SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1999
____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______________ to
_____________
Commission File Number: 000-21605
HYPERION TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1669404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Main at Water Street
Coudersport, PA 16915-1141
(Address of principal (Zip code)
executive offices)
814-274-9830
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At May 13, 1999, 22,393,821 shares of Class A Common Stock, par value
$0.01 per share, and 32,300,041 shares of Class B Common Stock, par value
$0.01 per share, of the registrant were outstanding.
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HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
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Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 1998 and March 31, 1999.....................3
Condensed Consolidated Statements of Operations - Three Months Ended
March 31, 1998 and 1999........................................................................4
Condensed Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1998 and 1999........................................................................5
Notes to Condensed Consolidated Financial Statements.............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................23
Item 2. Changes in Securities and Use of Proceeds......................................................23
Item 3. Defaults Upon Senior Securities...............................................................23
Item 4. Submission of Matters to a Vote of Security Holders...........................................23
Item 5. Other Information.............................................................................23
Item 6. Exhibits and Reports on Form 8-K...............................................................24
SIGNATURES..............................................................................................25
INDEX TO EXHIBITS.......................................................................................26
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<PAGE>
Item 1. Financial Statements
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except per share amounts)
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December 31, March 31,
1998 1999
---------------- ----------------
ASSETS:
Current assets:
Cash and cash equivalents $ 242,570 $ 142,386
Accounts receivable and other current assets 15,583 24,987
Due from parent - net 4,950 235,886
Due from affiliates - net
1,078 220
---------------- ---------------
Total current assets 264,181 403,479
U.S. government securities - pledged 58,054 43,521
Investments 112,328 111,258
Property, plant and equipment - net 374,702 523,742
Other assets - net 27,077 31,474
---------------- ---------------
Total $ 836,342 $ 1,113,474
================ ===============
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND (DEFICIENCY):
OTHER STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,386 $ 11,590
Accrued interest and other current liabilities 19,142 17,075
--------------- ---------------
Total current liabilities 39,528 28,665
13% Senior Discount Notes due 2003 220,784 228,531
12 1/4% Senior Secured Notes due 2004 250,000 250,000
12% Senior Subordinated Notes due 2007 --- 300,000
Other debt 23,325 39,693
--------------- ---------------
Total liabilities 533,637 846,889
--------------- ---------------
12 7/8% Senior exchangeable redeemable preferred stock 228,674 236,293
--------------- ---------------
Commitments and contingencies (Note 3)
Common stock and other stockholders' equity:
Class A common stock, $0.01 par value, 300,000,000
shares authorized, 22,376,071 and 22,392,521 shares
outstanding, respectively 224 224
Class B common stock, $0.01 par value, 150,000,000
shares authorized, 32,314,761 and 32,301,341 shares
outstanding, respectively 323 323
Additional paid in capital 286,782 279,180
Class B common stock warrants 4,483 4,466
Accumulated deficit (217,781) (253,901)
--------------- ---------------
Total common stock and other stockholders' equity 74,031 30,292
=============== ===============
Total $ 836,342 $ 1,113,474
=============== ===============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except per share amounts)
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Three Months Ended
March 31,
----------------------------
1998 1999
------------- -------------
Revenues $ 4,820 $ 21,438
------------- -------------
Operating expenses:
Network operations 2,541 8,504
Selling, general and administrative 5,215 21,009
Depreciation and amortization 4,450 13,535
------------- -------------
Total 12,206 43,048
------------- -------------
Operating loss (7,386) (21,610)
Other income (expense):
Interest income 5,102 1,998
Interest income-affiliate 251 2,828
Interest expense (13,400) (15,533)
------------ -------------
Loss before income taxes and
equity in net loss of joint ventures (15,433) (32,317)
Income tax expense --- ---
------------ -------------
Loss before equity in net loss
of joint ventures (15,433) (32,317)
Equity in net loss of joint ventures (3,683) (3,803)
------------ -------------
Net loss (19,116) (36,120)
Dividend requirements applicable to preferred stock (6,615) (7,479)
------------ -------------
Net loss applicable to common stockholders $ (25,731) $ (43,599)
============ =============
Basic and diluted net loss per weighted average
share of common stock $ (0.73) $ (0.79)
============ =============
Weighted average shares of
common stock outstanding 35,272 55,497
============ =============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
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Three Months
Ended March 31,
--------------------------------
1998 1999
--------------- ---------------
Cash flows from operating activities:
Net loss $ (19,116) $ (36,120)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 3,769 11,978
Amortization 681 1,557
Noncash interest expense 9,358 7,747
Equity in net loss of joint ventures 3,683 3,803
Change in operating assets and liabilities net of effects of acquisitions:
Other assets - net (1,656) (8,131)
Accounts payable 6,023 (9,649)
Accrued interest and other liabilities (7,470) (2,252)
-------------- --------------
Net cash used in operating activities (4,728) (31,067)
-------------- --------------
Cash flows from investing activities:
Expenditures for property, plant and equipment (33,795) (39,684)
Investments in joint ventures (18,634) (18,572)
Net cash used for acquisitions (58,330) (89,750)
Sale of U.S. government securities - pledged 15,653 15,322
-------------- --------------
Net cash used in investing activities (95,106) (132,684)
-------------- --------------
Cash flows from financing activities:
Repayments of debt (1,924) (342)
Repayments from (advances to) related parties 24 (230,943)
Proceeds from debt --- 300,000
Costs associated with financing (379) (5,148)
-------------- --------------
Net cash (used in) provided by financing activities (2,279) 63,567
-------------- --------------
Decrease in cash and cash equivalents (102,113) (100,184)
Cash and cash equivalents, beginning of period 332,863 242,570
-------------- --------------
Cash and cash equivalents, end of period $ 230,750 $ 142,386
============== ==============
See notes to condensed consolidated financial statements.
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<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
Hyperion Telecommunications, Inc. is a majority owned subsidiary of
Adelphia Communications Corporation ("Adelphia"). The accompanying unaudited
condensed consolidated financial statements of Hyperion Telecommunications,
Inc. and its majority owned subsidiaries ("Hyperion" or the "Company") have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission.
On March 30, 1999, the Board of Directors of Hyperion approved a change
in its 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. Hyperion
anticipates filing its Transition Report on Form 10-K for the nine months ended
December 31, 1998 prior to June 30, 1999. These condensed consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements included in its Annual Report on Form 10-K for the fiscal
year ended March 31, 1998, the Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 1998, and the Transition Report on Form 10-K for the
nine months December 31, 1998, when filed with the Securities and Exchange
Commission.
In the opinion of management, all adjustments, consisting of only
normal recurring adjustments necessary for a fair presentation of the financial
position of Hyperion at March 31, 1999, and the unaudited results of operations
for the three months ended March 31, 1998 and 1999, have been included. The
results of operations for the three months ended March 31, 1999, are not
necessarily indicative of the results to be expected for the year ending
December 31, 1999.
1. Significant Events Subsequent to December 31, 1998:
On March 2, 1999, Hyperion issued $300,000 of 12% Senior Subordinated
Notes due 2007 ("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.
During March 1999, Hyperion consummated purchase agreements with
subsidiaries of Multimedia Inc. and MediaOne of Colorado Inc. to acquire their
respective interests in jointly owned networks located in the Wichita, KS,
Jacksonville, FL and Richmond, VA markets for an aggregate of $89,750. The
agreements increased the Company's ownership interest in each of these networks
to 100%. The acquisitions were accounted for under the purchase method of
accounting. Accordingly, the financial results of the acquired networks are
included in the consolidated results of Hyperion effective from the date
acquired.
On March 31, 1999, the Company entered into an agreement 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
approximately $35,776 for its ownership interests in these markets. The
agreement is subject to normal closing conditions and regulatory approvals and
will increase the Company's ownership interest in the three markets to 100%.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
On April 15, 1999, the Company entered into an agreement with e.spire
Communications, Inc. ("e.spire") to acquire an indefeasible right of use ("IRU")
of approximately 576 miles of network fiber and construction services which
allows the Company access to 14 new markets. In exchange, the Company granted
e.spire an IRU to a 432-strand fiber optic cable in South Florida that is
currently under construction.
