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 December 31, 1998
____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______________
to _____________
Commission File Number: 000-21605
HYPERION TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1669404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Main at Water Street Coudersport, PA 16915-1141
(Address of principal (Zip code)
executive offices)
814-274-9830
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At February 12, 1999, 22,391,221 shares of Class A Common Stock, par
value $0.01 per share, and 32,302,641 shares of Class B Common Stock,
par value $0.01 per share, of the registrant were outstanding.
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1998 and December 31, 1998.....................3
Condensed Consolidated Statements of Operations - Three and nine months ended
December 31, 1997 and 1998.....................................................................4
Condensed Consolidated Statements of Cash Flows - Nine months ended
December 31, 1997 and 1998.....................................................................5
Notes to Condensed Consolidated Financial Statements.............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................28
Item 2. Changes in Securities and Use of Proceeds......................................................28
Item 3. Defaults Upon Senior Securities...............................................................28
Item 4. Submission of Matters to a Vote of Security Holders...........................................29
Item 5. Other Information.............................................................................30
Item 6. Exhibits and Reports on Form 8-K...............................................................30
SIGNATURES..............................................................................................32
INDEX TO EXHIBITS.......................................................................................33
Item 1. Financial Statements
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except share amounts)
March 31, December 31,
1998 1998
---------- ----------
ASSETS:
Current assets:
Cash and cash equivalents $ 230,750 $ 242,570
Due from parent - net -- 4,950
Due from affiliates - net 2,151 1,078
Other current assets 4,434 15,583
--------- ---------
Total current assets 237,355 264,181
U.S. government securities - pledged 70,535 58,054
Investments 53,064 112,328
Property, plant and equipment - net 250,633 374,702
Other assets - net 28,425 27,077
--------- ---------
Total $ 639,992 $ 836,342
========= =========
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND (DEFICIENCY):
OTHER STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 11,775 $ 20,386
Due to parent - net 6,541 --
Accrued interest and other current liabilities 4,687 19,142
--------- ---------
Total current liabilities 23,003 39,528
13% Senior Discount Notes due 2003 215,213 220,784
12 1/4% Senior Secured Notes due 2004 250,000 250,000
Note payable - Adelphia 35,876 --
Other debt 27,687 23,325
--------- ---------
Total liabilities 551,779 533,637
--------- ---------
12 7/8% Senior exchangeable redeemable preferred stock 207,204 228,674
--------- ---------
Commitments and contingencies (Note 3)
Common stock and other stockholders' equity (deficiency):
Class A common stock, $0.01 par value, 300,000,000 shares
authorized, 396,500 and 22,376,071 shares outstanding,
respectively 4 224
Class B common stock, $0.01 par value, 150,000,000
shares authorized, 32,500,000 and 32,314,761 shares
outstanding, respectively 325 323
Additional paid in capital 179 286,782
Class A common stock warrants 13,000 --
Class B common stock warrants 11,087 4,483
Loans to stockholders (3,000) --
Accumulated deficit (140,586) (217,781)
--------- ---------
Total common stock and other stockholders' equity (deficiency) (118,991) 74,031
--------- ---------
Total $ 639,992 $ 836,342
========= =========
See notes to condensed consolidated financial statements.
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except per share amounts)
Three Months Ended Nine months Ended
December 31, December 31,
----------------------- -----------------------
1997 1998 1997 1998
--------- --------- --------- ---------
Revenues $ 4,983 $ 15,043 $ 8,690 $ 34,776
-------- -------- -------- --------
Operating expenses:
Network operations 2,657 6,664 5,263 18,709
Selling, general and administrative 3,840 16,518 9,099 35,341
Depreciation and amortization 3,344 10,708 7,027 26,671
-------- -------- -------- --------
Total 9,841 33,890 21,389 80,721
-------- -------- -------- --------
Operating loss (4,858) (18,847) (12,699) (45,945)
Other income (expense):
Interest income 5,632 1,829 7,675 10,233
Interest income - affiliate 93 3,576 276 8,395
Interest expense (16,770) (12,399) (35,934) (38,638)
Other income -- -- -- 1,113
-------- -------- -------- --------
Loss before income taxes and
equity in net loss of joint ventures (15,903) (25,841) (40,682) (64,842)
Income tax expense -- -- -- --
-------- -------- -------- --------
Loss before equity in net loss
of joint ventures (15,903) (25,841) (40,682) (64,842)
Equity in net loss of joint ventures (2,858) (3,776) (9,284) (9,580)
-------- -------- -------- --------
Loss before extraordinary gain (18,761) (29,617) (49,966) (74,422)
Extraordinary gain on repurchase of debt -- -- -- 237
-------- -------- -------- --------
Net loss (18,761) (29,617) (49,966) (74,185)
Dividend requirements applicable to preferred stock (5,794) (7,284) (5,794) (21,117)
-------- -------- -------- --------
Net loss applicable to common stockholders $(24,555) $(36,901) $(55,760) $(95,302)
======== ======== ======== ========
Basic and diluted net loss per weighted average
share of common stock $ (0.70) $ (0.66) $ (1.60) $ (1.80)
======== ======== ======== ========
Weighted average shares of
common stock outstanding 34,890 55,497 34,890 53,035
======== ======== ======== ========
See notes to condensed consolidated financial statements.
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine months
Ended December 31,
--------------------------
1997 1998
----------- -----------
Cash flows from operating activities:
Net loss $ (49,966) $ (74,185)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 5,269 23,838
Amortization 1,758 2,833
Noncash interest expense 24,680 23,857
Equity in net loss of joint ventures 9,284 9,580
Issuance of Class A common stock bonus 27 761
Extraordinary gain on repurchase of debt -- (237)
Change in operating assets and liabilities
net of effects of acquisitions:
Other assets - net (3,646) (15,533)
Accounts payable (101) 9,862
Accrued interest and other 11,086 10,414
--------- ---------
Net cash used in operating activities (1,609) (8,810)
--------- ---------
Cash flows from investing activities:
Expenditures for property, plant and equipment (34,834) (146,752)
Investments in joint ventures (48,574) (69,018)
Net cash used for acquisitions (7,638) --
Investment in U. S. government securities - pledged (83,400) --
Sale of U.S. government securities - pledged -- 15,312
--------- ---------
Net cash used in investing activities (174,446) (200,458)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 194,733 --
Proceeds from issuance of Class A common stock -- 255,462
Costs associated with issuance of Class A common stock -- (14,742)
Proceeds from debt 250,000 --
Costs associated with debt financing (12,496) --
Repayment of debt (402) (19,868)
Proceeds from sale and leaseback of equipment 14,876 --
Advances from (to) related parties 2,393 (2,764)
Repayment of loans to stockholders -- 3,000
--------- ---------
Net cash provided by financing activities 449,104 221,088
--------- ---------
Increase in cash and cash equivalents 273,049 11,820
Cash and cash equivalents, beginning of period 59,814 230,750
--------- ---------
Cash and cash equivalents, end of period $ 332,863 $ 242,570
========= =========
See notes to condensed consolidated financial statements.
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
Hyperion Telecommunications, Inc. is a majority owned subsidiary of
Adelphia Communications Corporation ("Adelphia"). The accompanying unaudited
condensed consolidated financial statements of Hyperion Telecommunications,
Inc. and its majority owned subsidiaries ("Hyperion" or the "Company") have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission.
In the opinion of management, all adjustments, consisting of only
normal recurring accruals necessary for a fair presentation of Hyperion at
December 31, 1998 and the unaudited results of operations for the three and nine
months ended December 31, 1997 and 1998, have been included. These condensed
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements included in its Annual Report on
Form 10-K for the fiscal year ended March 31, 1998. The results of operations
for the three and nine months ended December 31, 1998, are not necessarily
indicative of the results to be expected for the fiscal year ending March 31,
1999.
