<PAGE>
Filed Pursuant to Rule 424 (b) (i)
Registration No. 33-34738
PROSPECTUS
[LOGO OF 4,496,689 SHARES
INTERMEDIA INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
COMMUNICATIONS COMMON STOCK
APPEARS HERE]
Of the 4,496,689 shares (the "Shares") of common stock, par value $.01 per
share (the "Common Stock") of Intermedia Communications of Florida, Inc. (the
"Company") offered hereby (the "Offering"), 4,000,000 Shares are being offered
by the Company and 496,689 Shares are being offered by certain stockholders of
the Company (the "Selling Stockholders"). See "The Selling Stockholders." The
Company will not receive any proceeds from the sale of Shares by the Selling
Stockholders.
The Company is concurrently offering (the "Concurrent Offering") $330.0
million principal amount at maturity of 12 1/2% Senior Discount Notes due 2006
(the "Senior Discount Notes") generating gross proceeds of $179.9 million.
This Offering is not contingent upon the consummation of the Concurrent
Offering.
On May 8, 1996, the closing price for the Common Stock as quoted on the
Nasdaq National Market, under the symbol "ICIX", was $26.063 per share.
----------------
SEE "RISK FACTORS" ON PAGE 13 FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED
WITH AN INVESTMENT IN THE SHARES.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO THE
THE PUBLIC DISCOUNT(1) THE COMPANY(2) SELLING STOCKHOLDERS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share....... $26.00 $1.43 $24.57 $24.57
- -------------------------------------------------------------------------------
Total(3)......... $116,913,914 $6,430,265 $98,280,000 $12,203,649
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters (as defined herein) against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$170,000.
(3) The Company has granted the Underwriters an option exercisable within 30
days to purchase up to an aggregate of 674,503 additional shares of Common
Stock at the public offering price per share, less the Underwriting
Discount, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to the Public, Underwriting Discount
and Proceeds to the Company will be $134,450,992, $7,394,805 and
$114,682,539, respectively. See "Underwriting."
----------------
The Shares are being offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Shares will be made against payment therefor in New York, New
York on or about May 14, 1996.
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
The date of this Prospectus is May 8, 1996.
<PAGE>
[INTERMEDIA ENHANCED NETWORK DIAGRAM]
2
<PAGE>
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
3
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy and information statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, its Midwest
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and its Northeast Regional Office, 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Common Stock is listed on the Nasdaq
National Market under the symbol "ICIX". Reports, proxy and information
statements and other information concerning the Company can also be inspected
at the Nasdaq National Market at 1735 17 Street, N.W., Washington, D.C. 20006.
Statements contained in this Prospectus as to the contents of any contract
or other document are not necessarily complete, and reference is made to the
copy of such contract or other document filed as an exhibit hereto or as an
exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, which is incorporated herein by reference, each such
statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or information have been filed by the Company with
the Commission and are incorporated herein by reference:
The Company's Annual Report on Form 10-K for the year ended December 31,
1995.
The Company's Current Report on Form 8-K filed with the Commission on
February 21, 1996.
The Company's Current Report on Form 8-K filed with the Commission on
March 13, 1996.
The Company's Current Report on Form 8-K filed with the Commission on
April 30, 1996 including the exhibits thereto.
The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996.
The description of capital stock contained in the Company's registration
statements on Form 8-A under the Exchange Act, filed April 7, 1992, April
28, 1992 and April 30, 1992 (File No. 0-20135).
All documents subsequently filed by the Company with the Commission pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of
this Prospectus and prior to the termination of the offering covered by this
Prospectus will be deemed incorporated by reference into this Prospectus and
to be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
THE COMPANY HEREBY UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH PERSON TO
WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED, UPON THE WRITTEN OR ORAL
REQUEST OF SUCH PERSON TO INTERMEDIA COMMUNICATIONS OF FLORIDA, INC., 3625
QUEEN PALM DRIVE, TAMPA, FLORIDA 33619 (TELEPHONE 813-621-0011), ATTENTION:
INVESTOR RELATIONS, A COPY OF ANY OR ALL OF THE DOCUMENTS REFERRED TO ABOVE
(OTHER THAN EXHIBITS TO SUCH DOCUMENTS) WHICH HAVE BEEN INCORPORATED BY
REFERENCE IN THIS PROSPECTUS.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information including the Financial Statements and the Notes thereto appearing
elsewhere in this Prospectus. References in this Prospectus to the "Company" or
"ICI" means Intermedia Communications of Florida, Inc. together with its
subsidiaries, except where the context otherwise requires. Certain terms used
herein are defined in the Glossary attached hereto as Appendix A.
THE COMPANY
ICI is a rapidly growing provider of integrated telecommunication services.
Founded in 1987 as one of the nation's first facilities-based competitive
access providers ("CAPs"), the Company currently operates digital, fiber optic
networks in nine metropolitan areas and has one network under development.
Expanding beyond provision of traditional CAP services, the Company now
provides enhanced network services, including frame relay and Internet access
services, primarily to business and government customers, in approximately 600
cities nationwide, and is a facilities-based interexchange carrier providing
services, to approximately 10,000 customers. ICI intends to begin providing a
range of local exchange services in Florida in the second half of 1996 and in
other parts of its service territory as requisite approvals are obtained. ICI
has continued to increase its customer base and network density in the
Southeast and its customers' traffic to locations outside its existing service
territory continues to increase. The Company has pursued (and will continue to
pursue) attractive opportunities to expand into other geographic markets.
The Company's goal is to become the single source provider of comprehensive
telecommunications services to its customers. To accomplish this goal, the
Company's strategy is to systematically secure a growing portion of a
customer's telecommunications business and, over time, through the provision of
additional integrated services, increase the customer's reliance on, and sense
of partnership with, the Company. In addition, with the advent of state and
federal laws mandating local exchange competition, significant opportunities
exist for the Company to increase its market share and reach new market
segments by allowing other parties, including interexchange carriers ("IXCs"),
to resell its ICI's local exchange services, when available.
ICI's strategy is designed to build a base of recurring revenues and to take
advantage of the increasing requirements of business and government customers
for more effective and efficient solutions to their telecommunications needs.
These customers require maximum reliability, high quality service, broad
geographic coverage (including end-to-end connectivity), solutions-oriented
customer service and the timely introduction of innovative services. These
customers also demand that services be delivered in a cost-effective manner
and, preferably, from a single source. The Company is well positioned to
satisfy such customer requirements due to (i) the successful negotiation of
interconnection co-carrier agreements for Florida with BellSouth
Telecommunication, Inc. ("BellSouth"), GTE Florida Incorporated ("GTE") and
Sprint United Telephone-Florida/Centel-Florida ("Sprint-United") and the
implementation of network to network interfaces ("NNIs") for frame relay data
transmission with each of such carriers, (ii) a specialized sales and service
approach employing engineering and sales professionals who design and implement
customized, cost-effective telecommunications solutions, (iii) the ongoing
development and integration of new telecommunications services and (iv) the
strategic deployment of voice and data switches and digital fiber optic
networks designed with redundancy and diversity.
In December 1994, the Company acquired Phone One, Inc. ("Phone One"), a
facilities-based interexchange carrier providing services to customers
primarily located in Florida and Georgia. In July 1995, the Company consummated
its acquisition of FiberNet USA, Inc. and FiberNet Telecommunications of
Cincinnati, Inc. (collectively "FiberNet") thereby expanding its fiber optic
networks into four additional metropolitan areas. On February 20, 1996, the
Company entered into an agreement to purchase the telecommunications division
of EMI
5
<PAGE>
Communications Corp. ("EMI"), a wholly-owned subsidiary of Newhouse
Broadcasting Corporation (the "EMI Acquisition"), for 937,500 shares of ICI
Common Stock. EMI's telecommunications division, headquartered in Syracuse, New
York, is a provider of frame relay based network services and interexchange
private line services primarily over digital microwave networks in the
northeastern United States. For the year ended December 31, 1995, EMI's
revenues were approximately $43 million and the combined pro forma revenues of
ICI and EMI were approximately $82 million. Although ICI believes the EMI
Acquisition will be consummated, there can be no assurance that the conditions
to the closing of such transaction will be satisfied and that the transaction
will be consummated. The FiberNet and Phone One acquisitions have allowed (and
the pending EMI Acquisition will allow) ICI to (i) expand its customer base and
increase its exposure to additional interregional customers, (ii) introduce
additional business customers to all of the Company's service offerings, (iii)
add long distance to its portfolio of service offerings, (iv) reduce costs by
eliminating overlapping facilities and removing duplicate NNIs and (v) create
synergies between long distance and local service offerings such as economies
of scale, usage sensitive billing capabilities and cross-selling opportunities.
Subject to receipt by the Company of the requisite approvals, the Company
intends to deploy switching equipment to provide local exchange and switched
access services in each of its principal markets. These new switches will also
augment the Company's interexchange services. The Company recently began to
deploy such switching equipment in Florida and intends to deploy four switches
in Florida during 1996. In addition, the Company is the first alternative local
exchange carrier to enter into interconnection co-carrier agreements for
Florida with each of BellSouth, GTE and Sprint-United, the three major
providers of local exchange services in Florida, which provide for reciprocal
rights to terminate traffic on each other's networks. Based upon Federal
Communications Commission ("FCC") data and the Company's knowledge of the
industry, the Company estimates that the market for local network services in
1995 was $5.0 billion in Florida, and $95 billion in the United States,
substantially all of which is currently served by local exchange carriers
("LECs").
The Company has nine digital, fiber optic networks in service and one under
development in a total of ten metropolitan areas. As of December 31, 1995, this
infrastructure was comprised of 17,128 fiber miles and 504 route miles and was
connected to 380 buildings. ICI continues to expand these networks and has
identified expansion opportunities in other selected markets. This expansion
should enable the Company to (i) achieve economies of scale in the management
of its networks as well as the marketing and sales of its services, including
local exchange services, (ii) more effectively service customers that have a
presence in multiple metropolitan areas and (iii) reach a significant number of
new customers.
The Company has also undertaken a major expansion of its intercity network to
satisfy the growing demands for enhanced network services, including frame
relay networking services, ATM and Internet access. As a result, the Company
had approximately 2,300 nodes, serving customer locations in 600 cities as of
December 31, 1995 (not including the approximately 1,500 nodes in approximately
400 cities served by EMI), as compared to approximately 900 nodes, serving
customer locations in 336 cities as of December 31, 1994. Enhanced network
services, which are currently provided primarily on the Company's frame relay
network, are specialized interexchange services offered by the Company for
customers that need to transport large amounts of data among multiple
locations. To address the growing demand for end-to-end connectivity and
interoperability throughout the United States, in 1994, ICI created, in
conjunction with EMI and three other regional telecommunications companies, the
UniSPAN(C) consortium. This consortium, along with ICI's relationship with
certain other carriers, allows the Company to terminate traffic both nationally
and internationally utilizing other companies' networks and provides a flow of
traffic onto the Company's networks. In addition, to further increase efficient
access to a greater customer base, ICI and EMI have successfully established
approximately 100 NNIs which interconnect their frame relay networks to those
of BellSouth, Bell Atlantic Telephone Companies, Sprint-United, NYNEX
Corporation, Ameritech Operating Companies, Southern New England Telephone
Company, GTE and other carriers. According to industry sources, the frame relay
services market is projected to grow at the rate of 84% per year through 1997
from its 1993 base of $144 million; however, there can be no assurance that
such market growth will be realized or that the assumptions underlying such
projections are reliable.
