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 June 30, 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 August 12, 1999, 23,512,785 shares of Class A Common Stock, par
value $0.01 per share, and 31,181,077 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 - December 31, 1998 and June 30, 1999......................3
Condensed Consolidated Statements of Operations - Three and Six Months Ended
June 30, 1998 and 1999.........................................................................4
Condensed Consolidated Statements of Cash Flows - Six Months Ended
June 30, 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....................................................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................25
Item 2. Changes in Securities and Use of Proceeds......................................................25
Item 3. Defaults Upon Senior Securities................................................................25
Item 4. Submission of Matters to a Vote of Security Holders............................................25
Item 5. Other Information..............................................................................26
Item 6. Exhibits and Reports on Form 8-K...............................................................26
SIGNATURES..............................................................................................27
INDEX TO EXHIBITS.......................................................................................28
Item 1. Financial Statements
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except per share amounts)
December 31, June 30,
1998 1999
---------------- -----------------
ASSETS:
Current assets:
Cash and cash equivalents $ 242,570 $ 261,460
Accounts receivable and other current assets 15,583 39,438
Due from parent - net 4,950 ---
Due from affiliates - net 1,078 2,863
---------------- -----------------
Total current assets 264,181 303,761
U.S. government securities - pledged 58,054 44,178
Investments 112,328 89,576
Property, plant and equipment - net 374,702 653,996
Other assets - net 27,077 21,580
---------------- -----------------
Total $ 836,342 $ 1,113,091
================ =================
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND (DEFICIENCY):
OTHER STOCKHOLDERS' EQUITY (DEFICIENCY):
Current liabilities:
Accounts payable $ 20,386 $ 21,976
Due to parent - net --- 803
Accrued interest and other current liabilities 19,142 24,104
--------------- ----------------
Total current liabilities 39,528 46,883
13% Senior Discount Notes due 2003 220,784 236,745
12 1/4% Senior Secured Notes due 2004 250,000 250,000
12% Senior Subordinated Notes due 2007 --- 300,000
Other debt 23,325 44,097
--------------- ----------------
Total liabilities 533,637 877,725
--------------- ----------------
12 7/8% Senior exchangeable redeemable preferred stock 228,674 244,153
--------------- ----------------
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, 22,376,071 and 22,393,821 shares
outstanding, respectively 224 224
Class B common stock, $0.01 par value, 150,000,000
shares authorized, 32,314,761 and 32,300,041 shares
outstanding, respectively 323 323
Additional paid in capital 286,782 271,320
Class B common stock warrants 4,483 4,467
Accumulated deficit (217,781) (285,121)
--------------- ----------------
Total common stock and other stockholders' equity (deficiency) 74,031 (8,787)
=============== ================
Total $ 836,342 $ 1,113,091
=============== ================
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 Six Months Ended
June 30, June 30,
-------------------------------- ---------------------------
1998 1999 1998 1999
--------------- -------------- ------------- -------------
Revenues $ 7,635 $ 34,215 $ 12,455 $ 55,653
---------------- -------------- ------------- -------------
Operating expenses:
Network operations 4,989 11,671 7,530 20,175
Selling, general and administrative 8,432 32,637 13,647 53,646
Depreciation and amortization 6,120 13,586 10,570 27,121
---------------- -------------- ------------- -------------
Total 19,541 57,894 31,747 100,942
---------------- -------------- ------------- -------------
Operating loss (11,906) (23,679) (19,292) (45,289)
Other income (expense):
Interest income 4,235 14,780 9,337 16,778
Interest income-affiliate 1,824 2,779 2,075 5,607
Interest expense (13,704) (21,805) (27,104) (37,338)
Other income 1,000 --- 1,000 ---
---------------- -------------- ------------- -------------
Loss before income taxes and
equity in net loss of joint ventures (18,551) (27,925) (33,984) (60,242)
Income tax expense --- (4) --- (4)
---------------- -------------- ------------- -------------
Loss before equity in net loss
of joint ventures (18,551) (27,929) (33,984) (60,246)
Equity in net loss of joint ventures (3,190) (3,291) (6,873) (7,094)
---------------- -------------- ------------- -------------
Net loss (21,741) (31,220) (40,857) (67,340)
Dividend requirements applicable to preferred stock (6,807) (7,720) (13,422) (15,199)
---------------- -------------- ------------- -------------
Net loss applicable to common stockholders $ (28,548) $ (38,940) $ (54,279) $ (82,539)
================ ============== ============= =============
Basic and diluted net loss per weighted average
share of common stock $ (0.59) $ (0.70) $ (1.30) $ (1.49)
================ ============== ============= =============
Weighted average shares of
common stock outstanding 48,110 55,497 41,720 55,497
================ ============== ============= =============
See notes to condensed consolidated financial statements.