During the quarter ended March 31, 1999, the Company made demand
advances to Adelphia which, as of March 31, 1999, had an outstanding balance of
$235,886. The Company received interest on the advances at a rate of 5.15%.
2. Investments:
The equity method of accounting is used to account for investments in
joint ventures in which the Company holds less than a majority interest. Under
this method, the Company's initial investment is recorded at cost and
subsequently adjusted for the amount of its equity in the net income or losses
of its joint ventures. Dividends or other distributions are recorded as a
reduction of the Company's investment. Investments in joint ventures accounted
for using the equity method reflect the Company's equity in their underlying net
assets.
<TABLE>
The Company's non-consolidated investments are as follows:
<S> <C> <C> <C>
Ownership December 31, March 31,
Percentage 1998 1999
--------------- ---------------- ---------------
MediaOne Fiber Technologies (Jacksonville) 100.0 % (1) $ 8,150 $ ---
Multimedia Hyperion Telecommunications (Wichita) 100.0 (1) 5,863 ---
MediaOne of Virginia (Richmond) 100.0 (1) 7,284 ---
PECO-Hyperion (Philadelphia) 50.0 33,936 39,767
PECO-Hyperion (Allentown, Bethlehem, Easton, Reading) 50.0 7,227 8,904
Hyperion of York 50.0 5,721 8,421
Allegheny Hyperion Telecommunications 50.0 3,043 3,817
Entergy Hyperion Telecommunications of Louisiana 50.0 (2) 6,714 8,547
Entergy Hyperion Telecommunications of Mississippi 50.0 (2) 7,130 8,576
Entergy Hyperion Telecommunications of Arkansas 50.0 (2) 7,586 9,696
Baker Creek Communications 49.9 (3) 44,637 44,772
Other Various 1,323 4,024
---------------- ---------------
138,614 136,524
Cumulative equity in net losses (26,286) (25,266)
---------------- ---------------
Total $ 112,328 $ 111,258
================ ===============
<FN>
(1) As discussed in Note 1, the Company has consummated agreements which
increased its ownership to 100% in these networks during March 1999.
(2) As discussed in Note 1, the Company entered into an agreement to increase
its ownership to 100% in these networks.
(3) On March 24, 1998, the Federal Communications Commission ("FCC") completed
the auction of licenses for Local Multipoint Distribution Service. The
Company, through Baker Creek Communications, was the successful bidder for
195 31-Ghz licenses, which cover approximately 30% of the nation's
population - in excess of 83 million people in the eastern half of the
United States. The Company funded $10,000 of such purchase in January 1998,
a portion of which was refunded. In connection with the FCC's full review
of all bids and the granting of final licenses it was concluded that the
Company, through Baker Creek Communications, would acquire the entire
interest in the 195 licenses for a total cost of approximately $44,605, all
of which was paid as of October 26, 1998.
</FN>
</TABLE>
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
Summarized combined unaudited financial information for the Company's
investments being accounted for using the equity method of accounting, excluding
Jacksonville, Richmond and Wichita, is as follows:
December 31, March 31,
1998 1999
------------ -------------
Current assets $ 6,596 $ 20,920
Property, plant and equipment - net 130,382 141,842
Other non-current assets 46,702 45,899
Current liabilities 9,671 8,459
Non current liabilities 38,939 41,204
Three Month Ended March 31,
1998 1999
------------ --------------
Revenues $ 1,118 $ 8,436
Net loss (5,348) (7,552)
3. Commitments and Contingencies:
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations for a discussion of material commitments and
contingencies.
4. Net Loss Per Weighted Average Share of Common Stock:
Net loss per weighted average share of common stock is computed based on
the weighted average number of common shares outstanding after giving effect to
dividend requirements on the Company's preferred stock. Diluted net loss per
common share is equal to basic net loss per common share because additional
warrants outstanding had an anti-dilutive effect for the periods presented;
however, these warrants could have a dilutive effect on earnings per share in
the future.
5. Supplemental Financial Information:
For the three months ended March 31, 1998 and 1999, the Company paid
interest of $15,653 and $15,322, respectively.
Accumulated depreciation of property, plant and equipment amounted to
$38,089 and $50,067 at December 31, 1998 and March 31, 1999, respectively.
-------------------------------------------------
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction
with the Company's unaudited Condensed Consolidated Financial Statements and the
Notes thereto appearing elsewhere in this Form 10-Q, the Company's audited
Consolidated Financial Statements and Notes thereto filed on Form 10-K for the
fiscal year ended March 31, 1998 and the Company's audited Consolidated
Financial Statements and Notes thereto to be filed on Form 10-K for the nine
months ended December 31, 1998.
Overview
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-Q, including Management's Discussion and Analysis of Financial Condition
and Results of Operations, is forward-looking, such as information relating to
the effects of future regulation, future capital commitments and the effects of
competition. Such forward-looking information involves important risks and
uncertainties that could significantly affect expected results in the future
from those expressed in any forward-looking statements made by, or on behalf of,
the Company. These risks and uncertainties include, but are not limited to,
uncertainties relating to economic conditions, acquisitions and divestitures,
availability and cost of financing, government and regulatory policies, the
pricing and availability of equipment, materials and inventories, technological
developments, year 2000 issues and changes in the competitive environment in
which the Company operates. Unless otherwise stated, the information contained
in this Form 10-Q is as of and for the three months ended March 31, 1998 and
1999.
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) 24 telecommunications
networks in operation or under construction (the "Existing Networks") owned as
of March 31, 1999 by 22 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
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
("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 39 markets, representing distinct Metropolitan
Statistical Areas, or "MSAs", and plans to introduce services to a total of
approximately 90 MSAs by the end of year 2000, expanding Hyperion's presence to
approximately 30 states. At March 31, 1999, the Company had installed 22 Lucent
5ESS switches or remote switching modules and plans to put in operation during
1999 eight 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 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 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 167,341 access lines sold as a March 31, 1999,
of which approximately 144,647 lines are installed. This represents an addition
of 36,992 access lines sold and 37,979 access lines installed during the quarter
ended March 31, 1999. As of March 31, 1999, approximately 57% of these access
lines are provisioned entirely on the Company's network ("on-net lines") with
the remainder being a combination of unbundled loops or total service resale
from LEC networks.
Recent Developments
On March 2, 1999, Hyperion issued $300,000 of 12% Senior Subordinated
Notes due 2007 ("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.
During March 1999, Hyperion consummated purchase agreements with
subsidiaries of Multimedia Inc. and MediaOne of Colorado Inc. to acquire their
respective interests in jointly owned networks located in the Wichita, KS,
Jacksonville, FL and Richmond, VA markets for an aggregate of $89,750. The
agreements increased the Company's ownership interest in each of these networks
to 100%. The acquisitions were accounted for under the purchase method of
accounting. Accordingly, the financial results of the acquired networks are
included in the consolidated results of Hyperion effective on the date acquired.
On March 31, 1999, the Company entered into an agreement 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
approximately $35,776 for its ownership interests in these markets. The
agreement is subject to normal closing conditions and regulatory approvals and
will increase the Company's ownership interest in the three markets to 100%.
On April 15, 1999, the Company entered into an agreement with e.spire
Communications, Inc. ("e.spire") to acquire an indefeasible right of use ("IRU")
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
of approximately 576 miles of network fiber and construction services which
allows the Company access to 14 new markets. In exchange, the Company granted
e.spire an IRU to a 432-strand fiber optic cable in South Florida that is
currently under construction.
During the quarter ended March 31, 1999, the Company made demand
advances to Adelphia which, as of March 31, 1999, had an outstanding balance of
$235,886. The Company received interest on the advances at a rate of 5.15%.