6
<PAGE>
ICI was incorporated in the State of Delaware on November 9, 1987, as the
successor to a Florida corporation that was founded in 1986. The Company's
principal offices are located at 3625 Queen Palm Drive, Tampa, Florida 33619,
and its telephone number is (813) 621-0011.
CORPORATE STRATEGY
The Company's goals, and its strategy for achieving them, distinguish the
Company from many of its competitors. The Company's goal is to be a provider of
a comprehensive set of integrated telecommunications services to a broad range
of business and government customers, both directly and through resellers. The
Company has developed the staff and knowledge-based skills required to market
its services directly to business and government customers, as well as to
resellers. The Company believes this strategy reduces the risk that accompanies
the dependence on a few large customers. In addition, the Company has a
substantial base of customers to whom it can market local exchange services
when introduced. The significant capacity inherent in the Company's networks
also provides the Company with the opportunity to offer additional services
without a commensurate increase in operating expenses. ICI provides its
customers with a specialized sales and service approach that enhances the cost
effectiveness, value and reliability of the Company's service offerings to its
customers.
In order to become the single source provider of comprehensive
telecommunications services to its customers, ICI has developed operating
strategies designed to attract and retain customers, optimize the operational
and cost structure of its networks and achieve desired growth. Below are the
important components of these strategies.
Customer Strategy
-----------------
Provide Single-Source Telecommunications Services. The Company's service
portfolio currently includes: high capacity access and private line services,
high speed data networking (i.e., frame relay and ATM), Internet services,
interexchange long distance services, switched access transport and integration
services. The Company intends to continue to expand its service offerings to
customers, including providing local exchange services beginning in 1996, in
order to become a single-source provider of telecommunications services. Recent
state and federal legislation has opened the local exchange services market to
competition which until recently could only be serviced by the LECs. See
"Business--Government Regulation." A single-source capability provides
significant advantages for the customer and for the Company. Not only does this
capability address customers' complex requirements associated with integration
of diverse networks and technologies at various locations, but it also reduces
customers' administrative burdens associated with service charges, billing,
network monitoring, implementation, coordination and maintenance. The Company
also believes that expanding its service offerings will be advantageous
operationally as the Company is able to introduce additional services through
existing networks and customer connections thereby leveraging the significant
capacity inherent in its digital networks.
Focus on Business and Government Customers. The Company's portfolio of
service offerings, customer service approach, highly reliable networks, broad
geographic coverage and integration capabilities are well-suited to serve the
demands of telecommunications-intensive business and government customers. The
Company's existing business customer base includes firms in the retail,
financial services, grocery, manufacturing and other industry segments. The
Company has entered into a contract with the State of Florida to provide frame
relay based network services for the State Division of Communications. These
services will be deployed statewide and utilized by many of the State's
agencies. In addition, upon the consummation of the EMI Acquisition, the
Company would be a provider of telecommunications services to the State of New
York's Empire Net which connects numerous agencies within the State. The
Company believes that its success in providing these services to government
agencies will be replicated in other states within the Company's service
territory.
7
<PAGE>
Develop IXC and Value-Added Reseller Relationships. Recent changes in state
and federal regulation have accelerated ICI's ability to deliver local exchange
services and have provided LECs with incentives to foster local exchange
competition. In addition, as the IXCs enter the local exchange business, the
Company believes that they will seek to gain access to the local exchange
services market by either developing local network capacity or by purchasing
such capacity from alternative service providers. The Company believes that
these developments are likely to make ICI an attractive choice for joint
ventures and preferred vendor arrangements with the IXCs, LECs and other
telecommunications related companies. Such arrangements would benefit the
Company by enabling ICI to more rapidly recover its capital investment in
switches by increasing the traffic through its networks. These arrangements
should enable ICI to achieve greater market share and reach new market segments
more rapidly than it could otherwise. The Company intends to solicit IXCs, out
of region LECs, cable companies and other value added resellers to resell its
local exchange services, when available.
Maintain and Develop Long-Term Relationships. By providing customized
telecommunications solutions to its customers, the Company develops a sense of
partnership with its customers. As a result, the Company believes that a
growing portion of its revenue base will be associated with long-term customer
relationships.
Provide Cost-Effective Service Offerings. ICI has developed a number of
innovative services designed to provide cost-effective telecommunications
solutions to its customers. Each of the Company's individually packaged
services is competitively priced and when integrated into a comprehensive
telecommunications package provides significant value over comparable LEC and
IXC service offerings. The Company believes that the introduction of its
services at competitive market rates has stimulated demand from small to
medium-sized customers thereby broadening the market for ICI's services.
Expand Solutions-Oriented Sales Effort. The Company has rapidly expanded and
intends to continue to expand the utilization of its direct sales and support
team consisting of engineering and sales professionals to (i) increase the
level of integration between the Company's and the customer's operations thus
making the customer more reliant on the Company's services and (ii) broaden the
services that can be offered by the Company. During 1995, ICI increased its
sales representatives from 39 to 57. The Company believes its solutions-
oriented sales approach enables the Company to provide customers with effective
customized solutions to their telecommunications requirements.
Network Strategy
----------------
Control Franchise Points of the Networks. The Company focuses its capital
deployment on the segments of its networks that the Company believes will
provide it with the highest revenue potential and the greatest long-term
competitive advantage. The Company believes that connections to customers and
building entries represent an important strategic component of its networks.
These connections provide the Company with the platform to sell a variety of
services to existing or potential customers within a building. ICI also
believes that the deployment of switching technology and advanced network
electronics enables the Company to better configure its networks to provide
cost effective and customized solutions to its customers. The ability to offer
these types of solutions differentiates ICI from commodity transport service
providers.
Extend Coverage to Provide End-to-End Connectivity. The Company has entered
into interconnection co-carrier agreements with the large LECs in Florida,
which allow the Company access to substantially all business and government
telephones in Florida. The Company anticipates entering into similar
arrangements with LECs in other markets. To better serve its end user
customers, the Company has also interconnected its frame relay network to those
of BellSouth, GTE, Bell Atlantic and several other carriers, thereby
substantially expanding the reach of its networks. Upon consummation of the EMI
Acquisition, ICI would provide originating and terminating transport services
in 45 states and maintain points of presence ("POPs") for interexchange and
enhanced network services in most major cities in these states.
8
<PAGE>
Deploy Capital Cost Effectively on a Demand Driven Basis. The increasing
geographic coverage of the Company's services and the growing availability of
leased capacity at competitive rates have led the Company to lease network
capacity in various areas prior to, or in lieu of, building additional
capacity. Utilizing leased facilities enables the Company to (i) meet
customers' needs more rapidly, (ii) improve the utilization of ICI's existing
networks, (iii) add revenue producing customers before building networks
thereby reducing the risks associated with network construction and (iv) focus
its capital expenditures in geographic areas where network construction or
acquisition will provide a competitive advantage.
Growth Strategy
---------------
Accelerate Internal Growth. By focusing on business and government customers
and maintaining high-quality and cost-effective services, the Company generated
significant internal growth. The Company believes that its customer and network
strategies will continue to enable ICI to expand its services and markets,
increase its revenue base and compete effectively in a dynamic marketplace.
Selectively Acquire Existing Networks and Services. Over the past few years,
a portion of the Company's growth has been accomplished through acquisitions
(such as FiberNet, Phone One and EMI (pending)) and joint ventures or selling
relationships (such as those ICI has with its UniSPAN(C) partners). The Company
continues to examine from time to time various acquisition and joint venture
proposals to accelerate its rate of growth. In addition to the usual financial
considerations, ICI assesses each opportunity to determine if either: (i)
current network traffic into and out of the geographic areas served by the
target company warrant developing a presence in those geographic areas or (ii)
the target company offers services consistent with the Company's service
portfolio which are not currently offered by ICI utilizing technology
compatible with that utilized by ICI. Furthermore, ICI carefully evaluates the
target company's corporate culture to assess its ability to integrate the
target company's personnel and systems into the Company. While management does
not believe that acquisitions are necessary to achieve the Company's strategic
goals, strategic alliances with or acquisitions of appropriate companies may
accelerate achievement of those goals by creating operating synergies and more
rapid expansion of the Company's networks or services. Although the Company
considers potential acquisitions from time to time, other than the EMI
Acquisition, no agreement or agreement in principle has been reached for any
acquisition.
9
<PAGE>
THE OFFERING
Common Stock Offered
By the Company............ 4,000,000 Shares.
By the Selling
Stockholders............. 496,689 Shares.
Total................... 4,496,689 Shares.
Common Stock Outstanding
after the Offering......... 14,386,218 (1)
Use of Proceeds............. The net proceeds of the Offering to the Company,
after underwriting discounts, commissions and
expenses, are estimated to be $98.1 million. The
net proceeds to the Company will be used to
finance the continued expansion of the Company's
telecommunications networks and the installation
of voice switches, which will allow the Company
to offer local exchange service, and for general
corporate purposes, including working capital.
The Company may use a portion of the net proceeds
that it receives to repurchase a warrant to
purchase 10% of one of the Company's
subsidiaries. In addition, the Company may use
net proceeds that it receives to fund
acquisitions of assets or businesses which are
involved in the telecommunications business.
Although the Company considers potential
acquisitions from time to time, other than the
EMI Acquisition, no agreement or agreement in
principle has been reached for any acquisition.
The Company will not receive any of the proceeds
from the sale of Shares by the Selling
Stockholders.
Nasdaq National Market
Symbol..................... ICIX
Concurrent Offering......... The Company has concurrently registered
$330,000,000 principal amount at maturity of 12
1/2% Senior Discount Notes, to generate gross
proceeds of $179,919,300, for sale by the Company
(the "Concurrent Offering"). This Offering is not
contingent upon the consummation of the
Concurrent Offering.
Consent Solicitation........ The Company has obtained from the holders of a
majority of the aggregate principal amount
outstanding of the Company's 13 1/2% Series B
Senior Notes due 2005 (the "Existing Senior
Notes") consents to amend certain provisions of
the indenture governing such notes in order to
permit the Company to incur additional debt
(including the Senior Discount Notes offered
concurrently herewith) and to amend certain other
covenants of the Existing Senior Notes. On April
26, 1996, the Company and SunTrust Bank, Central
Florida, National Association, as trustee,
executed the amended and restated indenture
governing the Existing Senior Notes.
- --------
(1) Excludes shares of Common Stock issuable upon (i) the consummation of the
EMI Acquisition, (ii) the exercise of all outstanding options issued
pursuant to the Company's employee stock option plans and (iii) the
exercise of the Outstanding Warrants (as defined herein). See "Description
of Capital Stock." Also excludes up to 674,503 which may be issued to the
Underwriters solely to cover over-allotments. See "Underwriting."
10
<PAGE>
SUMMARY FINANCIAL AND OTHER OPERATING DATA
Statement of operations and balance sheet data presented below as of and for
the five years in the period ended December 31, 1995 have been derived from the
consolidated financial statements of the Company, which financial statements
have been audited by Ernst & Young LLP, independent certified public
accountants.