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six Months
Ended June 30,
--------------------------------
1998 1999
-------------- ---------------
Cash flows from operating activities:
Net loss $ (40,857) $ (67,340)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation 8,957 23,846
Amortization 1,613 3,275
Noncash interest expense 17,831 15,961
Equity in net loss of joint ventures 6,873 7,094
Issuance of Class A Common stock bonus 761 ---
Change in operating assets and liabilities net of effects of acquisitions:
Other assets - net (5,769) (20,463)
Accounts payable 22,739 (477)
Accrued interest and other liabilities 1,146 7,023
-------------- ---------------
Net cash provided by (used in) operating activities 13,294 (31,081)
-------------- ---------------
Cash flows from investing activities:
Expenditures for property, plant and equipment (77,259) (131,831)
Investments in joint ventures (21,539) (24,672)
Net cash used for acquisitions (58,330) (126,268)
Sale of U.S. government securities - pledged 15,653 15,322
Repayment of senior secured note --- 20,000
-------------- ---------------
Net cash used in investing activities (141,475) (247,449)
-------------- ---------------
Cash flows from financing activities:
Repayments of debt (2,383) (1,246)
Advances (to) from related parties (1,700) 4,066
Proceeds from debt --- 300,000
Costs associated with financing (379) (5,400)
Proceeds from issuance of Class A Common Stock 255,462 ---
Costs associated with issuance of Class A Common Stock (14,417) ---
Repayment of loans to stockholders 3,000 ---
-------------- ---------------
Net cash provided by financing activities 239,583 297,420
-------------- ---------------
Increase in cash and cash equivalents 111,402 18,890
Cash and cash equivalents, beginning of period 332,863 242,570
-------------- ---------------
Cash and cash equivalents, end of period $ 444,265 $ 261,460
============== ===============
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.
On March 30, 1999, Hyperion elected to change 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. 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 year
ended March 31, 1998 and its Transition Report on Form 10-K for the nine months
ended December 31, 1998.
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 June 30, 1999, and the unaudited results of operations
for the three and six months ended June 30, 1998 and 1999, have been included.
The results of operations for the three and six months ended June 30, 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 April 15, 1999, the Company acquired an indefeasible right of use
("IRU") from e.spire Communications, Inc. ("e.spire") for 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.
On May 25, 1999, the Company entered into an IRU agreement with CapRock
Communications Corp. for approximately $16,260 which grants the Company a
long-term license to approximately 1,650 route miles of long haul fiber. The IRU
gives the Company a presence in the southwestern United States.
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
During May 1999, the Company received $32,329 from Telergy, Inc.
("Telergy") for the repayment of a senior secured note held by the Company. The
payment represented $20,000 in principal and $12,329 of interest due to the
Company resulting from a February 1997 transaction in which the Company loaned
Telergy $20,000 in exchange for a $20,000 senior secured note and a fully
prepaid lease of dark fiber in New York state.
During June 1999, the Company consummated a purchase 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 received
approximately $36,518 for its ownership interests in these markets. 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.
During the six months ended June 30, 1999, the Company made demand
advances to Adelphia which, as of June 30, 1999, had been repaid. The Company
received interest on the advances at a rate of 5.15%.
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
2. Investments:
The equity method of accounting is used to account for investments in
joint ventures in which the Company holds less than a majority interest. Under
this method, the Company's initial investment is recorded at cost and
subsequently adjusted for the amount of its equity in the net income or losses
of its joint ventures. Dividends or other distributions are recorded as a
reduction of the Company's investment. Investments in joint ventures accounted
for using the equity method reflect the Company's equity in their underlying net
assets.
The Company's non-consolidated investments are as follows:
Ownership December 31, June 30,
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 ---
Entergy Hyperion Telecommunications of Louisiana 100.0 (2) 6,714 ---
Entergy Hyperion Telecommunications of Mississippi 100.0 (2) 7,130 ---
Entergy Hyperion Telecommunications of Arkansas 100.0 (2) 7,586 ---
PECO-Hyperion (Philadelphia) 50.0 33,936 39,386
PECO-Hyperion (Allentown, Bethlehem, Easton, Reading) 50.0 7,227 10,352
Hyperion of York 50.0 5,721 7,121
Allegheny Hyperion Telecommunications 50.0 3,043 4,718
Baker Creek Communications 49.9 (3) 44,637 44,637
Other Various 1,323 ---
---------------- ---------------
138,614 106,214
Cumulative equity in net losses (26,286) (16,638)
---------------- ---------------
Total $ 112,328 $ 89,576
================ ===============
<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 has consummated an agreement which
increased its ownership to 100% in these networks during June 1999.
(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>
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, Wichita and the Entergy partnerships follows:
December 31, June 30,
1998 1999
------------- --------------
Current assets $ 4,626 $ 15,545
Property, plant and equipment - net 93,929 109,066
Other non-current assets 45,266 44,898
Current liabilities 5,258 3,914
Non current liabilities 32,127 35,083
Six Months Ended June 30,
1998 1999
------------- --------------
Revenues $ 1,893 $ 14,336
Net loss (7,426) (4,744)
3. Commitments and Contingencies:
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations for a discussion of material commitments and
contingencies.
4. Net Loss Per Weighted Average Share of Common Stock:
Net loss per weighted average share of common stock is computed based on
the weighted average number of common shares outstanding after giving effect to
dividend requirements on the Company's preferred stock. Diluted net loss per
common share is equal to basic net loss per common share because additional
warrants outstanding had an anti-dilutive effect for the periods presented;
however, these warrants could have a dilutive effect on earnings per share in
the future.
5. Supplemental Financial Information:
For the six months ended June 30, 1998 and 1999, the Company paid
interest of $15,653 and $21,222, respectively.
Accumulated depreciation of property, plant and equipment amounted to
$38,089 and $61,934 at December 31, 1998 and June 30, 1999, respectively.
-------------------------------------------------
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(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 included in its Transition Report 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 and six months ended June 30, 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) 22 telecommunications
networks in operation or under construction (the "Core Markets") owned as of
June 30, 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) 50 additional markets under development (the "New Markets") 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 half of the 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 in the eastern half of the United States and the
interconnection of all of the Company's existing and new markets with the
Company's own fiber optic network facilities as well as implementing various
technologies including Dense Wave Division Multiplexing ("DWDM") to provide
greater bandwidth capacity on the Company's local and long-haul network system.