1. Significant Events Subsequent to March 31, 1998:
On May 8, 1998, the Company issued and sold 12,500,000 shares of Class A Common
Stock at a price to the public of $16.00 per share (the "IPO"). Simultaneously
with the closing of the IPO, the Company (i) issued and sold an additional
3,324,001 shares of Class A Common Stock to Adelphia at a purchase price of
$15.00 per share (or an aggregate of approximately $49,900) and (ii) issued
3,642,666 shares of Class A Common Stock to Adelphia in exchange for certain of
the Company's indebtedness and payables owed to Adelphia at a purchase price of
$15.00 per share (or an aggregate of $54,600). In a related transaction, on June
5, 1998, the Company issued and sold 350,000 shares of Class A Common Stock at
the $16.00 IPO price pursuant to the underwriters' over-allotment option in the
IPO. These transactions increased the Company's equity by approximately
$285,000, while raising approximately $241,000 of net proceeds to continue the
expansion of the Company's existing markets and to build new markets.
In connection with the IPO, Adelphia purchased all warrants, including
any antidilutive provisions, issued to MCImetro Access Transmission Services,
Inc. (together with its affiliate, MCI Communications, "MCI") in connection with
a previous agreement which designated the Company as MCI's preferred provider of
end use dedicated access for all new MCI customers and of end user dedicated
access circuits resulting from conversions from incumbent LECs in the Company's
markets. Furthermore, in consideration of the obligations undertaken by Adelphia
to facilitate the agreements between MCI and the Company, the Company paid to
Adelphia a fee of $500 and issued a warrant to Adelphia to purchase 200,000
shares of Hyperion's Class A Common Stock at an exercise price equal to the IPO
price.
Through December 31, 1998, 195,965 Class B warrants were exercised and
converted into 1,187,541 shares of Class B Common Stock. Of the 1,187,541 shares
issued, 1,172,391 shares had been converted into Class A Common Stock as of
December 31, 1998. The Company received $3 in consideration for the exercise of
the Class B warrants.
On May 15, 1998, Lenfest Telephony, Inc. ("Lenfest") exercised its
warrant to receive 731,624 shares of Hyperion's Class A Common Stock. The
warrant related to the purchase by Hyperion of Lenfest's partnership interest in
the Harrisburg, Pennsylvania network on February 12, 1998. The Company received
no additional consideration for the exercise of the warrant.
Hyperion has entered into a series of agreements with several local and
long-haul fiber optic network providers that will allow the Company to
significantly increase its presence in the eastern half of the United States.
These agreements, totaling approximately $126,000, provide the Company with
ownership or an indefeasible right of use (IRU) to over 9,000 route miles of
local and long-haul fiber optic cable. Through December 31, 1998, the Company
has paid $42,604 of the total due under the agreements, which was included in
the property, plant and equipment of the Company. The Company believes this will
allow Hyperion to expand its business strategy to include on-net provisioning of
regional, local and long distance, internet and data communications and to
cost-effectively further interconnect most of its 46 existing markets and to
cost effectively enter and interconnect approximately 50 new markets by the end
of 2001.
During 1998, through a partnership in which Hyperion is a 49.9% limited
partner, the Company was the successful bidder, at a cost of approximately $45
million, for 195 31-GHz licenses, which cover approximately 83 million POPs in
the eastern United States representing coverage in most of its network system
territory. Hyperion and its partner are currently in the process of dissolving
the partnership and the licenses are to become the property of Hyperion at no
additional cost to Hyperion. As of December 31, 1998, the partnership had fully
funded its obligation due to the Federal Communications Commission ("FCC"). The
Company plan to use the LMDS spectrum in most of its markets, and believe the
spectrum to be highly complementary to its fiber-based systems as a economical
means to provide "last-mile" connectivity for customers which otherwise could
not be economically addressed with broadband connectivity.
LMDS is a fixed broadband point-to-multipoint service which the FCC
anticipates will be used for the deployment of wireless local loop, high speed
data transfer and video broadcasting services. The Company currently plans to
use such spectrum for "last-mile" connectivity in certain of its markets, and
believes the spectrum to be highly complementary to its fiber-based systems. The
Company is in the process of further refining its plans for utilization of the
LMDS spectrum, which could involve substantial additional funds.
On November 4, 1998, the Company entered into purchase agreements with
subsidiaries of MediaOne of Colorado, Inc. ("MediaOne"), its local partners in
the Jacksonville, FL and Richmond, VA networks, whereby MediaOne will receive
approximately $82,751 in cash for MediaOne's ownership interests in these
networks. In addition, the Company will be responsible for the payment of fiber
lease liabilities due to MediaOne in the amount of approximately $14,500 which
are generally payable over the next ten years. Upon consummation of this
transaction, which is subject to normal closing conditions and receipt of
regulatory approvals, the Company's ownership interest in each of these networks
will increase to 100%.
On November 10, 1998, the Company and Telergy, Inc. ("Telergy") entered
into a binding letter agreement that modified certain provisions of the Senior
Secured Note agreement with Telergy and extended the note's maturity from
January 20, 1999 to January 20, 2000 in exchange for an IRU or long term lease
of certain fiber segments in New York City and along certain of Telergy's long
haul fiber segments in the northeastern United States and southeastern Canada.
Telergy must deliver such fiber segments within certain agreed upon timelines or
be subject to prescribed liquidated damages.
On January 25, 1999, the Company entered into a purchase agreement with
Multimedia, Inc. ("Multimedia"), the parent of its local partner in the Wichita,
KS market, whereby Multimedia will receive approximately $8,500 in cash for
Multimedia's ownership interest in this network. In addition, the Company will
be responsible for the payment of fiber lease liabilities due to Multimedia in
the amount of approximately $2,800 which is payable over the next six years.
Upon consummation of the transaction, which is subject to normal closing
conditions and receipt of regulatory approvals, the Company's ownership in
Wichita will increase to 100%.
During the quarter ended September 30, 1998, Hyperion paid $17,313 to
repurchase a portion of the 13% Senior Discount Notes due 2003 which had a face
value of $25,160 and a carrying value of $17,550. The notes were retired upon
repurchase which resulted in a $237 gain.
The Company has made demand advances to Adelphia which, as of December
31, 1998, had an outstanding balance of $7,600. The Company received interest on
the advances at a rate of 6.3%.
2. Investments:
The equity method of accounting is used to account for investments in
joint ventures in which the Company holds less than a majority interest. Under
this method, the Company's initial investment is recorded at cost and
subsequently adjusted for the amount of its equity in the net income or losses
of its joint ventures. Dividends or other distributions are recorded as a
reduction of the Company's investment. Investments in joint ventures accounted
for using the equity method reflect the Company's equity in their underlying net
assets.
The Company's nonconsolidated investments are as follows:
Ownership March 31, December 31,
Percentage 1998 1998
--------------- ------------ --------------
MediaOne Fiber Technologies (Jacksonville) 20.0% $ 7,984 $ 8,150
Multimedia Hyperion Telecommunications (Wichita) 49.9 3,537 5,863
MediaOne of Virginia (Richmond) 37.0 7,213 7,284
PECO-Hyperion (Philadelphia) 50.0 21,229 33,936
PECO-Hyperion (Allentown, Bethlehem, Easton, Reading) 50.0 2,753 7,227
Hyperion of York 50.0 4,256 5,721
Allegheny Hyperion Telecommunications 50.0 -- 3,043
Entergy Hyperion Telecommunications of Louisiana 50.0 3,407 6,714
Entergy Hyperion Telecommunications of Mississippi 50.0 3,666 7,130
Entergy Hyperion Telecommunications of Arkansas 50.0 4,209 7,586
Baker Creek Communications 49.9 (1) 10,009 44,637
Other Various 1,333 1,323
---------- ----------
69,596 138,614
Cumulative equity in net losses (16,532) (26,286)
---------- ----------
Total $ 53,064 $ 112,328
========== ==========
<FN>
(1) On March 24, 1998, the Federal Communications Commission ("FCC") completed
the auction of licenses for LMDS. 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. See Note 1 of the Condensed Consolidated Financial Statements.
</FN>
Summarized combined unaudited financial information for the
Company's nonconsolidated investments being investments listed above being
accounted for using the equity method of accounting as of December 31, 1998 for
the periods ended, is as follows:
March 31, December 31,
1998 1998
----------- ------------
Current assets $ 7,476 $ 11,315
Property, plant and equipment -net 153,495 190,552
Other non-current assets 13,454 47,522
Current liabilities 13,422 18,599
Non-current liabilities 58,004 48,635
Nine months ended December 31,
1997 1998
----------- -----------
Revenues 7,687 24,986
Net loss (13,719) (22,325)
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 nine months ended December 31, 1998, the Company paid interest
of $15,312. For the nine months ended December 31, 1997, no cash was paid for
interest.