The operating results of Phone One are included in the Company's consolidated
operating results since December 2, 1994. The operating results of FiberNet
have been included in the Company's consolidated operating results since March
1, 1995. The pro forma information gives effect to the acquisition of FiberNet
and the EMI Acquisition (pending) as if they occurred at January 1, 1995 for
operations information and December 31, 1995 for balance sheet and statistical
information. The following financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Business" and the Consolidated Financial Statements of the
Company and the Notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
PRO FORMA(1)
YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------------------- ------------
1991 1992 1993 1994 1995 1995
------- ------ ------- ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenue................ $ 5,184 $7,030 $ 8,292 $14,272 $ 38,631 $ 81,687
Expenses:
Facilities
administration and
maintenance and line
costs................. 1,483 1,760 2,843 5,396 22,989 62,604
Selling, general and
administrative........ 2,050 2,607 3,893 6,412 14,993 18,295
Depreciation and
amortization.......... 1,570 2,190 3,020 5,132 10,196 12,808
------- ------ ------- ------- -------- --------
5,103 6,557 9,756 16,940 48,178 93,707
------- ------ ------- ------- -------- --------
Operating income
(loss)................ 81 473 (1,464) (2,668) (9,547) (12,020)
Other income (expense)
Interest expense...... (1,063) (1,031) (844) (1,218) (13,767) (13,826)
Interest and other
income............... 23 323 234 819 4,060 4,082
Income tax benefit.... -- -- -- -- 97 97
------- ------ ------- ------- -------- --------
Loss before
extraordinary item... (959) (235) (2,074) (3,067) (19,157) $(21,667)
========
Extraordinary loss on
early extinguishment
of debt.............. -- -- -- -- (1,592)
======= ====== ======= ======= ========
Net loss............... $ (959) $ (235) $(2,074) $(3,067) $(20,749)
======= ====== ======= ======= ========
Net loss per share:(2)
Loss before
extraordinary item... $ (1.01) $ (.10) $ (.29) $ (.34) $ (1.91) $ (1.95)
========
Extraordinary loss.... -- -- -- -- (.16)
------- ------ ------- ------- --------
Net loss.............. $ (1.01) $ (.10) $ (.29) $ (.34) $ (2.07)
======= ====== ======= ======= ========
Weighted average number
of shares
outstanding........... 1,354 4,797 7,077 8,956 10,036 11,087
OTHER DATA:
Ratio of earnings to
combined fixed charges
and preferred stock
dividends(3).......... -- -- -- -- -- --
Earnings before
interest, income
taxes, depreciation
and amortization
("EBITDA")(4)......... $ 1,651 $2,663 $ 1,556 $ 2,464 $ 649 $ 788
Capital expenditures,
including acquisitions
of businesses, net of
cash acquired......... $ 3,463 $8,818 $10,486 $13,731 $ 31,915 --
<CAPTION>
PRO FORMA(5)
DECEMBER 31, DECEMBER 31,
------------------------------------------- ------------
1991 1992 1993 1994 1995 1995
------- ------ ------- ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
NETWORK DATA:(6)
Buildings connected.... 110 161 234 293 380 402
Route miles............ 165 240 335 378 504 4,904
Fiber miles............ 2,956 6,184 10,239 11,227 17,128 17,128
Number of city-based
networks in service... 3 4 5 6 9 9
ENHANCED NETWORK
SERVICES:(6)
Nodes(7)............... -- -- 100 900 2,300 3,800
Cities(8).............. -- -- 37 336 600 900
Switches............... -- -- 4 12 31 52
EMPLOYEES(6)............ 26 49 58 146 287 434
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA(9) AS ADJUSTED(10)
DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------------------------------- ------------ ---------------
1991 1992 1993 1994 1995 1995 1995
------- ------- ------- ------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents(11)....... $ 575 $ 1,775 $27,954 $10,208 $ 50,997 $ 50,997 $322,249
Working capital
(deficit)(12)......... (949) 8,999 25,712 9,588 70,353 70,103 341,355
Total assets........... 17,577 36,174 61,219 74,086 216,018 233,143 511,172
Long-term debt
(including current
maturities)(13)....... 9,549 9,647 9,647 10,072 159,307 159,307 339,226
Total stockholders'
equity (deficit)...... (7,526) 21,257 45,987 52,033 40,254 57,129 155,239
</TABLE>
11
<PAGE>
- --------
(1) Gives effect to the acquisitions of FiberNet and EMI (pending) as if they
occurred at the beginning of the period presented. Pro forma information
excludes the effects of the historical extraordinary item.
(2) Net loss per share for the years ended December 31, 1991 and 1992 have
been increased by the amount of redeemable preferred stock dividends.
Additionally, net loss per share for the year ended December 31, 1991 has
been increased to reflect the effects of certain options and warrants
issued shortly before ICI's initial public offering in April, 1992 in
accordance with a Staff Accounting Bulletin of the Commission.
(3) For purposes of calculating the ratio of earnings to fixed charges: (i)
earnings consist of loss before income taxes, plus fixed charges excluding
capitalized interest and (ii) fixed charges consist of interest expensed
and capitalized, plus amortization of deferred financing costs, plus the
portion of rent expense under operating leases deemed by the Company to be
representative of the interest factor, as well as dividends on redeemable
preferred stock. For the years ended December 31, 1991, 1992, 1993, 1994
and 1995 the Company's earnings were insufficient to cover fixed charges
by $1,061, $355, $2,288, $3,324 and $19,931, respectively. For the year
ended December 31, 1995, the Company's pro forma earnings including
$23,634 of interest expense related to the Concurrent Offering were
insufficient to cover fixed charges by $46,076.
(4) EBITDA consists of earnings before interest, income taxes, depreciation
and amortization. In addition the 1995 amount excludes $1,592 related to
an extraordinary loss on the early extinguishment of debt. EBITDA is
provided since it is a measure commonly used in the telecommunications
industry to measure operating performance, asset value and financial
leverage. It is presented to enhance the reader's understanding of the
Company's operating results and is not intended to represent cash flow for
the period indicated. See Consolidated Statements of Cash Flows contained
in the Consolidated Financial Statements of the Company and the Notes
thereto included elsewhere in this Prospectus.
(5) Gives effect to the EMI Acquisition (pending). Certain numbers are
estimated based on information provided to the Company by EMI.
(6) Based upon Company records.
(7) An individual point of origination and termination of data served by the
ICI enhanced network. All node numbers are approximate.
(8) The number of discrete postal cities to which enhanced services are
provided.
(9) Gives effect to the EMI Acquisition (pending).
(10) Gives effect to (i) the Offering (4.0 million shares at a price of $26.00
per share), the Concurrent Offering and the application of the net
proceeds therefrom and (ii) the EMI Acquisition (pending), but does not
reflect any costs associated with obtaining consents from the holders of
the Existing Senior Notes, including approximately $4.3 million paid to
certain of such holders as consideration for such consents.
(11) Excludes Restricted Investments held as of December 31, 1995 for the
repayment of certain interest on the Existing Senior Notes.
(12) Includes $18,854 of Restricted Investments as of December 31, 1995
classified as a current asset.
(13) Excludes capital lease obligations at December 31, 1991, 1992, 1993, 1994
and 1995 and December 31, 1995 (pro forma) of $1,512, $2,095, $1,967,
$6,455, $6,238 and $6,238, respectively.
The Company's unaudited revenues, EBITDA, and loss for the three months ended
March 31, 1996 were approximately $13.5 million, $(1.7) million and $(8.9)
million, respectively, as compared to $8.7 million, $.9 million and $(1.3)
million, respectively, for the three months ended March 31, 1995.
12
<PAGE>
RISK FACTORS
Substantial Indebtedness; Insufficiency of Earnings to Cover Fixed
Charges. At December 31, 1995, after giving pro forma effect to (i) the
Offering and the Concurrent Offering and the application of the proceeds
therefrom and (ii) the EMI Acquisition, the Company would have had outstanding
approximately $355.9 million in aggregate principal amount of indebtedness and
other liabilities on a consolidated basis (including trade payables), of which
approximately $348.6 million would have been indebtedness and other
liabilities of the Company and approximately $7.3 million would have been
indebtedness and other liabilities of the Company's subsidiaries (excluding
approximately $17.4 million due to ICI). The degree to which the Company is
leveraged could have important consequences to holders of the Common Stock,
including the following: (i) the Company will have significant cash interest
expense and principal repayment obligations with respect to outstanding
indebtedness; (ii) the Company's significant degree of leverage could increase
its vulnerability to changes in general economic conditions or increases in
prevailing interest rates; (iii) the Company's ability to obtain additional
financing for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes could be impaired; and (iv) the Company
may be more leveraged than certain of its competitors, which may be a
competitive disadvantage.
For the year ended December 31, 1995, and on a pro forma basis after giving
effect to (i) the Offering, the Concurrent Offering and the application of the
proceeds therefrom and (ii) the acquisitions of FiberNet and EMI as if they
had occurred on January 1, 1995, the Company's pro forma earnings would have
been inadequate to cover its pro forma fixed charges by $46.1 million,
primarily as a result of operating expenses associated with the expansion of
the Company's networks and operations. In order for the Company to meet its
debt service obligations, the Company will need to substantially improve its
operating results. There can be no assurance that the Company's operating
results will be of sufficient magnitude to enable the Company to meet its debt
service obligations. In the absence of such operating results, the Company
could face substantial liquidity problems and might be required to raise
additional financing through the issuance of debt or equity securities;
however, there can be no assurance that ICI would be successful in raising
such financing, or the terms or timing thereof. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Limited Operations; History of Net Losses. The Company's business commenced
in 1987 and substantially all of the Company's revenues are derived from
enhanced network services, integration services, long distance services and
certain local network services. The Company is expecting to substantially
increase the size of its operations and number of service offerings in the
near future. Prospective investors, therefore, have limited historical
financial information about the Company upon which to base an evaluation of
the Company's performance. Given the Company's limited operating history,
there is no assurance that it will be able to compete successfully in the
telecommunications business.
The development of the Company's business and the installation and expansion
of its networks require significant expenditures, a substantial portion of
which are incurred before the realization of revenues. Together with the
associated early operating expenses, these capital expenditures will result in
negative cash flow until an adequate customer base is established. ICI
reported net losses of approximately $2.1 million, $3.1 million and $20.7
million for the years ended December 31, 1993, 1994 and 1995, respectively.
Although its revenues have increased in each of the last three years, ICI has
incurred significant increases in expenses associated with the development and
expansion of its fiber optic networks, services and customer base. There can
be no assurance that ICI will achieve or sustain profitability in the future.
Consummation of the EMI Acquisition. On February 20, 1996, the Company
signed an agreement with EMI to acquire its telecommunications division. The
significant conditions to closing the acquisition are (i) receipt of federal
and state regulatory and municipal approvals and (ii) receipt of certain third
party consents to the assignment of various contracts, all of which must be
obtained by September 30, 1996. The terms of the EMI acquisition agreement
provide for the acquisition by ICI of certain (but not all) of the
telecommunications assets of EMI if certain consents are not obtained.
Although ICI believes that all of the conditions to the
13
<PAGE>
consummation of the acquisition will be satisfied by September 30, 1996, there
can be no assurance that such conditions will be timely satisfied and that the
EMI Acquisition will be consummated.