By the year 2001, Hyperion expects to serve most of the major cities in
the eastern half of the United States. The Company currently provides
communications services in 40 markets, representing distinct Metropolitan
Statistical Areas, or "MSAs", and plans to offer services to a total of
approximately 90 MSAs by the end of year 2000, expanding Hyperion's presence to
approximately 30 states. At June 30, 1999, the Company had installed 22 Lucent
5ESS switches or remote switching modules and plans to put in operation during
1999 nine additional regional switches (the "super switches"). Once fully
installed, the Company's fiber optic backbone will connect each of the Company's
markets. This fully redundant, 16,000 route mile network system will support
Hyperion's full line of communications service offerings. To date, 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 this 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 billion.
The Company has experienced initial success in the sale of business
access lines with approximately 212,191 access lines sold as of June 30, 1999,
of which approximately 191,285 lines are installed. This represents an addition
of 44,850 access lines sold and 46,638 access lines installed during the quarter
ended June 30, 1999. As of June 30, 1999, approximately 65% of these access
lines are provisioned on the Company's own switches ("on-switch lines").
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 April 15, 1999, the Company acquired an indefeasible right of use
("IRU") from e.spire Communications, Inc. ("e.spire") for 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.
On May 25, 1999, the Company entered into an IRU agreement with CapRock
Communications Corp. for approximately $16,260 which grants the Company a
long-term license to approximately 1,650 route miles of long haul fiber. The IRU
gives the Company a presence in the southwestern United States.
During May 1999, the Company received $32,329 from Telergy for the
repayment of a senior secured note held by the Company. The payment represented
$20,000 in principal and $12,329 of interest due to the Company resulting from a
February 1997 transaction in which the Company loaned Telergy $20,000 in
exchange for the $20,000 senior secured note and a fully prepaid lease of dark
fiber in New York state.
During June 1999, the Company consummated a purchase 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 received
approximately $36,518 for its ownership interests in these markets. 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.
During the six months ended June 30, 1999, the Company made demand
advances to Adelphia which, as of June 30, 1999, had been repaid. The Company
received interest on the advances at a rate of 5.15%.
On July 1, 1999, Adelphia and Hyperion announced their decision to
further combine the efforts of both companies and that Hyperion was changing the
name under which it will be doing business to Adelphia Business Solutions. With
this decision, Adelphia and Hyperion will align the strengths of both
organizations and develop a single brand in the communications marketplace.
Results of Operations
Three Months Ended June 30, 1999 in Comparison with Three Months Ended June 30,
1998
Revenues increased 348% to $34,215 for the three months ended June 30,
1999, from $7,635 for the same quarter in the prior year. Growth in revenues of
$26,580 resulted from an increase in revenues from majority and wholly-owned
networks of approximately $26,290 as compared to the same period in the prior
year due to the continued expansion of the Company's customer base, 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 Jacksonville, Richmond and
Wichita markets. The increase was also due to increased management fees from the
non-consolidated subsidiaries of $290 from the same period in the prior year.
Network operations expense increased 134% to $11,671 for the three
months ended June 30, 1999 from $4,989 for the same quarter in the prior year.
The increase was attributable to the expansion of operations at the Network
Operating Control Center ("NOCC"), the increased number and size of the
operations of the networks which resulted in increased employee related costs,
equipment maintenance costs, costs related to planned expansion into new
markets, and the consolidation of the Jacksonville, Richmond and Wichita
markets.
Selling, general and administrative expense increased 287% to $32,637
for the three months ended June 30, 1999 from $8,432 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 Core Markets,
the development of a sales presence in many of the New Markets, an increase in
corporate overhead costs to accommodate the growth in the number, size and
operations of the networks as a result of the expansion, and the consolidation
of the Jacksonville, Richmond and Wichita markets.
Depreciation and amortization expense increased 122% to $13,586 during
the three months ended June 30, 1999 from $6,120 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, amortization of deferred financing costs and the
consolidation of the Jacksonville, Richmond and Wichita markets.
Interest income for the three months ended June 30, 1999 increased 249%
to $14,780 from $4,235 for the same quarter in the prior year as a result of the
payment of interest due to the Company from Telergy as discussed above, offset
by decreases in interest from cash and cash equivalents and U.S. Government
securities resulting from the interest payments on the 12 1/4% senior secured
notes, investments in joint ventures, and expenditures for property, plant and
equipment.
Interest income-affiliate for the three months ended June 30, 1999
increased to $2,779 from $1,824 as a result of demand advances made to Adelphia
during the period.
Interest expense increased 59% to $21,805 during the three months ended
June 30, 1999 from $13,704 for the same period in the prior year. The increase
was primarily attributable to higher interest expense associated with interest
on the 12% senior subordinated notes.
Equity in net loss of joint ventures increased by 3% to $3,291 during
the three months ended June 30, 1999 from $3,190 for the same quarter in the
prior year. The net losses of the nonconsolidated Operating Companies for the
three months ended June 30, 1998 were primarily the result of increased revenues
only partially offsetting startup and other costs and expenses associated with
design, construction, operation and management of the networks of the Operating
Companies.
The number of nonconsolidated Operating Companies paying management
fees to the Company decreased from 8 at June 30, 1998 to 4 at June 30, 1999 due
to the Company's increased ownership in certain Operating Companies as a result
of the previously mentioned acquisitions. These non-consolidated Operating
Companies and networks under construction paid management and monitoring fees to
the Company, which are included in revenues, aggregating approximately $1,032
for the three months ended June 30, 1999, as compared with $742 for the same
quarter in the prior fiscal year. The nonconsolidated Operating Companies' net
losses, including networks under construction, for the three months ended June
30, 1998 and 1999 aggregated approximately $3,765 and $2,518, respectively.