Accumulated depreciation of property, plant and equipment amounted to
$14,251 and $38,089 at March 31, 1998 and December 31, 1998, respectively.
6. Recent Accounting Pronouncements:
Statement of Position ("SOP") 98-5, "Reporting on the costs of Start-Up
Activities," has been issued and is effective for fiscal years beginning after
December 15, 1998. SOP 98-5 provides guidance on the financial reporting of
start up costs and organization costs. It requires such costs to be expensed as
incurred. Management of the Company believes that SOP 98-5 will not have a
material impact on the Company.
7. Reclassification:
Certain prior period amounts have been reclassified to conform with the current
period presentation.
-------------------------------------------------
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction
with the Company's unaudited Condensed Consolidated Financial Statements and the
Notes thereto appearing elsewhere in this Form 10-Q and the Company's audited
Consolidated Financial Statements and Notes thereto filed on Form 10-K for the
fiscal year ended March 31, 1998.
Overview
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-Q, including Management's Discussion and Analysis of Financial Condition
and Results of Operations, is forward-looking, such as information relating to
the effects of future regulation, future capital commitments and the effects of
competition. Such forward-looking information involves important risks and
uncertainties that could significantly affect expected results in the future
from those expressed in any forward-looking statements made by, or on behalf of,
the Company. These risks and uncertainties include, but are not limited to,
uncertainties relating to economic conditions, acquisitions and divestitures,
government and regulatory policies, the pricing and availability of equipment,
materials, and inventories, technological developments, year 2000 issues,
actions of competitors and changes in the competitive environment in which the
Company operates. Unless otherwise stated, the information contained in this
Form 10-Q is as of and for the nine months ended December 31, 1997 and 1998.
The "Company" or "Hyperion" means Hyperion Telecommunications, Inc.
together with its majority-owned subsidiaries, except where the context
otherwise requires. Unless the context otherwise requires, references herein to
the "networks" or the "Company's networks" mean the (a) 22 telecommunications
networks (in 46 cities served) in operation or under construction (the "Existing
Networks") owned as of December 31, 1998 by 20 Operating Companies (which, as
defined herein, are (i) wholly and majority owned subsidiaries of the Company or
(ii) joint venture partnerships and corporations managed by the Company and in
which the Company holds less than a majority equity interest with one or more
other partners) and (b) additional networks under development (the "New
Networks") as of such date.
The Company, through its Operating Companies, provides a competitive
alternative to the telecommunications services offered by the incumbent local
exchange carriers ("LECs") in its markets. The Operating Companies' customers
are principally small, medium and large businesses and government and
educational end users as well as Interexchange or Long Distance Carriers
("IXCs") and other telecommunications providers.
As of December 31, 1998, the Company's Operating Companies are made up
of ten wholly-owned subsidiaries (through which the Company has an interest in
11 networks), one partnership in which it is a majority owner and nine joint
venture investments (through which the Company has an interest in ten networks)
in which the Company owns 50% or less. Results of the wholly and majority owned
subsidiaries and partnerships are consolidated into the Company's financial
statements. The Company's pro rata share of the results of the Operating
Companies where the Company owns 50% or less are recorded under the caption
"Equity in net loss of joint ventures" in the Company's consolidated financial
statements and results of operations utilizing the equity method of accounting.
Correspondingly, the Company's initial investments in these Operating Companies
have been carried at cost, and subsequently have been adjusted for the Company's
pro rata share of the Operating Companies' net losses, additional capital
contributions to the Operating Companies, and distributions from the Operating
Companies to the Company. Hyperion's weighted average ownership in these
Operating Companies, adjusted for the pending acquisition of its partners'
interests in the Jacksonville, FL, Richmond, VA and Wichita, KS markets
discussed in Recent Developments below, is approximately 90%, based upon gross
property, plant and equipment.
The Company initiated its switched services deployment plan in 1997 and
currently provides switched services in 20 markets. Switches for the remaining
markets are expected to be operational during 1999. In the Existing Networks,
the Company estimates that there are approximately 13.2 million business access
lines in service. With the expansion of the Company's business into the New
Networks, the Company anticipates that its total addressable market will exceed
$40 billion annually or 20 million access lines. The Company has experienced
initial success in the sale of business access lines with approximately 133,686
access lines sold as of December 31, 1998, of which approximately 110,005 lines
are installed. This represents an addition of 39,726 access lines sold and
32,871 access lines installed during the quarter ended December 31, 1998. As of
December 31, 1998, approximately 63% of these access lines are provisioned
entirely on the Company's network ("on-net lines") with the remainder being a
combination of unbundled loops or total service resale from LEC networks.
Recent Developments
On May 8, 1998, the Company issued and sold 12,500,000 shares of Class A Common
Stock at a price to the public of $16.00 per share (the "IPO"). Simultaneously
with the closing of the IPO, the Company (i) issued and sold an additional
3,324,001 shares of Class A Common Stock to Adelphia at a purchase price of
$15.00 per share (or an aggregate of approximately $49,900) and (ii) issued
3,642,666 shares of Class A Common Stock to Adelphia in exchange for certain of
the Company's indebtedness and payables owed to Adelphia at a purchase price of
$15.00 per share (or an aggregate of $54,600). In a related transaction, on June
5, 1998, the Company issued and sold 350,000 shares of Class A Common Stock at
the $16.00 IPO price pursuant to the underwriters' over-allotment option in the
IPO. These transactions increased the Company's equity by approximately
$285,000, while raising approximately $241,000 of net proceeds to continue the
expansion of the Company's existing markets and to build new markets.
In connection with the IPO, Adelphia purchased all warrants, including
any antidilutive provisions, issued to MCImetro Access Transmission Services,
Inc. (together with its affiliate MCI Communications, "MCI") in connection with
a previous agreement which designated the Company as MCI's preferred provider of
end use dedicated access for all new MCI customers and of end user dedicated
access circuits resulting from conversions from incumbent LECs in the Company's
markets. Furthermore, in consideration of the obligations undertaken by Adelphia
to facilitate the agreements between MCI and the Company, the Company paid to
Adelphia a fee of $500 and issued a warrant to Adelphia to purchase 200,000
shares of Hyperion's Class A Common Stock at an exercise price equal to the IPO
price.
Through December 31, 1998, 195,965 Class B warrants were exercised and
converted into 1,187,541 shares of Class B Common Stock. Of the 1,187,541 shares
issued, 1,172,391 shares had been converted into Class A Common Stock as of
December 31, 1998. The Company received $3 in consideration for the exercise of
the Class B warrants.
On May 15, 1998, Lenfest Telephony, Inc. ("Lenfest") exercised its
warrant to receive 731,624 shares of Hyperion's Class A Common Stock. The
warrant related to the purchase by Hyperion of Lenfest's partnership interest in
the Harrisburg, Pennsylvania network on February 12, 1998. The Company received
no additional consideration for the exercise of the warrant.
Hyperion has entered into a series of agreements with several local and
long-haul fiber optic network providers that will allow Hyperion to
significantly increase its presence in the eastern half of the United States.
These agreements, totaling approximately $126,000, provide Hyperion with
ownership or an indefeasible right of use to over 9,000 route miles of fiber
optic cable. Through December 31, 1998, the Company has paid $42,604 of the
total due under the agreements, which was included in the property, plant and
equipment of the Company. The Company believes this will allow Hyperion to
expand its business strategy to include on-net provisioning of regional, local
and long distance, internet and data communications and to cost effectively
further interconnect most of its 46 existing markets and to cost effectively
enter and interconnect 50 new markets by the end of 2001.
During 1998, through a partnership in which Hyperion is a 49.9% limited
partner, the Company was the successful bidder, at a cost of approximately $45
million, for 195 31-GHz licenses, which cover approximately 83 million POPs in
the eastern United States representing coverage in most of its network system
territory. Hyperion and its partner are currently in the process of dissolving
the partnership and the licenses are to become the property of Hyperion at no
additional cost to Hyperion. As of December 31, 1998, the partnership had fully
funded its obligation due to the Federal Communications Commission ("FCC"). The
Company plan to use the LMDS spectrum in most of its markets, and believe the
spectrum to be highly complementary to its fiber-based systems as a economical
means to provide "last-mile" connectivity for customers which otherwise could
not be economically addressed with broadband connectivity.