Results of Operations
Three Months Ended March 31, 1999 in Comparison with Three Months Ended
March 31, 1998
Revenues increased 345% to $21,438 for the three months ended March 31,
1999, from $4,820 for the same quarter in the prior year. Growth in revenues of
$16,618 resulted from an increase in revenues from majority and wholly-owned
networks of approximately $16,016 as compared to the same period in the prior
year due to the continued expansion of the Company's customer base and success
in the roll out of switched services as a result of the retail end-user strategy
adopted by the Company. The increase was also due to increased management fees
from the non-consolidated subsidiaries of $602 from the same period in the prior
year.
Network operations expense increased 235% to $8,504 for the three
months ended March 31, 1999 from $2,541 for the same quarter in the prior year.
The increase was attributable to the expansion of operations at the Network
Operating Control Center ("NOCC"), and the increased number and size of the
operations of the networks which resulted in increased employee related costs,
equipment maintenance costs and costs related to planned expansion into new
markets.
Selling, general and administrative expense increased 303% to $21,009
for the three months ended March 31, 1999 from $5,215 for the same quarter in
the prior year. The increase was due primarily to increased expenses associated
with the network expansion plan, an increase in the sales force in the Existing
Networks, the development of a sales presence in many of the New 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.
Depreciation and amortization expense increased 204% to $13,535 during
the three months ended March 31, 1999 from $4,450 for the same quarter in the
prior year primarily as a result of increased depreciation resulting from the
higher depreciable asset base at the NOCC and the majority and wholly owned
Operating Companies and amortization of deferred financing costs.
Interest income for the three months ended March 31,1998 decreased 61%
to $1,998 from $5,102 for the same quarter in the prior year as a result of
decreases in cash and cash equivalents and U.S. Government securities due to the
interest payments on the 12 1/4% Senior Secured Notes, investments in joint
ventures, expenditures for property, plant and equipment and the demand advances
made to Adelphia.
Interest income-affiliate for the three months ended March 31, 1999
increased to $2,828 from $251 as aresult of demand advances made to Adelphia
during the period.
Interest expense increased 16% to $15,533 during the three months ended
March 31, 1999 from $13,400 for the same period in the prior year. The increase
was attributable to higher interest expense associated with the accretion of the
13% Senior Discount Notes and interest on the 12% Senior Subordinated Notes,
partially offset by the reduction of interest expense associated with the
reduced amounts payable to Adelphia.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
Equity in net loss of joint ventures increased by 3% to $3,803 during
the three months ended March 31, 1999 from $3,683 for the same quarter in the
prior year. The net losses of the nonconsolidated Operating Companies for the
three months ended March 31, 1999 were primarily the result of increased
revenues only partially offsetting startup and other costs and expenses
associated with design, construction, operation and management of the networks
of the Operating Companies
The number of nonconsolidated Operating Companies paying management
fees to the Company decreased from 8 at March 31, 1998 to 7 at March 31, 1999
due to the Company's increased ownership in certain Operating Companies as a
result of the previously mentioned acquisitions partially offset by the start-up
of new non-consolidated Operating Companies. These non-consolidated Operating
Companies and networks under construction paid management and monitoring fees to
the Company, which are included in revenues, aggregating approximately $1,578
for the three months ended March 31, 1999, as compared with $976 for the same
quarter in the prior fiscal year. The nonconsolidated Operating Companies' net
losses, including networks under construction, for the three months ended March
31, 1998 and 1999 aggregated approximately $5,348 and $7,552, respectively.
Preferred stock dividends increased by 13% to $7,479 for the three
months ended March 31, 1999 from $6,615 for the same period in the prior year.
The increase was due to a higher outstanding preferred stock base resulting from
dividends being paid in additional shares of preferred stock.
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 than it could have on its own. The Company currently
has joint ventures covering seven networks with Local Partners where the Company
owns 50% or less of each joint venture. 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 Operating Companies. Because of the recently
completed partner roll-ups, management of the Company believes this historical
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 purchased
in either February 1998 or March 1999. All adjusted GAAP results of operations
are presented as if Hyperion consolidated all Operating Companies which were
involved in the partnership 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.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
Summary adjusted GAAP information:
Three Months Ended
March 31,
1998 1999
--------- ---------
Adjusted GAAP revenue $ 8,540 $ 26,539
Adjusted GAAP EBITDA loss (2,398) (6,583)
Adjusted GAAP operating loss (11,844) (24,260)
Adjusted GAAP net loss applicable to common stockholders (29,502) (46,333)
Adjusted GAAP capital expenditures 34,960 43,512
Adjusted GAAP gross property, plant and equipment 404,707 573,808
For the three months ended March 31, 1999 adjusted GAAP revenue
increased 211% to $26,539 as compared to $8,540 for the same quarter in the
prior 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 three months ended March 31, 1999, adjusted GAAP EBITDA
(earnings before interest expense, income taxes, depreciation and amortization,
other non-cash charges, interest income and equity in net loss of joint
ventures) loss was $6,583 as compared to $2,398 for the same quarter in the
prior year. EBITDA and similar measurements of cash flow are commonly used in
the telecommunications industry to analyze and compare telecommunications
companies on the basis of operating performance, leverage, and liquidity. While
EBITDA is not an alternative to operating income as an indicator of operating
performance or an alternative to cash flows from operating activities as a
measure of liquidity, all as defined by generally accepted accounting
principles, and while EBITDA may not be comparable to other similarly titled
measures of other companies, the Company's management believes EBITDA is a
meaningful measure of performance. The increase in adjusted GAAP EBITDA loss for
the three months ended March 31, 1999 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 three months ended March 31, 1999, adjusted GAAP operating loss
was $24,259 as compared to $11,844 for the same quarter in the prior 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 three months ended March 31, 1999 adjusted GAAP net loss
applicable to common stockholders was $46,333 as compared to $29,502 for the
same quarter in the prior 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
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
and amortization and increased interest expense and 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 roll-ups.
During the three months ended March 31, 1999, the Company and its
Operating Companies invested $59,197 in capital expenditures, of which
Hyperion's adjusted GAAP share was $43,512. As of March 31, 1999, total gross
property, plant and equipment of the Company and its consolidated subsidiaries
and the Operating Companies, was approximately $732,819. As of March 31, 1999,
Hyperion's proportionate share of gross property, plant and equipment of all
Operating Companies was approximately 90%.
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 $33,795 and $39,684 for
the three months ended March 31, 1998 and 1999, respectively. Further,
investments made by the Company in nonconsolidated Operating Companies were
$18,634 and $18,572 for the three months ended March 31, 1998 and 1999,
respectively. The increase in capital expenditures for the three months ended
March 31, 1999 as compared with the same period in the prior fiscal year is
largely attributable to the 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 the 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 "Recent Developments."
The Company has experienced negative operating cash flow since its
inception. A combination of operating losses, substantial capital investments
required to build the Company's networks and its state-of-the-art NOCC, and
incremental investments in the Operating Companies has resulted in substantial
negative cash flow.
Expansion of the Company's Existing Networks and services and the
development of New Networks and additional networks and services require
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 the New Networks and (iv) the
acquisition of additional ownership interests in Existing Networks. The Company
has made substantial capital investments and investments in Operating Companies
in connection with the installation of switches or remote switching modules in
all of its Existing Networks and plans to install regional super switches in
certain New Networks when such New Networks are operational. To date, the
Company has installed switches in 22 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 connection with the
expansion of its sales force and marketing efforts generally. The Company also
plans to purchase its partners' interests in the Operating Companies when it can
do so at attractive economic terms. The Company estimates that it will require
approximately $400 million to fund the roll-ups, the Entergy acquisition, the
Company's capital expenditures, working capital requirements, operating losses
and pro rata investments in the Operating Companies from April 1, 1999 through
the quarter ended September 30, 2000.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
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 variance 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 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 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.
