock, Class B Common Stock and 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. The presence, in person or by proxy, of holders of a majority of
the votes of all outstanding shares of the Company's capital stock entitled to
vote is necessary to constitute a quorum at the Annual Meeting. A majority of
the votes of all outstanding shares of the Company's capital stock entitled to
vote and represented at the Annual Meeting are required for the adoption of the
proposals described below, except that the directors shall be elected by a
plurality of the votes of the shares of capital stock present in person or
represented by proxy at the Annual Meeting and entitled to vote on the election
of directors.
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, FOR the approval of the amendment to Article I of the
Amended and Restated Certificate of Incorporation to change the name of the
Company to "Adelphia Business Solutions, Inc." and FOR the approval of the
amendment to Article IV of the Amended and Restated Certificate of Incorporation
to increase the authorized number of shares of capital stock. 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.
At the Annual Meeting, the proposals will be decided by the affirmative
vote of a majority of the votes of all outstanding shares of the Company's
capital stock entitled to vote and represented at the meeting, except that the
directors shall be elected by a plurality of the votes of the shares of capital
stock present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. Abstentions and broker non-votes will be
2
<PAGE>
counted as shares present for purposes of determining whether a quorum is
present. Abstentions will count as shares entitled to vote and represented at
the Annual Meeting and not voting in favor of the proposals. Broker non-votes
will not count as shares entitled to vote and represented at the Annual Meeting
and will not be included in calculating the number of votes necessary for
approval of the proposals described below.
PROPOSAL 1
ELECTION OF DIRECTORS
Description of Board of Directors
The Bylaws of the Company provide for the Board of Directors to be elected
by a plurality of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of directors by the
holders of Class A Common Stock, the holders of Class B Common Stock and the
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 eight (8) directors,
six 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 duly elected and 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, Pete Metros, James L. Gray, Edward S. Mancini and Peter
L. Venetis on behalf of all of the stockholders of the Company. All nominees
except , Mr. Metros, Mr. Gray, Mr. Mancini and Mr. Venetis 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. This is the first time that
Mr. Mancini and Mr. Venetis are being nominated for election as directors of the
Company.
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. Six of the current directors of the
Company are nominees for reelection as directors.
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Nominees for Election of Directors
John J. Rigas
Age 74
John J. Rigas is the Chairman of the Board of the Company. He also is the
founder, Chairman, Chief Executive Officer and President of Adelphia
Communications Corporation ("Adelphia"). Mr. Rigas has owned and operated cable
television systems since 1952. Among his business and community service
activities, Mr. Rigas is Chairman of the Board of Directors of Citizens Bank
Corp., Inc., Coudersport, Pennsylvania and a member of the Board of Directors of
the Charles Cole Memorial Hospital. He is a director of the National Cable
Television Association and a member of its Pioneer Association and a past
President of the Pennsylvania Cable Television Association. He is also a member
of the Board of Directors of C-SPAN and the Cable Advertising Bureau, and is a
Trustee of St. Bonaventure University. He graduated from Rensselaer Polytechnic
Institute with a B.S. in Management Engineering in 1950.
John J. Rigas is the father of Michael J. Rigas, Timothy J. Rigas and James
P. Rigas, each of whom currently serves as a director and executive officer of
the Company, and is the father-in-law of Peter L. Venetis who is nominated to
serve as a director of the Company.
James P. Rigas
Age 41
James P. Rigas is Vice Chairman, Chief Executive Officer, Chief Operating
Officer and a Director of the Company, Executive Vice President, Strategic
Planning and a Director of Adelphia and a Vice President and Director of
Adelphia's other subsidiaries. He has been with Adelphia since 1986. Mr. Rigas
graduated from Harvard University (magna cum laude) in 1980 and received a Juris
Doctor degree and an M.A. degree in Economics from Stanford University in 1984.
From June 1984 to February 1986, he was a consultant with Bain & Co., a
management consulting firm.
Michael J. Rigas
Age 45
Michael J. Rigas is Vice Chairman and a Director of the Company, Executive
Vice President, Operations and a Director of Adelphia and a Vice President and
Director of Adelphia's other subsidiaries. He has been with Adelphia since
1981. From 1979 to 1981, he worked for Webster, Chamberlain & Bean, a
Washington, D.C. law firm. Mr. Rigas graduated from Harvard University (magna
cum laude) in 1976 and received his Juris Doctor degree from Harvard Law School
in 1979.
Timothy J. Rigas
Age 43
Timothy J. Rigas is Vice Chairman, Chief Financial Officer, Treasurer and a
Director of the Company, Executive Vice President, Treasurer and a Director of
Adelphia, and a Vice President and Director of Adelphia's other subsidiaries.
He has been with Adelphia since 1979. Mr. Rigas graduated from the University
of Pennsylvania, Wharton School, with a B.S. degree in Economics (cum laude) in
1978.
4
<PAGE>
Pete J. Metros
Age 59
Pete J. Metros became a director of Hyperion on April 1, 1997. Mr. Metros
is the Managing Director of Mannesmann Dematic Systems - worldwide. On February
1, 1998, he was appointed to the Board of Directors of Mannesmann Dematic AG,
headquartered in Wetter, Germany. He continues to be the President and a member
of the Board of Directors for Mannesmann Dematic Rapistan Corporation (since
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 has served as a director of Adelphia since 1986 and received a BS degree
from Georgia Institute of Technology in 1962.
James L. Gray
Age 64
James L. Gray became a director of Hyperion on April 1, 1997. Mr. Gray has
been chairman & CEO of PRIMESTAR Partners since January 1995. Mr. Gray has more
than 20 years of experience in the telecommunications, cable and satellite
industries. He joined Warner Cable in 1974, and advanced through several
division operating posts prior to being named president of Warner Cable in 1986.
In 1992, after the merger of Time Inc. and Warner Communications, Mr. Gray was
appointed vice chairman of Time Warner Cable where he served until his
retirement in 1993. Mr. Gray has served on the boards of several
telecommunications companies and associations, including the National Cable
Television Association, where he served as a director from 1986 to 1992, and
Turner Broadcasting System, where he served as a director from 1987 to 1991. He
also served as chairman of the executive committee and director of C-SPAN and as
a director of E! Entertainment Television, Cable in the Classroom and the Walter
Kaitz Foundation. Beginning in 1992, Mr. Gray began serving on PRIMESTAR's
board of directors. 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.
Peter L. Venetis
Age 42
Peter L. Venetis is President and Chief Executive Officer of the Atlantic
Bank of New York. Mr. Venetis also serves as a member of Atlantic Bank's Board
of Directors and as Chairman of the Executive Committee of the Board. Mr.
Venetis joined Atlantic Bank as its Chief Executive Officer in 1992. From 1986
to 1992, Mr. Venetis was a Director in the Leveraged Finance Group at Salomon
Brothers, Inc. in New York. Mr. Venetis is also a board member of the NY Metro
Chapter of the Young President's Organization and is a Trustee of the Churchill
School and Center in Manhattan. Mr. Venetis graduated from Columbia University
(cum laude) in 1979 and received his MBA in Finance and International Business
from the Columbia University Graduate School of Business in 1981.
Edward S. Mancini
Age 39
Edward S. Mancini is President/Owner of Artistic Stitches, Inc. From 1989
to 1993, Mr. Mancini was Vice President-Media Lending at Canadian Imperial Bank
of Commerce. From 1986 to 1989, Mr. Mancini was in the corporate training
program at Chase Manhattan Bank. Mr. Mancini received has Masters of Science,
Finance and Accounting from Texas A&M University in 1986.
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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 met one time during 1998. The Board of Directors
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 of Directors and the investing public. The
Audit Committee met once to review the Company's financial condition and results
of operations for the nine months ended December 31, 1998. The Board of
Directors met or acted by written consent in lieu of meeting nine times during
the nine months ended December 31, 1998. Each director attended at least 75% of
the meetings of the Board of Directors and the respective committees of which
each is a member.
Recommendation of the Board of Directors
The Board of Directors of the Company recommends a vote FOR each of the
nominees named above for election as directors.
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EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding compensation
paid by the Company for services rendered during the years ended March 31, 1997
and 1998 and the nine and twelve months ended December 31, 1998 to the Company's
Chief Executive Officer and the three executive officers whose compensation
exceeded $100,000 in salary and bonus during the nine months ended December 31,
1998:
Compensation
<TABLE>
<CAPTION>
Long Term
Compensation
---------------- All Other
Restricted Compensation
Name and Principal Position(a) Period (b) Salary Bonus Stock Awards (h)
- ------------------------------- ------------------------- -------------- ------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
James P. Rigas(c).............. 9 months ended 12/98 $171,003 $ --- $ --- $11,431(i)
Chief Executive Officer 12 months ended 12/98 229,385 --- --- 11,431(i)
12 months ended 3/98 213,011 --- --- 11,410(i)
12 months ended 3/97 206,857 --- --- 11,410(i)
Daniel R. Milliard(d).......... 9 months ended 12/98 $176,438 $ --- $760,500(e) $ 5,340(j)
President, Vice Chairman 12 months ended 12/98 238,191 --- 760,500(e) 5,340(j)
and Secretary 12 months ended 3/98 229,810 --- 27,000(f) 5,340(j)
12 months ended 3/97 238,863 75,000 156,000(g) 5,340(j)
Charles R. Drenning............ 9 months ended 12/98 $126,575 $50,000 $ --- $10,000(k)
Senior Vice President 12 months ended 12/98 174,041 50,000 --- 33,400(k)
12 months ended 3/98 167,712 30,000 --- 93,000(k)
12 months ended 3/97 167,712 12,500 --- 46,475(k)
Randolph S. Fowler............. 9 months ended 12/98 $126,575 $50,000 $ --- $10,000(k)
Senior Vice President 12 months ended 12/98 174,041 50,000 --- 33,400(k)
12 months ended 3/98 167,712 30,000 --- 93,000(k)
12 months ended 3/97 167,712 12,500 --- 46,475(k)
</TABLE>
____________
(a) John J. Rigas, Michael J. Rigas and Timothy J. Rigas are not employed by
the Company but are compensated by Adelphia for services to the Company
pursuant to employment agreements with Adelphia. The Company does not
reimburse Adelphia directly 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) The twelve months ended December 31, 1998 includes three months
compensation from the fiscal year ended March 31, 1998.
(c) During the periods presented through December 31, 1998, James P. Rigas 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 did not directly reimburse Adelphia for
Mr. Rigas' base salary, insurance premium payments and other benefits paid
by Adelphia. Effective January 1, 1999, the Company employed Mr. Rigas
directly.
(d) 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. Mr. Milliard resigned as President and
Secretary
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of the Company effective as of September 20, 1999, although he will
continue to serve as a director of the Company until the 1999 annual
stockholders meeting.
(e) 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, 1998, the 58,500 shares are not subject to vesting,
will participate in any dividends, and had a value of approximately
$760,500 as of April 1, 1998. As of December 31, 1998, the 455,000
aggregate shares of restricted stock bonus awards held by Mr. Milliard had
a value of approximately $6,881,875.
(f) 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.
(g) 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.