New Telecommunications Act and Uncertainty of Future Regulation. The Company
is subject to federal regulation by the FCC and local service regulation by
the public service commissions in the states in which it provides
jurisdictionally interstate services. The Company may also be subject to
regulation by the public service commissions of other states into which the
Company is expanding. In addition, many of these regulations may be subject to
judicial review, the result of which ICI is unable to predict. The FCC has
determined that non-dominant carriers, such as the Company, are required to
file interstate tariffs on an ongoing basis. The recently enacted
Telecommunications Act of 1996 (the "1996 Act") provides the FCC with the
authority to forebear from imposing any regulations it deems unnecessary,
including requiring non-dominant carriers to file tariffs. The FCC has
initiated two different proceedings which may eliminate the tariff-filing
obligation of the Company, however, there can be no assurance that the FCC
will so forebear. The Company is also generally subject to state
certification, tariff filing and other regulatory requirements. Challenges to
tariffs by third parties may cause the Company to incur significant legal and
administrative expenses. Although the trend in federal and state regulations
appears to favor increased competition, no assurance can be given that changes
in current or future regulations adopted by the FCC or state regulatory bodies
or legislative initiatives would not have a material adverse effect on the
Company.
Risks of Implementation; Need to Obtain Permits and Rights of Way. The
Company is continuing to expand its existing networks. In addition, the
Company has a network under development in St. Louis, Missouri. The Company
has identified other expansion opportunities in Florida and other parts of the
eastern United States and is currently extending the reach of its networks to
pursue such opportunities. There can be no assurance that the Company will be
able to expand its existing networks or construct or acquire new networks as
currently planned on a timely basis. The expansion of the Company's existing
networks and its construction or acquisition of new networks will be
dependent, among other things, on its ability to acquire rights-of-way and any
required permits on satisfactory terms and conditions and on its ability to
finance such expansion, acquisition and construction. These factors and others
could adversely affect the expansion of the Company's customer base on its
existing networks and commencement of operations on new networks. If the
Company is not able to expand, acquire or construct its networks in accordance
with its plans, the growth of its business would be materially adversely
affected.
Competition. In each of its markets, the Company faces significant
competition for the local network services it offers from LECs, which
currently dominate their local telecommunications markets. LECs have long-
standing relationships with their customers which relationships may create
competitive barriers. Furthermore, LECs may have the potential to subsidize
competitive service from monopoly service revenues. In addition, a continuing
trend toward business combinations and alliances in the telecommunications
industry may create significant new competitors to the Company. The Company
also faces competition in most markets in which it operates from one or more
CAPs operating fiber optic networks. In addition, the Company faces
competition in its network systems integration business from equipment
manufacturers, the regional Bell operating companies ("RBOCs") and other LECs,
long distance carriers and systems integrators, and in its enhanced network
services business from local telephone companies, long distance carriers, very
small aperture terminal ("VSAT") providers and others. Many of the Company's
existing and potential competitors have financial, personnel and other
resources significantly greater than those of the Company.
The Company believes that various legislative initiatives, including the
recently enacted 1996 Act, have removed remaining legislative barriers to
local exchange competition. Nevertheless, in light of the passage of the 1996
Act, regulators are also likely to provide LECs with increased pricing
flexibility as competition increases. If LECs are permitted to lower their
rates substantially or engage in excessive volume or discount pricing
practices for their customers, the net income or cash flow of competitive
local exchange carriers, including the Company, could be materially adversely
affected. In addition, while the Company currently competes with AT&T, Inc.
("AT&T"), MCI Communications Corporation ("MCI") and others in the
interexchange services market, the recent federal legislation permits the
RBOCs to provide interexchange services once certain criteria are met. If the
RBOCs begin to provide such services, they will be in a position to offer
single source service similar to that being offered by ICI. In addition, AT&T,
MCI and other interexchange carriers have announced their intent to enter into
the local exchange services market. The Company cannot predict the number of
competitors that will emerge as a result of any new federal and state
regulatory or
14
<PAGE>
legislative actions. Competition from the RBOCs with respect to interexchange
services or from AT&T and MCI with respect to local exchange services could
have a material adverse effect on the Company's business.
Significant Capital Requirements. Expansion of the Company's existing
networks and services and the development of new networks and services require
significant capital expenditures. ICI expects to fund its capital requirements
through existing resources, internally generated funds, joint ventures and
debt or equity financing, including capital raised through the Offering and
the Concurrent Offering, as appropriate. There can be no assurance, however,
that ICI will be successful in producing sufficient cash flow or raising
sufficient debt or equity capital on terms that it will consider acceptable.
In addition, the Company's future capital requirements will depend upon a
number of factors, including marketing expenses, staffing levels and customer
growth, as well as other factors that are not within the Company's control,
such as competitive conditions, government regulation and capital costs.
Failure to consumate the Concurrent Offering or to generate sufficient funds
may require ICI to delay or abandon some of its future expansion or
expenditures, which would have a material adverse effect on its growth and its
ability to compete in the telecommunications industry.
Expansion Risk. The Company is experiencing a period of rapid expansion
which management expects will increase in the near future. This growth has
increased the operating complexity of the Company as well as the level of
responsibility for both existing and new management personnel. The Company's
ability to manage its expansion effectively will require it to continue to
implement and improve its operational and financial systems and to expand,
train and manage its employee base. The Company's inability to effectively
manage its expansion could have a material adverse effect on its business.
A portion of the Company's expansion may occur through acquisitions as an
alternative to direct investments in the assets required to implement the
expansion. No assurance can be given that suitable acquisitions can be
identified, financed and completed on acceptable terms, or that the Company's
future acquisitions, if any, will be successful.
Risk of New Service Acceptance. The Company offers a number of services that
the Company believes are important to its long-term growth. The success of
these services will be dependent upon, among other things, the willingness of
customers to accept new telecommunications technology. No assurance can be
given that such acceptance will occur; the lack of such acceptance could have
a material adverse effect on the Company.
Rapid Technological Changes. The telecommunications industry is subject to
rapid and significant changes in technology. While ICI believes that, for the
foreseeable future, these changes will neither materially affect the continued
use of its fiber optic networks nor materially hinder its ability to acquire
necessary technologies, the effect on the business of ICI of technological
changes such as changes relating to emerging wireline and wireless
transmission technologies, including software protocols, cannot be predicted.
Dependence on Key Personnel. The Company's business is managed by a small
number of key management and operating personnel, the loss of certain of whom
could have a material adverse impact on the Company's business. The Company
believes that its future success will depend in large part on its continued
ability to attract and retain highly skilled and qualified personnel. None of
the Company's key executives, other than David C. Ruberg, President, Chief
Executive Officer and Chairman of the Board, is a party to an employment
agreement with the Company.
Risk of Cancellation or Non-Renewal of Network Agreements, Licenses and
Permits. The Company has lease and/or purchase agreements for rights-of-way,
utility pole attachments, conduit and dark fiber for its fiber optic networks.
Although the Company does not believe that any of these agreements will be
cancelled in the near future, cancellation or non-renewal of certain of such
agreements could materially adversely affect the Company's business in the
affected metropolitan area. In addition, the Company has certain licenses and
permits from local government authorities. The 1996 Act requires that local
government authorities treat telecommunications carriers in a competitively
neutral, non-discriminatory manner, and that most utilities, including most
LECs and electric companies, afford alternative carriers access to their
poles, conduits and rights-of-way at reasonable rates on non-discriminatory
terms and conditions. There can be no assurance that the Company will be able
to maintain its existing franchises, permits and rights or to obtain and
maintain the other franchises, permits and rights needed to implement its
strategy on acceptable terms.
15
<PAGE>
Dependence on Business from IXCs. For the year ended December 31, 1995,
approximately 10% of the Company's consolidated revenues were attributable to
access services provided to IXCs. The loss of access revenues from IXCs in
general could have a material adverse effect on the Company's business. See
"Business--The Company--Customer Strategy."
In addition, the Company's growth strategy assumes increased revenues from
IXCs following the deployment of switches on its networks and the provision of
switched access origination and termination services. There is no assurance
that the IXCs will continue to increase their utilization of the Company's
services, or will not reduce or cease their utilization of the Company's
services, which could have a material adverse effect on the Company.
Lack of Dividend History. The Company has never declared or paid any cash
dividends on its Common Stock and does not expect to declare any such
dividends in the foreseeable future. Payment of any future dividends will
depend upon earnings and capital requirements of the Company, the Company's
debt facilities and other factors the Board of Directors considers
appropriate. ICI intends to retain its earnings, if any, to finance the
development and expansion of its business, and therefore does not anticipate
paying any dividends in the foreseeable future. In addition, the terms of the
indenture governing the Senior Discount Notes offered concurrently herewith
(the "Indenture") and the indenture governing the Existing Senior Notes
restrict the payment of dividends.
Business Combinations; Change of Control. The Company has from time to time
held, and continues to hold, preliminary discussions with (i) potential
strategic investors who have expressed an interest in making an investment in
or acquiring the Company and (ii) potential joint venture partners looking
toward the formation of strategic alliances that would expand the reach of the
Company's networks or services without necessarily requiring an additional
investment in the Company. In addition to providing additional growth capital,
management believes that an alliance with an appropriate strategic investor
would provide operating synergy to, and enhance the competitive positions of,
both ICI and the investor within the rapidly consolidating telecommunications
industry. There can be no assurance that agreements for any of the foregoing
will be reached. However, management does not believe that the consummation of
any such agreements are necessary to successfully implement its strategic
plans. An investment, business combination or strategic alliance could
constitute a Change of Control. Each of the Indenture and the indenture
governing the Existing Senior Notes provides that a Change of Control would
require the Company to repay the indebtedness outstanding under such
instruments. If a Change of Control does occur, there is no assurance that the
Company would have sufficient funds to make such repayments or could obtain
any additional debt or equity financing that could be necessary in order to
repay the Senior Discount Notes or Existing Senior Notes.
Anti-Takeover Provisions. The Company's Certificate of Incorporation and
Bylaws, the provisions of the Delaware General Corporation Law, the Existing
Senior Notes and the Senior Discount Notes may make it difficult in some
respects to effect a change in control of the Company and replace incumbent
management. In addition, the Company's Board of Directors has adopted a
Stockholder's Rights Plan, pursuant to which rights to acquire a newly created
series of Preferred Stock, exercisable upon the occurrence of certain events,
were distributed to its stockholders. The existence of these provisions may
have a negative impact on the price of the Common Stock, may discourage third
party bidders from making a bid for the Company, or may reduce any premiums
paid to stockholders for their Common Stock. In addition, the Board has the
authority to fix the rights and preferences of, and to issue shares of, the
Company's Preferred Stock, which may have the effect of delaying or preventing
a change in control of the Company without action by its stockholders.
Shares Eligible for Future Sale. Future sales of shares by existing
stockholders under Rule 144 of the Securities Act, or through the exercise of
outstanding registration rights or the issuance of shares of Common Stock upon
the exercise of options or warrants could materially adversely affect the
market price of shares of Common Stock and could materially impair the
Company's future ability to raise capital through an offering of equity
securities. Substantially all of the Company's outstanding shares, other than
those held by affiliates, are
16
<PAGE>
transferable without restriction under the Securities Act. Not including the
Shares registered on behalf of the Selling Stockholders in the Registration
Statement of which this Prospectus forms a part, the Company has filed
registration statements covering the offering of approximately 1,700,000
shares of Common Stock by selling security holders. In addition, the Company
has registered 1,346,000 shares of Common Stock for issuance upon exercise of
options granted to its employees under the Company's 1992 Stock Plan and
intends to register 1,500,000 shares for issuance pursuant to the Long-Term
Incentive Plan, which plan is subject to stockholder approval at the Company's
annual meeting. Options to acquire 370,147 shares of Common Stock were
currently exercisable under the 1992 Stock Plan at March 29, 1996. No
predictions can be made as to the effect, if any, that market sales of such
shares or the availability of such shares for future sale will have on the
market price of shares of Common Stock prevailing from time to time.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company of the Offering, after underwriting
discounts, commissions and expenses, are estimated to be $98.1 million. Such
net proceeds, together with the net proceeds of the Concurrent Offering,
estimated to be $173.1 million, will be used by the Company to finance the
continued expansion of ICI's telecommunications networks (including the
networks to be acquired from EMI) and the installation of voice switches,
which will allow the Company to offer local exchange service, and for general
corporate purposes, including working capital. The Company will not receive
any of the proceeds from the sale of Shares by the Selling Stockholders.