The Company currently expects that its existing cash balance, demand
advances to Adelphia, internally generated funds and future financing sources
will be sufficient to fund the Company's capital expenditures, acquisitions,
operating losses and pro rata investments in the Operating Companies through
September 2000. There can be no assurance, however, as to the availability of
funds from internal cash flow, Local Partner investments or from the private or
public equity or debt markets. Also, the indentures relating to the 13% Senior
Discount Notes (the "Senior Notes"), the 12 1/4% Senior Secured Notes (the
"Senior Secured Notes") and the Subordinated Notes and the Certificate of
Designation for the 12 7/8% Senior Exchangeable Redeemable Preferred Stock
provide certain restrictions upon the Company's ability to incur additional
indebtedness. The Company's inability to fund its capital expenditures,
acquisitions, operating losses or pro rata investment in the Operating Companies
could have a material adverse effect upon the Company and/or the Operating
Companies.
Year 2000 Issues
The year 2000 issue refers to the inability of computerized systems and
technologies to recognize and process dates beyond December 31, 1999. The
Company is evaluating the impact of the year 2000 issue on its business
applications and its products and services. This could present risks to the
operation of the Company's business in several ways. 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,
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
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:
inventorying and assessing the impact on affected technology and systems,
developing solutions for affected technology and systems,
modifying or replacing affected technology and systems,
testing and verifying solutions,
implementing solutions, 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, and 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.
Costs incurred to date directly related to addressing the year 2000
issue have totaled $475. 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
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
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's systems. The Company's failure or a third-party's
failure to become year 2000 ready or the Company's ability 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.
Competition
The Company faces competition from many competitors with significantly
greater financial resources, well-established brand names and large, existing
installed customer bases. Moreover, we expect the level of competition to
intensify in the future.
In each of the markets served by the Company's networks, the services
offered by the Company compete principally with the services offered by the
Incumbent Local Exchange Carrier ("ILEC") serving that area. ILECs have
long-standing relationships with their customers, have the potential to
subsidize competitive services from monopoly service revenues, and benefit from
favorable state and federal regulations. In light of the passage of the
Telecommunications Act of 1996 (the "Telecommunications Act"), federal and state
regulatory initiatives will provide increased business opportunities to
competitive local exchange carriers ("CLECs") such as the Company, but
regulators are likely to provide ILECs with increased pricing flexibility for
their services as competition increases. Further, if a Regional Bell Operating
Company ("RBOC") is authorized to provide in region long distance service in one
or more states by fulfilling the market operating provisions of the
Telecommunications Act, the RBOC may be able to offer "one stop shopping" that
would be competitive with the company's offerings. To date, each request for
such authority has been denied by the FCC. An approval could result in decreased
market share for the major IXCs, which are among the Operating Companies'
significant customers. Any of these results could have an adverse effect on the
Company.
There has been significant merger activity among the RBOCs in
anticipation of entry into the long distance market, including the completed
merger of Bell Atlantic and NYNEX, whose combined territory covers a substantial
portion of the Company's markets. Other combinations have occurred in the
industry, which may have an effect on the Company, such as the combination of
AT&T Corp. and Teleport Communications Group Inc. ("TCG") and the pending
combination of Bell Atlantic and GTE. The effects of these combinations are
unknown at this time. The Company believes that combinations of RBOCs and others
will also affect the Company's strategy of originating and terminating a
significant proportion of its customers' communications traffic over its own
networks, rather than relying on the network of the ILEC.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
The Company also faces, and will continue to face, competition from
other current and potential market entrants, including other CLECs, ILECs which
are not subject to RBOC restrictions on long distance, AT&T, MCI WorldCom,
Sprint and other IXCs, cable television companies, electric utilities, microwave
carriers, wireless telecommunications providers and private networks built by
large end users. In addition, new carriers, such as Williams, Qwest
Communications International and Level 3 Communications are building and
managing nationwide networks which, in some cases, are designed to provide local
services. Further, AT&T's acquisition of TCI and MediaOne will exploit
ubiquitous local cable infrastructure for telecommunications and other services
provided by the operating companies. Finally, although the Company has generally
good relationships with the other existing IXCs, there are no assurances that
any of these IXCs will not build their own facilities, purchase other carriers
or their facilities, or resell the services of other carriers rather than use
the Company's services when entering the market for local exchange services.
Regulation
Government Overview
A significant portion of the services provided by the Company and its
networks are subject to regulation by federal, state and local government
agencies. Future federal or state regulations and legislation may be less
favorable to us than current regulation and legislation and therefore may have a
material and adverse impact on our business and financial projects. In addition,
we may expend significant financial and managerial resources to participate in
proceedings setting rules at either federal or state level, without achieving a
favorable result.
Federal Legislation and Regulation
The Telecommunications Act ("Telecommunications Act") enacted on
February 21, 1996, substantially departs from prior legislation in the
telecommunications industry by establishing local exchange competition as a
national policy. This act removes state regulatory barriers to competition, and
imposes numerous requirements to facilitate the provision of local
telecommunications services by multiple providers. For instance, carriers must
provide to each other services for resale, number portability, dialing parity,
access to rights of way, and compensation for traffic they exchange. ILECs must
provide competitors with network interconnection, access to unbundled network
elements, and collocation at ILEC premises, among other things. Finally, the FCC
is responsible for implementing and presiding over regimes for universal service
subsidiaries and access.
The Telecommunications Act prohibits state and local governments from
enforcing any law, rule or legal requirement that prohibits or has the effect of
prohibiting any entity from providing interstate or intrastate
telecommunications services. States retain jurisdiction under the
Telecommunications Act to adopt laws necessary to preserve universal service,
protect public safety and welfare, ensure the continued quality of
telecommunications services and safeguard the rights of consumers. The Company
has challenged states' attempts to limit competition in certain rural areas. An
FCC order is pending. Depending on the result, the Company's expansion plans may
be adversely affected.
The FCC is charged with the broad responsibility of implementing the
local competition provisions of the Telecommunications Act. It has done so by
promulgating rules which encourage increased local competition. In 1997, a
federal appeals court for the Eighth Circuit vacated some of these rules. In
January 1999, the United States Supreme Court reversed elements of the Eighth
Circuit's ruling, finding that the FCC has broad authority to interpret the
Telecommunications Act and issue rules for its implementation. Specifically, the
Court stated that the FCC has authority to set pricing guidelines for unbundled
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
network elements, to prevent ILECs from dismantling existing combinations of
network elements, and to establish rules allowing competitors to "pick and
choose" among provisions of existing interconnection agreements. However, the
Court vacated the FCC's rules that identified the unbundled network elements
that ILECs must provide to CLECs. The FCC recently initiated a new proceeding to
reexamine which unbundled network elements ILECs must provide. In addition,
because the Eighth Circuit had only ruled on the FCC's jurisdiction to set a
pricing methodology, the ILECs have renewed their opposition to the actual
methodology.
Many new carriers have experienced difficulties in working with the
ILECs, with respect to provisioning, interconnection, rights-of-way, collocation
and implementing the systems used by these new carriers to order and receive
unbundled network elements and wholesale service from the ILECs. Coordination
with ILECs is necessary for new carriers such as us to provide local service to
customers on a timely and competitive basis. The Telecommunications Act created
incentives for RBOCs to cooperate with new carriers and permit access to their
facilities satisfied statutory conditions designed to open their local markets
to competition. The RBOCs in the Company's proposed markets are not yet
permitted by the FCC to offer long distance services and the Company cannot be
assured that these RBOCs will be accommodating to the Operating Companies once
they are permitted to offer long distance service. If the Operating Companies
are unable to obtain the cooperation of an RBOC in a region, whether or not such
RBOC has been authorized to offer long distance service, ability to offer local
services in such region on a timely and cost effective basis would be adversely
affected.