Preferred stock dividends increased by 13% to $7,720 for the three
months ended June 30, 1999 from $6,807 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.
Six Months Ended June 30, 1999 in Comparison with Six Months Ended June 30, 1998
Revenues increased 347% to $55,653 for the six months ended June 30,
1999, from $12,455 for the same period in the prior year. Growth in revenues of
$43,198 resulted from an increase in revenues from majority and wholly-owned
networks of approximately $42,306 as compared to the same period in the prior
year due to the continued expansion of the Company's customer base, 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 Jacksonville, Richmond and
Wichita markets. The increase was also due to increased management fees from the
non-consolidated subsidiaries of $892 from the same period in the prior year.
Network operations expense increased 168% to $20,175 for the six months
ended June 30, 1999 from $7,530 for the same period in the prior year. The
increase was attributable to the expansion of operations at the NOCC, 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, and the consolidation of the
Jacksonville, Richmond and Wichita markets.
Selling, general and administrative expense increased 293% to $53,646
for the six months ended June 30, 1999 from $13,647 for the same period 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 Core Markets,
the development of a sales presence in many of the New Markets, 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, and the
consolidation of the Jacksonville, Richmond and Wichita markets.
Depreciation and amortization expense increased 157% to $27,121 during
the six months ended June 30, 1999 from $10,570 for the same period 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, amortization of deferred financing costs and the consolidation of the
Jacksonville, Richmond and Wichita markets.
Interest income for the six months ended June 30, 1999 increased 80% to
$16,778 from $9,337 for the same period in the prior year as a result of the
payment of interest due to the Company from Telergy as discussed above, offset
by decreases in interest from cash and cash equivalents and U.S. Government
securities resulting from 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 six months ended June 30, 1999
increased to $5,607 from $2,075 as a result of demand advances made to Adelphia
during the period.
Interest expense increased 38% to $37,338 during the six months ended
June 30, 1999 from $27,104 for the same period in the prior year. The increase
was primarily attributable to higher interest expense associated with the 12%
senior subordinated notes.
Equity in net loss of joint ventures increased by 3% to $7,094 during
the six months ended June 30, 1999 from $6,873 for the same period in the prior
year. The net losses of the nonconsolidated Operating Companies for the six
months ended June 30, 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 June 30, 1998 to 4 at June 30, 1999 due
to the Company's increased ownership in certain Operating Companies as a result
of the previously mentioned acquisitions. These non-consolidated Operating
Companies and networks under construction paid management and monitoring fees to
the Company, which are included in revenues, aggregating approximately $2,609
for the six months ended June 30, 1999, as compared with $1,718 for the same
period in the prior fiscal year. The nonconsolidated Operating Companies' net
losses, including networks under construction, for the six months ended June 30,
1998 and 1999 aggregated approximately $7,426 and $4,744, respectively.
Preferred stock dividends increased by 13% to $15,199 for the six
months ended June 30, 1999 from $13,422 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 four 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 and other joint ventures, a substantial portion of
the Operating Companies' historic results have been 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 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 consolidated Operating
Companies in combination with the nonconsolidated joint venture Operating
Companies on a combined basis. This combined financial presentation reflects
Hyperion's consolidated financial position and results of operations adjusted
for the inclusion of certain Operating Companies (Richmond, Jacksonville and
Wichita) which were purchased in March 1999 combined with the non-consolidated
joint ventures' results of operations. All combined 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.
Quarter ended Quarter ended
June 30, 1999 June 30, 1998
---------------------------------------- -----------------------------------------
(dollars in thousands)
Adjusted
Consolidated Joint Venture Combined Consolidated Joint Venture Combined
Operating Operating Operating Operating Operating Operating
Results Results Results Results Results Results
---------------------------------------- -----------------------------------------
Revenues $34,215 $9,742 $43,957 $11,212 $1,479 $12,691
Direct Operating Expenses 11,671 3,565 15,236 6,132 1,081 7,213
---------------------------------------- -----------------------------------------
Gross Margin 22,544 6,177 28,721 5,080 398 5,478
Gross Margin Percentage 65.9% 63.4% 65.3% 45.3% 26.9% 43.2%
Sales General and Administrative Expenses 32,637 5,875 38,512 9,658 2,520 12,178
---------------------------------------- -----------------------------------------
EBITDA (a) (10,093) 302 (9,791) (4,578) (2,122) (6,700)
---------------------------------------- -----------------------------------------
EBITDA Percentage of Revenues (29.5%) 3.1% (22.3%) (40.8%) (143.5%) (52.8%)
June 1999
Quarter vs. June
1998 Quarter
----------------------------------------------------
Adjusted
% Change Comparison Consolidated Joint Venture Combined
Operating Operating Operating
Results Results Results
----------------------------------------------------
Revenues 205.2% 558.7% 246.4%
Direct Operating Expenses 90.3% 229.8% 111.2%
----------------------------------------------------
Gross Margin 343.8% 1452.0% 424.3%
Sales General and Administrative Expenses 237.9% 133.1% 216.2%
----------------------------------------------------
EBITDA (a) (120.5%) NM(b) (46.1%)
----------------------------------------------------
<FN>
(a) 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 generally accepted
accounting principles, and while EBITDA may not be comparable to other
similarly titled measures of other companies, management of Hyperion
believes that EBITDA is a meaningful measure of performance.