A portion of the Company's expansion may occur through acquisitions
(utilizing cash or securities of the Company) as an alternative to direct
investments in the assets required to implement the expansion. The businesses
that the Company may acquire will likely consist of companies that own
existing networks or companies that provide services that complement the
Company's existing businesses. The Indenture and the indenture governing the
Existing Senior Notes prohibit the Company from acquiring assets or businesses
which are not involved in the Telecommunications Business (as defined
therein). Although the Company considers potential acquisitions from time to
time, other than the EMI Acquisition, no agreement or agreement in principle
to acquire or effect any material acquisition has been reached.
The Company is acquiring the telecommunications division of EMI in exchange
for Common Stock. The purchase agreement does however provide for a contingent
cash payment in the amount of $594,000 if a certain planned network expansion
is completed prior to the closing of the EMI Acquisition. If such expansion is
completed, a portion of the net proceeds to the Company of the Offering and
the Concurrent Offering may be used to make such contingent payment.
A portion of the net proceeds may be used to repurchase a warrant to
purchase ten percent of the capital stock of FiberNet North Carolina, Inc., a
wholly-owned subsidiary of the Company.
Prior to the application of the net proceeds to the Company of the Offering
as described above, such funds will be invested in short-term investment grade
securities.
18
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is listed for trading on the Nasdaq National Market under
the symbol "ICIX". As of March 15, 1996, based upon the number of holders of
record and an estimate of the number of individual participants represented by
security position listings, the Company had approximately 3,200 stockholders.
The following table sets forth the high and low sales prices of the Common
Stock as reported by the Nasdaq National Market for each of the quarters
indicated:
<TABLE>
<CAPTION>
QUARTER HIGH LOW
------- ------ ------
<S> <C> <C>
1995
First................................................... 15 11
Second.................................................. 13 8 1/2
Third................................................... 17 1/2 10 1/2
Fourth.................................................. 17 1/2 11
1996
First .................................................. 19 3/4 13 7/8
Second (through May 8, 1996)............................ 27 1/4 17 3/4
</TABLE>
On May 8, 1996, the last reported closing price of the Common Stock on the
Nasdaq National Market was $26.063.
DIVIDEND POLICY
ICI has never declared or paid cash dividends on its Common Stock. ICI
intends to retain its earnings, if any, to finance the development and
expansion of its business, and therefore does not anticipate paying any
dividends in the foreseeable future. In addition, the terms of the Senior
Discount Notes offered concurrently herewith and the terms of the Existing
Senior Notes restrict the payment of dividends. See "Description of Capital
Stock--Dividend Restrictions." When such restrictions no longer exist, the
decision whether to pay dividends will be made by the Board of Directors in
light of conditions then existing, including the Company's results of
operations, financial condition and capital requirements, business conditions
and other factors. The payment of dividends on the Common Stock is also
subject to the preferences that may be applicable to any then outstanding
preferred stock.
DILUTION
The net tangible book value of the Common Stock at December 31, 1995 was
$13.3 million or $1.28 per share. The net tangible book value per share
represents the amount of total tangible assets of the Company reduced by the
amount of total liabilities and divided by the number of shares of Common
Stock outstanding. After giving effect to (i) the Offering and the Concurrent
Offering and the application of the estimated net proceeds of approximately
$271.2 million therefrom and (ii) the proposed EMI Acquisition, the adjusted
pro forma net tangible book value of the Company as of December 31, 1995 would
have been approximately $121.5 million or $7.94 per share (representing an
immediate increase in net tangible book value to existing stockholders of
$108.2 million or $6.66 per share on a pro forma basis). This would result in
an immediate dilution in the net tangible book value of $18.06 per share to
investors purchasing Common Stock. Dilution in net tangible book value
represents the difference between the price per share to be paid by purchasers
of Common Stock in the Offering and the pro forma net tangible book value as
of December 31, 1995.
19
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated actual and consolidated pro
forma cash and cash equivalents and capitalization of the Company at December
31, 1995. This table should be read in conjunction with the Consolidated
Financial Statements of the Company and the Notes thereto, and other
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
----------------------
ACTUAL PRO FORMA(1)
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents(2)............................. $ 50,997 $322,249
======== ========
Long-term debt (including current maturities):
13 1/2% Series B Senior Notes due 2005................. $158,984 $158,984
Senior Discount Notes.................................. -- 179,919
Other long-term debt................................... 323 323
Capital lease obligations.............................. 6,238 6,238
-------- --------
Total long-term debt................................. 165,545 345,464
-------- --------
Stockholders' equity:
Common stock and additional paid-in capital............ 74,197 189,182
Accumulated deficit.................................... (33,943) (33,943)
-------- --------
Total stockholders' equity............................... 40,254 155,239
-------- --------
Total capitalization..................................... $205,799 $500,703
======== ========
</TABLE>
- --------
(1) Gives effect to (i) the Offering, the Concurrent Offering and the
application of the net proceeds therefrom and (ii) the EMI Acquisition
(pending).
(2) Excludes Restricted Investments held as of December 31, 1995 for the
repayment of certain interest on the Existing Senior Notes and does not
reflect any costs associated with obtaining consents from the holders of
the Existing Senior Notes, including approximately $4.3 million paid to
certain of such holders as consideration for such consents.
20
<PAGE>
SELECTED FINANCIAL AND OTHER OPERATING DATA
The selected financial data and balance sheet data presented below as of and
for the five years in the period ended December 31, 1995 have been derived
from the consolidated financial statements of the Company, which financial
statements have been audited by Ernst & Young LLP, independent certified
public accountants.
The operating results of Phone One are included in the Company's
consolidated operating results since December 2, 1994 (the date of acquisition
by the Company). The operating results of FiberNet have been included in the
Company's consolidated operating results since March 1, 1995. The pro forma
information gives effect to the acquisition of FiberNet and the EMI
Acquisition (pending) as if they occurred at January 1, 1995 for operations
information and December 31, 1995 for balance sheet and statistical
information. The following financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Business" and the Consolidated Financial Statements of the
Company and the Notes thereto, included elsewhere in this Prospectus.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<TABLE>
<CAPTION>
PRO FORMA(1)
YEAR ENDED DECEMBER 31, YEAR ENDED
-------------------------------------------- DECEMBER 31,
1991 1992 1993 1994 1995 1995
------- ------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Revenue................ $ 5,184 $ 7,030 $ 8,292 $14,272 $ 38,631 $ 81,687
Expenses
Facilities
administration and
maintenance and line
costs................. 1,483 1,760 2,843 5,396 22,989 62,604
Selling, general and
administrative........ 2,050 2,607 3,893 6,412 14,993 18,295
Depreciation and
amortization.......... 1,570 2,190 3,020 5,132 10,196 12,808
------- ------- ------- ------- -------- --------
5,103 6,557 9,756 16,940 48,178 93,707
------- ------- ------- ------- -------- --------
Operating income
(loss)................ 81 473 (1,464) (2,668) (9,547) (12,020)
Other income (expense)
Interest expense...... (1,063) (1,031) (844) (1,218) (13,767) (13,826)
Interest and other
income............... 23 323 234 819 4,060 4,082
Income tax benefit.... -- -- -- -- 97 97
------- ------- ------- ------- -------- --------
Loss before
extraordinary item... (959) (235) (2,074) (3,067) (19,157) $(21,667)
========
Extraordinary loss on
early extinguishment
of debt.............. -- -- -- -- (1,592)
------- ------- ------- ------- --------
Net loss............... $ (959) $ (235) $(2,074) $(3,067) $(20,749)
======= ======= ======= ======= ========
Net loss per share:(2)
Loss before
extraordinary item... $ (1.01) $ (.10) $ (.29) $ (.34) $ (1.91) $ (1.95)
========
Extraordinary loss.... -- -- -- -- (.16)
------- ------- ------- ------- --------
Net loss.............. $ (1.01) $ (.10) $ (.29) $ (.34) $ (2.07)
======= ======= ======= ======= ========
Weighted average number
of shares
outstanding........... 1,354 4,797 7,077 8,956 10,036 11,087
OTHER DATA:
Ratio of earnings to
combined fixed charges
and preferred stock
dividends(3).......... -- -- -- -- -- --
Earnings before
interest, income
taxes, depreciation
and amortization
("EBITDA")(4)......... $ 1,651 $ 2,663 $ 1,556 $ 2,464 $ 649 $ 788
Capital expenditures,
including acquisitions
of businesses, net of
cash acquired......... $ 3,463 $ 8,818 $10,486 $13,731 $ 31,915 --
<CAPTION>
DECEMBER 31, PRO FORMA (5)
-------------------------------------------- DECEMBER 31,
1991 1992 1993 1994 1995 1995
------- ------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
NETWORK DATA:(6)
Buildings connected.... $ 110 $ 161 $ 234 $ 293 $ 380 402
Route miles............ 165 240 335 378 504 4,904
Fiber miles............ 2,956 6,184 10,239 11,227 17,128 17,128
Number of city-based
networks in service... 3 4 5 6 9 9
ENHANCED NETWORK SERVIC-
ES:(6)
Nodes(7)............... -- -- 100 900 2,300 3,800
Cities(8).............. -- -- 37 336 600 900
Switches............... -- -- 4 12 31 52
EMPLOYEES(6)............ 26 49 58 146 287 434
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA (9) AS ADJUSTED(10)
DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------------------------------- ------------- ---------------
1991 1992 1993 1994 1995 1995 1995
------ ------ ------- ------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents(11)............. $ 575 $1,775 $27,954 $10,208 $ 50,997 $ 50,997 $322,249
Working capital (defi-
cit)(12).............. (949) 8,999 25,712 9,588 70,353 70,103 341,355
Total assets........... 17,577 36,174 61,219 74,086 216,018 233,143 511,172
Long-term debt
(including current
maturities)(13)....... 9,549 9,647 9,647 10,072 159,307 159,307 339,226
Total stockholders' eq-
uity (deficit)........ (7,526) 21,257 45,987 52,033 40,254 57,129 155,239
</TABLE>
21
<PAGE>
- --------
(1) Gives effect to the acquisitions of FiberNet and EMI (pending) as if they
occurred at the beginning of the period presented. Pro forma information
excludes the effects of the historical extraordinary item.
(2) Net loss per share for the years ended December 31, 1991 and 1992 have
been increased by the amount of redeemable preferred stock dividends.
Additionally, net loss per share for the year ended December 31, 1991 has
been increased to reflect the effects of certain options and warrants
issued shortly before ICI's initial public offering in April, 1992 in
accordance with a Staff Accounting Bulletin of the Commission.