LMDS is a fixed broadband point-to-multipoint service which the FCC
anticipates will be used for the deployment of wireless local loop, high speed
data transfer and video broadcasting services. The Company currently plans to
use such spectrum for "last-mile" connectivity in certain of its markets, and
believes the spectrum to be highly complementary to its fiber-based systems. The
Company is in the process of further refining its plans for utilization of the
LMDS spectrum, which could involve substantial additional funds.
On November 4, 1998, the Company entered into purchase agreements with
subsidiaries of MediaOne of Colorado, Inc. ("MediaOne"), its local partners in
the Jacksonville, FL and Richmond, VA networks, whereby MediaOne will receive
approximately $82,751 in cash for MediaOne's ownership interests in these
networks. In addition, the Company will be responsible for the payment of fiber
lease liabilities due to MediaOne in the amount of approximately $14,500 which
are generally payable over the next ten years. Upon consummation of this
transaction, which is subject to normal closing conditions and receipt of
regulatory approvals, the Company's ownership interest in each of these networks
will increase to 100%.
On November 10, 1998, the Company and Telergy, Inc. ("Telergy") entered
into a binding letter agreement that modified certain provisions of the Senior
Secured Note agreement with Telergy and extended the note's maturity from
January 20, 1999 to January 20, 2000 in exchange for an IRU or long term lease
of certain fiber segments in New York City and along certain of Telergy's long
haul fiber segments in the northeastern United States and southeaster Canada.
Telergy must deliver such fiber segments within certain agreed upon timelines or
be subject to prescribed liquidated damages.
On January 25, 1999, the Company entered into a purchase agreement with
Multimedia, Inc. ("Multimedia"), the parent of its local partner in the Wichita,
KS market, whereby Multimedia will receive approximately $8,500 in cash for
Multimedia's ownership interest in this network, In addition, the Company will
be responsible for the payment of fiber lease liabilities due to Multimedia in
the amount of approximately $2,800 which are payable over the next six years.
Upon consummation of the transaction, which is subject to normal closing
conditions and receipt of regulatory approvals, the Company's ownership in
Wichita will increase to 100%.
During the quarter ended September 30, 1998, Hyperion paid $17,313 to
repurchase a portion of the 13% Senior Discount Notes due 2003 which had a face
value of $25,160 and a carrying value of $17,550. The notes were retired upon
repurchase which resulted in a $237 gain.
The Company has made demand advances to Adelphia which, as of December
31, 1998, had an outstanding balance of $7,600. The Company received interest on
the advances at a rate of 6.3%.
Results of Operations
Three Months Ended December 31, 1998 in Comparison with Three Months Ended
December 31, 1997
Revenues increased 202% to $15,043 for the three months ended December
31, 1998, from $4,983 for the same quarter in the prior fiscal year. Growth in
revenues of $10,060 resulted from an increase in revenues from majority and
wholly-owned Operating Companies of approximately $11,133 as compared to the
same period in the prior fiscal year due to the continued expansion of the
Company's customer base, its success in the roll out of switched services as a
result of the retail end user strategy adopted by the Company and the
consolidation of the New Jersey, Louisville, Lexington and Harrisburg networks.
Management fees from nonconsolidated subsidiaries decreased $1,076 as compared
to the same period in the prior fiscal year primarily due to the consolidation
of the above mentioned networks.
Network operations expense increased 151% to $6,664 for the three
months ended December 31, 1998 from $2,657 for the same quarter in the prior
fiscal 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 Operating Companies which resulted in increased employee
related costs and equipment maintenance costs and the consolidation of the New
Jersey, Louisville, Lexington and Harrisburg networks.
Selling, general and administrative expense increased 330% to $16,518
for the three months ended December 31, 1998 from $3,840 for the same quarter in
the prior fiscal 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 by the
Company, as well as the consolidation of the New Jersey, Louisville, Lexington
and Harrisburg networks.
Depreciation and amortization expense increased 220% to $10,708 during
the three months ended December 31, 1998 from $3,344 for the same quarter in the
prior fiscal year primarily as a result of increased amortization of deferred
financing costs, and increased depreciation resulting from the higher
depreciable asset base at the NOCC and the majority and wholly owned Operating
Companies, and the consolidation of the New Jersey, Louisville, Lexington and
Harrisburg networks.
Interest income for the three months ended December 31, 1998 decreased
68% to $1,829 from $5,632 for the same quarter in the prior fiscal year as a
result of decreased cash and cash equivalents and U.S. Government securities due
to an interest payment 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, partially offset by proceeds from the IPO.
Interest income - affiliate for the three months ended December 31,
1998 increased to $3,576 from $93 as a result of demand advances made to
Adelphia during the period.
Interest expense decreased 26% to $12,399 during the three months ended
December 31, 1998 from $16,770 for the same period in the prior fiscal year. The
decrease was attributable to the reduction of interest expense associated with
the reduced amounts payable to Adelphia and higher interest capitalized on
networks under construction.
Equity in net loss of joint ventures increased by 32% to $3,776 during
the three months ended December 31, 1998 from $2,858 for the same quarter in the
prior fiscal year. The net losses of the nonconsolidated Operating Companies for
the three months ended December 31, 1998 were primarily the result of increased
revenues only partially offsetting startup and other costs and expenses
associated with design, construction, operation and management of the networks
of the Operating Companies, and the effect of the typical lag time between the
incurrence of such costs and expenses and the subsequent generation of revenues
by a network. The increase was partially offset by the consolidation of the New
Jersey, Louisville, Lexington and Harrisburg networks for the current period.
The number of nonconsolidated Operating Companies paying management
fees to the Company was 8 at December 31, 1998. These Operating Companies and
networks under construction paid management and monitoring fees to the Company,
which are included in revenues, aggregating approximately $1,064 for the three
months ended December 31, 1998, as compared with $2,140 for the same quarter in
the prior fiscal year. The nonconsolidated Operating Companies' net losses,
including networks under construction, for the three months ended December 31,
1997 and 1998 aggregated approximately $5,447 and $8,038 respectively.
Preferred stock dividends increased by 26% to $7,284 for the three
months ended December 31, 1998 from $5,794 for the same period in the prior
fiscal year. The increase is due to a higher outstanding preferred stock base
resulting from dividends being paid in additional shares of preferred stock.
Nine months Ended December 31, 1998 in Comparison with Nine months Ended
December 31, 1997
Revenues increased 300% to $34,776 for the nine months ended December
31, 1998, from $8,690 for the same period in the prior fiscal year. Growth in
revenues of $26,086 resulted from an increase in revenues from majority and
wholly-owned Operating Companies of approximately $27,171 as compared to the
same period in the prior fiscal year due to the continued expansion of the
Company's customer base, its success in the roll out of switched services as a
result of the retail end user strategy adopted by the Company and the
consolidation of the Buffalo, Syracuse, New Jersey, Louisville, Lexington and
Harrisburg networks. Management fees from nonconsolidated subsidiaries decreased
$1,085 as compared to the same period in the prior fiscal year primarily due to
the consolidation of the above mentioned networks.
Network operations expense increased 255% to $18,709 for the nine
months ended December 31, 1998 from $5,263 for the same period in the prior
fiscal year. The increase was attributable to the expansion of operations at the
NOCC, and the increased number and size of the operations of the Operating
Companies which resulted in increased employee related costs and equipment
maintenance costs and the consolidation of the Buffalo, Syracuse, New Jersey,
Louisville, Lexington and Harrisburg networks.
Selling, general and administrative expense increased 288% to $35,341
for the nine months ended December 31, 1998 from $9,099 for the same period in
the prior fiscal year. The increase was due primarily to increased expense
associated with the network expansion plan, an increase in the sales force in
the Existing Networks and an increase in corporate overhead costs to accommodate
the growth in the number, size and operations of Operating Companies managed and
monitored by the Company, as well as the consolidation of the Buffalo, Syracuse,
New Jersey, Louisville, Lexington and Harrisburg networks.