The FCC recently adopted new rules designed to make it easier and less
expensive for CLECs to obtain collocation at ILEC central offices by, among
other things, restricting the ILECs' ability to prevent certain types of
equipment from being collocated and requiring ILECs to offer alternative
collocation arrangements to CLECs. The FCC also initiated a new proceeding to
address line sharing which, if implemented, would allow CLECs to offer data
services over the same line that a consumer uses for voice services without the
CLEC having to provide the voice service. While the Company expects that the
FCC's new collocation rules will be beneficial to the Operating Companies, it
remains uncertain that these new rules will be implemented in a favorable
manner. Moreover, ILECs or other parties may ask the FCC to reconsider some or
all of its new collocation rules, or may appeal these rules in federal court.
A number of ILECs around the country have been contesting whether the
obligation to pay reciprocal compensation to CLECs should apply to local
telephone calls terminating to Internet service providers ("ISPs"). The ILECs
claim that this traffic is interstate in nature and therefore should be exempt
from compensation arrangements applicable to local, intrastate calls. Most
states have required ILECs to pay ISPs reciprocal compensation. However, on
February 25, 1999, the FCC adopted an order in which it determined that calls to
ISPs are interstate in nature and proposed rules to govern compensation to
carriers for transmitting these calls. It stated, however, that its action was
not intended to dislodge previous state decisions interpreting interconnection
agreements between ILECs and CLECs to require reciprocal compensation between
two local carriers jointly delivering dial-up traffic to ISPs. Although the FCC
does not intend to require ISPs to pay access charges to contribute to universal
service funds, the FCC's order could affect the costs incurred by ISPs and the
demand for their offerings. An unfavorable outcome could materially affect the
Company's potential future revenues.
Several ILECs have recently filed petitions at the FCC requesting a
waiver of certain obligations imposed on ILECs in the Telecommunications Act
with respect to RBOC-provisioned high-speed data services, including, among
other things, the obligation to unbundle and offer for resale such services. In
addition, the ILECs are seeking to provide high-speed data services on an
interLATA basis without complying with the market opening provisions of the
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
competitive checklist set forth in the Telecommunications Act, which would be
otherwise required of them. The FCC has subsequently approved that such services
are subject to interstate jurisdiction and to the resale and unbundling
obligation of the Telecommunications Act. However, the FCC has initiated a
proceeding to determine whether ILECs can create separate affiliates for their
high-speed data services that would be free from these obligations. This outcome
could have a material adverse effect on the Company.
Any of the regulatory changes discussed above could require
renegotiation of relevant portions of existing interconnection agreements, or
subject them to additional court and regulatory proceedings. It remains to be
seen whether the Operating Companies can continue to obtain and maintain
interconnection agreements on terms acceptable to them in every state, though
most states have already adopted pricing rules, if not interim prices, which are
for the most part consistent with the FCC's related pricing provisions.
In an exercise of its "forbearance authority," the FCC has ruled that
following a transition period non-dominant IXCs will no longer be able to file
tariffs with the FCC concerning their interexchange long distance services (the
"IXC Detariffing Order"). Tariffs set forth the terms and conditions under which
the operating companies provide services. This would deprive the Company of the
advantages of being able to rely on terms and conditions contained in a filed
tariff, requiring instead reliance on individual contracts. The IXC Detariffing
Order has been stayed pending review in the U.S. Court of Appeals for the
District of Columbia.
In May 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime. For example, the FCC
established new subsidies for telecommunications and information services
provided to qualifying schools and libraries with an annual cap of $2.3 billion
and for services provided to rural health care providers with an annual cap of
$400 million. The FCC also expanded the federal subsidies for local exchange
telephone service provided to low-income consumers. Providers of interstate
telecommunications services, such as the Company, as well as certain other
entities, must pay for these programs. The Company's share of the payments into
these federal subsidy funds will be based on its share of certain defined
telecommunications end-users' revenues. Currently, the FCC is assessing such
payments on the basis of a provider's revenue for the previous year. In the May
1997 order, the FCC also announced that it will soon revise its rules for
subsidizing service provided to consumers in high cost areas, which may result
in further substantial increases in the overall cost of the subsidy program.
Several parties have appealed the May 1997 order. Such appeals have been
consolidated and transferred to the United States Court of Appeals for the Fifth
Circuit where oral argument was heard in December 1998. Various states area also
in the process of implementing their own universal service programs.
To the extent that the Operating Companies provide interexchange
telecommunications service, access charges are required to be paid to ILECs when
the facilities of those companies are used to originate or terminate
interexchange calls. Also, as CLECs, the Operating Companies provide access
service to other interexchange service providers. The interstate access charges
of ILECs are subject to extensive regulation by the FCC, while those of CLECs
are subject to a lesser degree of FCC regulation but remain subject to the
requirement that all charges be just, reasonable, and not unreasonably
discriminatory. In two orders released in December 1996 and May 1997, the FCC
made major changes in the interstate access charge structure. In the December
1996 order, the FCC removed restrictions on ILECs' ability to lower access
prices and relaxed the regulation of new switched access services in those
markets where there are other providers of access service. If this increased
pricing flexibility is not effectively monitored by federal regulators, it could
have a material adverse effect on the Company's ability to compete in providing
interstate access services. The May 1997 order substantially increased the cost
that ILECs subject to the FCC's price cap rules ("price cap LECs") recover
through a monthly, non-traffic-sensitive access charges. In the May 1997 order,
the FCC also announced its plan to bring interstate access rate levels more in
line with cost. The plan will include rules that are expected to be established
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
sometime in 1999 that may grant price cap LECs increased pricing flexibility
upon demonstration of increased competition (or potential competition) in
relevant markets. The manner in which the FCC implements this approach to
lowering access charge levels could have a material effect on the Company's
ability to compete in providing interstate access services.
In addition, the Operating Companies assess access charges to companies
that use their facilities to originate or terminate long distance calls. Some of
these companies, including AT&T and Sprint, have announced plans to resist
paying access charges that exceed the access charges of the ILEC in any given
geographic area. While the Operating Companies have not experienced any such
challenges to their rights to collect access charges, they could experience them
in the future. If so, the effect upon the Company's business could be material
and adverse.
The Telecommunications Act prohibits state and local governments from
enforcing any law, rule or legal requirement that prohibits or has the effect of
prohibiting any entity from providing interstate or intrastate
telecommunications services. States retain jurisdiction under the
Telecommunications Act to adopt laws necessary to preserve universal service,
protect public safety and welfare, ensure the continued quality of
telecommunications services and safeguard the rights of consumers. The Company
has challenged states' attempts to limit competition in certain rural areas. An
FCC order is pending. Depending on the result, the Company's expansion plans may
be adversely affected.
The FCC also presides over ongoing proceedings addressing a variety of
other matters, including number portability, internet telephony, slamming, and
pole attachment. The outcome of any such proceedings may adversely affect the
Company and its ability to offer service in competition with LECs.
State Regulation
Most State Public Utility Commissions ("PUCs") require companies that
wish to provide intrastate common carrier services to be certified to provide
such services. These certifications generally require a showing that the carrier
has adequate financial, managerial and technical resources to offer the proposed
services in a manner consistent with the public interest. In addition, Operating
Companies have been certificated or are otherwise authorized to provide
telecommunications services in Alabama, Arkansas, Connecticut, Delaware,
District of Columbia, Florida, Indiana, Kansas, Kentucky, Louisiana, Maryland,
Massachusetts, Mississippi, New Hampshire, New Jersey, New York, North Carolina,
Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont and
Virginia and West Virginia. The certificates or other authorizations permit the
Operating Companies to provide a full range of local telecommunications
services, including basic local exchange service. In certain states, each of the
Company, its subsidiaries and the Operating Companies may be subject to
additional state regulatory requirements, including tariff filing requirements,
to begin offering the telecommunications services for which such entities have
been certificated. In some states, and Operating Company's tariff lists a rate
range or sets prices on an individual case basis. Many states also may have
additional regulatory requirements such as reporting and customer service and
quality requirements, Y2K compliance, unbundling and universal service
contributions all of which are subject to change and may adversely affect the
Company. In addition, in virtually every state, the Company's certificate or
other authorization is subject to the outcome of proceedings by the state
commission that address regulation of LECs and CLECs, competition, geographic
build-out, mandatory detariffing, and service requirements, and universal
service issues.