(3) For purposes of calculating the ratio of earnings to fixed charges: (i)
earnings consist of loss before income taxes, plus fixed charges
excluding capitalized interest and (ii) fixed charges consist of interest
expensed and capitalized, plus amortization of deferred financing costs,
plus the portion of rent expense under operating leases deemed by the
Company to be representative of the interest factor, as well as dividends
on redeemable preferred stock. For the years ended December 31, 1991,
1992, 1993, 1994 and 1995 the Company's earnings were insufficient to
cover fixed charges by $1,061, $355, $2,288, $3,324 and $19,931,
respectively. For the year ended December 31, 1995, the Company's pro
forma earnings including $23,634 of interest expense related to the
Concurrent Offering were insufficient to cover fixed charges by $46,076.
(4) EBITDA consists of earnings before interest, income taxes, depreciation
and amortization. In addition the 1995 amount excludes $1,592 related to
an extraordinary loss on the early extinguishment of debt. EBITDA is
provided since it is a measure commonly used in the telecommunications
industry to measure operating performance, asset value and financial
leverage. It is presented to enhance the reader's understanding of the
Company's operating results and is not intended to represent cash flow
for the period indicated. See Consolidated Statements of Cash Flows
contained in the Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this Prospectus.
(5) Gives effect to the EMI Acquisition (pending). Certain numbers are
estimated based on information provided to the Company by EMI.
(6) Based upon Company records.
(7) An individual point of origination and termination of data served by the
ICI enhanced network. All node numbers are approximate.
(8) The number of discrete postal cities to which enhanced services are
provided.
(9) Gives effect to the EMI Acquisition (pending).
(10) Gives effect to (i) the Offering (4.0 million shares at a price of $26.00
per share), the Concurrent Offering and the application of the net
proceeds therefrom and (ii) the EMI Acquisition (pending), but does not
reflect any costs associated with obtaining consents from the holders of
the Existing Senior Notes, including approximately $4.3 million paid to
certain of such holders as consideration for such consents.
(11) Excludes Restricted Investments held as of December 31, 1995 for the
repayment of certain interest on the Existing Senior Notes.
(12) Includes $18,854 of Restricted Investments as of December 31, 1995
classified as a current asset.
(13) Excludes capital lease obligations at December 31, 1991, 1992, 1993, 1994
and 1995 and December 31, 1995 (pro forma) of $1,512, $2,095, $1,967,
$6,455, $6,238 and $6,238, respectively.
The Company's unaudited revenues, EBITDA, and loss for the three months
ended March 31, 1996 were approximately $13.5 million, $(1.7) million and
$(8.9) million, respectively, as compared to $8.7 million, $.9 million and
$(1.3) million, respectively, for the three months ended March 31, 1995.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
audited Financial Statements and the Notes thereto appearing elsewhere in this
Prospectus.
OVERVIEW
Since its inception in 1987, the Company has experienced substantial growth.
Building from its original base in Florida, ICI is now a provider of
integrated telecommunications services to customers that have a presence in
its southeastern United States service territory. The Company has nine
digital, fiber optic networks in service and one under development in a total
of ten metropolitan areas. In addition, the Company's frame relay network
serves customers in approximately 600 cities and provides end-to-end
connectivity throughout the United States and certain international markets.
As its networks and service offerings have expanded, the Company has
experienced significant year to year growth in revenues and customers.
ICI provides customers with a competitive alternative to the local exchange
telephone companies and interexchange carriers in its service territory for a
full range of voice and data telecommunications services. ICI's customers
include a broad range of businesses and government customers and IXCs. The
Company delivers local network services primarily over digital fiber optic
telecommunications networks that it either owns or leases. In some
circumstances, leasing facilities enables the Company to more rapidly initiate
service to customers, reduces the risk of network construction or acquisition
and potentially improves cash flow due to the reduction or deferment of
capital expenditures. The Company also offers enhanced network services to its
customers on an extensive intercity network that connects its customers,
either through its own network or through other carriers, to locations
throughout the country and internationally. In December 1994, the Company
entered the long distance business through the acquisition of Phone One, a
facilities-based provider of long distance services. During the fourth quarter
of 1995, the sales, customer support and network administration functions of
Phone One were integrated into the Company's operating structure.
At its inception, ICI provided special access and private line services to
interexchange carriers. In 1988, ICI was the first telecommunications service
provider in Florida to begin providing special access and private line
services to business customers. In 1991, ICI began offering integration
services in response to customers' needs and in 1992, ICI introduced its first
enhanced network services to provide flexible capacity and highly reliable
end-to-end data connectivity for its business and government customers. The
Company began offering interexchange long distance service in December 1994,
Internet services in 1995 and intends to deploy local switching equipment
beginning in 1996 to provide switched access and local exchange service in
Florida, and, with requisite approvals, in other portions of its service
territory. The pace with which the Company has introduced new service
offerings has enabled it to achieve substantial growth, improve its mix of
customers and diversify its sources of revenue. The Company believes that
business and government customers will continue to account for a substantial
share of its revenues over the next several years, because of its ability to
offer such customers integrated, cost-effective telecommunications solutions.
The Company believes that during the first few years of local exchange
competition, the IXCs may enter the market by becoming resellers of the
Company's local services. If the IXCs pursue a reseller strategy, the amount
of revenue the Company realizes from carriers may increase during this period.
In the last five years the Company has achieved positive EBITDA and
increased its revenue base substantially. However, as a result of significant
investments in network infrastructure and in resources necessary to launch
local exchange services and expand enhanced network services, EBITDA has
decreased as a percentage of revenue and the Company expects EBITDA to be
negative for 1996. The Company believes that this is due to its significant up
front expenses related to the development of its networks and leased
facilities, the revenue from which is expected to be realized in later
periods. The development of the Company's business and the installation and
expansion of its networks have resulted in substantial capital expenditures
and net losses during this period
23
<PAGE>
of its operations. Procurement of rights-of-way, administration and
maintenance of facilities, depreciation of network capital expenditures and
sales, general and administrative costs will continue to represent a large
portion of the Company's expenses during its rapid expansion. In addition, the
Company has experienced rapid growth in marketing and selling expenses
consistent with the addition of new customers and an increased level of
selling and marketing activity. All of the marketing and selling expenses
associated with the acquisition of new customers are expensed as they occur
even though these customers are expected to generate recurring revenue for the
Company for several years. The continued expansion of the Company's networks
in anticipation of new customers and the marketing of services to new and
existing customers is therefore adversely impacting EBITDA of the Company in
the near term. The Company anticipates, but there can be no assurance, that as
its customer base grows, incremental revenues will be greater than incremental
operating expenses.
PLAN OF OPERATION
The Company believes that a significant portion of its growth in 1996 will
be derived from its enhanced network services. In addition to anticipated
internal growth, the EMI Acquisition, if consummated, will substantially
increase the geographic coverage of the Company's frame relay network and its
customer base. According to industry sources, the market for frame relay
services nationwide is projected to be $1.2 billion in 1996; however, there
can be no assurance that such amount will be realized or that the assumptions
underlying such projection are reliable.
In 1997 and beyond, the Company believes that its growth will be balanced
among its local network, enhanced network and interexchange services. Based on
the Company's analysis of FCC data and its knowledge of the industry, the
Company estimates that the market for local exchange and switched access
services, which is currently serviced only by the LECs, was $5.0 billion in
1995 in Florida alone. As a result of recent deregulation of the Florida
market and the successful negotiation of interconnection co-carrier agreements
with each of the three major LECs in Florida, the Company is now positioned to
provide local exchange services in a number of Florida's communities. The
Company intends to begin offering local exchange services in Florida during
the second half of 1996 and in other parts of its service area as requisite
approvals are obtained.
In order to develop its businesses more rapidly and efficiently utilize its
capital resources, ICI plans to use the existing fiber optic infrastructure of
other providers in addition to using its existing and planned networks. While
the Company will use significant amounts of capital to deploy enhanced data
and voice switches on a demand driven basis in selected markets, ICI believes
that its substantial existing network capacity should enable it to add new
customers and provide additional services that will result in increased
revenues with lower incremental costs and, correspondingly, over time improve
its EBITDA. For example, selling additional services, such as local exchange
services, to existing or new customers allows the Company to utilize unused
portions of the capacity inherent in its existing fiber optic networks. This
operating leverage increases the utilization of the network with limited
additional capital expenditures. The Company's strategy to offer a full
complement of telecommunications services is designed to enable the Company to
take advantage of the operating leverage of its networks.
RECENT STRATEGIC DEVELOPMENTS
EMI Acquisition. On February 20, 1996, the Company entered into an agreement
to purchase the telecommunications division of EMI. EMI's telecommunications
division, headquartered in Syracuse, New York, is a provider of frame relay
based network services and interexchange private line services primarily in
the northeastern United States. For the past several years, the Company has
utilized EMI's networks for termination of enhanced network services traffic
in EMI's territory. EMI operates owned and leased microwave and fiber optic
digital network capacity in New York, Massachusetts, Vermont, Rhode Island,
Connecticut, New Jersey, Pennsylvania, Maryland and the District of Columbia
and maintains POPs in most major cities in these states. The consummation of
the EMI Acquisition would allow ICI to (i) expand its customer base and
increase its exposure to additional interregional customers, (ii) cross sell
ICI's long distance and local exchange services into this new base of
customers and (iii) reduce costs by eliminating overlapping facilities,
removing duplicate NNIs and creating economies of scale.
24
<PAGE>
Regulation. The 1996 Act, which was signed into law on February 8, 1996,
effected plenary changes in regulation at both the federal and state levels
that affect virtually every segment of the telecommunications industry. The
1996 Act greatly expands the FCC's collocation requirements, allowing
companies such as ICI to collocate their equipment with the LECs and requiring
the LECs and other competitors to reciprocally compensate each other for
terminating traffic on each other's networks. In addition, the 1996 Act frees
the RBOCs from the judicial orders that prohibited their provision of
interLATA services. Specifically, the Act permits RBOCs to provide long
distance services outside of their local service regions immediately, and
permits them to provide in-region interLATA service upon demonstrating to the
FCC and state regulatory commissions that they have adhered to the FCC's
interconnection regulations. As a result of these provisions of the 1996 Act,
the Company will gain access to an expanded customer base, and will be able to
realize a reduction in its costs of interconnection. At the same time, the
1996 Act also makes competitive entry more attractive to RBOCs, other LECs,
interexchange carriers and other companies, and likely will increase the level
of competition that the Company faces. See "Business--Government Regulation"
and "Business--Competition."
Interconnection Co-Carrier Agreements. In order to provide expanded end-to-
end connectivity and interoperability in Florida, ICI has entered into
interconnection co-carrier agreements with BellSouth, GTE and Sprint-United,
which provide for reciprocal rights to terminate traffic on each other's
networks. The Company expects to enter into similar agreements with LECs cable
television companies, utility companies and other competitive local exchange
providers in Florida and other states.
REVENUE AND CUSTOMER BASE ANALYSIS
Since the Company's founding in 1987, ICI has continually introduced new
services. Due to these efforts, ICI's customer and revenue base has expanded
substantially in recent years. The Company believes that the continued
aggressive expansion of its enhanced network services, the proposed
acquisition of EMI and the introduction of local exchange services will
accelerate the diversification of the Company's customer and revenue base. The
Company believes the expansion of the Company's customer base and the
diversification of its revenue sources have (i) reduced the Company's
percentage of revenue associated with the more price sensitive services to
IXCs, (ii) lowered the Company's reliance on any one customer and (iii)
increased the total addressable market for the Company's services. The table
set forth below provides an analysis of the Company's customer and revenue
base.