Depreciation and amortization expense increased 280% to $26,671 during
the nine months ended December 31, 1998 from $7,027 for the same period in the
prior fiscal year primarily as a result of increased amortization of deferred
financing costs and increased depreciation resulting from the higher depreciable
asset base at the NOCC and the majority and wholly owned Operating Companies and
the consolidation of the Buffalo, Syracuse, New Jersey, Louisville, Lexington
and Harrisburg networks.
Interest income for the nine months ended December 31, 1998 increased
33% to $10,233 from $7,675 for the same period in the prior fiscal year as a
result of increased cash and cash equivalents and U.S. Government securities due
to the investment of the proceeds of the 12 1/4% Senior Secured Notes, the 12
7/8% Senior Exchangeable Redeemable Preferred Stock and the IPO, partially
offset by demand advances made to Adelphia.
Interest income - affiliate for the nine months ended December 31, 1998
increased to $8,395 from $276 as a result of demand advances made to Adelphia
during the current period.
Interest expense increased 8% to $38,638 during the nine months ended
December 31, 1998 from $35,934 for the same period in the prior fiscal year. The
increase was attributable to the interest on the 12 1/4 Senior Secured Notes
partially offset by the reduction of interest expense associated with the
reduced amounts payable to Adelphia and higher interest capitalized on networks
under construction.
Equity in net loss of joint ventures increased to $9,580 during the
nine months ended December 31, 1998 from $9,284 for the same period in the prior
fiscal year. The net losses of the nonconsolidated Operating Companies for the
nine months ended December 31, 1998 were primarily the result of increased
revenues only partially offsetting startup and other costs and expenses
associated with design, construction, operation and management of the networks
of the Operating Companies, and the effect of the typical lag time between the
incurrence of such costs and expenses and the subsequent generation of revenues
by a network. The increase was partially offset by the consolidation of the
Buffalo, Syracuse, New Jersey, Louisville, Lexington and Harrisburg networks for
the current period.
The number of nonconsolidated Operating Companies paying management
fees to the Company was 8 at December 31, 1998. These Operating Companies and
networks under construction paid management and monitoring fees to the Company,
which are included in revenues, aggregating approximately $2,724 for the nine
months ended December 31, 1998, as compared with $3,809 for the same period in
the prior fiscal year. The nonconsolidated Operating Companies' net losses,
including networks under construction, for the nine months ended December 31,
1997 and 1998 aggregated approximately $13,719 and $22,325 respectively.
Preferred stock dividends increased by 264% to $21,117 for the nine
months ended December 31, 1998 from $5,794 for the same period in the prior
fiscal year. The increase is due to the preferred stock which was issued in
October 1997.
Supplementary Operating Company Financial Analysis
The Company believes that historically, working with Local Partners to
develop markets has enabled the Company to build larger networks in a rapid and
more cost effective manner then it could have on its own. The Company currently
has joint ventures covering 10 networks with Local Partners where the Company
owns 50% or less of each joint venture. In three of these joint ventures, the
Company has pending agreements to purchase its local partners' interest (see
"Recent Developments"). 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 announced partner
roll-ups which have not yet been consummated, the 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 either
purchased in February 1998 or are involved in the pending partnership roll-ups,
as more fully described in "Recent Developments". 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.
Summary adjusted GAAP information:
Three Months Ended Nine Month Ended
December 31, December 31,
1997 1998 1997 1998
------------- ------------ ------------ -------------
Adjusted GAAP revenue $ 8,010 $ 19,562 $ 18,715 $ 47,336
Adjusted GAAP EBITDA (1,304) (6,728) (5,086) (14,704)
Adjusted GAAP operating loss (11,069) (21,515) (31,719) (53,805)
Adjusted GAAP net loss applicable to common stockholders (30,605) (39,585) (72,913) (103,426)
Adjusted GAAP capital expenditures 27,653 39,584 76,029 158,059
Adjusted GAAP gross property, plant and equipment $ 386,089 $ 573,359 $ 386,089 $ 573,359
For the three months ended December 31, 1998, adjusted GAAP revenue
increased 144% to $19,562 as compared to $8,010 for the same quarter in the
prior fiscal year. The increase in revenues resulted from the continued
expansion of the Company's customer base and its success in the roll out of
switched services as a result of the retail end user strategy adopted by the
Company.
For the three months ended December 31, 1998, adjusted GAAP EBITDA
(earnings before interest expense, income taxes, depreciation and amortization,
other non-cash charges, gain on sale of investment, interest income and equity
in net loss of joint ventures) loss was $6,728 as compared to $1,304 for the
same quarter in the prior fiscal year. EBITDA and similar measurements of cash
flow are commonly used in the telecommunications industry to analyze and compare
telecommunications companies on the basis of operating performance, leverage,
and liquidity. While EBITDA is not an alternative to operating income as an
indicator of operating performance or an alternative to cash flows from
operating activities as a measure of liquidity, all as defined by generally
accepted accounting principles, and while EBITDA may not be comparable to other
similarly titled measures of other companies, the Company's management believes
EBITDA is a meaningful measure of performance. The increase in adjusted GAAP
EBITDA loss for three months ended December 31, 1998 was due primarily to
increased selling, general, and administrative expenses as a result of the
increase in direct sales and marketing distribution channels as the Company has
aggressively moved to an end-user strategy over the past year, focusing on
medium to large business customers, governmental and educational end-users 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 December 31, 1998, adjusted GAAP operating
loss was $21,515 as compared to $11,069 for the same quarter in the prior fiscal
year. The increase in adjusted GAAP operating loss was due primarily to the
above mentioned increase in selling, general and administrative expenses and
increased depreciation and amortization expense resulting from a higher
depreciable asset base.
For the three months ended December 31, 1998 adjusted GAAP net loss
applicable to common stockholders was $39,585 as compared to $30,605 for the
same quarter in the prior fiscal year. The increase in adjusted GAAP net loss
applicable to common stockholders was due primarily to the above mentioned
increase in selling, general and administrative expenses, increased depreciation
and amortization and increased preferred stock dividends associated with the
Company's financing activities. In particular, depreciation and amortization
increase 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 December 31, 1998, the Company and its
Operating Companies invested $54,179 in capital expenditures, of which
Hyperion's adjusted GAAP share was $39,584. As of December 31, 1998, total gross
property, plant and equipment of the Company and its consolidated subsidiaries,
adjusted for the pending Operating Company roll-ups was approximately $573,359.
As of December 31, 1998, Hyperion's proportionate share of gross property, plant
and equipment of all Operating Companies was approximately 90%, adjusted for the
pending roll-ups.
For the nine months ended December 31, 1998, adjusted GAAP revenue
increased 153% to $47,336 as compared to $18,715 for the same period in the
prior fiscal year. The increase in revenues resulted from the continued
expansion of the Company's customer base and its success in the roll out of
switched services as a result of the retail end user strategy adopted by the
Company.
For the nine months ended December 31, 1998, adjusted GAAP EBITDA loss
was $14,704 as compared to $5,086 for the same period in the prior fiscal year.
The increase in adjusted GAAP EBITDA loss for the nine months ended December 31,
1998 was due primarily to increased selling, general, and administrative
expenses as a result of the increase in direct sales and marketing distribution
channels as the Company has aggressively moved to an end-users strategy over the
past year, focusing on medium to large business customers, governmental and
educational end-user and other telecommunications service providers, and was
also due to increased costs associated with the Company's New Network expansion
efforts.
For the nine months ended December 31, 1998, adjusted GAAP operating
loss was $53,805 as compared to $31,719 for the same period in the prior fiscal
year. The increase in adjusted GAAP operating loss was due primarily to the
above mentioned increase in selling, general and administrative expenses and
increased depreciation and amortization expense resulting from a higher
depreciable asset base.
For the nine months ended December 31, 1998, adjusted GAAP net loss
applicable to common stockholders was $103,426 as compared to $72,913 for the
same period in the prior fiscal year. The increase in adjusted GAAP net loss
applicable to common stockholders was due primarily to the above mentioned
increase in selling, general and administrative expenses, increased depreciation
and amortization, increased equity in net loss of joint ventures and increased
preferred stock dividends associated with the Company's financing activities. In
particular, depreciation and amortization increase substantially due to the
significant capital investment the Company has made and the consolidation of the
Operating Companies involved in the pending roll-ups.