(h) Does not include the value of certain non-cash compensation to each
respective named individual which did not exceed the lesser of $50,000 or
10% of such individual's total salary shown in the table.
(I) Nine and twelve months ended December 31, 1998 and fiscal years ended March
31, 1998 and 1997 amounts include (i) life insurance premiums paid during
each respective fiscal period pursuant to the employment agreement of James
P. Rigas with Adelphia, in the premium payment amounts of $10,681 during
the nine and twelve months ended December 31, 1998 and $10,660 during each
of the fiscal years ended March 31, 1998 and 1997, on policies owned by Mr.
Rigas and (ii) $750 in matching contributions for Mr. Rigas under
Adelphia's 401(k) savings plan for the nine and twelve months ended
December 31, 1998 and each of the fiscal years ended March 31, 1998 and
1997.
(j) Nine and twelve months ended December 31, 1998 and fiscal years ended March
31, 1998 and 1997 amounts include (i) life insurance premiums paid during
each respective fiscal period pursuant to the employment agreement of
Daniel R. Milliard with Adelphia or the Company, in the premium payment
amounts of $4,590 during each such period on policies owned by Mr. Milliard
and (ii) $750 in matching contributions for Mr. Milliard under Adelphia's
401(k) savings plan for the nine and twelve months ended December 31, 1998
and each of the fiscal years ended March 31, 1998 and 1997.
(k) Amounts represent interest accrued during (i) the period April 1, 1998 to
May 8, 1998 for the nine months ended December 31, 1998, (ii) the period
January 1, 1998 to May 8, 1998 for the twelve months ended December 31,
1998 and (iii) each of the fiscal years ended March 31, 1998 and 1997 in
connection with certain loans with the Company which were repaid by the
named individuals in May 1998. See "Certain Transactions" in this proxy
statement. As of April 1999, Mr. Fowler and Mr. Drenning were no longer
officers or employees of the Company.
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. In April 1998, the Company authorized the granting of certain stock
8
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awards and stock options to certain executive officers of the Company. See
"Certain Transactions."
Employment Contracts
The Company and Mr. Milliard are parties to an employment agreement which
provided for his employment as President 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 March 31, 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; except,
that prior to the Company's May 1998 public offering of Class A common stock,
the Company granted stock bonuses in lieu of any stock options required to be
granted under the employment agreement, such stock bonuses being 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 was used to
repay outstanding loans to Adelphia, and (v) certain employee benefits. It is
expected that all such stock options or stock bonuses will be granted under the
1996 Plan. The initial term of the 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, non-competition and non-solicitation of customers, suppliers
and employees. Mr. Milliard resigned as president and secretary of the Company
and senior vice president and secretary of Adelphia effective as of September
20, 1999 although he will continue to serve as a director of the Company until
the 1999 annual stockholders meeting.
Each of Messrs. Drenning and Fowler had employment agreements with the
Company which expired on October 20, 1998. The employment agreements provided
for base salary, bonuses and benefits, and contained noncompetition and
nondisclosure provisions. The employment agreements also provided 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.
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 of Directors 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.
9
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Executive compensation decisions during the nine-month period ended
December 31, 1998 were addressed by the Compensation Committee of the Board of
Directors (see "Election of Directors--Audit and Compensation Committees and
Meetings of the Board of Directors"), composed of two independent, non-employee
directors, Pete J. Metros and James L. Gray.
The Compensation Committee 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.
During the nine-month period ended December 31, 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 and the Compensation Committee
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 non-salary compensation of Mr. Milliard reflected in his employment
agreement with the Company 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. Mr. Milliard did not
receive additional bonus compensation during the nine-month period ended
December 31, 1998.
The Chief Executive Officer of the Company, James P. Rigas, was not
directly compensated by the Company during the nine-month period ended December
31, 1998. His services, as well as the services of certain other executive
officers of the Company and other employees of Adelphia were paid for directly
by Adelphia. Adelphia has historically charged the Company directly 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. Effective January 1, 1999, Mr. Rigas was
employed by the Company directly.
COMPENSATION COMMITTEE
Pete J. Metros
James L. Gray
10
<PAGE>
Compensation Committee Interlocks and Insider Participation
James Gray and Pete Metros serve as members of the Compensation Committee
of the Board of Directors. Neither Mr. Gray nor Mr. Metros is or has been an
officer or employee of the Company.
11
<PAGE>
Stock Performance Graph
The following graph compares the percentage change in the cumulative total
shareholder return on the weighted average of the Company's Class A Common Stock
("Hyperion Class A Common Stock") during the period from May 5, 1998 through
December 31, 1998 with the cumulative total return on the Standard & Poor's 500
Stock Index and with a selected peer group of five companies engaged in the
competitive access/telephony industry: Allegiance Telecom Inc. (Class A); GST
Telecommunications Inc. (Class A); ICG Communications Inc. (Class A); RCN Corp.
(Class A) and US Lec Corp. (Class A). The returns of each component issuer in
the foregoing peer group have been weighted according to the respective issuer's
market capitalization. The comparison assumes $100 was invested on May 5, 1998
in the Company's Class A Common Stock and in each of the foregoing indices, and
also assumes reinvestment of dividends.
[GRAPH APPEARS HERE]
COMPARISON OF 11 MONTH CUMULATIVE TOTAL RETURN*
AMONG HYPERION TELECOMMUNICATIONS, INC., THE S & P 500 INDEX
AND A PEER GROUP
Cumulative Total Return
-------------------------------------
5/5/98 6/98 9/98 12/98 3/99
HYPERION TELECOMMUNICATIONS, INC. 100 98 37 95 76
PEER GROUP 100 97 63 81 125
S & P 500 100 102 92 111 117
* $100 INVESTED ON 5/5/98 IN STOCK OR INDEX -
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDED MARCH 31.
12
<PAGE>
Certain Transactions
During the period April 1, 1998 to May 8, 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 the nine months ended December 31, 1998 was approximately
$0.7 million. As discussed below, on December 31, 1998, no amount was
outstanding on the Adelphia note. Also, during the nine months ended December
31, 1998, the Company made advances to Adelphia periodically, for which the
Company earned interest totaling approximately $8.4 million. During the period
April 1, 1998 to December 31, 1998, the largest amount due from Adelphia at the
end of any quarter was approximately $212.3 million.
Messrs. Drenning and Fowler and former officer Paul Fajerski (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. As of September 30, 1999, none of the Management Stockholders was an
employee of the Company
The Company also had 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, was 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 are parties to 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.
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 the nine months ended December 31, 1998, the Company incurred
charges from Adelphia of approximately $3.0 million for the provision to the
Company of shared corporate overhead services in areas such as
13
<PAGE>
personnel, payroll, management information services, computer 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 the nine
months ended December 31, 1998, the Company (i) paid Adelphia or certain of
Adelphia's affiliates, fiber lease payments of approximately $0.1 million and
(ii) paid to entities owned by members of the Rigas Family who are executive
officers of the Company approximately $1.0 million for property, plant and
equipment and services.
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 (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). At December 31, 1998, no Rigas Options or
Rigas Grants have been granted. Also in April 1998, pursuant to an existing
agreement, the Company authorized the issuance under the 1996 Plan to each of
Messrs. Drenning 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. As of September 30, 1999, the only Management Stockholder who was an
employee or director was Mr. Fowler.
On March 2, 1999, Highland Holdings, a partnership owned by the Rigas
Family, purchased directly from the Company $100 million aggregate principal
amount of the Company's 12% Senior Subordinated Notes due 2007 at a purchase
price equal to the principal amount less the discount to the initial purchasers
of the other $200 million of such notes sold on that date.
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. To the Company's knowledge, based solely on a review of the
copies of such reports furnished to the Company or written representations that
no other reports were required, the Company's directors, officers and more than
ten percent stockholders filed on a timely basis all reports
14
<PAGE>
due under Section 16(a) for the period from April 1, 1998 through December 31,
1998, except that each of Edward Babcock and James Rigas was late filing one
report covering one transaction, and Mr. Metros was late filing two reports each
covering one transaction.
15
<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 September 2, 1999 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 September 2, 1999, there were 23,512,785 shares of Class A Common Sock
outstanding and 31,181,077 shares of Class B Common Stock outstanding. Unless
otherwise indicated, each of the stockholders in the table has sole voting and
investment power with respect to the shares beneficially owned.
<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).................................. 515,500 -- 0.9%
James P. Rigas (a)................................. 542,500 -- 1.0%
Michael J. Rigas (a)............................... 502,500 -- 0.9%
Timothy J. Rigas (a)............................... 492,500 -- 0.9%
Daniel R. Milliard................................. 576,250(d) -- 1.1%
Randolph S. Fowler................................. (b) 1,124,978 2.1%
Pete J. Metros..................................... 3,000 -- --
James L. Gray...................................... 5,000 -- --
All executive officers and directors as a group
(eight persons)(a)................................ 8,126,417(e) 30,250,044(e) 70.2%
Ardsley Advisory Partners
646 Steamboat Road
Greenwich, Connecticut 06836...................... 1,485,000(f) -- 2.7%
</TABLE>
_____________
(a) The business address of Adelphia Communications Corporation is One North
Main 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, James P. Rigas, Michael J. Rigas, Timothy J. Rigas and
Daniel R. Milliard. Share amounts shown for John J. Rigas, James P. Rigas,
Michael J. Rigas and Timothy J. Rigas each include 492,500 of the same
Class A Common Stock shares held by a Rigas family partnership in which
each of them is a general partner.
(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 (1) vote per share and
holders of Class B Common Stock are entitled to ten (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 A Common
Stock into which Class B Common Stock may be converted 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 71.0% of the Class A Common Stock as of such date.
(d) Mr. Milliard shares voting and investment power over 40,000 of such shares
with his spouse. The amount shown includes 81,250 shares subject to stock
options granted on April 1, 1999 exercisable within 60 days from the date
of this filing.
16
<PAGE>
(e) 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, James
P. Rigas, Michael J. Rigas, Timothy J. Rigas and Daniel R. Milliard. The
information presented excludes 1,621,501 shares of Class A Common Stock
issuable under warrants held by Adelphia.
(f) According to a Schedule 13G, the named entity and Philip J. Hempleman, its
managing partner, share or may be deemed to share voting and investment
power over the shares shown, which represent 6.6% of the outstanding Class
A Common Stock and all of which are held by discretionary accounts managed
by them.
17
<PAGE>
PROPOSAL 2
CHANGE OF NAME
On September 22, 1999, the Board of Directors adopted a resolution to amend
the Company's Amended and Restated Certificate of Incorporation to change the
name of the Company from "Hyperion Telecommunications, Inc." to "Adelphia
Business Solutions, Inc." On July 1, 1999, the Company and Adelphia
Communications Corporation ("Adelphia"), the Company's majority owner, announced
their decision to align the strengths of both organizations and develop a single
brand in the communications marketplace by operating the Company under the doing
business as (d.b.a.) name of Adelphia Business Solutions.