(b) Not meaningful
</FN>
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 Markets, 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 $77,259 and $131,831 for
the six months ended June 30, 1998 and 1999, respectively. Further, investments
made by the Company in nonconsolidated Operating Companies were $21,539 and
$24,672 for the six months ended June 30, 1998 and 1999, respectively. The
increase in capital expenditures for the six months ended June 30, 1999 as
compared with the same period in the prior fiscal year is largely attributable
to the capital expenditures necessary to develop the Core Markets and the New
Markets 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 Core Markets and services and the
development of New Markets and additional markets 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 Core Markets, (iii) the
design, construction and development of the New Markets and (iv) the acquisition
of additional ownership interests in Core Markets. 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 Core Markets and plans to install regional super switches in certain New
Markets when such New Markets are operational. To date, the Company has
installed switches in all of its Core Markets and plans to provide such services
in all of its New Markets on a standard switching platform based on Lucent 5
switch technology. In addition, the Company intends to continue 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
continue to purchase its partners' interests in the Operating Companies when it
can do so on attractive economic terms. The Company estimates that it will
require approximately $400 million to fund the Company's capital expenditures,
working capital requirements, operating losses and pro rata investments in the
Operating Companies from July 1, 1999 through the quarter ending December 31,
2000.
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 Core
Markets and New Markets 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 networks 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,
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 December 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 12 1/4%
Senior Secured Notes and the 12% 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 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's
evaluation also includes evaluating the potential impact as a result of its
reliance on third-party systems that may have the year 2000 issue.
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 its inventory and assessment of
affected computerized systems and technologies. The Company is in the final
stages of its year 2000 compliance program with respect to the remediation of
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 has certified six of
eight financial systems as year 2000 compliant. The Company expects its
financial reporting systems to be fully year 2000 compliant by September 1999.
A third-party billing vendor currently facilitates customer billing.
This third-party vendor has certified that it implemented and successfully
tested its own year 2000 solution in April 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 has substantially completed 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 October 1999.
Costs incurred to date directly related to addressing the year 2000
issue have been approximately $525. 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 $1,000. 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 is 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 the year 2000 issue 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 inability to become compatible with
third parties with which the Company has a material relationship, including
companies that the Company acquires, may have a material adverse effect on the
Company, including significant service interruption or outages; however, the
Company cannot 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 MediaOne and the proposed mergers between SBC and Ameritech, Bell
Atlantic and GTE, and Qwest and US West. 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.
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 Global Crossing, 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 various cable companies 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 is 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 prospects. In
addition, we may expend significant financial and managerial resources to
participate in proceedings setting rules at either the federal or state level,
without achieving a favorable result.
Federal Legislation and Regulation
The 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 successfully challenged states' attempts to limit competition in certain
rural areas. One state has requested a stay of the favorable FCC order.
Depending successfully 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 the majority 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 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 or contribute to universal
service funds, the FCC's order and subsequent state rulings 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 filed petitions at the FCC and have initiated
legislative efforts to effect 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 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. In addition, there are numerous bills being considered
by Congress which would deregulate advanced services. These outcomes 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 are 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
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 successfully challenged states' attempts to limit competition in certain
rural areas. However, inability to implement the related FCC order could
adversely effect the Company's expansion plans.
The FCC also presides over ongoing proceedings addressing a variety of
other matters, including number portability, Internet, telephony, slamming, and
pole attachments. 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, Georgia, Indiana, Kansas, Kentucky, Louisiana,
Maine, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New
York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina,
Tennessee, Texas, Vermont, 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, an 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, 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
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.
The Company is subject to requirements in some states to obtain prior
approval for, or notify the commission of any transfers of control, sales of
assets, corporate reorganizations, issuance of stock or debt instruments, and
other transactions that may effect a change in the way that the Company does
business. Although the Company believes such authorization could be obtained,
there can be no assurance that the state commissions would grant the Company
authority to complete any transactions.
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 and redeemable preferred stock to fund
its working capital requirements, capital expenditures and acquisitions. These
financing 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 June 30,
1999.
Expected Maturity
----------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
--------- --------- ---------- ---------- ---------- ----------- ------------ ------------
Fixed Rate Debt and
Redeemable Preferred Stock: --- --- --- --- $303,840 $793,313 $1,097,153 $1,041,236
Average Interest Rate 12.53% 12.53% 12.53% 12.53% 12.41% 12.35% --- ---
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 June 30, 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 June 30, 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 and six months ended June 30, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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 August 10, 1999
(b) Reports on Form 8-K:
A Form 8-K was filed on April 6, 1999 which reported information under
Item 5 thereof. No financial statements were filed.
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: August 16, 1999 By: /s/ Timothy J. Rigas
Timothy J. Rigas
Vice Chairman, Chief Financial Officer
(authorized officer) and Treasurer
Date: August 16, 1999 By: /s/ Edward E. Babcock, Jr.
Edward E. Babcock, Jr.