During the nine months ended December 31, 1998, the Company and its
Operating Companies invested $200,331 in capital expenditures, of which
Hyperion's adjusted GAAP share was $158,059.
Liquidity and Capital Resources
The development of the Company's business and the installation and
expansion of the Operating Companies' networks, as well as the development of
the New Networks, combined with the construction of the Company's NOCC, have
resulted in substantial capital expenditures and investments during the past
several years. Capital expenditures by the Company were $39,775 and $146,752 for
the nine months ended December 31, 1997 and 1998, respectively. Further,
investments made by the Company in nonconsolidated Operating Companies and in
LMDS licenses were $53,194 and $69,018 for the nine months ended December 31,
1997 and 1998, respectively. The significant increase in capital expenditures
for the nine months ended December 31, 1998 as compared with the same period in
the prior fiscal year is largely attributable to capital expenditures necessary
to develop the Existing Networks and the New Networks, as well as the fiber
purchases to interconnect the networks (see "Recent Developments"). The Company
expects that it will continue to incur substantial capital expenditures in this
development effort. The Company also expects to continue to fund operating
losses as the Company develops and grows its business. For information regarding
recent transactions affecting the Company's liquidity and capital resources, see
"Recent Developments."
The Company has experienced negative operating and investing cash flow
since its inception. A combination of operating losses, substantial capital
investments required to build the Company's networks and its state-of-the-art
NOCC, and incremental investments in the Operating Companies has resulted in
substantial negative cash flow.
Expansion of the Company's Existing Networks and services and the
development of New Networks and additional networks and services requires
significant capital expenditures. The Company's operations have required and
will continue to require substantial capital investment for (i) the installation
of electronics for switched services in the Company's networks, (ii) the
expansion and improvement of the Company's Network Operating Control Center
("NOCC") and Existing Networks, (iii) the design, construction and development
of New Networks and (iv) the acquisition of additional ownership interests in
Existing Networks or New Networks. The Company has made substantial capital
investments and investments in Operating Companies in connection with the
installation of 5ESS switches or remote switching modules in all of its Existing
Networks and plans to install regional super switches in certain key New
Networks when such New Networks are operational. To date, the Company has
installed switches in 20 of its Existing Networks and plans to provide such
services in all of its New Networks on a standard switching platform based on
Lucent 5 switch technology. In addition, the Company intends to increase
spending on marketing and sales significantly in the foreseeable future in
connection with the expansion of its sales force and marketing efforts
generally. The Company also plans to purchase its partners' interest in the
Operating Companies when it can do so at attractive economic terms. The Company
estimates that it will require approximately $400 million to fund the Roll-ups,
anticipated capital expenditures, working capital requirements and operating
losses and pro rata investments in the Operating Companies through the end of
March 31, 2000. The Company believes that the net proceeds from the Offering and
the Rigas Notes Purchase, together with its existing cash balance and internally
generated funds, will be sufficient to fund the Rollups, the Company's capital
expenditures, working capital requirements, operating losses and pro rata
investments in the Operating Company's capital expenditures, working capital
requirements, operating losses and pro rata investments in the Operating
Companies through fiscal quarter ended September30, 2000. In addition, there can
be no assurance (i) that the Company's future cash requirements will not vary
significantly from those presently planned due to a variety of factors including
acquisition of additional networks, development of the LMDS spectrum, continued
acquisition of increased ownership in its networks and material variances from
expected capital expenditure requirements for Existing Networks and New Networks
or (ii) that anticipated financings, Local Partner investments and other sources
of capital will become available to the Company. In addition, it is possible
that expansion of the Company's networks may include the geographic expansion of
the Company's existing clusters and the development of other new markets not
currently planned. The Company expects to continue to build new networks in
additional markets, which have broader geographic coverage and require higher
capital outlays than those with partners in the past. The Company also has
funded the purchase of certain partnership interests and expects to fund
additional purchases of partnership interests.
The Company will need substantial additional funds to fully fund its
business plan. The Company expects to fund its capital requirements through
existing resources, credit facilites 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 interst of Local
Partners through existing resources, internally generated funds and additional
debt or equity financings, as appropriate. There can be no assurnaces, 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.
Year 2000 Issues
The year 2000 issue refers to the inability of computerized systems and
technologies to recognize and process dates beyond December 31, 1999. This could
present risks to the operation of the Company's business in several ways. The
Company is evaluating the impact of the year 2000 issue on its business
applications and its products and services. The evaluation includes a review of
the Company's information technology systems, telephony equipment and other
embedded technologies. A significant portion of the Company's computerized
systems and technologies have been developed, installed or upgraded in recent
years and are generally more likely to be year 2000 ready. The Company is also
evaluating the potential impact as a result of its reliance on third-party
systems that may have year 2000 issues.
Computerized business applications that could be adversely affected by
the year 2000 issue include:
information processing and financial reporting systems,
customer billing systems,
customer service systems,
telecommunication transmission and reception systems, and
facility systems.
System failure or miscalculation could result in an inability to
process transactions, send invoices, accept customer orders or provide customers
with products and services. Customers could also experience a temporary
inability to receive or use the Company's products and services.
The Company has developed a program to assess and address the year 2000
issue. This program consists of the following phases:
inventorying and assessing the impact on affected technology and systems,
developing solutions for affected technology and systems,
modifying or replacing affected technology and systems,
testing and verifying solutions,
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 June 1999.
A third-party billing vendor currently facilitates customer billing.
The Company is currently in the process of testing an in-house service ordering,
provisioning, maintenance and billing system that would replace the third-party
billing vendor. The Company expects to have this new system implemented by
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 June
1999.
Telecommunication plant rebuilds and upgrades in recent years have
minimized the potential impact of the year 2000 issue on the Company's
facilities, customer service, telecommunication transmission and reception
systems. The Company is engaged in a comprehensive internal inventory and
assessment of all hardware components and component controlling software
throughout its telecommunication networks. The Company expects to implement any
hardware and software modifications, upgrades or replacements resulting from the
internal review by June 1999.
Costs incurred to date directly related to addressing the year 2000
issue have totaled $350. The Company has also redeployed internal resources to
meet the goals of its year 2000 program. The Company currently estimates the
total cost of its year 2000 remediation program to be approximately $775.
Although the Company will continue to incur substantial capital expenditures in
the ordinary course of meeting its telecommunications system upgrade goals
through the year 2000, it will not specifically accelerate its expenditures to
facilitate year 2000 readiness, and accordingly such expenditures are not
included in the above estimate.
The Company has begun communicating with others with whom it does
significant business to determine their year 2000 readiness and to determine the
extent to which the Company is vulnerable to year 2000 issues related to those
third parties. The Company purchases much of its technology from third parties.
There can be no assurance that the systems of other companies on which the
Company's systems rely will be year 2000 ready or timely converted into systems
compatible with the Company systems. The Company's failure or a third-party's
failure to become year 2000 ready or the Company's inability to become
compatible with third parties with which the Company has a material
relationship, may have a material adverse effect on the Company, including
significant service interruption or outages; however the Company can not
currently estimate the extent of any such adverse effects.
The Company is in the process of identifying secondary sources to
supply its systems or services in the event it becomes probable that any of its
systems will not be year 2000 ready prior to the end of 1999. The Company is
also in the process of identifying secondary vendors and service providers to
replace those vendors and service providers whose failure to be year 2000 ready
could lead to a significant delay in the company's ability to provide its
service to its customers.
REGULATORY AND COMPETITIVE MATTERS
Overview
Telecommunications services provided by the Company and its networks
are subject to regulation by federal, state and local government agencies. At
the federal level, the FCC has jurisdiction over interstate and international
services. State public utilities commissions (PUCs) exercise jurisdiction over
intrastate services. Additionally, municipalities and other local government
agencies may regulate limited aspects of the Company's business, such as use of
rights-of-way. Many of the regulations issued by these regulatory bodies may be
subject to judicial review, the result of which the Company is unable to
predict. The networks are also subject to numerous local regulations such as
building codes, franchise and right-of-way licensing requirements.
Telecommunications Act of 1996 ("The Telecommunications Act")
On February 8, 1996, the Telecommunications Act was signed into law.