Management believes that this change represents another important step in
creating a single brand in the converging markets of voice, video and data for
both residential and business customers. As comprehensive communications
providers of a broad range of services, the Company and Adelphia will focus on
creating brand equity under the Adelphia Business Solutions name for business
customers, and residential customers. It is anticipated that the Company will
pay Adelphia a licensing fee, to be negotiated on a basis which management
believes is no more or less favorable than the Company could obtain from an
unrelated third party, for the use of Adelphia's name and trademarks as part of
joint marketing initiatives.
The Board of Directors believes that the Company and its stockholders would
benefit from the proposed name change.
The following is the proposed amendment to Article I of the Company's
Amended and Restated Certificate of Incorporation:
ARTICLE I
The name of this corporation is Adelphia Business Solutions, Inc.
The Board of Directors recommends a vote FOR the amendment to change the
name of the Company to "Adelphia Business Solutions, Inc."
18
<PAGE>
PROPOSAL 3
INCREASE IN AUTHORIZED CAPITAL STOCK
On September 22, 1999, the Board of Directors adopted a resolution
proposing that Article IV of the Amended and Restated Certificate of
Incorporation of the Company be amended to increase the authorized number of
shares of Capital Stock of the Company from 455,000,000 to 1,250,000,000, to
increase the authorized number of shares of Class A Common Stock of the Company
from 300,000,000 to 800,000,000, to increase the authorized number of shares of
Class B Common Stock from 150,000,000 to 400,000,000 and to increase the
authorized number of shares of Preferred Stock from 5,000,000 to 50,000,000. On
September 2, 1999, 23,512,785 shares of Class A Common Stock were issued and
outstanding, and 276,487,215 shares were authorized but not outstanding
(although 31,181,077 of such shares are reserved for issuance upon conversion of
the issued and outstanding Class B Common Stock), 31,181,077 shares of Class B
Common Stock were issued and outstanding and 118,818,923 shares were authorized
but not outstanding and 250,165 shares of Preferred Stock were issued and
outstanding and 4,749,835 shares were authorized but not outstanding. After
approval of the proposed amendment by the stockholders, the Company will have
the authority to issue 800,000,000 shares of Class A Common Stock of which
776,487,215 will be authorized but not outstanding, 400,000,000 shares of Class
B Common Stock of which 368,818,923 shares will be authorized but not
outstanding and 50,000,000 shares of Preferred Stock of which 49,749,835 shares
will be authorized but not outstanding. The additional 1,145,306,138 shares of
common stock would each be part of existing classes of common stock and, if and
when issued, would have the same respective rights and privileges as the shares
of common stock presently issued and outstanding.
In the judgment of the Board of Directors, the additional shares of common
stock should be authorized so that they will be available for issuance from time
to time by action of the Board of Directors if need therefore should arise; for
example, if it should become desirable to implement financing through the sale
of additional shares of common stock, make an acquisition by the issuance of
common stock, or effect a stock dividend or stock split. The Board of Directors
believes that increasing the authorized shares of common stock would enable it,
if it so chooses, to take actions promptly on behalf of the Company that may
involve the issuance of additional shares of common stock without the delay
necessarily incident to the convening of a stockholders meeting. After adoption
of the proposed amendment, the Board of Directors, without further action by the
stockholders, would have authority to issue additional authorized and unissued
shares of common stock at such times, for a consideration of such character and
value (not less than par), and upon such terms, as it may deem advisable and in
accordance with the Delaware General Corporation Law. In certain circumstances,
a vote of the stockholders on the issuance of additional shares may be required
under the rules of the National Association of Securities Dealers. The Board of
Directors believes it is prudent for the Company to have this flexibility. The
holders of the Company's common stock are not entitled to preemptive rights.
Accordingly, the issuance of additional shares of common stock might
dilute, under certain circumstances, the ownership and voting rights of
stockholders. The proposed increase in the number of shares of common stock the
Company is authorized to issue is not intended to inhibit a change of control of
the Company. The availability for issuance of additional shares of common stock
could discourage, or make more difficult, efforts to obtain control of the
Company. For example, the issuance of shares of common stock in a public or
private sale, merger or similar transaction would increase the number of
outstanding shares, thereby possibly diluting the interest of a party attempting
to obtain control of the Company. The Company is not aware of any pending or
threatened efforts to acquire control of the Company.
As of the date of this proxy statement, the Board of Directors does not
have any plans, agreements or commitments for the issuance of additional shares
of common stock for which the current authorized but unissued shares of common
stock would be insufficient for any such stock issuance without the adoption of
the proposed amendment to the Company's Amended and Restated Certificate of
Incorporation.
19
<PAGE>
The Board of Directors also believes that it is advisable to authorize the
issuance of 45,000,000 additional shares of Preferred Stock. The additional
Preferred Stock would be available to the Company for issuance in one or more
series as determined in the future by the Board of Directors. The Board of
Directors would be empowered to fix, among other things, the designation of and
number of shares to comprise each series and the relative rights, preferences
and privileges of shares of each series, including the dividends payable
thereon, voting rights, conversion rights, the price and terms on which shares
may be redeemed, the amounts payable upon such shares in the event of voluntary
or involuntary liquidation and any sinking fund provisions for redemption or
purchases of such shares. The Board of Directors believes that increasing the
authorized shares of Preferred Stock would provide the Company with additional
flexibility concerning possible future acquisitions and financing and enable it
to quickly capitalize on such opportunities.
As of the date of this proxy statement, the Board of Directors does not
have any plans, agreements or commitments for the issuance of additional shares
of Preferred Stock.
There may be, however, certain disadvantages to the additional flexibility
afforded the Company as a result of the authorization of the additional shares
of Preferred Stock. The adoption of the proposed amendment will permit the
Company to issue additional shares of Preferred Stock having voting rights, thus
diluting the voting and ownership interest of existing stockholders. The Board
of Directors could also issue Preferred Stock having terms that could discourage
an acquisition attempt or other transaction that some stockholders might believe
to be in their best interest or in which stockholders might receive a premium
for their stock over the then-current market price of such stock. The Board of
Directors of the Company does not have any commitment or understanding relating
to the issuance of the Preferred Stock in any future transaction.
The following is the proposed amendment to the first paragraph of Article
IV of the Company's Amended and Restated Certificate of Incorporation:
ARTICLE IV
The total number of shares of capital stock of all classes which the
Corporation shall have the authority to issue is 1,250,000,000 shares which
shall be divided as follows: (i) 800,000,000 shares of Class A Common Stock,
par value $0.01 per share (the "Class A Common Stock"); (ii) 400,000,000 shares
of Class B Common Stock, par value $0.01 per share (the "Class B Common Stock")
(collectively, the Class A Common Stock and the Class B Common Stock is referred
to herein as the "Common Stock"); and (iii) 50,000,000 shares of the Preferred
Stock, par value $0.01 per share (the "Preferred Stock"). The designations and
the powers; preferences; and relative, participating, optional or other rights
of the capital stock; and the qualifications, limitations or restrictions
thereof are as follows:
If the proposed amendment is adopted by the stockholders, we plan to file a
Certificate of Amendment to the Amended and Restated Certificate of
Incorporation to be effective as soon as practicable following the Annual
Meeting.
The Board of Directors recommends a vote FOR the amendment to increase the
authorized capital stock of the Company.
20
<PAGE>
TRANSITION REPORT ON FORM 10-K TO THE SECURITIES
AND EXCHANGE COMMISSION
A COPY OF THE TRANSITION REPORT ON FORM 10-K (EXCLUDING EXHIBITS) OF THE
COMPANY FOR THE PERIOD FROM APRIL 1, 1998 TO DECEMBER 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
TELECOMMUNICATIONS, INC., ONE NORTH MAIN STREET, COUDERSPORT, PENNSYLVANIA
16915.
OTHER MATTERS
The Company knows of no other matters to be presented for action at the
Annual Meeting. If any other matters should properly come before the Annual
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 the nine-month period
ended December 31, 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 2000 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, 2000.
21
<PAGE>
APPENDIX A
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Selected Financial Data................................................................ A-2
Management's Discussion and Analysis of Financial Condition and Results of Operations.. A-5
Quantitative and Qualitative Disclosure About Market Risk.............................. A-14
Independent Auditors' Report........................................................... A-15
Consolidated Balance Sheets, March 31, 1998 and December 31, 1998...................... A-16
Consolidated Statements of Operations, Years Ended March 31, 1997 and 1998 and
Nine Months Ended December 31, 1998................................................ A-17
Consolidated Statements of Common Stock and Other Stockholders' Equity (Deficiency),
Years Ended March 31, 1997 and 1998 and Nine Months Ended December 31, 1998........ A-18
Consolidated Statements of Cash Flows, Years Ended March 31, 1997 and 1998 and
Nine Months Ended December 31, 1998................................................ A-19
Notes to Consolidated Financial Statements............................................. A-20
Market for the Company's Common Equity and Related Stockholder Matters................. A-39
</TABLE>
A-1
<PAGE>
The following selected consolidated financial data as of and for each of
the four years in the period ended March 31, 1998 and the nine months ended
December 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 the years ended March 31, 1997 and 1998 and the nine months ended
December 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, 1995, 1996 and 1997 and the
statement of operations data and the other Company data with respect to the
fiscal years ended March 31, 1995 and 1996 have been derived from audited
consolidated financial statements of the Company not included herein.
<TABLE>
<CAPTION>
Nine Months
------------------------------------------- Ended
Year Ended March 31, December 31,
------------------------------------------- ----------------
1995 1996 1997 1998 1998
--------- --------- --------- ---------- ----------------
Statement of Operations Data (a): (Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues......................................................... $ 1,729 $ 3,322 $ 5,088 $ 13,510 $ 34,776
Operating expenses:
Network operations.............................................. 1,382 2,690 3,432 7,804 18,709
Selling, general and administrative............................. 2,524 3,084 6,780 14,314 35,341
Depreciation and amortization................................... 463 1,184 3,945 11,477 26,671
-------- -------- -------- --------- ---------
Operating loss................................................... (2,640) (3,636) (9,069) (20,085) (45,945)
Gain on sale of investment....................................... --- --- 8,405 --- ---
Interest income.................................................. 39 199 5,976 13,304 10,233
Interest income--affiliate....................................... --- --- --- --- 8,395
Interest expense and fees........................................ (3,321) (6,088) (28,377) (49,334) (38,638)
Other income..................................................... --- --- --- --- 1,113
Equity in net loss of joint ventures............................. (1,799) (4,292) (7,223) (12,967) (9,580)
Net loss......................................................... (7,692) (13,620) (30,547) (69,082) (74,185)
Dividend requirements applicable to preferred stock.............. --- --- --- (12,409) (21,117)
Net loss applicable to common stockholders....................... (7,692) (13,620) (30,547) (81,491) (95,302)
Basic and diluted net loss per weighted average
share of common stock........................................... $(0.24) $(0.42) $(0.89) $(2.33) $(1.80)
Common stock dividends........................................... --- --- --- --- ---
Other Company Data (a):
EBITDA (b)....................................................... $ (2,177) $ (2,452) $ (5,124) $ (8,608) $ (19,274)
Capital expenditures and Company investments (c)................. 10,376 18,899 79,396 132,889 215,770
Cash used in operating activities................................ (2,130) (833) (4,823) (6,333) (8,810)
Cash used in investing activities................................ (10,376) (18,899) (72,818) (266,604) (200,458)
Cash provided by financing activities............................ 12,506 19,732 137,455 443,873 221,088
</TABLE>
<TABLE>
<CAPTION>
As of March 31, As of December 31,
------------------------------------------- ------------------
1995 1996 1997 1998 1998
--------- --------- --------- ---------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (a):
Cash and cash equivalents.................................... $ --- $ --- $ 59,814 $ 230,750 $242,570
Total assets................................................. 23,212 35,269 174,601 639,992 836,342
Long term debt and exchangeable redeemable
preferred stock............................................. 35,541 50,855 215,675 735,980 722,783
Common stock and other stockholders' equity
(deficiency)................................................ (13,703) (27,323) (50,254) (118,991) 74,031
</TABLE>
- --------------
(a) The data presented represents financial information for the Company and its
consolidated subsidiaries. As of December 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, 1995, 1996, 1997 and 1998 and the nine
months ended December 31, 1998, the Company's capital expenditures
(including capital expenditures relating to its wholly owned operating
companies) were $2.9, $6.1, $24.6, $68.6 and $146.8 million, respectively,
and the Company's investments in its less than wholly owned operating
companies were $7.5, $12.8, $34.8, $64.3 and $69.0 million, respectively,
for the same periods. Furthermore, during the fiscal year ended March 31,
1997, the Company invested $20.0 million in fiber assets and a senior
secured note.