REVENUE AND CUSTOMER BASE ANALYSIS
<TABLE>
<CAPTION>
PRO FORMA(1)
------------
YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
--------------------------- ------------
1993 1994 1995 1995
-------- -------- ------- ------------
<S> <C> <C> <C> <C>
Customer revenue:
Non-IXCs.......................... 59% 77% 90% 95%
IXCs.............................. 41 23 10 5
-------- -------- ------- -----
Total........................... 100% 100% 100% 100%
======== ======== ======= =====
Number of customers served (at end
of period)(2)...................... 230 8,148 9,530 9,930
Revenue sources:
Local network services............ 84% 57% 28% 26%
Enhanced network services......... 4 16 18 44
Interexchange services............ 0 9 49 23
System integration................ 12 18 5 7
-------- -------- ------- -----
100% 100% 100% 100%
======== ======== ======= =====
</TABLE>
- --------
(1) Gives effect to the acquisition of FiberNet and the EMI Acquisition
(pending) as if they had occurred at the beginning of the period
presented.
(2) Excludes long distance customers for whom billings during December 1995
were less than $5.00.
25
<PAGE>
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain information
derived from the Consolidated Statements of Operations of the Company and the
Unaudited Pro Forma Condensed Consolidated Financial Statements expressed in
percentages of revenue:
<TABLE>
<CAPTION>
PRO FORMA(1)
YEAR ENDED DECEMBER 31, YEAR ENDED
--------------------------- DECEMBER 31,
1993 1994 1995 1995
------- ------- ------- ------------
<S> <C> <C> <C> <C>
Revenue............................ 100.0% 100.0% 100.0% 100.0 %
Facilities administration and main-
tenance and line cost............. 34.3 37.8 59.5 76.6
Selling, general and administra-
tive.............................. 46.9 44.9 38.8 22.4
Depreciation and amortization...... 36.4 36.0 26.4 15.7
------- ------- ------- ------
Operating loss..................... (17.6) (18.7) (24.7) (14.7)
Interest expense................... (10.2) (8.5) (35.6) (16.9)
Interest and other income.......... 2.8 5.7 10.5 5.0
Income tax benefit................. -- -- 0.2 0.1
------- ------- ------- ------
Loss before extraordinary item..... (25.0) (21.5) (49.6) (26.5)%
======
Extraordinary loss on early extin-
guishment of debt................. -- -- (4.1)
------- ------- -------
Net loss........................... (25.0)% (21.5)% (53.7)%
======= ======= =======
</TABLE>
- --------
(1) Gives effect to the acquisition of FiberNet and the EMI Acquisition
(pending) as if they had occurred at the beginning of the period
presented. Pro forma information excludes the effects of the historical
extraordinary item.
1995 IN COMPARISON WITH 1994
The Company's revenue grew from $14.3 million to $38.6 million or 171% from
1994 to 1995. A substantial portion of the increase in revenue was derived
from growth in the Company's enhanced network services, integration services
and the contribution of Phone One (interexchange long distance services) for
the full year in 1995. The Company acquired all of the outstanding common
stock of Phone One on December 2, 1994. The increase in the level of enhanced
network services was evidenced by the increase in nodes which grew
approximately 155% from approximately 900 at December 31, 1994 to
approximately 2,300 at December 31, 1995. The geographic coverage of the
Company's networks also grew in 1995 primarily through the acquisition of
FiberNet and the expansion of the Company's intercity network. Monthly
recurring revenue in the backlog (booked sales that have yet to be installed)
at December 31, 1995 was approximately $4.2 million annualized, an
approximately 45% increase in the recurring revenue in the backlog from the
prior year. From December 31, 1994 to December 31, 1995, the number of fiber
miles in the Company's networks increased from 11,227 to 17,128; route miles
increased from 378 to 504; and the number of customers served by ICI
(including interexchange long distance customers) increased from 8,148 to
9,530. The Company's interexchange long distance revenues were $18.9 million
in 1995.
Operating expense in total increased by 184% from $16.9 million for 1994 to
$48.2 million in 1995, a $31.3 million increase. Approximately $20.5 million
of the increase was attributable to the inclusion of operating expenses
relating to the Company's interexchange long distance services. Approximately
$2.1 million of the increase was attributable to the inclusion of FiberNet's
operating expenses. The operating results of FiberNet have been included in
the consolidated results since March 1, 1995. The balance of the increase was
consistent with the significant expansion of the Company's owned and leased
networks and equipment sales to customers. As a result, the Company incurred a
net loss of $20.7 million for 1995, as compared to a net loss of $3.1 million
in 1994.
Facilities administration and maintenance and line costs increased by 326%
from $5.4 million in 1994 to $23.0 million in 1995, a $17.6 million increase.
Approximately $13.3 million of the increase is due to inclusion of the
operating results of the Company's interexchange long distance services. In
addition, increases in
26
<PAGE>
maintenance expense due to network expansion, payroll expense due to hiring
additional engineering staff and cost of goods sold related to equipment sold
to customers contributed to the change.
Selling, general, and administrative expense increased by 134% from $6.4
million in 1994 to $15.0 million in 1995, an $8.6 million increase.
Approximately $5.2 million of the increase is due to the inclusion of the
operating results of the Company's interexchange long distance services and
$.3 million is due to the inclusion of FiberNet's operating results. The
remaining change was primarily due to increases in sales commissions as a
result of increases in sales bookings, accounting, marketing and management
information systems staff, and increased property taxes relating to network
expansion and enhancements. In addition, the Company expended additional
resources by increasing the number and skill level of its sales and sales
support staff. Recovery of these additional expenditures typically is
recognized in future periods.
Depreciation and amortization expense increased by 99% from $5.1 million in
1994 to $10.2 million in 1995, an increase of $5.1 million. These increases
are directly related to the $34.9 million and $18.3 million of
telecommunications equipment additions (including capital leases) in 1995 and
1994, respectively, relating to ongoing network construction and expansion and
increases in the amortization of intangibles associated with the acquisitions
of Phone One and FiberNet.
Interest and other income increased 402% from $0.8 million in 1994 to $4.1
million in 1995, a $3.3 million increase, as a result of interest earned on
the cash available from the proceeds of the offering of the Existing Senior
Notes which were received in June 1995.
Interest expense increased by 1029% from $1.2 million in 1994 to $13.8
million in 1995, an increase of $12.6 million. The increase is primarily due
to the interest incurred on the Existing Senior Notes.
Extraordinary loss of $1.6 million was incurred which consisted of $1.2
million in prepayment penalties relating to certain indebtedness which was
repaid from the proceeds of the offering of the Existing Senior Notes and the
write off of the unamortized deferred financing costs associated with the
indebtedness repaid.
EBITDA decreased by $1.8 million or 74% from $2.5 million in 1994 to $0.6
million in 1995. As a percent of revenue, 1995 and 1994 EBITDA were
approximately 2% and 17%, respectively. This decline was the result of the
inclusion of a full year of revenues and expenses relating to interexchange
long distance services which have a lower operating margin than the Company's
other services, the incurrence of additional growth oriented expenses (such as
increases in sales and support staff and market development costs) prior to
realizing revenues associated with these expenditures and the Company's
introduction of switched access transport services to IXCs.
1994 IN COMPARISON WITH 1993
The Company's revenue grew from $8.3 million to $14.3 million or 72% from
1993 to 1994. A substantial portion of the increase in revenue was derived
from growth in the Company's enhanced network services, integration services
and the contribution of Phone One for the month of December 1994. The increase
in the level of enhanced network services was evidenced by the increase in
nodes which grew approximately 800% from approximately 100 at December 31,
1993 to approximately 900 at December 31, 1994. Partially as a result of the
increase in the number of customer locations utilizing the Company's enhanced
network services, there was also a significant increase in the level of
revenue generated from integration services. Monthly recurring revenue in the
backlog (booked sales that have yet to be installed) at December 31, 1994 was
approximately $0.2 million or $2.9 million annualized, nearly double the
recurring revenue in the backlog from the prior year. From December 31, 1993
to December 31, 1994, the number of fiber miles in the Company's networks
increased from 10,239 to 11,227; route miles increased from 335 to 378; and
the number of customers served by ICI increased from 230 to 345 (excluding
interexchange long distance customers) or 8,148 (including interexchange long
distance customers). The Company also began offering international enhanced
network services to customers in 1994.
27
<PAGE>
Operating expense in total increased by 74% from $9.8 million in 1993 to
$16.9 million in 1994, a $7.1 million increase. This increase was consistent
with the significant expansion of the Company's owned and leased networks,
equipment sales to customers and the write-off of approximately $0.2 million
in expenses related to strategic investor activities. As a result, the Company
incurred a net loss of $3.1 million for 1994, as compared to a net loss of
$2.1 million in 1993. Operating expenses for 1994 include $1.4 million of
expenses related to the operations of Phone One for one month.
Facilities administration and maintenance and line costs increased by 90%
from $2.8 million in 1993 to $5.4 million in 1994, a $2.6 million increase.
The increase is primarily due to significant growth in leased facilities
required to support the rapid growth in enhanced network services. A total of
$0.9 million of the 1994 increase relates to leased network costs associated
with the operations of Phone One for December 1994. In addition, increases in
maintenance expense proportionate to network expansion, payroll expense due to
hiring additional engineering staff and cost of goods sold related to
equipment sold to customers contributed to the change.
Selling, general, and administrative expense increased by 65% from $3.9
million in 1993 to $6.4 million in 1994, a $2.5 million increase. The change
was primarily due to increases in sales commissions as a result of
proportionate increases in sales bookings, accounting and management
information systems staff, and increased property taxes relating to network
expansion and enhancements. In addition, the Company expended additional
resources by increasing the number and skill level of its sales, sales support
and engineering staff. Selling, general, and administrative expenses incurred
by the Company and related to Phone One in 1994 totaled $0.3 million.
Depreciation and amortization expense increased by 70% from $3.0 million in
1993 to $5.1 million in 1994, an increase of $2.1 million. These increases
were directly related to the $18.3 million of 1994 telecommunications
equipment additions related to ongoing network construction and expansion.
Interest and other income increased 251% from $0.2 million in 1993 to $0.8
million in 1994, a $0.6 million increase, as a result of the full year's
effect of investing the funds received from the Company's November 1993 public
offering of common stock.
Interest expense increased by 44% from $0.8 million in 1993 to $1.2 million
in 1994, an increase of $0.4 million. The increase is primarily due to the
capitalization of a significant fiber lease during 1994.
EBITDA increased by $0.9 million or 58% from $1.6 million in 1993 to $2.5
million in 1994. This increase is the result of revenue increasing while the
EBITDA margin remained relatively stable. As a percent of revenue, 1994 and
1993 EBITDA were approximately 17% and 19% respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have required substantial capital investment for
the purchase of telecommunications equipment and the design, construction and
development of the Company's networks. Capital expenditures for the Company
were $10.5 million, $13.7 million and $30.0 million in 1993, 1994 and 1995,
respectively, excluding capital leases and telecommunications equipment
acquired in connection with business acquisitions. The Company expects that it
will continue to have substantial capital requirements in connection with the
(i) expansion and improvement of the Company's existing networks, (ii) design,
construction and development of new networks, (iii) connection of additional
buildings and customers to the Company's networks, (iv) purchase of switches
necessary for local exchange services and expansion of interexchange services
and (v) development of the Company's enhanced network services.