Among its more significant provisions, the Telecommunications Act (i) removes
legal barriers to entry in local telephone markets, (ii) requires incumbent LECs
to "interconnect" with competitors, (iii) establishes procedures for incumbent
LEC entry into new markets, such as long distance and cable television, (iv)
relaxes regulation of telecommunications services provided by incumbent LECs and
all other telecommunications service providers, and (v) directs the FCC to
establish an explicit subsidy mechanism for the preservation of universal
service. As a component of the need for explicit subsidy mechanisms for
universal service, the FCC was also directed by Congress to revise and make
explicit subsidies inherent in the current access charge system.
Removal of Entry Barriers
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.
Interconnection with LEC Facilities
A company cannot compete effectively with the incumbent LEC in the
market for switched local telephone services unless it is able to connect its
facilities with the incumbent LEC and obtain access to certain essential
services and resources under reasonable rates, terms and conditions. Incumbent
LECs historically have been reluctant to provide these services voluntarily and
generally have done so only when so ordered by State PUCs. The
Telecommunications Act imposes a number of access and interconnection
requirements on all local exchange providers, including CLECs, with additional
requirements imposed on non-rural incumbent LECs. These requirements will
provide access to certain networks under reasonable rates, terms and conditions.
Specifically, LECs must (i) allow customers to retain the same telephone number
("number portability") when they switch local service providers, (ii) ensure
that an end user does not have to dial any more digits to reach customers of
local competitors ("dialing parity"), (iii) establish reciprocal compensation
arrangements for the transport and termination of telecommunications traffic,
(iv) permit the resale of their services on reasonable and nondiscriminatory
terms and interconnect their networks to those of other carriers, and (v)
provide access to their poles, ducts, conduits and rights-of-way on a
reasonable, nondiscriminatory basis. In addition, incumbent LECs must permit
resale of their retail services at wholesale rates and unbundle their network
elements at any technical feasible point on rates and terms that are reasonable
and nondiscriminatory in a manner that allows carriers to combine such elements
in order to provide telecommunications services. Ongoing proceedings addressing
these matters, and RBOC and incumbent LEC cooperation with respect thereto, may
affect the cost of doing business.
Dependence on RBOCs and incumbent LECs
While the Telecommunications Act generally requires incumbent LECs,
including Regional Bell Operating Companies ("RBOCs"), to offer interconnection,
unbundled network elements and resold services to CLECs, LEC-CLEC
interconnection agreements may have short terms, requiring the CLEC continually
to renegotiate the agreements. LECs may not provide timely provisioning or
adequate service quality thereby impairing a CLEC's reputation with customers
who can easily switch back to the LEC. In addition, the prices set in the
agreements may be subject to significant rate increases if state regulatory
commissions establish prices designed to pass on to the CLECs part of the cost
of providing universal service.
Reciprocal Compensation
The Company's interconnection agreements with incumbent LECs entitle
it, among other things, to collect reciprocal compensation payments from the
incumbent LECs for local telephone calls terminating on the Company's facilities
(as well as obligating us to make similar payments for outbound local calls it
delivers to the incumbent LECs). However, incumbent LECs have claimed that these
payments should not apply to calls terminating at Internet service provider
("ISP") points of presence, based on the argument that Internet traffic is
inherently interstate, not local, in nature. To date, over 25 state PUCs have
issued final orders on this issue (some of which are subject to court appeals),
and every such order has affirmed that local calls to ISPs are subject to
reciprocal compensation. However, the FCC has announced a plan to release a
decision of nationwide scope on this issue, and there can be no assurance that
this decision will be favorable to the Company's interests. In addition, there
can be no assurance that the current reciprocal compensation arrangements will
be renewed on their existing terms when they expire.
Federal Regulation Generally
On August 8, 1996 the FCC promulgated rules and regulations to
implement Congress' statutory directive concerning the interconnection
obligations of all telecommunications carriers, including obligations of CLECs
and LECs, and incumbent LEC pricing of interconnection and unbundled elements
(the "Local Competition Orders"). On July 18, 1997, the U.S. Court of Appeals
for the Eighth Circuit ("Eighth Circuit") vacated certain portions of the Local
Competition Orders, including provisions establishing a methodology for pricing
interconnection and unbundled network elements, a rule permitting new entrants
to "pick and choose" among various provisions of existing interconnection
agreements between LECs and their competitors, and other provisions relating to
the purchase of access to unbundled network elements. On August 22, 1997, the
Eighth Circuit issued an order vacating the FCC's rules implementing the
Telecommunications Act's dialing parity requirement. On October 14, 1997, the
Eighth Circuit issued a decision vacating additional FCC rules finding that
incumbent LECs need not provide combinations of network elements to CLECs, even
when the incumbent LEC has already combined the same elements within its own
network.
On January 25, 1999, the Supreme Court issued an opinion confirming the
FCC's authority to issue regulations implementing the pricing and other
provisions of the Telecommunications Act and reinstating most of the challenged
rules. However, the Supreme Court vacated a key FCC rule identifying the network
elements that incumbent LECs are required to unbundle. The Eighth Circuit
decisions and their recent reversal by the Supreme Court perpetuate continuing
uncertainty about the rules governing the pricing, terms and conditions of
interconnection agreements. Although state PUCs have continued to conduct
arbitrations, and to implement and enforce interconnection agreements during the
pendency of the Eighth Circuit proceedings, the Supreme Court's recent ruling
and further proceedings on remand (either to the FCC or the Eighth Circuit) may
affect the scope of state commission's authority to conduct such proceedings or
to implement or enforce interconnection agreements. They could also result in
new or additional rules being promulgated by the FCC. Given the general
uncertainty surrounding the effect of the Eighth Circuit decisions and the
recent decision of the Supreme Court reversing them, there can be no assurance
that the Company will be able to continue to obtain or enforce interconnection
terms that are acceptable to it or that are consistent with its business plans.
Finally, continuing challenges to state and federal rules and policies
implementing the Telecommunications Act, and individual actions by State PUCs
could cause the Company to incur substantial legal and administrative expenses.
LEC Entry into New Markets
The Telecommunications Act establishes local market-opening procedures
under which an RBOC can enter the market for interLATA services originating
within its telephone service area. The ability of the RBOCs to provide interLATA
services will enable them to provide customers with a full range of local and
long distance telecommunications services. The provision of interLATA services
by RBOCs is expected to reduce the market share of the major long distance
carriers, which are one of the Company's networks' primary customers.
Consequently, the entry of the RBOCs into the long distance market may have
adverse consequences on the ability of CLECs both to generate access revenues
from the long distance carriers and to compete in offering a package of local
and long distance services. A number of RBOCs have made initial applications for
the approvals necessary to enter their "in-region" long distance markets,
although, to date, all such applications have been denied on the basis that the
RBOC has not satisfied the list of competitive requirements. However, there have
recently been extensive discussions among the state commissions, the FCC, and
RBOCs in order to develop a definitive understanding of these requirements and
the specific criteria to measure their satisfaction. These discussions may lead
to one or more successful RBOC "in-region" applications in the future.
Several RBOCs have recently filed petitions at the FCC requesting a
waiver of certain obligations imposed on incumbent LECs 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 RBOCs are seeking to provide
high-speed data services on an interLATA basis without complying with the market
opening provisions of the competitive checklist set forth in the
Telecommunications Act, which would be otherwise required of them. In October
1998, the FCC ruled that high-speed services are telecommunications services
subject to the requirements of the Telecommunications Act to unbundle such
services and offer them for resale. In October 1998, the FCC also issued a
Notice of Proposed Rulemaking indicating its intention to clarify expanded
rights of CLECs for collocation, access to copper loops, and various other
issues of consequence to CLECs deploying high-speed services. In particular, the
FCC has proposed allowing RBOCs to promote advanced-services through a separate
subsidiary, which would be free of regulatory requirements such as unbundling
and resale. These decisions are currently subject to reconsideration and appeal.
The final outcome of these decisions, originally scheduled to be announced on
January 28, 1999, has been postponed by the FCC while it considers the impact of
the Supreme Court's ruling on the Telecommunications Act. The final outcome of
these petitions or other proceedings interpreting the requirements of the
Telecommunications Act may adversely affect the Company's business.