A-2
<PAGE>
Supplemental 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 an Adjusted GAAP 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.
ADJUSTED GAAP (a)
<TABLE>
<CAPTION> Unaudited
Nine Months
Year Ended
Ended March 31, December 31,
----------------------- -------------
1997 1998 1998
---------- ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Operating revenue...................................................................... $ 14,159 $ 27,255 $ 47,336
Direct operating expenses.............................................................. 8,018 12,894 22,432
-------- --------- ---------
Gross margin........................................................................... 6,141 14,361 24,904
Selling, general and administrative expenses........................................... 11,829 21,845 39,608
Depreciation and amortization expense.................................................. 26,793 36,079 39,101
-------- --------- ---------
Operating loss......................................................................... (32,481) (43,563) (53,805)
Interest income........................................................................ 6,035 13,175 10,345
Interest income--affiliate............................................................. --- 527 8,396
Interest expense....................................................................... (30,948) (52,420) (39,597)
Other income........................................................................... 8,146 --- 1,113
-------- --------- ---------
Net loss............................................................................... (52,874) (90,005) (82,309)
Dividend requirements applicable to preferred stock.................................... --- (12,409) (21,117)
-------- --------- ---------
Net loss applicable to common stockholders............................................. $(52,874) $(102,414) $(103,426)
======== ========= =========
Basic and diluted net loss per weighted average share
of common stock....................................................................... $(1.54) $(2.93) $(1.95)
======== ========= =========
Weighted average shares of common stock outstanding (in thousands).................... 34,421 34,986 53,035
======== ========= =========
Other Operating Data:
EBITDA (b)............................................................................ $ (5,688) $ (7,484) $ (14,704)
Capital Expenditures.................................................................. 74,170 115,519 158,059
<CAPTION>
As of March 31, December 31,
---------------------- ------------
1997 1998 1998
-------- --------- ---------
<S> <C> <C> <C>
Other Network Data:
Gross property, plant & equipment (in thousands) (c).................................. $169,174 $ 336,473 $ 533,719
Networks (d).......................................................................... 21 22 22
Markets served (e).................................................................... 33 46 46
Route miles (e)....................................................................... 3,461 5,363 15,005
Fiber miles (e)....................................................................... 166,131 249,672 369,777
Buildings w/ customers................................................................ 1,270 1,909 6,460
LEC central offices collocated........................................................ 104 113 123
Access lines sold..................................................................... 7,000 41,500 133,686
Access lines installed................................................................ 1,450 23,200 110,005
Switches installed (f)................................................................ 7 17 20
Employees (g)......................................................................... 261 571 969
</TABLE>
A-3
<PAGE>
(a) The adjusted GAAP 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 adjusted for the
consolidation of certain joint ventures (Buffalo, Syracuse, New Jersey,
Louisville, Lexington, Harrisburg, Richmond, Jacksonville and Wichita).
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.
(b) 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 adjusted GAAP property, plant and equipment (before accumulated
depreciation) of the networks, the NOCC and the Company.
(d) Includes networks under construction.
(e) Data as of March 31, 1997 excludes networks under construction. Data as of
March 31, 1998 and December 31, 1998 includes networks under construction.
(f) Represents Lucent 5ESS switches or remote switch modules which deliver full
switch functionality.
(g) 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
(Dollars in thousands except per share amounts)
Overview
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
proxy statement, 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 "forward looking statements" can be identified by
the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should," "intends" or "intends" or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy that involve risks and uncertainties. These risks and uncertainties
include, but are not limited to, uncertainties relating to economic conditions,
acquisitions and divestitures, the cost of availability of capital, government
and regulatory policies, the pricing and availability of equipment, materials,
inventories and programming, Year 2000 issues, product acceptance, technological
developments and changes in the competitive environment in which the Company
operates. Persons reading this proxy statement are cautioned that forward-
looking statements herein are only predictions, that no assurance can be given
that the future results will be achieved, and that actual events or results may
differ materially as a result of the risks and uncertainties facing the Company.
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 46 markets served) in operation or under construction (the
"Existing Networks") owned as of December 31, 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 under development (the
"New Networks") as of such date.
Hyperion is a super-regional provider of communications services offering a
full range of communications services to customers that include businesses,
governmental and educational end users and other telecommunications service
providers throughout the eastern United States. The Company provides these
customers with communications services such as local switch dial tone, long
distance service, high speed data, and Internet connectivity. The customer has a
choice of receiving these services individually or as part of a bundle of
services, which is typically priced at a discount when compared to the price of
the individual services. In order to take advantage of the improved economic
returns from providing services over the Company's own network system (having
"on-net" traffic), the Company is in the process of significantly expanding
the reach of its network system. This network system expansion includes the
purchase, lease or construction of fiber optic network facilities in more than
50 new markets and the interconnection of all of the Company's existing and new
markets with the Company's own fiber optic network facilities, as well as
implementing various technologies including Dense Wave Division Multiplexing
("DWDM") to provide greater bandwidth capacity on the Company's local and
long-haul network system.
By the year 2001, Hyperion expects to serve most of the major cities in the
eastern half of the United States. The Company currently provides
communications services in 46 markets and plans to introduce services in more
than 50 new markets, expanding Hyperion's presence to approximately 30 states.
At December 31, 1998, the Company had installed 20 Lucent 5ESS switches or
remote switching modules and plans to put in operation during 1999 nine
additional regional switches (the "super switches"). Once fully installed, the
Company's fiber optic backbone will connect each of the Company's markets. This
fully redundant, 16,000 route mile network system will support Hyperion's full
line of
A-5
<PAGE>
communications service offerings. The Company has chosen the eastern
half of the United States as its overall target market because it presents an
opportunity for rapid growth. Once fully deployed, management believes that the
Company's network system will encompass over 26 million addressable business
access lines (approximately 34% of the nation's population), which currently
generate annual estimated communications services revenues of over $50,000,000.
The Company has experienced initial success in the sale of business access
lines with approximately 133,686 access lines sold as of December 31, 1998, of
which approximately 110,005 lines are installed. This represents an addition of
39,726 access lines sold and 32,871 access lines installed during the quarter
ended December 31, 1998. As of December 31, 1998, approximately 63% 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.
Financing and Acquisition Transactions
On May 8, 1998, Hyperion 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, Hyperion 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, Hyperion issued 3,642,666 shares of Class A common
stock to Adelphia in exchange for certain of Hyperion'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, Hyperion
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. At December 31,
1998, Adelphia owned approximately 66% of the Hyperion outstanding common stock
and approximately 86% of the total voting power.
On March 2, 1999 Hyperion issued $300,000 of 12% Senior Subordinated Notes
due 2007 (the "Subordinated Notes"). An entity controlled by members of the
Rigas family, controlling stockholders of Adelphia, purchased $100,000 of the
Subordinated Notes directly from Hyperion at a price equal to the aggregate
principal amount less the discount to the initial purchasers. The net proceeds
of approximately $295,000 were or will be used to fund Hyperion's acquisition of
interests held by local partners in certain of its markets and will be used to
fund capital expenditures and investments in its networks and for general
corporate and working capital purposes.
On March 23, 1999, Hyperion consummated a purchase agreement with
Multimedia, Inc. ("Multimedia"), the parent of its local partner in the Wichita,
KS market, whereby Multimedia received approximately $9,778 in cash for
Multimedia's ownership interest in this network. In addition, Hyperion will be
responsible for the payment of fiber lease liabilities due to Multimedia in the
amount of approximately $2,800 which are payable over the next six years. As a
result of the transaction, the Hyperion ownership in Wichita increased to 100%.
On March 31, 1999, Hyperion consummated purchase agreements with
subsidiaries of MediaOne of Colorado, Inc. ("MediaOne"), its local partners in
the Jacksonville, FL and Richmond, VA networks, whereby MediaOne received
approximately $81,520 in cash for MediaOne's ownership interests in these
networks. In addition, Hyperion 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. As a result of the transactions,
Hyperion's ownership interest in each of these networks increased to 100%.
Together with the Multimedia acquisition, these transactions are referred to
below as the "Roll-ups."
On March 31, 1999, Hyperion entered into purchase agreements with Entergy
Corporation ("Entergy"), the parent of its local partner in the Baton Rouge, LA,
Little Rock, AR and Jackson, MS markets, whereby Entergy will receive $35,776 in
cash for Entergy's ownership interests in these markets. Upon consummation of
this transaction, which is subject to normal closing conditions and regulatory
approvals, the Company's ownership interest in each of these networks will
increase to 100%.
A-6
<PAGE>
Results of Operations
Change of Year End. On March 30, 1999, the Board of Directors of Hyperion
approved a change in Hyperion's fiscal year from March 31 to December 31. The
decision was made to conform to general industry practice and for administrative
purposes. The change became effective for the nine months ended December 31,
1998.
Nine months Ended December 31, 1998 in Comparison with Nine months Ended
December 31, 1997
Revenues increased 300% to $34,776 for the nine months ended December 31,
1998, from $8,690 for the same period in the prior fiscal year. Growth in
revenues of $26,086 resulted from an increase in revenues from majority and
wholly-owned Operating Companies of approximately $27,171 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. Management fees from non-consolidated subsidiaries
decreased $1,085 as compared to the same period in the prior fiscal year
primarily due to the consolidation of the above mentioned networks.