In addition to obtaining certification, an Operating Company must
negotiate terms of interconnection with the ILEC before it can begin providing
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
switched services. To date, the Operating Companies have negotiated
interconnection agreements with one or more of the ILECs, in each state in which
they have been certificated. Agreements are subject to State PUC approval.
Local Government Authorizations
An Operating Company may be required to obtain from municipal
authorities street opening and construction permits, or operating franchises, to
install and expand its fiber optic networks in certain cities. In some cities,
the Local Partners or subcontractors may already possess the requisite
authorizations to construct or expand the Company's networks. An Operating
Company or its Local Partners also may be required to obtain a license to attach
facilities to utility poles in order to build and expand facilities. Because
utilities that are owned by a cooperative or municipality are not subject to
federal pole attachment regulation, there are no assurances that an Operating
Company or its Local Partners will be able to obtain pole attachments from these
utilities at reasonable rates, terms and conditions.
In some of the areas where the Operating Companies provide service,
their Local Partners pay license or franchise fees based on a percent of fiber
lease payment revenues. In addition, in areas where the Company does not use
facilities constructed by a Local Partner, the Operating Company may be required
to pay such fees. There are no assurances that certain municipalities that do
not currently impose fees will not seek to impose fees in the future, nor is
there any assurance that, following the expiration of existing franchises, fees
will remain at their current levels. In addition, some municipalities may seek
to impose requirements or fees on users of transmission facilities, even though
they do not own such facilities.
In many markets, other companies providing local telecommunications
services, particularly the ILECs, currently are excused from paying license or
franchise fees or pay fees that are materially lower than those required to be
paid by the Operating Company or Local Partner. The Telecommunications Act
requires municipalities to charge nondiscriminatory fees to all
telecommunications providers, but it is uncertain how quickly this requirement
will be implemented by particular municipalities in which the Company operates
or plans to operate or whether it will be implemented without a legal challenge
initiated by the Company or another CLEC.
If any of the existing Local Partner Agreements or Fiber Lease
Agreements held by a Local Partner or an Operating Company for a particular
market were terminated prior to its expiration date and the Local Partner or
Operating Company were forced to remove its fiber optic cables from the streets
or abandon its network in place, even with compensation, such termination could
have a material adverse effect on the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 March 31, 1999.
<TABLE>
Expected Maturity
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---------- ---------- ---------- ---------- ---------- ----------- ------------ ------------
Fixed Rate Debt: --- --- --- --- $303,840 $786,294 $1,090,134 $1,055,011
Average Interest Rate 12.53% 12.53% 12.53% 12.53% 12.41% 12.35% --- ---
</TABLE>
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On February 24, 1999, the Company was served with a summons and
complaint filed in the United States District Court for the Northern District of
New York, Case Number 99-CV-268, by Hyperion Solutions Corporation
("Solutions"), which is described in the complaint as a company in the business
of developing, marketing and supporting comprehensive computer software tools,
executive information systems and applications that companies use to improve
their business performance. The complaint alleges, among other matters, that the
company's use of the name "Hyperion" in its business infringes upon various
trademarks and service marks of Solutions in violation of federal trademark laws
and violates various New York business practices, advertising and business
reputation laws. The Complaint seeks, among other matters, to enjoin the Company
from using the name or mark "Hyperion" in the company's business as well as to
recover unspecified damages, treble damages and attorneys' fees. Management of
the Company believes that the Company has meritorious defenses to the complaint
and intends to vigorously defend this lawsuit. Although management believes that
this lawsuit will not in any event have a material adverse effect upon the
Company, no assurance can be given regarding the effect upon the Company if
Solutions were to prevail in this lawsuit.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The attached Exhibit 99.01 provides certain financial and business
information of the Company for the three months ended March 31, 1999, pursuant
to Section 4.03(a)(iii) of the Indenture dated April 15, 1996 with respect to
the 13% Senior Discount Notes.
The attached Exhibit 99.02 provides certain financial and business
information of the Company for the three months ended March 31, 1999, pursuant
to Section 4.03(a)(iii) of the Indenture dated August 27, 1997 with respect to
the 12 1/4% Senior Secured Notes.
The attached Exhibit 99.03 provides certain financial and business
information of the Company for the three months ended March 31, 1999.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 4.01 Indenture dated as of March 2, 1999, with
respect to Hyperion Telecommunications, Inc. 12%
Senior Subordinated Notes due 2007, between Hyperion
and the Bank of Montreal Trust Company (Incorporated
by reference herein is Exhibit 4.01 to the Current
Report on Form 8-K for Adelphia Communications
Corporation filed on March 10, 1999.) (File No.
0-16014).
Exhibit 4.02 Form of 12% Senior Subordinated Notes due 2007
(Contained in Exhibit 4.01).
Exhibit 4.03 Registration Rights Agreement between Hyperion
Telecommunications, Inc. and the Initial Purchasers,
dated March 2, 1999, regarding Hyperion's 12% Senior
Subordinated Notes due 2007 (Incorporated by
reference herein is Exhibit 10.04 to Adelphia's
Current Report on Form 8-K filed on March 10, 1999.)
Exhibit 10.01 Purchase Agreement between Hyperion
Telecommunications, Inc. and the Initial Purchasers
named therein, dated as of February 25, 1999,
regarding Hyperion's 12% Senior Subordinated Notes
due 2007 (Incorporated herein by reference is
Exhibit 10.03 to Adelphia's Current Report on Form
8-K for the event dated February 22, 1999.)
(File No. 0-16104).
Exhibit 10.02 Purchase Agreement between Hyperion
Telecommunications, Inc. and Highland Holdings, dated
as of February 25, 1999, regarding Hyperion's 12%
Senior Subordinated Notes due 2007 (Incorporated
herein by reference is Exhibit 10.05 to Adelphia's
Current Report on Form 8-K for the event dated
February 22, 1999.) (File No. 0-16104).
Exhibit 27.01 Financial Data Schedule (supplied for the information
of the Commission).
Exhibit 99.01 "Schedule E - Form of Financial Information and
Operating Data of the Subsidiaries and the Joint
Ventures Presented by Cluster".
Exhibit 99.02 "Schedule F - Form of Financial Information and
Operating Data of the Pledged Subsidiaries and the
Joint Ventures".
Exhibit 99.03 Press Release dated May 17, 1999
(b) Reports on Form 8-K:
Form 8 Ks were filed on February 18, March 10, and April 6, 1999 which
reported information under Items 5 and 7 thereof. No financial statements
were filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYPERION TELECOMMUNICATIONS, INC.
(Registrant)
Date: May 17, 1999 By: /s/ Timothy J. Rigas
--------------------
Timothy J. Rigas
Vice Chairman, Chief Financial Officer
(authorized officer) and Treasurer
Date: May 17, 1999 By: /s/ Edward E. Babcock, Jr.
--------------------------
Edward E. Babcock, Jr.
Vice President, Finance and
Chief Accounting Officer
<PAGE>
Exhibit Index
Exhibit 27.01 Financial Data Schedule (supplied for the information
of the Commission).
Exhibit 99.01 "Schedule E - Form of Financial Information and
Operating Data of the Subsidiaries and the Joint Ventures
Presented by Cluster".
Exhibit 99.02 "Schedule F - Form of Financial Information and
Operating Data of the Pledged Subsidiaries and the Joint
Ventures".
Exhibit 99.03 Press Release dated May 17, 1999
<PAGE>
Exhibit 99.01
<TABLE>
SCHEDULE E
Hyperion Telecommunications, Inc.