Vice President, Finance and
Chief Accounting Officer
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 August 10, 1999
Exhibit 99.01
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: 6/30/99
Unaudited ***
North East Mid-Atlantic Mid-South Other Markets Total
FINANCIAL DATA (dollars in thousands):
Total Revenue $ 11,797.0 $ 17,784,6 $ 9,415.9 $ 3,869.7 $ 42,867.2
Total Capital Expenditures $ 8,402.5 $ 53,515.1 $ 21,570.5 $ 12,581.4 $ 96,069.5
Total EBITDA $ 5,304.1 $ (1,446.3)$ (2,572.4)$ (2,458.7)$ (1,173.3)
Gross PP&E $ 108,382.4 $ 391,138.0 $ 163,881.2 $ 177,921.0 $ 841,322.6
Proportional Revenue * $ 11,797.0 $ 13,983.9 $ 9,290.0 $ 3,869.7 $ 38,940.6
Proportional Capital Expenditures* $ 8,402.5 $ 49,173.6 $ 21,360.6 $ 12,581.4 $ 91,518.1
Proportional EBITDA * $ 5,304.1 $ (1,855.6)$ (2,597.8)$ (2,458.7)$ (1,608.0)
Proportional Gross PP&E * $ 108,382.4 $ 328,441.7 $ 161,790.4 $ 177,921.0 $ 776,535.5
STATISTICAL DATA
Increase for June 30, 1999 quarter:
Markets in Operation --- 1 --- --- 1
Route Miles --- 163 47 --- 210
Fiber Miles --- 2,520 2,256 --- 4,776
Buildings connected --- 66 12 38 116
Building with customers --- 2,441 228 727 3,396
LEC-COs collocated ** --- 15 2 --- 17
Voice Grade Equivalent Circuits 34,944 121,632 55,104 42,336 254,016
As of March 31, 1999:
Markets in Operation **** 4 20 9 6 39
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
As of June 30, 1999:
Markets in Operation 4 21 9 6 40
Route Miles 3,220 4,350 3,618 4,102 15,290
Fiber Miles 94,374 155,174 69,184 59,368 378,100
Buildings connected 353 763 377 444 1,937
Buildings with customers 2,401 3,879 4,128 1,463 11,871
LEC-COs collocated ** 16 82 32 18 148
Voice Grade Equivalent Circuits 285,600 823,872 401,184 303,744 1,814,400
Access Lines Sold 33,787 105,885 54,675 17,844 212,191
Access Lines Installed 28,566 99,635 47,641 15,443 191,285
<FN>
* Represents portion attributable to the Company.
** Local Exchange Carrier's central office
*** Other Market amounts includes Network Control Centers and Corporate Capital Expenditures
and Gross Property, Plant and Equipment
**** Previously reported amounts have been restated to reflect Metropolitan Statistical Areas.
</FN>
Exhibit 99.02
SCHEDULE F
Hyperion Telecommunications, Inc.
Form of Financial Information and Operating Data
of the Pledged Subsidiaries and the Joint Ventures
Data presented for the quarter ended: 6/30/99
Unaudited
Total
FINANCIAL DATA (dollars in thousands)(a):
Total Revenue $ 19,586.2
Total Capital Expenditures $ 14,785.9
Total EBITDA $ 7,048.5
Gross Property, Plant & Equipment $ 208,048.4
STATISTICAL DATA(b):
As of June 30, 1999:
Markets in Operation 7
Route Miles 3,270
Fiber Miles 149,222
Buildings connected 918
LEC-COs collocated 59
Voice Grade Equivalent Circuits 825,888
Access Lines Sold 76,628
Access Lines Installed 65,701
(a) Financial Data represents 100% of the operations of all entities except
Hyperion of Florida, which is reflected at its ownership in the
Jacksonville network, which is 20%.
(b) Statistical Data represents 100% of operating data for all entities.
Exhibit 99.03
PRESS RELEASE
Contact Information
Ed Babcock
Hyperion Communications
814-274-9830
FOR IMMEDIATE RELEASE:
HYPERION TELECOMMUNICATIONS, INC ANNOUNCES SECOND QUARTER RESULTS OF OPERATIONS
Coudersport, PA - August 10, 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 second quarter which ended on
June 30, 1999. Second quarter results saw record levels of consolidated
operating revenues of $34.2 million, record access line installations of 46,638
and positive EBITDA in the Company's Core Markets ("defined in Table 2") of $7.7
million. Net loss applicable to common shareholders for the second quarter
totaled $38.9 million, or $0.70 per share, compared with $28.6 million, or $0.59
per share, for the same period in the prior year. The Company now offers
communications services in 40 markets in the eastern half of the United States
operating under the tradename "Adelphia Business Solutions." Summarized
financial results are included in Tables 1, 2 and 3 below.
"We are pleased by the continued progress we are making in all facets of our
business plan," commented James Rigas, CEO of Hyperion. "EBITDA margins in our
Core Markets continue to increase, with our current EBITDA losses due to the new
market expansion efforts. Because we are very confident in our ability to
develop and grow these New Markets, and given our proven financial success in
our existing core markets, we are more optimistic than ever in the Company's
expanded business plan. Each quarters' improved financial performance in our
Core Markets further solidifies our commitment to the competitive telephony
business. Furthermore, with the expanding data market, coupled with our
extensive network presence, we believe the market opportunity is greater than it
has ever been. Finally, with our partnership roll-up efforts largely behind us,
the benefits of ownership will accrue to all Hyperion stockholders."
Access lines installed increased by 46,638, resulting in an installed access
line base of 191,285 as of June 30, 1999, 65% of which are serviced on the
Company's switches. Access lines sold as of June 30, 1999 totaled 212,191, an
increase of 44,850 in the quarter.
During the June 1999 quarter, the Company and its Operating Companies invested
$102.3 million in capital expenditures, of which Hyperion's consolidated total
was $92.1 million. As of June 30, 1999, total gross property, plant and
equipment of the Company and its consolidated subsidiaries was approximately
$715.9 million.
As of June 30, 1999, the Operating Companies had approximately 6,317 local route
miles and 288,209 local fiber miles. The Company had customers located in
approximately 11,871 buildings of which 1,937 buildings were connected with
Company owned fiber and was collocated in 148 local exchange carriers LSOs. To
date, 22 Lucent 5ESS switches or remote switching modules have been installed to
provide local telephone service with nine additional regional super switches
planned for operation during 1999 and early 2000.