Network operations expense increased 255% to $18,709 for the nine months
ended December 31, 1998 from $5,263 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 288% to $35,341 for
the nine months ended December 31, 1998 from $9,099 for the same period in the
prior fiscal year. The increase was due primarily to increased expense
associated with the network expansion plan, 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 280% to $26,671 during the
nine months ended December 31, 1998 from $7,027 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 nine months ended December 31, 1998 increased 33% to
$10,233 from $7,675 for the same period in the prior fiscal year as a result of
increased cash and cash equivalents and U.S. Government securities due to the
investment of the proceeds of the 12 1/4% Senior Secured Notes, the 12 7/8%
Senior Exchangeable Redeemable Preferred Stock and the IPO, partially offset by
demand advances made to Adelphia.
Interest income--affiliate for the nine months ended December 31, 1998
increased to $8,395 from $276 as a result of demand advances made to Adelphia
during the current period.
Interest expense increased 8% to $38,638 during the nine months ended
December 31, 1998 from $35,934 for the same period in the prior fiscal year. The
increase was attributable to the 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 and higher interest capitalized on networks
under construction.
Equity in net loss of joint ventures increased to $9,580 during the nine
months ended December 31, 1998 from $9,284 for the same period in the prior
fiscal year. The net losses of the nonconsolidated Operating Companies for the
nine months ended December 31, 1998 were primarily the result of increased
revenues only partially offsetting startup and other costs and expenses
associated with design, construction,
A-7
<PAGE>
operation and management of the networks of the Operating Companies, and the
effect of the typical lag time between the incurrence of such costs and expenses
and the subsequent generation of revenues by a network. The increase was
partially offset by the consolidation of the Buffalo, Syracuse, New Jersey,
Louisville, Lexington and Harrisburg networks for the current period.
The number of non-consolidated Operating Companies paying management fees
to the Company was 8 at December 31, 1998. These Operating Companies and
networks under construction paid management and monitoring fees to the Company,
which are included in revenues, aggregating approximately $2,724 for the nine
months ended December 31, 1998, as compared with $3,809 for the same period in
the prior fiscal year. The non-consolidated Operating Companies' net losses,
including networks under construction, for the nine months ended December 31,
1997 and 1998 aggregated approximately $13,719 and $22,325 respectively.
Preferred stock dividends increased by 264% to $21,117 for the nine months
ended December 31, 1998 from $5,794 for the same period in the prior fiscal
year. The increase is due to the preferred stock which was issued in October
1997.
Year ended March 31, 1998 in comparison with year ended March 31, 1997
Revenues increased 166% to $13,510 for the fiscal year ended March 31,
1998, from $5,088 in the prior fiscal year. Growth in revenues of $8,422
resulted primarily from majority and wholly-owned Operating Companies' revenues
which increased approximately $6,800 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 from nonconsolidated Operating Companies increased $1,582 over
the prior fiscal year due to a full year of operation in Philadelphia and the
commencement of operations in the markets served in partnership with Entergy.
Network operations expense increased 127% to $7,804 in Fiscal 1998 from
$3,432 in the prior fiscal. 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 Operating Companies.
Selling, general and administrative expense increased 111% to $14,314 in
Fiscal 1998 from $6,780 in the prior fiscal year. The increase was due to an
increase in the sales 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 $11,477 during
Fiscal 1998 from $3,945 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 1997 was due to the sale of the
Company's 15.7% partnership interest in TCG of South Florida to Teleport
Communications Group Inc. on May 16, 1996 for an aggregate sale price of
approximately $11,600. This sale resulted in a gain of $8,405. No such sale
occurred during Fiscal 1998.
Interest income for Fiscal 1998 increased to $13,304 from $5,976 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, the 12 7/8% Senior Exchangeable
Redeemable Preferred.
Interest expense and fees increased 74% to $49,334 during Fiscal 1998 from
$28,377 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.
A-8
<PAGE>
Equity in net loss of joint ventures increased by 80% to $12,967 in Fiscal
1998 from $7,223 in the prior fiscal year as more non-consolidated Operating
Companies began operations. The net losses of the non-consolidated Operating
Companies for Fiscal 1998 were primarily the result revenues only partially
offsetting startup and other costs and expenses associated with design,
construction, operation and management of the networks of the non-consolidated
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 non-consolidated Operating Companies paying management fees
to the Company decreased form 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 $4,786 for Fiscal 1998, an
increase of approximately $1,582 over prior fiscal year. The non-consolidated
networks' net losses, including networks under construction, for Fiscal 1998
aggregated approximately $19,923.
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.
Supplementary Operating Company Financial Analysis
The Company believes that historically, working with local partners to
develop markets has enabled the Company to build larger networks in a rapid and
more cost effective manner then it could have on its own. As of December 31,
1998, the Company had joint ventures covering 10 networks with local partners
where the Company owns 50% or less of each joint venture. In three of these
joint ventures, the Company has recently purchased its local partners' interest.
As a result of the Company's historic ownership position in these joint
ventures, a substantial portion of the Operating Companies' historic 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
unconsolidated Operating Companies. Because of the recently completed Roll-ups,
the historical Generally Accepted Accounting Principles ("GAAP") presentation of
the assets, liabilities and results of operations of the Company does not
represent a complete measure of the financial position, growth or operations of
the Company.
In order to provide an additional measure of the financial position, growth
and performance of the Company and its Operating Companies, management of the
Company analyzes financial information of the Operating Companies on an adjusted
GAAP basis. Adjusted GAAP reflects Hyperion's consolidated GAAP financial
position and results of operations adjusted for the inclusion of certain
operating companies (Buffalo, Syracuse, New Jersey, Louisville, Lexington,
Harrisburg, Richmond, Jacksonville, and Wichita) which were either purchased in
February 1998 or are involved in the Roll-ups, as more fully described in "Item
1-Business, Recent Developments" in the Company's Transition Report on Form 10-K
for the nine months ended December 31. 1998. All adjusted GAAP results of
operations are presented as if Hyperion consolidated all Operating Companies
which were either purchased in February 1998 or are involved in the Roll-ups
during the entire period presented. This financial information, however, is not
indicative of the Company's overall historical financial position or results of
operations.
A-9
<PAGE>
<TABLE>
<CAPTION>
Summary adjusted GAAP information:
Nine Months Ended
December 31,
1997 1998
----------- ------------
<S> <C> <C>
Adjusted GAAP revenue $ 18,715 $ 47,336
Adjusted GAAP EBITDA (5,086) (14,704)
Adjusted GAAP operating loss (31,719) (53,805)
Adjusted GAAP net loss applicable to common stockholders (72,913) (103,426)
Adjusted GAAP capital expenditures 76,029 158,059
Adjusted GAAP gross property, plant and equipment 386,089 533,719
</TABLE>
For the nine months ended December 31, 1998, adjusted GAAP revenue
increased 153% to $47,336 as compared to $18,715 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 nine months ended December 31, 1998, adjusted GAAP EBITDA loss was
$14,704 as compared to $5,086 for the same period in the prior fiscal year. The
increase in adjusted GAAP EBITDA loss for the nine months ended December 31,
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, and was
also due to increased costs associated with the Company's New Network expansion
efforts.
For the nine months ended December 31, 1998, adjusted GAAP operating loss
was $53,805 as compared to $31,719 for the same period in the prior fiscal year.
The increase in adjusted GAAP 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 nine months ended December 31, 1998, adjusted GAAP net loss
applicable to common stockholders was $103,426 as compared to $72,913 for the
same period in the prior fiscal year. The increase in adjusted GAAP net loss
applicable to common stockholders was due primarily to the above mentioned
increase in selling, general and administrative expenses, increased depreciation
and amortization, increased equity in net loss of joint ventures and increased
preferred stock dividends associated with the Company's financing activities. In
particular, depreciation and amortization increased substantially due to the
significant capital investment the Company has made and the consolidation of the
Operating Companies involved in the February 1998 acquisitions and the Roll-ups.
During the nine months ended December 31, 1998, the Company and its
Operating Companies invested $200,331 in capital expenditures, of which
Hyperion's adjusted GAAP share was $158,059.
Liquidity and Capital Resources
The development of the Company's business and the installation and
expansion of the Operating Companies' networks, as well as the development of
the New 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 $39,775 and $146,752
for the nine months ended December 31, 1997 and 1998, respectively. Further,
investments made by the Company in nonconsolidated Operating Companies and in
LMDS licenses were $53,194 and $69,018 for the nine months ended December 31,
1997 and 1998, respectively. The significant increase in capital expenditures
A-10
<PAGE>
for the nine months ended December 31, 1998 as compared with the same period in
the prior fiscal year is largely attributable to capital expenditures necessary
to develop the Existing Networks and the New Networks, as well as the fiber
purchases to interconnect the networks. The Company expects that it will
continue to incur substantial capital expenditures in this development effort.
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 "Financing and
Acquisition Transactions."
The Company has experienced negative operating and investing 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.
Expansion of the Company's Existing Networks and services and the
development of New Networks and additional networks and services requires
significant capital expenditures. The Company's operations have required and
will continue to require substantial capital investment for (i) the installation
of electronics for switched services in the Company's networks, (ii) the
expansion and improvement of the Company's NOCC and Existing Networks, (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 has made substantial capital investments and investments in Operating
Companies in connection with the installation of 5ESS switches or remote
switching modules in all of its Existing Networks and plans to install regional
super switches in certain key New Networks when such New Networks are
operational. To date, the Company has installed switches in 20 of its Existing
Networks and plans to provide such services in all of its New Networks on a
standard switching platform based on Lucent 5 switch technology. In addition,
the Company intends to increase spending on marketing and sales significantly in
the foreseeable future in connection with the expansion of its sales force and
marketing efforts generally. The Company also plans to purchase its partners'
interest in the Operating Companies when it can do so at attractive economic
terms. The Company estimates that it will require approximately $400,000 to fund
the Roll-ups, the Entergy acquisition, anticipated capital expenditures, working
capital requirements and operating losses and pro rata investments in the
Operating Companies from January 1999 through the end of March 2000. The
Company believes that the net proceeds from the offering of the Subordinated
Notes, together with its existing cash balance and internally generated funds,
will be sufficient to fund the Rollups, the Entergy acquisition, the Company's
capital expenditures, working capital requirements, operating losses and pro
rata investments in the Operating Company's capital expenditures through the
fiscal quarter ended September 30, 2000. In addition, there can be no assurance
(i) that the Company's future cash requirements will not vary significantly from
those presently planned due to a variety of factors including acquisition of
additional networks, development of the LMDS spectrum, continued acquisition of
increased ownership in its networks and material variances from expected capital
expenditure requirements for Existing Networks and New Networks or (ii) that
anticipated financings, local partner investments and other sources of capital
will become available to the Company. In addition, it is possible that
expansion of the Company's networks may include the geographic expansion of the
Company's existing clusters and the development or acquisition of other new
markets not currently planned. The Company expects to continue to build new
networks in additional markets, which have broader geographic coverage and
require higher capital outlays than those with partners in the past. The
Company also has funded the purchase of certain partnership interests and
expects to fund additional purchases of partnership interests.