Form of Financial Information and Operating Data
of the Subsidiaries and the Joint Ventures Presented by Cluster
Data presented for the quarter ended: 3/31/99
<S> <C> <C> <C> <C> <C>
Unaudited ***
North East Mid-Atlantic Mid-South Other Total
FINANCIAL DATA (dollars in thousands):
Total Revenue $ 8,270.2 $ 13,473.4 $ 7,122.2 $ 3,628.0 $ 32,493.8
Total Capital Expenditures $ 8,703.0 $ 30,274.9 $ 12,812.7 $ 7,406.7 $ 59,197.3
Total EBITDA $ 2,576.4 $ (1,535.5) $ (3,215.6) $ (1,192.4) $ (3,367.1)
Gross PP&E $ 111,479.9 $ 337,622.9 $ 129,876.7 $ 153,839.7 $ 732,819.2
Proportional Revenue * $ 8,137.6 $ 8,758.9 $ 6,479.5 $ 1,060.1 $ 24,436.1
Proportional Capital Expenditures* $ 8,703.0 $ 23,573.5 $ 10,817.2 $ 5,843.6 $ 48,937.3
Proportional EBITDA * $ 2,979.3 $ (2,533.6) $ (2,265.2) $ (1,480.2) $ (3,299.7)
Proportional Gross PP&E * $ 111,479.9 $ 279,268.2 $ 106,845.1 $ 153,839.7 $ 651,432.9
STATISTICAL DATA Increase for March 31, 1999:
Networks in Operation --- 3 --- --- 3
Route Miles 22 34 14 5 75
Fiber Miles 1,065 1,652 648 182 3,547
Buildings connected 6 16 15 36 73
Building with customers 378 516 982 139 2,015
LEC-COs collocated ** --- 3 5 --- 8
Voice Grade Equivalent Circuits 38,304 232,512 145,824 65,856 482,496
As of December 31, 1998:
Networks in Operation 3 9 6 2 20
Route Miles 3,198 4,153 3,557 4,097 15,005
Fiber Miles 93,309 151,002 66,280 59,186 369,777
Buildings connected 347 681 350 370 1,748
Buildings with customers 2,023 922 2,918 597 6,460
LEC-COs collocated ** 16 64 25 18 123
Voice Grade Equivalent Circuits 212,352 469,728 200,256 195,552 1,077,888
As of March 31, 1999:
Networks in Operation 3 12 6 2 23
Route Miles 3,220 4,187 3,571 4,102 15,080
Fiber Miles 94,374 152,654 66,928 59,368 373,324
Buildings connected 353 697 365 406 1,821
Buildings with customers 2,401 1,438 3,900 736 8,475
LEC-COs collocated ** 16 67 30 18 131
Voice Grade Equivalent Circuits 250,656 702,240 346,080 261,408 1,560,384
Access Lines Sold 27,078 82,344 46,752 11,167 167,341
Access Lines Installed 22,891 75,649 40,116 5,991 144,647
<FN>
* Represents portion attributable to the Company.
** Local Exchange Carrier's central office
*** Other Network amounts includes Network Control Centers and Corporate Capital Expenditures
and Gross Property, Plant and Equipment
</FN>
</TABLE>
<PAGE>
Exhibit 99.02
<TABLE>
SCHEDULE F
Hyperion Telecommunications, Inc.
Form of Financial Information and Operating Data
of the Pledged Subsidiaries and the Joint Ventures
<S> <C>
Data presented for the quarter ended: 3/31/99
Unaudited
Total
FINANCIAL DATA (dollars in thousands)(a):
Total Revenue $ 14,703.2
Total Capital Expenditures $ 17,335.1
Total EBITDA $ 3,614.3
Gross Property, Plant & Equipment $ 204,762.4
STATISTICAL DATA(b):
As of March 31, 1999:
Networks in Operation 7
Route Miles 3,223
Fiber Miles 146,966
Buildings connected 878
LEC-COs collocated 57
Voice Grade Equivalent Circuits 732,480
Access Lines Sold 68,504
Access Lines Installed 55,884
(a) Financial Data represents 100% of the operations of all entities except
Hyperion of Florida, which is reflected at Hyperion's ownership in the
Jacksonville network, which is 20%.
(b) Statistical Data represents 100% of operating data for all entities
</TABLE>
<PAGE>
Exhibit 99.03
Contact Information:
Ed Babcock
Hyperion Communications
814-274-9830
FOR IMMEDIATE RELEASE
HYPERION TELECOMMUNICATIONS, INC. AND ITS OPERATING COMPANIES ANNOUNCE
FIRST QUARTER RESULTS
Coudersport, PA - May 17, 1999
John J. Rigas, Chairman of Adelphia Communications Corporation ("Adelphia")
(NASDAQ NNM: ADLAC) and Hyperion Telecommunications, Inc. ("Hyperion" or "the
Company") (NASDAQ NNM: HYPT) reported results of operations for Hyperion and
its Operating Companies (defined in footnote) for the first quarter which ended
on March 31, 1999.
Due to the recently completed purchase of its partners' interests in the
Jacksonville, FL, Richmond, VA and Wichita, KS markets, Hyperion's and its
consolidated subsidiaries operating results are presented on both an adjusted
generally accepted accounting principles ("GAAP") basis (Exhibit A below) and in
accordance with historical GAAP (Exhibit B below). Adjusted GAAP reflects
Hyperion's consolidated results of operations adjusted for the results of
operations of all Operating Companies for which the Company acquired the
outstanding partnership interests (a "roll-up"). Adjusted GAAP results of
operations are presented as if Hyperion consolidated these Operating Companies
during the entire periods presented. The Company will include operating results
in accordance with GAAP in its Form 10-Q, which will be filed with the
Securities and Exchange Commission.
First quarter results saw adjusted GAAP revenue increase 211% to $26,539,000
over the same quarter in the prior fiscal year and 35% over the December 1998
quarter. The increase in revenues for the first quarter was primarily due to the
continued expansion of the Company's customer base and its success in the
deployment of switched services as a result of the retail end user strategy
adopted by the Company. During the March 1999 quarter, the Operating Companies
sold 36,992 additional access lines, bringing total sales to 167,341 access
lines as of March 31, 1999. (The Company counts access lines on a one for one
basis, irrespective of the number of telephone sets in use through trunks into a
PBX; that is, no multipliers are used.) Installed lines increased 37,979 during
the March 1999 quarter, bringing total installed access lines to 144,647 at
March 31, 1999, approximately 57% of which are provisioned completely on the
Company's network (on-net lines).
First quarter adjusted GAAP gross margin was $16,342,000 or 62% of sales as
compared to $4,522,000, or 53% of sales for the same quarter in the prior fiscal
year and 59% of sales in the December 1998 quarter. The strong gross margin
performance was due to a combination of high margin on-net business customers
with access lines and high margin dedicated access revenues from each of the
markets consolidated from the three completed roll-ups.
First quarter adjusted GAAP EBITDA loss was $6,583,000 as compared to $2,398,000
for the same quarter in the prior fiscal year and $6,728,000 in the December
1998 quarter. The EBITDA loss was somewhat better than Company's expectations
due to the above noted gross margin improvement and higher sales. Offsetting the
improved gross margin were increased selling, general, and administrative
expenses as a result of the ramp up in direct sales and marketing distribution
channels and increased costs associated with the Company's network expansion
efforts. The Company's sales force increased in the quarter by 153 professionals
from 251 at December 31, 1998 to 404 at March 31, 1999 reflecting the Company's
commitment to its expansion strategy into 50 new markets during 1999 and 2000.
The Company is now selling communication services in 39 markets (represented as
separate Metropolitan Statistical Areas or MSAs) in the eastern half of the
United States up from 22 MSAs in December 1998.
<PAGE>
First quarter adjusted GAAP net loss applicable to common stockholders was
$46,333,000 or ($0.83) per share as compared to $29,502,000 or ($0.84) per
share for the same quarter in the prior fiscal year and $39,585,000 or ($0.71)
per share for the December 1998 quarter. The increase in adjusted GAAP net loss
for the first quarter was due primarily to the above mentioned increase in
selling, general and administrative expenses, increased depreciation and
amortization expenses 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
roll-ups.