Hyperion 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. As a result of its
consolidation efforts, the Company now owns 100% of the interests in 36 of 40
markets in which it currently offers communications services, with the remaining
4 markets operating as 50% owned joint ventures with a local partner. By the
year 2001, Hyperion expects to serve most cities in the eastern half of the
United States through the interconnection of approximately 75 markets, 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, or to review an electronic version of this press release visit the
company's web site at http://www.hyperion.net.
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").
Hyperion Telecommunications, Inc.
Table 1 - Unaudited Proforma Consolidated and
Joint Venture Operating Results
Quarter ended June 30, 1999
----------------------------------------------
Consolidated Joint Venture Total
(dollars in thousands) Operating Operating Operating
Results Results Results
----------------------------------------------
Revenues $ 34,215 $ 9,742 $ 43,957
Direct Operating Expenses 11,671 3,565 15,236
----------------------------------------------
Gross Margin 22,544 6,177 28,721
Gross Margin Percentage 65.9% 63.4% 65.3%
Sales General and Administrative Expenses 32,637 5,875 38,512
----------------------------------------------
EBITDA (a) (10,093) 302 (9,791)
----------------------------------------------
EBITDA Percentage of Revenues -29.5% 3.1% -22.3%
Quarter ended March 31, 1999
----------------------------------------------
Pro-forma
Consolidated Joint Venture Total
(dollars in thousands) Operating Operating Operating
Results Results Results
----------------------------------------------
Revenues $ 26,539 $ 7,804 $ 34,343
Direct Operating Expenses 10,197 3,314 13,511
----------------------------------------------
Gross Margin 16,342 4,490 20,832
Gross Margin Percentage 61.6% 57.5% 60.7%
Sales General and Administrative Expenses 22,925 5,264 28,189
----------------------------------------------
EBITDA (a) (6,583) (774) (7,357)
----------------------------------------------
EBITDA Percentage of Revenues -24.8% -9.9% -21.4%
Quarter ended June 30, 1998
----------------------------------------------
Pro-forma
Consolidated Joint Venture Total
(dollars in thousands) Operating Operating Operating
Results Results Results
----------------------------------------------
Revenues $ 11,212 $ 1,479 $ 12,691
Direct Operating Expenses 6,132 1,081 7,213
----------------------------------------------
Gross Margin 5,080 398 5,478
Gross Margin Percentage 45.3% 26.9% 43.2%
Sales General and Administrative Expenses 9,658 2,520 12,178
----------------------------------------------
EBITDA (a) (4,578) (2,122) (6,700)
----------------------------------------------
EBITDA Percentage of Revenues -40.8% -143.5% -52.8%
June 1999 Quarter vs. March 1999 Quarter
----------------------------------------------
Pro-forma
Percent Change Comparison Consolidated Joint Venture Total
Operating Operating Operating
Results Results Results
----------------------------------------------
Revenues 28.9% 24.8% 28.0%
Direct Operating Expenses 14.5% 7.6% 12.8%
----------------------------------------------
Gross Margin 38.0% 37.6% 37.9%
Sales General and Administrative 42.4% 11.6% 36.6%
----------------------------------------------
EBITDA (a) 53.3% NM 33.1%
June 1999 Quarter vs. June 1998 Quarter
----------------------------------------------
Pro-forma
Percent Change Comparison Consolidated Joint Venture Total
Operating Operating Operating
Results Results Results
----------------------------------------------
Revenues 205.2% 558.7% 246.4%
Direct Operating Expenses 90.3% 229.8% 111.2%
----------------------------------------------
Gross Margin 343.8% 1452.0% 424.3%
Sales General and Administrative 237.9% 133.1% 216.2%
----------------------------------------------
EBITDA (a) 120.5% NM 46.1%
<FN>
Table 1 summarizes operating results for (i) Hyperion and its consolidated
subsidiaries and (II) its non-consolidated joint ventures. All prior period's
operating results have been presented on a pro-forma basis, adjusted for the
consolidation of the Richmond, Jacksonville and Wichita markets as if Hyperion's
purchase of its partners' interests in these markets had occurred at the
beginning of each period presented.
(a) Earnings before interest, income taxes, depreciation and amortization and
other income/expense ("EBITDA") and similar measures of cash flow are commonly
used in the telecommunications industry to analyze and compare
telecommunications companies on the basis of operating performance, leverage,
and liquidity. While EBITDA is not an alternative indicator of operating
performance or an alternative to cash flows from operating activities as a
measure of liquidity as defined by GAAP, and while EBITDA may not be comparable
to other similarly titled measures of other companies, management of Hyperion
believes that EBITDA is a meaningful measure of performance.
</FN>
Hyperion Telecommunications, Inc.