The Company will need substantial additional funds to fully fund its
business plan. The Company expects to fund its capital requirements through
existing resources, credit facilities and vendor financings at the Company and
Operating Company levels, internally generated funds, equity invested by local
partners in Operating Companies and additional debt or equity financings, as
appropriate, and expects to fund its purchase of partnership interests of local
partners through existing resources, internally generated funds and additional
debt or equity financings, as appropriate. There can be no assurances, however,
that the
A-11
<PAGE>
Company will be successful in generating sufficient cash flow or in raising
sufficient debt or equity capital on terms that it will consider acceptable, or
at all.
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 of fiscal years 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. Management of the Company
has not completed its evaluation of the impact of the impact of SFAS No. 133 on
the Company's financial statements.
Statement of Position ("SOP") 98-5, "Reporting on the Cost 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 organizational costs. It requires such costs to be expensed
as incurred. Management of the Company believes that SOP 98-5 will not have a
material impact on the Company's financial statements.
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. This
could present risks to the operation of the Company's business in several ways.
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, and
. 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,
A-12
<PAGE>
. implementing solutions, and
. 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 July 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
September 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 August
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 August 1999.
Through December 31, 1998, costs incurred directly related to addressing
the year 2000 issue totaled $350. 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 $775. 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.
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 in the past two fiscal years in the period ended March 31, 1998 and
the nine months ended December 31, 1998.
A-13
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
(Dollars in thousands)
The Company uses fixed rate debt to fund its working capital requirements,
capital expenditures and acquisitions. These debt arrangements expose the
Company to market risk related to changes in interest rates. The table below
summarizes the fair values and contract terms of the Company's financial
instruments subject to interest rate risk as of December 31, 1998.
<TABLE>
<CAPTION>
Expected Maturity
--------------------------------------------- Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt: $ --- $ --- $ --- $ --- $303,840 $478,674 $782,514 $669,924
Fixed Rate
Average Interest Rate 12.72% 12.72% 12.72% 12.72% 12.62% 12.62%
</TABLE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes thereto and independent
auditors' report follow.
A-14
<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, 1998 and December 31,
1998, and the related consolidated statements of operations, of common stock and
other stockholders' equity (deficiency) and of cash flows for the years ended
March 31, 1997 and 1998 and the nine months ended December 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, 1998 and December 31, 1998, and the results of
their operations and their cash flows for the years ended March 31, 1997 and
1998 and the nine months ended December 31, 1998 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
May 17, 1999
A-15
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
-------------- -----------------
1998 1998
---- ----
<S> <C> <C>
ASSETS:
- -------
Current assets:
Cash and cash equivalents........................................................ $ 230,750 $ 242,570
Due from parent--net............................................................. --- 4,950
Due from affiliates--net......................................................... 2,151 1,078
Accounts receivable--net......................................................... 4,434 15,583
--------- ---------
Total current assets.......................................................... 237,335 264,181
U.S. government securities--pledged................................................ 70,535 58,054
Investments........................................................................ 53,064 112,328
Property, plant and equipment--net................................................. 250,633 374,702
Other assets--net.................................................................. 28,425 27,077
--------- ---------
Total......................................................................... $ 639,992 $ 836,342
========= =========
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------
(DEFICIENCY):
- --------------
Current liabilities:
Accounts payable................................................................. $ 11,775 $ 20,386
Due to parent--net............................................................... 6,541 ---
Accrued interest and other liabilities........................................... 4,687 19,142
--------- ---------
Total current liabilities..................................................... 23,003 39,528
13% Senior Discount Notes due 2003................................................. 215,213 220,784
12 1/4% Senior Secured Notes due 2004.............................................. 250,000 250,000
Note payable--Adelphia............................................................. 35,876 ---
Other debt......................................................................... 27,687 23,325
--------- ---------
Total liabilities............................................................. 551,779 533,637
--------- ---------
12 7/8% Senior Exchangeable Redeemable Preferred Stock............................. 207,204 228,674
--------- ---------
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,
396,500 and 22,376,071 shares outstanding, respectively........................ 4 224
Class B common stock, $0.01 par value, 150,000,000 shares authorized,
32,500,000 and 32,314,761 shares outstanding, respectively..................... 325 323
Additional paid in capital....................................................... 179 286,782
Class A common stock warrant..................................................... 13,000 ---
Class B common stock warrants.................................................... 11,087 4,483
Loans to stockholders............................................................ (3,000) ---
Accumulated deficit.............................................................. (140,586) (217,781)
--------- ---------
Total common stock and other stockholders' equity (deficiency)................ (118,991) 74,031
--------- ---------
Total......................................................................... $ 639,992 $ 836,342
========= =========
</TABLE>
See notes to consolidated financial statements.
A-16
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended March 31, December 31,
----------------------- -------------
1997 1998 1998
----------- ---------- -------------
<S> <C> <C> <C>
Revenues.................................................................. $ 5,088 $ 13,510 $ 34,776
-------- -------- --------
Operating expenses:
Network operations...................................................... 3,432 7,804 18,709
Selling, general and administrative..................................... 6,780 14,314 35,341
Depreciation and amortization........................................... 3,945 11,477 26,671
-------- -------- --------
Total................................................................ 14,157 33,595 80,721
-------- -------- --------
Operating loss............................................................ (9,069) (20,085) (45,945)
Other income (expense):
Gain on sale of investment.............................................. 8,405 --- ---
Interest income......................................................... 5,976 13,304 10,233
Interest income--affiliate.............................................. --- --- 8,395
Interest expense and fees............................................... (28,377) (49,334) (38,638)
Other income............................................................ --- --- 1,113
-------- -------- --------
Loss before income taxes, equity in net loss of joint ventures and
extraordinary gain....................................................... (23,065) (56,115) (64,842)
Income tax expense........................................................ (259) --- ---
-------- -------- --------
Loss before equity in net loss of joint ventures and extraordinary gain... (23,324) (56,115) (64,842)
Equity in net loss of joint ventures...................................... (7,223) (12,967) (9,580)
-------- -------- --------
Loss before extraordinary gain............................................ (30,547) (69,082) (74,422)
Extraordinary gain on repurchase of debt.................................. --- --- 237
-------- -------- --------
Net loss.................................................................. (30,547) (69,082) (74,185)
Dividend requirements applicable to preferred stock....................... --- (12,409) (21,117)
-------- -------- --------
Net loss applicable to common stockholders................................ $(30,547) $(81,491) $(95,302)
======== ======== ========
Basic and diluted net loss per weighted average share of common stock
before extraordinary gain................................................ $(0.89) $(2.33) $(1.81)
Basic and diluted extraordinary gain on repurchase of debt per weighted
average share of common stock............................................ --- --- 0.01
======== ======== ========
Basic and diluted net loss per weighted average share of common stock.....
Weighted average shares of common stock outstanding....................... 34,421 34,986 53,035
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
A-17
<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 Warrant Warrants Stockholders Deficit Total
------- -------- ----------- ---------- --------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
Proceeds from issuance of
Class A common stock.. 129 --- 190,731 --- --- --- --- 190,860
Proceeds from issuance of
Class A common stock
to Adelphia.......... 33 --- 49,827 --- --- --- --- 49,860
Exercise of Class A
common stock warrant.. 7 --- 12,993 (13,000) --- --- --- ---
Conversion of note and
payables to Adelphia
to Class A common
stock................ 36 --- 44,222 --- --- --- --- 44,258
Exercise of Class B
common stock warrants. --- 8 6,596 --- (6,604) --- --- ---
Conversion of Class B
common stock to
Class A common stock.. 10 (10) --- --- --- --- --- ---
Repayment of loan
to stockholders...... --- --- --- --- --- 3,000 --- 3,000
Dividend requirements
applicable to
preferred --- --- (18,168) --- --- --- (2,949) (21,117)
stock................
Other...................... --- --- (353) --- --- --- (61) (414)
Issuance of Class A
common stock bonus... 5 --- 755 --- --- --- --- 760
Net loss................... --- --- --- --- --- --- (74,185) (74,185)
---- ------- -------- --------- -------- ------------ --------- ---------
Balance December 31, 1998........... $224 $323 $286,782 --- $ 4,483 $ --- $(217,781) $ 74,031
==== ======= ======== ========= ======== ============ ========= =========
</TABLE>
See notes to consolidated financial statements.
A-18
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended March 31, December 31,
------------------------------ --------------
1997 1998 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $(30,547) $ (69,082) $ (74,185)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation.............................................................. 2,604 9,038 23,838
Amortization.............................................................. 1,341 2,439 2,833
Equity in net loss of joint ventures...................................... 7,223 12,967 9,580
Non-cash interest expense................................................. 23,467 34,038 23,857
Deferred income taxes..................................................... 257 --- ---
Gain on sale of investment................................................ (8,405) --- ---
Issuance of Class A common stock bonus.................................... 156 27 761
Extraordinary gain on repurchase of debt.................................. --- --- (237)
Changes in operating assets and liabilities, net of effects of
acquisitions:
Other assets--net...................................................... (624) (5,302) (15,533)
Accounts payable....................................................... (264) 6,023 9,862
Accrued interest and other liabilities--net............................ (31) 3,519 10,414
-------- --------- ---------
Net cash used in operating activities.......................................... (4,823) (6,333) (8,810)
-------- --------- ---------
Cash flows from investing activities:
Net cash used for acquisitions............................................. (5,040) (65,968) ---
Expenditures for property, plant and equipment............................. (24,627) (68,629) (146,752)
Investment in fiber asset and senior secured note.......................... (20,000) --- ---
Proceeds from sale of investment........................................... 11,618 --- ---
Investments in joint ventures.............................................. (34,769) (64,260) (69,018)
Investments in U.S. government securities--pledged......................... --- (83,400) ---
Sale of U.S. government securities--pledged................................ --- 15,653 15,312
-------- --------- ---------
Net cash used in investing activities.......................................... (72,818) (266,604) (200,458)
-------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of preferred stock.................................. --- 194,522 ---
Proceeds from issuance of Class A common stock............................. --- --- 255,462
Proceeds from sale and leaseback of equipment.............................. --- 14,876 ---
Proceeds from debt......................................................... 163,705 250,000 ---
Repayments of debt......................................................... --- (2,326) (19,868)
Proceeds from issuance of Class B common stock warrants.................... 11,087 --- ---
Costs associated with debt financing....................................... (6,555) (12,664) ---
Costs associated with issuance of Class A common stock..................... --- --- (14,742)
(Loans to) repayment from stockholders..................................... (3,000) --- 3,000
Repayment of note payable--Adelphia........................................ (25,000) --- ---
Advances to affiliates..................................................... (2,782) (535) (2,764)
-------- --------- ---------
Net cash provided by financing activities...................................... 137,455 443,873 221,088
-------- --------- ---------
Increase in cash and cash equivalents.......................................... 59,814 170,936 11,820
Cash and cash equivalents, beginning of period................................. --- 59,814 230,750
-------- --------- ---------
Cash and cash equivalents, end of period....................................... $ 59,814 $ 230,750 $ 242,570
======== ========= =========
</TABLE>
See notes to consolidated financial statements.
A-19
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 it's 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 is a majority owned subsidiary of Adelphia Communications Corporation
("Adelphia").