Relaxation of Regulation
Under the Telecommunications Act, the FCC has authority to forbear from
regulation provided that such forbearance is consistent with the public
interest. Since the Company is a non-dominant carrier and, therefore, is not
heavily regulated by the FCC, the potential for regulatory forbearance likely
will be more beneficial to the incumbent LECs than the Company in the long run.
In addition, should the FCC prohibit tariff filings as a part of such
forbearance, the Company will be unable to take advantage of such protections.
Universal Service and Access Charge Reform
On May 8, 1997, the FCC issued its Universal Service Order that
requires all telecommunications carriers providing interstate telecommunications
services, including the Company, to contribute to universal service support. In
a related proceeding, on May 16, 1997, the FCC issued an order to implement
certain reforms to its access charge rules that govern charges imposed by LECs
on long distance providers for access to the local exchange network, and are
designed to compensate the LEC for its investment in the local network. There
can be no assurance of how the Universal Service and/or Access Charge Reform
Orders and charges will be implemented, changed or enforced, or what effect the
Orders will have on competition within the telecommunications industry,
generally, or on the competitive position of the Company, specifically.
State Regulation Generally
The Company's intrastate long distance operations are subject to
various state laws and regulations, including, in most jurisdictions,
certification and tariff filing requirements. Certificates of authority can
generally be conditioned, modified, canceled, terminated, or revoked by state
PUCs for failure to comply with state law and/or the regulations and policies of
the state PUCs. Fines and penalties also may be imposed for such violations.
State PUCs also regulate access charges and other pricing for telecommunications
services within each state. The Company may also be required to contribute to
funds to support universal service, telecommunications relay services, and E-911
programs in some states.
Local Government Authorizations
An Operating Company may be required to obtain from municipal
authorities street opening and construction permits, or operating franchises, to
install and expand its fiber optic networks in certain cities. In some cities,
the Local Partners or subcontractors may already possess the requisite
authorizations to construct or expand the Company's networks. An Operating
Company or its Local Partners also may be required to obtain a license to attach
facilities to utility poles in order to build and expand facilities. Because
utilities that are owned by a cooperative or municipality are not subject to
federal pole attachment regulation, there are no assurances that an Operating
Company or its Local Partners will be able to obtain pole attachments from these
utilities at reasonable rates, terms and conditions.
In some of the areas where the Operating Companies provide service,
their Local Partners pay license or franchise fees based on a percent of fiber
lease payment revenues. In addition, in areas where the Company does not use
facilities constructed by a Local Partner, the Operating Company may be required
to pay such fees. There are no assurances that certain municipalities that do
not currently impose fees will not seek to impose fees in the future, nor is
there any assurance that, following the expiration of existing franchises, fees
will remain at their current levels. In many markets, other companies providing
local telecommunications services, particularly the incumbent LECs, currently
are excused from paying license or franchise fees or pay fees that are
materially lower than those required to be paid by the Operating Company or
Local Partner. The Telecommunications Act requires municipalities to charge
nondiscriminatory fees to all telecommunications providers, but it is uncertain
how quickly this requirement will be implemented by particular municipalities in
which the Company operates or plans to operate or whether it will be implemented
without a legal challenge initiated by the Company or another CLEC.
If any of the existing Local Partner Agreements or Fiber Lease
Agreements held by a Local Partner or an Operating Company for a particular
market were terminated prior to its expiration date and the Local Partner or
Operating Company were forced to remove its fiber optic cables from the streets
or abandon its network in place, even with compensation, such termination could
have a material adverse effect on the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of the Company was held on October 6,
1998. Stockholders entitled to vote a total of 309,371,236 votes, out of
348,075,849 votes attributable to all shares of the Company's outstanding
capital stock, were represented at the meeting either in person or by proxy. At
such meeting, nine (9) directors were elected by the vote of the stockholders,
as follows:
Broker
Director Elected Class of Stock Votes for Withheld Non-Votes
John J. Rigas Class A Common 18,240,474 207,785 --
Class B Common 291,130,762 -- --
12 7/8% Preferred -- -- --
Michael J. Rigas Class A Common 18,240,474 207,785 --
Class B Common 291,130,762 -- --
12 7/8% Preferred -- -- --
Timothy J. Rigas Class A Common 18,240,474 207,785 --
Class B Common 291,130,762 -- --
12 7/8% Preferred -- -- --
James P. Rigas Class A Common 18,240,474 207,785 --
Class B Common 291,130,762 -- --
12 7/8% Preferred -- -- --
Daniel R. Milliard Class A Common 18,240,474 207,785 --
Class B Common 291,130,762 -- --
12 7/8% Preferred -- -- --
Randolph S. Fowler Class A Common 18,240,474 207,785 --
Class B Common 291,130,762 -- --
12 7/8% Preferred -- -- --
Charles R. Drenning Class A Common 18,240,474 207,785 --
Class B Common 291,130,762 -- --
12 7/8% Preferred -- -- --
Pete J. Metros Class A Common 18,240,474 207,785 --
Class B Common 291,130,762 -- --
12 7/8% Preferred -- -- --
James L. Gray Class A Common 18,240,474 207,785 --
Class B Common 291,130,762 -- --
12 7/8% Preferred -- -- --
Item 5. Other Information
The attached Exhibit 99.1 provides certain financial and business
information of the Company for the three months ended December 31, 1998,
pursuant to Section 4.03(a)(iii) of the Indenture dated April 15, 1996 with
respect to the 13% Senior Discount Notes.
The attached Exhibit 99.2 provides certain financial and business
information of the Company for the three months ended December 31, 1998,
pursuant to Section 4.03(a)(iii) of the Indenture dated August 27, 1997 with
respect to the 12 1/4% Senior Secured Notes.
The attached Exhibit 99.3 provides certain financial and business
information of the Company for the three months ended December 31, 1998.
The attached Exhibits 99.4 through 99.11 provide certain financial and
business information for the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27.1 Financial Data Schedule (supplied for the information
of the Commission).
Exhibit 99.1 "Schedule E - Form of Financial Information and
Operating Data of the Subsidiaries and the Joint Ventures
Presented by Cluster".
Exhibit 99.2 "Schedule F - Form of Financial Information and
Operating Data of the Pledged Subsidiaries and the Joint
Ventures".
Exhibit 99.3 Press Release Dated February 9, 1999
Exhibit 99.4 Press Release Dated December 10, 1998
Exhibit 99.5 Press Release Dated December 16, 1998
Exhibit 99.6 Press Release Dated November 4, 1998
Exhibit 99.7 Press Release Dated February 1, 1999
Exhibit 99.8 Press Release Dated February 8, 1999
Exhibit 99.9 Press Release Dated February 9, 1999
Exhibit 99.10 Press Release Dated February 10, 1999
Exhibit 99.11 Press Release Dated February 11, 1999
(b) Reports on Form 8-K:
None
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: February 16, 1999 By: /s/ Timothy J. Rigas
---------------------------
Timothy J. Rigas
Vice Chairman, Chief
Financial Officer
(authorized officer)
and Treasurer
Date: February 16, 1999 By: /s/ Edward E. Babcock, Jr.
---------------------------
Edward E. Babcock, Jr.
Vice President, Finance and
Chief Accounting Officer
Exhibit Index
Exhibit 27.1 Financial Data Schedule (supplied for the information
of the Commission).
Exhibit 99.1 "Schedule E - Form of Financial Information and
Operating Data of the Subsidiaries and the Joint Ventures
Presented by Cluster".
Exhibit 99.2 "Schedule F - Form of Financial Information and
Operating Data of the Pledged Subsidiaries and the Joint
Ventures".
Exhibit 99.3 Press Release Dated February 9, 1999
Exhibit 99.4 Press Release Dated December 10, 1998
Exhibit 99.5 Press Release Dated December 16, 1998
Exhibit 99.6 Press Release Dated November 4, 1998
Exhibit 99.7 Press Release Dated February 1, 1999
Exhibit 99.8 Press Release Dated February 8, 1999
Exhibit 99.9 Press Release Dated February 9, 1999
Exhibit 99.10 Press Release Dated February 10, 1999
Exhibit 99.11 Press Release Dated February 11, 1999