Hyperion's six most mature markets (the "Mature Markets") continued to
demonstrate improved financial results with March 1999 quarterly revenues of
$13,583,000, a 19.4% quarterly increase over December 1998 revenues and 137%
increase over the comparable quarter a year ago. Gross margins continued to be
very strong at 72% of sales and EBITDA margins of 36% of sales, or $4,900,000
represented a 31% quarterly increase over the December 1998 quarter and over six
times the March 1998 quarter. Furthermore, 12 of Hyperion's base 22 markets were
EBITDA positive in the March 1999 quarter, up from 8 in December 1998, and
Hyperion's base 22 markets generated overall positive EBITDA of $4,600,000, or
14% of sales.
"We are very pleased with our first quarter financial and operating results, and
are equally excited about the prospects for future growth," stated James Rigas,
Hyperion's Chief Executive Officer. "Both the mature markets and base markets
financial performance clearly demonstrates the business plan works. Our market
expansion strategy is on track and we have had success attracting and retaining
talented professionals in all areas of the organization. Overall, we are
optimistic about Hyperion's prospects for future success."
During the March 1999 quarter, the Company and its Operating Companies invested
$59,197,000 in capital expenditures, of which Hyperion's adjusted GAAP share was
$43,512,000. As of March 31, 1999, total gross property, plant and equipment of
the Company and its consolidated subsidiaries on an adjusted GAAP basis was
approximately $573,808,000.
As of March 31, 1999, Hyperion's proportionate share of the gross, property
plant and equipment of the Company and the Operating Companies was approximately
90%. Proportionate share reflects the collective sum of Hyperion and Hyperion's
economic interest in each of the Operating Companies it owns and manages at
Hyperion's ownership percentage as of March 31, 1999. As of March 31, 1999, the
Operating Companies had approximately 6,108 local route miles and 283,432 local
fiber miles. The Company had customers located in approximately 8,475 buildings
of which 1,821 buildings were connected with Company owned fiber and was
collocated in 131 local exchange carriers LSOs. To date, 22 Lucent 5ESS switches
or remote switching modules have been installed to provide local telephone
service with eight additional regional super switches planned for operation
during 1999.
Hyperion Communications, is a majority owned subsidiary of Adelphia
Communications Corporation that provides integrated communications services to
business customers through its state-of-the-art fiber optic communications
network. By the year 2001, Hyperion will serve most cities in the eastern half
of the United States through the interconnection of approximately 100 MSAs,
creating a single fiber optic backbone network. This fully redundant,
16,000-mile local and long-haul fiber optic network will support Hyperion's full
line of communication service offerings, including local and long distance voice
services, messaging, high-speed data and Internet services. For more information
on Hyperion, visit the company's web site at http://www.hyperioncom.net.
Exhibit A that follows sets forth the adjusted GAAP operating results for
Hyperion and consolidated subsidiaries, adjusted for the roll-up transactions,
for the three months ended March 31, 1998 and 1999.
Exhibit B that follows sets forth the operating results in accordance with
historical GAAP for Hyperion and its consolidated subsidiaries for the three
months ended March 31, 1998 and 1999, respectively.
Footnote: Hyperion's Operating Companies represent partnerships or
limited liability companies with local partners, and wholly or majority owned
subsidiaries of the Company (collectively, the "Operating Companies").
<PAGE>
<TABLE>
EXHIBIT A
Hyperion Telecommunications, Inc. and its Operating Companies
Adjusted GAAP Operating Results (a)
Unaudited
Three Months Ended
March 31,
1998 1999
<S> <C> <C>
Operating Revenue $ 8,540,000 $ 26,539,000
Direct Operating Expenses 4,018,000 10,197,000
-------------- --------------
Gross Margin 4,522,000 16,342,000
Sales, General & Administrative Expenses 6,920,000 22,925,000
-------------- --------------
EBITDA (b) (2,398,000) (6,583,000)
Depreciation & Amortization Expense 9,446,000 17,677,000
-------------- --------------
Operating Loss (11,844,000) (24,260,000)
Interest Income 5,394,000 2,029,000
Interest Income - Affiliate 251,000 2,828,000
Interest Expense (14,041,000) (15,849,000)
-------------- --------------
Loss before Equity in Net Loss of Joint Ventures (20,240,000) (35,252,000)
Equity in Net Loss of Joint Ventures (2,647,000) (3,602,000)
-------------- --------------
Net Loss (22,887,000) (38,854,000)
Preferred Stock Dividends (6,615,000) (7,479,000)
-------------- --------------
Net Loss Applicable to Common Stockholders $ (29,502,000) $ (46,333,000)
============== ==============
Basic and Diluted Net Loss per Weighted Average Share
of Common Stock $ (0.84) $ (0.83)
============== ==============
Weighted Average Shares of Common Stock Outstanding 35,272,000 55,497,000
============== ==============
<FN>
(a) Adjusted GAAP reflects Hyperion's consolidated operating results adjusted
for the consolidation of certain joint ventures (Buffalo, Syracuse, New Jersey,
Louisville, Lexington, Harrisburg, Richmond, Jacksonville, and Wichita) in which
Hyperion has bought out its partners' interests. All results of operations are
presented as if all of the purchases had occurred at the beginning of the
periods presented.
(b) Earnings before interest, income taxes, depreciation and amortization and
other income/expense ("EBITDA") and similar measures of cash flow are commonly
used in the telecommunications industry to analyze and compare
telecommunications companies on the basis of operating performance, leverage,
and liquidity. While EBITDA is not an alternative indicator of operating
performance or an alternative to cash flows from operating activities as a
measure of liquidity as defined by GAAP, and while EBITDA may not be meaningful
measure of performance.
</FN>
</TABLE>
<PAGE>
<TABLE>
EXHIBIT B
Hyperion Telecommunications, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
Three Months Ended
March 31,
1998 1999
<S> <C> <C>
Revenues $ 4,820,000 $ 21,438,000
-------------- --------------
Operating Expenses
Network Operations 2,541,000 8,504,000
Selling, General & Administrative 5,215,000 21,009,000
Depreciation & Amortization 4,450,000 13,535,000
-------------- --------------
Total 12,206,000 43,048,000
-------------- --------------
Operating Loss (7,386,000) (21,610,000)
Other Income (Expense)
Interest Income 5,102,000 1,998,000
Interest Income - Affiliate 251,000 2,828,000
Interest Expense (13,400,000) (15,533,000)
-------------- --------------
Loss Before Equity in Net Loss (15,433,000) (32,317,000)
of Joint Ventures
Equity in Net Loss of Joint Ventures (3,683,000) (3,803,000)
-------------- --------------
Net Loss (19,116,000) (36,120,000)
Preferred Stock Dividends (6,615,000) (7,479,000)
-------------- --------------
Net Loss Applicable to Common Stockholders $ (25,731,000) $ (43,599,000)
============== ==============
Basic and Diluted Net Loss per Weighted Average
Share of Common Stock $ (0.73) $ (0.79)
============== ==============
Weighted Average Shares of Common 35,272,000 55,497,000
============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE FOR HYPERION TELECOMMUNICATIONS, INC. FOR THE THREE
MONTHS ENDED MARCH 31, 1999
</LEGEND>
<CIK> 0001017648
<NAME> HYPERION TELECOMMUNICATIONS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 142,386
<SECURITIES> 0
<RECEIVABLES> 261,093
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 523,742
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,113,474
<CURRENT-LIABILITIES> 28,665
<BONDS> 778,531
0
236,293
<COMMON> 547
<OTHER-SE> 29,745
<TOTAL-LIABILITY-AND-EQUITY> 1,113,474
<SALES> 0
<TOTAL-REVENUES> 21,483
<CGS> 0
<TOTAL-COSTS> 43,048
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (15,533)
<INCOME-PRETAX> (32,317)
<INCOME-TAX> 0
<INCOME-CONTINUING> (32,317)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,599)
<EPS-PRIMARY> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