On March 30, 1999, the Board of Directors of Hyperion approved a change in
Hyperion's fiscal year from March 31 to December 31. The decision was made to
conform to general industry practice and for administrative purposes. The
change became effective for the nine months ended December 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 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 with a carrying value of $44,258 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. At December 31, 1998, Adelphia owned approximately 66% of Hyperion's
outstanding common stock and approximately 86% of total voting power.
The Company provides facilities-based telecommunications services 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 has
historically partnered 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. Most networks provide local switch dial tone, long distance service, high-
speed data and internet connectivity to businesses, governmental and educational
end users and other telecommunication service providers. 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.
Acquisitions and Sale of Partner Interests
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 year ended March 31, 1997 were $221.
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.
A-20
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
As 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.
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, 1996.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
March 31, December 31,
------------------------------ -----------------
1997 1998 1998
--------------- ------------- -----------------
<S> <C> <C> <C>
Revenues........................................................ $ 8,495 $ 17,919 $ 34,776
Net loss........................................................ (38,744) (80,004) (74,185)
Net loss applicable to common stockholders...................... (38,744) (92,413) (95,302)
Net loss per weighted average share of common stock............. (1.10) (2.59) (1.80)
</TABLE>
See Note 4 for discussion of other partnership interest purchases subsequent to
December 31, 1998.
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.
Accounts Receivable
An allowance for doubtful accounts of $1,128 is recorded as a reduction of
accounts receivable at December 31, 1998. There was no allowance for doubtful
accounts at March 31, 1998.
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-21
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 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.
The Company recognizes revenues related to management and network monitoring of
the joint ventures in the month that the related services are provided.
Reciprocal compensation revenue is an element of switched service revenue, which
represents compensation from Local Exchange Carriers ("LECs") for local exchange
traffic terminated on the Company's facilities originated by other LECs.
Hyperion recognizes revenue based upon established contracts with the LECs and
has established a reserve for a portion of those revenues that are under
dispute.
Significant Customers
During the nine months ended December 31, 1998, Hyperion's sales to AT&T and
Bell Atlantic represented 11.4% and 10.1% of total revenues, respectively.
During the year ended March 31, 1998, Hyperion sales to AT&T and MCIWorldCom
("MCI"), represented 18.3% and 14.5% of total revenues, respectively.
Basic and Diluted Net Loss per Weighted Average Share of Common Stock
Basic net loss per weighted average share of common stock is computed based
upon the weighted average number of common shares and warrants outstanding
during the period. Diluted net loss per common share is equal to basic net loss
per common share because the Adelphia Warrant discussed in Note 6 had an
antidilutive effect for the periods presented; however, the Adelphia Warrant
could have a dilutive effect 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 shares of Class B common stock have been included as shares
outstanding for purposes of the calculation of both basic and diluted net loss
per share for the years ended March 31, 1997 and 1998 and the nine months ended
December 31, 1998. 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).
Other Assets -- net
Costs incurred in developing new networks or expanding existing networks
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 non-development costs incurred during the pre-
operating phase of a newly constructed network and are amortized over five-year
periods commencing with the start of operations. Deferred debt financing costs,
included in other assets, are amortized over the term of the related debt. The
unamortized amounts of deferred debt financing costs at March 31, 1998 and
December 31, 1998 were $16,566 and $14,606, respectively. Also included in other
assets at March 31, 1998 and December 31, 1998 is a Senior Secured Note (See
Note 3).
A-22
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
Asset Impairments
Hyperion periodically 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 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 and $2,500 at
March 31, 1998 and December 31, 1998, respectively. The fair value of the
Redeemable Preferred Stock exceeded the carrying value by approximately $15,688
at March 31, 1998; the carrying value of the Redeemable Preferred Stock exceeded
the fair value by approximately $23,938 at December 31, 1998. The fair value of
the Senior Discount Notes exceeded the carrying value by approximately $35,649
and $9,516 at March 31, 1998 and December 31, 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 year ended March 31, 1998 and the
nine months ended December 31, 1998 totaled $24,500 and $1,155, respectively
(See Note 5). Dividend requirements applicable to preferred stock were
satisfied by the issuance of an additional 6,860 and 20,624 shares of such
preferred stock during the year ended March 31, 1998 and the nine months ended
December 31, 1998, respectively (See Note 5). During the nine months ended
December 31, 1998, Hyperion converted the Note Payable--Adelphia and certain
accounts payable into Class A common stock (See Note 1). See Note 1 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.
A-23
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
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 of fiscal years 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. Management of the Company
has not completed its evaluation of the impact of SFAS No. 133 on the Company's
financial statements.
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 believes that SOP 98-5 will not have a
material impact on the Company's financial statements.
Reclassifications
For the fiscal years ended March 31, 1997 and 1998, certain amounts have been
reclassified to conform with the presentation for the nine months ended December
31, 1998.
(2) Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
-------------- ----------------
1998 1998
-------------- ----------------
<S> <C> <C>
Telecommunications networks............................................... $ 50,421 $ 59,764
Network monitoring and switching equipment................................ 130,283 165,697
Fiber asset under construction (Note 3)................................... 11,500 11,500
Fiber optic use rights.................................................... --- 44,109
Construction in process................................................... 66,075 123,439
Other..................................................................... 6,605 8,282
-------- --------
264,884 412,791
Less accumulated depreciation............................................. (14,251) (38,089)
-------- --------
Total..................................................................... $250,633 $374,702
======== ========
</TABLE>
Depreciation is computed on the straight-line method using estimated useful
lives of 5 to 20 years for operating plant and equipment and 3 to 20 years for
support equipment and real estate. Additions to property, plant and equipment
are recorded at cost which includes amounts for material, applicable labor and
overhead and interest. Depreciation expense amounted to $2,604, $9,038 and
$23,838 for the years ended March 31, 1997 and 1998 and the nine months ended
December 31, 1998, respectively. Capitalized interest amounted to $4,271 and
$9,986 for the year ended March 31, 1998 and the nine months ended December 31,
1998, respectively.
(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-24
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
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"), a right to receive 58,752
shares of Telergy Class A common stock ("Telergy Stock"), 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. No amounts were allocated to the
Telergy Stock. The allocation reflects the Company's estimate of the relative
fair values of the assets acquired. Hyperion will recognize the interest income
on the Senior Secured Note when received.
During the nine months ended December 31, 1998, construction of the fiber has
continued and no repayments have been received on the Senior Secured Note. On
May 15, 1998, Telergy paid Hyperion $1,000 in exchange for the Telergy Stock and
a gain of $1,000 was recorded by the Company, which is included in "other
income" in the consolidated statement of operations.
On November 10, 1998, the Senior Secured Note was amended to mature on
January 20, 2000 in exchange for an indefeasible right to use ("IRU") or long
term lease of certain fiber segments in New York City and along Telergy's long
haul fiber segments in the northeastern United States and Southeastern Canada.
(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.
A-25
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
The Company's nonconsolidated investments are as follows:
<TABLE>
<CAPTION>
Ownership March 31, December 31,
Percentage 1998 1998
---------------- --------------- --------------
<S> <C> <C> <C>
MediaOne Fiber Technologies (Jacksonville)........................... 20.0% (1) $ 7,984 $ 8,150
Multimedia Hyperion Telecommunications (Wichita)..................... 49.9% (2) 3,537 5,863
MediaOne of Virginia (Richmond)...................................... 37.0% (1) 7,213 7,284
PECO-Hyperion (Philadelphia)......................................... 50.0% 21,229 33,936
PECO-Hyperion (Allentown, Bethlehem, Easton, Reading)................ 50.0% 2,753 7,227
Hyperion of York..................................................... 50.0% 4,256 5,721
Allegheny Hyperion Telecommunications................................ 50.0% --- 3,043
Entergy Hyperion Telecommunications of Louisiana..................... 50.0% (3) 3,407 6,714
Entergy Hyperion Telecommunications of Mississippi................... 50.0% (3) 3,666 7,130
Entergy Hyperion Telecommunications of Arkansas...................... 50.0% (3) 4,209 7,586
Baker Creek Communications........................................... 49.9% (4) 10,009 44,637
Other................................................................ Various 1,333 1,323
-------- --------
69,596 138,614
Cumulative equity in net losses...................................... (16,532) (26,286)
-------- --------
Total Investments.................................................... $ 53,064 $112,328
======== ========
</TABLE>
(1) As discussed below, the Company consummated agreements on March 31, 1999
which increased its ownership to 100% in these networks.
(2) As discussed below, the Company consummated agreements on March 23, 1999
which increased its ownership to 100% in this network.
(3) As discussed below, the Company entered into a definitive agreement on
March 31, 1999 to increase its ownership to 100% in these networks.
(4) On March 24, 1998, the Federal Communications Commission ("FCC") completed
the auction of licenses for Local Multipoint Distribution Service
("LMDS"). In connection with the FCC's full review of all bids and the
granting of final licenses, the Company, through Baker Creek
Communications, acquired 195 licenses for a total cost of approximately
$44,605, $10,000 of which was paid upon submission of the Company's bid in
January 1998 with the remainder paid as of October 1998.
Summarized unaudited combined financial information for the Company's
nonconsolidated investments listed above being accounted for using the equity
method of accounting as of the dates and for the periods ended, is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
------------- ----------------
1998 1998
---- ----
<S> <C> <C>
Current assets.............................................................. $ 7,476 $ 11,315
PP&E-net.................................................................... 153,495 190,552
Non-current assets.......................................................... 13,454 47,522
Current liabilities......................................................... 13,422 18,599
Non-current liabilities..................................................... 58,004 48,635
<CAPTION>
Nine months ended
---------------------
Year Ended March 31, December 31,
---------------------- ---------------------
1997 1998 1998
------- -------- --------
<S> <C> <C> <C>
Revenues......................................................... $ 7,251 $ 11,999 $ 24,986
Net loss......................................................... (9,881) (19,923) (22,325)
</TABLE>
A-26
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
During 1998, through a partnership in which Hyperion is a 49.9% limited
partner, the Company was the successful bidder, at a cost of approximately
$45,000, for 195 31-GHz licenses (see above), which cover approximately 83
million people in the eastern United States representing coverage in most of its
network system territory. Hyperion and its partner are currently in the process
of dissolving the partnership and the licenses are to become the property of
Hyperion at no additional cost to Hyperion. As of December 31, 1998, the
partnership had fully funded its obligation due to the FCC. The Company plans
to use the LMDS spectrum in most of its markets, and believes the spectrum to be
highly complementary to its fiber-based systems as an economical means to
provide "last-mile" connectivity for customers which otherwise could not be
economically addressed with broadband connectivity. The Company is in the
process of further refining its plans for utilization of the LMDS spectrum,
which could involve substantial additional funds.
On March 23, 1999, Hyperion consummated a purchase agreement with Multimedia,
Inc. ("Multimedia"), the parent of its local partner in the Wichita, KS market,
whereby Multimedia received approximately $9,778 in cash for Multimedia's
ownership interest in this network. In addition, Hyperion will be responsible
for the payment of fiber lease liabilities due to Multimedia in the amount of
approximately $2,800 which are payable over the next six years. As a result of
the transaction, the Hyperion ownership in Wichita increased to 100%.