Table 2 - Unaudited Core Market and Quarter ended June 30, 1999
----------------------------------------------
New Network Operating Results Core New Total
(dollars in thousands) Markets Markets Operating
Results Results Results
----------------------------------------------
Revenues $ 43,317 $ 640 $ 43,957
Direct Operating Expenses before Allocated
Corporate Overhead Charges 11,987 907 12,894
----------------------------------------------
Gross Margin before Corporate Overhead 31,330 (267) 31,063
Gross Margin Percentage 72.3% -41.7% 70.7%
Sales General and Administrative Expenses 17,002 11,223 28,225
Allocated Corporate Overhead Expense 6,615 6,014 12,629
----------------------------------------------
EBITDA (a) 7,713 (17,504) (9,791)
----------------------------------------------
EBITDA Percentage of Revenues 17.8% -2735.0% -22.3%
Quarter ended March 31, 1999
----------------------------------------------
Core New Total
Markets Markets Operating
Results Results Results
----------------------------------------------
Revenues $ 34,093 $ 250 $ 34,343
Direct Operating Expenses before Allocated
Corporate Overhead Charges 11,146 519 11,665
----------------------------------------------
Gross Margin before Corporate Overhead 22,947 (269) 22,678
Gross Margin Percentage 67.3% -107.6% 66.0%
Sales General and Administrative Expenses 14,364 5,881 20,245
Allocated Corporate Overhead Expense 5,983 3,807 9,790
----------------------------------------------
EBITDA (a) 2,600 (9,957) (7,357)
----------------------------------------------
EBITDA Percentage of Revenues 7.6% -3982.8% -21.4%
Quarter ended June 30, 1998
----------------------------------------------
Core New Total
Markets Markets Operating
Results Results Results
----------------------------------------------
Revenues $ 12,661 $ 30 $ 12,691
Direct Operating Expenses before Allocated
Corporate Overhead Charges 5,844 60 5,904
----------------------------------------------
Gross Margin before Corporate Overhead 6,817 (30) 6,787
Gross Margin Percentage 53.8% -100.0% 53.5%
Sales General and Administrative Expenses 7,365 7 7,372
Allocated Corporate Overhead Expense 6,115 - 6,115
----------------------------------------------
EBITDA (a) (6,663) (37) (6,700)
----------------------------------------------
EBITDA Percentage of Revenues -52.6% -123.3% -52.8%
June 1999 Quarter vs. March 1999 Quarter
----------------------------------------------
Core New Total
Percent Change Comparison Markets Markets Operating
Results Results Results
----------------------------------------------
Revenues 27.1% 156.0% 28.0%
Direct Operating Expenses 7.5% 74.8% 10.5%
----------------------------------------------
Gross Margin 36.5% -0.7% 37.0%
Sales General and Administrative Expenses 18.4% 90.8% 39.4%
Allocated Corporate Overhead 10.6% 58.0% 29.0%
----------------------------------------------
EBITDA (a) 196.7% NM 33.1%
June 1999 Quarter vs. June 1998 Quarter
----------------------------------------------
Core New Total
Percent Change Comparison Markets Markets Operating
Results Results Results
----------------------------------------------
Revenues 242.1% NM 246.4%
Direct Operating Expenses 105.1% NM 118.4%
----------------------------------------------
Gross Margin 359.6% NM 357.7%
Sales General and Administrative Expenses 130.8% NM 282.9%
Allocated Corporate Overhead 8.2% NM 106.5%
----------------------------------------------
EBITDA (a) NM NM 46.1%
<FN>
Table 2 summarizes operating results for (i) Hyperion's 22 Core Markets which
were in operation when Hyperion completed its initial public offering in May
1998 and (ii) Hyperion's New Markets as a result of its geographic expansion in
the eastern half of the United States. Corporate overhead has been allocated on
the basis of the nunber of markets in service or under development for each
period presented.
(a) Earnings before interest, income taxes, depreciation and amortization and
other income/expense ("EBITDA") and similar measures of cash flow are commonly
used in the telecommunications industry to analyze and compare
telecommunications companies on the basis of operating performance, leverage,
and liquidity. While EBITDA is not an alternative indicator of operating
performance or an alternative to cash flows from operating activities as a
measure of liquidity as defined by GAAP, and while EBITDA may not be comparable
to other similarly titled measures of other companies, management of Hyperion
believes that EBITDA is a meaningful measure of performance.
</FN>
TABLE 3
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------------
1998 1999 1998 1999
--------------- -------------- ------------ -------------
Revenues $ 7,635 $ 34,215 $ 12,455 $ 55,653
--------------- -------------- ------------- -------------
Operating expenses:
Network operations 4,989 11,671 7,530 20,175
Selling, general and administrative 8,432 32,637 13,647 53,646
Depreciation and amortization 6,120 13,586 10,570 27,121
--------------- -------------- ------------- -------------
Total 19,541 57,894 31,747 100,942
--------------- -------------- ------------- -------------
Operating loss (11,906) (23,679) (19,292) (45,289)
Other income (expense):
Interest income 4,235 14,780 9,337 16,778
Interest income-affiliate 1,824 2,779 2,075 5,607
Interest expense (13,704) (21,805) (27,104) (37,338)
Other income 1,000 --- 1,000 ---
--------------- -------------- ------------- -------------
Loss before income taxes and
equity in net loss of joint ventures (18,551) (27,925) (33,984) (60,242)
Income tax expense --- (4) --- (4)
--------------- -------------- ------------- -------------
Loss before equity in net loss
of joint ventures (18,551) (27,929) (33,984) (60,246)
Equity in net loss of joint ventures (3,190) (3,291) (6,873) (7,094)
--------------- -------------- ------------- -------------
Net loss (21,741) (31,220) (40,857) (67,340)
Dividend requirements applicable to preferred stock (6,807) (7,720) (13,422) (15,199)
--------------- -------------- ------------- -------------
Net loss applicable to common stockholders $ (28,548) $ (38,940) $ (54,279) $ (82,539)
=============== ============== ============= =============
Basic and diluted net loss per weighted average
share of common stock $ (0.59) $ (0.70) $ (1.30) $ (1.49)
=============== ============== ============= =============
Weighted average shares of
common stock outstanding 48,110 55,497 41,720 55,497
=============== ============== ============= =============
<FN>
Table 3 represents the Condensed Consolidated Statements of Operations to be
filed with Hyperion's Quarterly Report on Form 10-Q for the period ended June
30, 1999.
</FN>