On March 31, 1999, Hyperion consummated purchase agreements with subsidiaries
of MediaOne of Colorado, Inc. ("MediaOne"), its local partners in the
Jacksonville, FL and Richmond, VA networks, whereby MediaOne received
approximately $81,520 in cash for MediaOne's ownership interests in these
networks. In addition, Hyperion 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. As a result of the transactions,
Hyperion's ownership interest in each of these networks increased to 100%.
On March 31, 1999, Hyperion entered into purchase agreements with Entergy
Corporation ("Entergy"), the parent of its local partner in the Baton Rouge, LA,
Little Rock, AR, and Jackson, MS markets, whereby Entergy will receive $35,776
in cash for Entergy's ownership interests in each of these markets. Upon
consummation of this transaction, which is subject to normal closing conditions
and regulatory approvals, the Company's ownership interest in each of these
networks will increase to 100%.
(5) Financing Arrangements
Note payable -- Adelphia
The Company had 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. 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 was evidenced by an unsecured subordinated note due April 16, 2003.
This obligation had an interest rate of 16.5% per annum. Interest accrued
through May 8, 1998 on the amount outstanding to Adelphia totaled $10,645. 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).
A-27
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
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. 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 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. Through December 31, 1998, 195,965 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 December 31, 1998. The Company received $3 in consideration for the
exercise of the warrants.
During the nine months ended December 31, 1998, the Company paid $17,313 to
repurchase a portion of the Senior Discount Notes which had a face value of
$25,160 and a carrying value of $17,750. The notes were retired upon repurchase
which resulted in a $237 gain.
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 the Company's wholly owned subsidiaries. A portion of the
proceeds 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.
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
A-28
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
112.25% of principal with the net proceeds of one or more Qualified Equity
Offerings (as defined in the Indenture). On or after September 1, 2001, the
Company may redeem, at its option, all or a portion of the Senior Secured Notes
at 106.125% of principal which declines to par in 2003, plus accrued interest.
The holders of the Senior Secured Notes may put them to the Company at 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.
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.
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.
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 switching equipment. Included in the lease
facility is the sale and leaseback of certain switch equipment for which the
Company received $14,876.
A-29
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
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 other debt for the five years after December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999.............................................................................. $3,288
2000.............................................................................. 3,117
2001.............................................................................. 3,266
2002.............................................................................. 3,653
2003.............................................................................. 3,635
</TABLE>
12% Senior Subordinated Notes
On March 2, 1999, Hyperion issued $300,000 of 12% Senior Subordinated Notes
due 2007 (the "Subordinated Notes"). An entity controlled by members of the
Rigas family, controlling stockholders of Adelphia, purchased $100,000 of the
Subordinated Notes directly from Hyperion at a price equal to the aggregate
principal amount less the discount to the other initial purchasers. The net
proceeds of approximately $295,000 were or will be used to fund Hyperion's
acquisition of interests held by local partners in certain of its markets and
will be used to fund capital expenditures and investments in its networks, and
for general corporate and working capital purposes.
(6) Common Stock and Other Stockholders' Equity (Deficiency)
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 of its Class
A common stock (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 terminated
automatically upon the date of the IPO. 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 $1,000 from the
A-30
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
Company. Each 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 of the IPO and the Officers have the right to
sell at least $1,000 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 $1,000 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 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).
Adelphia Warrant
On June 13, 1997, the Company entered into agreements with MCI. Pursuant
to these agreements 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 2 1/2% 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 Class
A common stock, on a fully diluted basis, at fair value, if MCI met 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
A-31
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
respect to the Adelphia shares purchased 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 purchased 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 paid to
Adelphia a fee of $500 and issued a warrant to Adelphia, 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 the 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 shares,
respectively, of Class A common stock to Daniel R. Milliard pursuant to his
employment agreement with the Company.
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). At
December 31, 1998, no Rigas Options or Rigas Grants have been granted. Also in
April 1998, pursuant to the then existing Stockholder Agreement, the Company
authorized the issuance under the 1996 Plan to certain Officers of stock options
(the "Management Stockholder Options") currently covering a total of 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 and the
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 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 $1,103, $1,236 and $1,893 for the years ended March 31, 1997 and 1998
and the nine months ended December 31, 1998, respectively.
A-32
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
The minimum future lease obligations under the noncancelable operating leases
as of December 31, 1998 are approximately:
<TABLE>
<CAPTION>
Period ending December 31,
- --------------------------
<S> <C>
1999.............................................................................. $3,296
2000.............................................................................. 2,888
2001.............................................................................. 2,779
2002.............................................................................. 2,659
2003.............................................................................. 2,645
Thereafter........................................................................ 8,176
</TABLE>
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
("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.
Hyperion has entered into a series of agreements with several local and long-
haul fiber optic network providers that will allow Hyperion to significantly
increase its presence in the eastern half of the United States. These
agreements, totaling approximately $126,000, provide Hyperion with ownership or
an IRU to over 9,000 route miles of local and long-haul fiber optic cable.
Through December 31, 1998, Hyperion has paid $42,604 of the total due under the
agreements, which was included in property, plant and equipment. Hyperion
believes this will allow it to expand its business strategy to include on-net
provisioning of regional, local and long distance, internet and data
communications and to cost-effectively further interconnect most of its 46
existing markets and to enter and interconnect approximately 50 new markets by
the end of 2001.
A-33
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
(8) Related Party Transactions
The following table summarizes the Company's transactions with related
parties:
<TABLE>
<CAPTION>
Nine Months
-----------
Ended
Year Ended -----
March 31, December 31,
--------- ------------
1997 1998 1998
---- ---- ----
<S> <C> <C> <C>
Revenues:
Management fees................................................ $2,600 $3,809 $2,135
Network monitoring fees........................................ 604 977 589
Special access fees............................................ 540 500 ---
------ ------ ------
Total.......................................................... $3,744 $5,286 $2,724
====== ====== ======
Interest Income................................................... $ 230 $ 617 $8,395
====== ====== ======
Expenses:
Interest expense and fees...................................... $4,731 $5,997 $ 737
Allocated corporate costs...................................... 1,199 1,656 2,981
Fiber leases................................................... 738 47 139
------ ------ ------
Total.......................................................... $6,668 $7,700 $3,857
====== ====== ======
</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 represents interest charged on certain affiliate receivable
balances with joint ventures and with Adelphia.
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-34
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
During the year ended March 31, 1998 and the nine months ended December 31,
1998, Hyperion paid $299 and $1,044, respectively, to entities owned by certain
shareholders of Adelphia primarily for property, plant and equipment and
services.
(9) Income Taxes
Adelphia and its corporate subsidiaries (including the Company) filed
consolidated federal income tax returns for the years ended March 31, 1997 and
1998. For the nine months ended December 31, 1998, Hyperion will not be
included within Adelphia's 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 for the year ended March 31, 1998 are adjusted for the
effects of filing a consolidated income tax return, similar to provisions of the
Internal Revenue Code. At December 31, 1998, the Company had net operating loss
carryforwards for federal income tax purposes of $178,503 expiring through 2018.
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, December 31,
--------- ------------
1998 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Differences between book and tax basis of intangible assets..................... $ 188 $ 138
Net operating loss carryforwards................................................ 33,918 71,391
Other........................................................................... 77 77
-------- --------
Total....................................................................... 34,183 71,606
Valuation allowance............................................................. (17,379) (48,746)
-------- --------
Total....................................................................... 16,804 22,860
-------- --------
Deferred tax liabilities:
Differences between book and tax basis of property, plant and Equipment......... 12,959 19,015
Investment in partnerships...................................................... 3,808 3,808
-------- --------
Total....................................................................... 16,767 22,823
-------- --------
Net deferred tax asset.......................................................... $ 37 $ 37
======== ========
</TABLE>
The net change in the valuation allowance for the year ended March 31, 1998
and the nine months ended December 31, 1998 was an increase of $5,023 and
$31,367, respectively.
Income tax expense for the years ended March 31, 1997 and 1998 and the nine
months ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
March 31, December 31,
------------------------- ----------------
1997 1998 1998
---- ---- ----
<S> <C> <C> <C>
Current................................................................. $ (2) $ --- $ ---
Deferred................................................................ (257) --- ---
----- ----------- -----------
Total................................................................... $(259) $ --- $ ---
===== =========== ===========
</TABLE>
A-35
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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>
Year Ended Nine Months Ended
----------------------- ------------------
March 31, December 31,
----------------------- ------------------
1997 1998 1998
----------- ---------- ------------------
<S> <C> <C> <C>
Statutory federal income tax rate........................................ 35.0% 35.0% 35.0%
Change in valuation allowance............................................ (34.6) (35.0) (35.0)
State taxes, net of federal benefit and other............................ (1.2) --- ---
----- ----- -----
Income tax expense....................................................... (0.8)% ---% ---%
===== ===== =====
</TABLE>
A-36
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
(10) Quarterly Financial Data (unaudited)
The following tables summarize the financial results of the Company for each
of the quarters in the year ended March 31, 1998 and the nine months ended
December 31, 1998:
<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-37
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
(10) Quarterly Financial Data (unaudited), continued
<TABLE>
<CAPTION>
June 30, September 30, December 31,
1998 1998 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues.............................................. $ 7,635 $ 12,098 $ 15,043
-------- -------- --------
Operating expenses:
Network operations................................. 4,989 7,056 6,664
Selling, general and administrative................ 8,432 10,391 16,518
Depreciation and amortization...................... 6,120 9,843 10,708
-------- -------- --------
Total.............................................. 19,541 27,290 33,890
-------- -------- --------
Operating loss........................................ (11,906) (15,192) (18,847)
Other income (expense):
Interest income.................................... 4,235 4,169 1,829
Interest income -- affiliate....................... 1,824 2,995 3,576
Interest expense and fees.......................... (13,704) (12,535) (12,399)
Other income....................................... 1,000 113 ---
-------- -------- --------
Loss before income taxes, equity in net loss
of joint ventures and extraordinary gain.......... (18,551) (20,450) (25,841)
Income tax expense.................................... --- --- ---
-------- -------- --------
Loss before equity in net loss of joint ventures and
extraordinary gain................................ (18,551) (20,450) (25,841)
Equity in net loss of joint ventures.................. (3,190) (2,614) (3,776)
-------- -------- --------
Loss before extraordinary gain........................ (21,741) (23,064) (29,617)
Extraordinary gain on repurchase of debt.............. --- 237 ---
-------- -------- --------
Net loss.............................................. (21,741) (22,827) (29,617)
Dividend requirements applicable to preferred
stock............................................. (6,807) (7,026) (7,284)
-------- -------- --------
Net loss applicable to common stockholders............ $(28,548) $(29,853) $(36,901)
======== ======== ========
Basic and diluted net loss per weighted average
share of common stock............................. $(0.59) $(0.54) $(0.66)
======== ======== ========
Weighted average shares of common stock
outstanding (in thousands)........................ 48,110 55,497 55,497
======== ======== ========
</TABLE>
A-38
<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 (NASDAQ-NMS).
Hyperion's NASDAQ-NMS symbol is "HYPT." 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 indentures 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-39