The Company has funded a substantial portion of these expenditures primarily
through the public sale of debt and equity securities and, to a lesser extent,
privately placed debt. From inception to December 31, 1995, the Company has
sold or issued an aggregate of approximately $74.2 million of Common Stock,
including Common Stock issued in connection with the acquisitions of FiberNet
and Phone One, and $160 million in Existing Senior Notes.
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The Company has produced positive EBITDA in each of the last five years.
However, the substantial capital investment required to build the Company's
networks has resulted in negative cash flow after investing activities from
operations in the five year period. This negative cash flow after investing
activities is a result of the requirement to build a substantial portion of
the network in anticipation of connecting revenue generating customers. The
Company expects to continue to produce negative cash flow after investing
activities for at least the next two years due to expansion activities
associated with the development of the Company's networks. Until sufficient
cash flow after investing activities is generated from operations, the Company
will have to utilize its current capital resources to meet its cash flow
requirements.
The Company currently estimates that it requires approximately $175.0
million to fund anticipated capital expenditures for 1996 and 1997 and
approximately $110.0 million to fund anticipated capital expenditures for
1998. The Company expects that it will have adequate resources to fund its
anticipated capital expenditures in 1996, 1997 and a portion of its
anticipated capital expenditures in 1998 through the Offering and Concurrent
Offering and through internal sources of funds including cash flow from
operations. Capital expenditures will be used for the development and
expansion of its existing networks and for the development of fiber based
networks, owned and leased, in other selected metropolitan areas. In addition,
the Company expects to expend capital toward the further development of the
Company's enhanced network services and interexchange long distance service
offerings. The Company expects to expend substantial amounts to upgrade its
existing networks in order to switch traffic within a local service area in
those states where it is currently permitted to provide such services. In
addition, as any approvals necessary to permit the Company to provide such
services in other states are obtained, additional capital may be expended in
developing the capacity to provide switched services. If the Company's
internal resources are not sufficient to meet capital expenditure requirements
and to fund operating losses, the Company may obtain additional funding
through the sale of public or private debt and/or equity securities or through
securing a bank credit facility. There can be no assurance as to the
availability or the terms upon which such financing might be available.
Moreover, the Senior Discount Notes and the Existing Senior Notes impose
certain restrictions upon the Company's ability to incur additional
indebtedness.
The Company has from time to time held, and continues to hold, preliminary
discussions with (i) potential strategic investors who have expressed an
interest in making an investment in or acquiring the Company and (ii)
potential joint venture partners looking toward the formation of strategic
alliances that would expand the reach of the Company's networks or services
without necessarily requiring an additional investment in the Company. In
addition to providing additional growth capital, management believes that an
alliance with an appropriate strategic investor would provide operating
synergy to, and enhance the competitive positions of, both ICI and the
investor within the rapidly consolidating telecommunications industry.
Potential strategic alliances or acquisitions are also continually being
explored by the Company. There can be no assurance that agreements for any of
the foregoing will be reached nor does management believe that the
consummation of any thereof is necessary to successfully implement its
strategic plans.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's operations over
the past three years.
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<PAGE>
BUSINESS
INDUSTRY HISTORY
The present structure of the U.S. telecommunications market resulted largely
from the divestiture of the "Bell System" in 1984 (the "Divestiture"). As part
of the Divestiture, seven RBOCs were created to offer services in
geographically defined areas called LATAs. The RBOCs were separated from the
long distance provider, AT&T, resulting in the creation of two distinct
industries: local exchange and interexchange (commonly known as long
distance). The Divestiture provided for direct, open competition in the long
distance segment; however, it did not provide for competition in the local
exchange market. Nonetheless, several factors have served to promote
competition in the local exchange market, including (i) the LECs' monopoly
position and regulated pricing structure, which provided little incentive for
the LECs to reduce prices, improve service or upgrade their networks, (ii)
customers' desire for an alternative to the LEC monopoly, which desire grew
rapidly and was spurred in part by the development of competitive activities
in the long distance market and increasing demand for high quality, reliable
services, (iii) the advancement of fiber optic and digital electronic
technology (such as ATM and SONET), which combined the ability to transmit
voice and data at high speeds with greatly increased capacity and reliability
as compared to LECs' copper-based networks and (iv) the significant fees,
called "access charges," IXCs were required to pay to the LECs for access to
the LEC networks.
Established in the mid-1980's, "competitive access providers" or "CAPs" were
among the first competitors in the local exchange market. CAPs provided non-
switched services (i.e., dedicated special access and private line) by
installing fiber optic facilities connecting IXCs' POPs within a metropolitan
area and, in some cases, connecting customers (primarily large businesses and
government agencies) with IXCs. CAPs used the substantial capacity and
economies of scale inherent in fiber optic cable to offer service that was
generally less expensive and of a higher quality than the LECs. In addition,
CAPs offered shorter installation and repair intervals and improved service
reliability in comparison to the LECs.
At the same time, large numbers of regional and/or national IXCs were formed
to compete with AT&T in the interexchange market. These IXCs generally fell
into two categories, facilities-based IXC's and non-facilities-based IXCs
(i.e., switchless reseller).
As CAPs proliferated during the latter part of the 1980's and early 1990's,
regulators in some states and at the federal level issued rulings which
favored competition and promoted the opening of markets to new entrants. These
rulings allowed CAPs to offer a number of new services, including, in certain
states, certain local network services.
In the late 1980's and early 1990's, CAPs could compete effectively only for
dedicated special access and private line services to customers in buildings
physically connected to separate, privately owned CAP networks. In the early
1990's, federal regulations permitted CAPs to interconnect their networks with
the LEC networks at the LEC central offices. CAPs then had the opportunity to
increase significantly the number of customers and markets served without
physically expanding their networks. By connecting to the LEC central offices,
CAPs were able to use the extensive LEC networks to reach additional
customers, thus conserving their own capital while significantly expanding
their potential markets.
In the summer of 1995, several states began opening their markets to local
exchange competition. On February 8, 1996, the Telecommunications Act of 1996
was signed into law. The 1996 Act provides a framework by which all states
must allow competition for local exchange services. See "--Government
Regulation." The market for telecommunications services in the United States
was $158 billion in 1995.
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THE COMPANY
ICI is a rapidly growing provider of integrated telecommunication services.
Founded in 1987 as one of the nation's first facilities-based CAPs, the
Company currently operates digital, fiber optic networks in nine metropolitan
areas and has one network under development. Expanding beyond provision of
traditional CAP services, the Company now provides enhanced network services,
including frame relay and Internet access services, primarily to business and
government customers, in approximately 600 cities nationwide, and is a
facilities-based interexchange carrier providing services, to approximately
10,000 customers. ICI intends to begin providing a range of local exchange
services in Florida in the second half of 1996 and in other parts of its
service territory as requisite approvals are obtained. ICI has continued to
increase its customer base and network density in the Southeast and its
customers' traffic to locations outside its existing service territory
continues to increase. The Company has pursued (and will continue to pursue)
attractive opportunities to expand into other geographic markets.
The Company's goal is to become the single source provider of comprehensive
telecommunications services to its customers. To accomplish this goal, the
Company's strategy is to systematically secure a growing portion of a
customer's telecommunications business and, over time, through the provision
of additional integrated services, increase the customer's reliance on, and
sense of partnership with, the Company. In addition, with the advent of state
and federal laws mandating local exchange competition, significant
opportunities exist for the Company to increase its market share and reach new
market segments by allowing other parties, including IXCs, to resell ICI's
local exchange services, when available.
ICI's strategy is designed to build a base of recurring revenues and to take
advantage of the increasing requirements of business and government customers
for more effective and efficient solutions to their telecommunications needs.
These customers require maximum reliability, high quality service, broad
geographic coverage (including end-to-end connectivity), solutions-oriented
customer service and the timely introduction of innovative services. These
customers also demand that services be delivered in a cost-effective manner
and, preferably, from a single source. The Company is well positioned to
satisfy such customer requirements due to (i) the successful negotiation of
interconnection co-carrier agreements for Florida with BellSouth, GTE and
Sprint-United and the implementation of NNIs for frame relay data transmission
with each of such carriers, (ii) a specialized sales and service approach
employing engineering and sales professionals who design and implement
customized, cost-effective telecommunications solutions, (iii) the ongoing
development and integration of new telecommunications services and (iv) the
strategic deployment of voice and data switches and digital fiber optic
networks designed with redundancy and diversity.
In December 1994, the Company acquired Phone One, a facilities-based
interexchange carrier providing services to customers primarily located in
Florida and Georgia. In July 1995, the Company consummated its acquisition of
FiberNet thereby expanding its fiber optic networks into four additional
metropolitan areas. On February 20, 1996, the Company entered into an
agreement to purchase the telecommunications division of EMI, a wholly-owned
subsidiary of Newhouse Broadcasting Corporation, for 937,500 shares of ICI
Common Stock. EMI's telecommunications division, headquartered in Syracuse,
New York, is a provider of frame relay based network services and
interexchange private line services primarily over digital microwave networks
in the northeastern United States. For the year ended December 31, 1995, EMI's
revenues were approximately $43 million and the combined pro forma revenues of
ICI and EMI were approximately $82 million. Although ICI believes the EMI
Acquisition will be consummated, there can be no assurance that the conditions
to the closing of such transaction will be satisfied and that the transaction
will be consummated. The FiberNet and Phone One acquisitions have allowed (and
the pending EMI Acquisition will allow) ICI to (i) expand its customer base
and increase its exposure to additional interregional customers, (ii)
introduce additional business customers to all of the Company's service
offerings, (iii) add long distance to its portfolio of service offerings, (iv)
reduce costs by eliminating overlapping facilities and removing duplicate NNIs
and (v) create synergies between long distance and local service offerings
such as economies of scale, usage sensitive billing capabilities and cross-
selling opportunities.
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Subject to receipt by the Company of the requisite approvals, the Company
intends to deploy switching equipment to provide local exchange and switched
access services in each of its principal markets. These new switches will also
augment the Company's interexchange services. The Company recently began to
deploy such switching equipment in Florida and intends to deploy four switches
in Florida during 1996. In addition, the Company is the first alternative
local exchange carrier to enter into interconnection co-carrier agreements for
Florida with each of BellSouth, GTE and Sprint-United, the three major
providers of local exchange services in Florida, which provide for reciprocal
rights to terminate traffic on each other's networks. Based upon FCC data and
the Company's knowledge of the industry, the Company estimates that the market
for local network services in 1995 was $5.0 billion in Florida, and $95
billion in the United States, substantially all of which is currently served
by LECs.
The Company has nine digital, fiber optic networks in service and one under
development in a total of ten metropolitan areas. As of December 31, 1995,
this infrastructure was comprised of 17,128 fiber miles and 504 route miles
and was connected to 380 buildings. ICI continues to expand these networks and
has identified expansion opportunities in other selected markets. This
expansion should enable the Company to (i) achieve economies of scale in the
management of its networks as well as the marketing and sales of its services,
including local exchange services, (ii) more effectively service customers
that have a presence in multiple metropolitan areas and (iii) reach a
significant number of new customers.
The Company has also undertaken a major expansion of its intercity network
to satisfy the growing demands for enhanced network services, including frame
relay networking services, ATM and Internet access. As a result, the Company
had approximately 2,300 nodes, serving customer locations in 600 cities as of
December 31, 1995 (not including the approximately 1,500 nodes in
approximately 400 cities served by EMI), as compared to approximately 900
nodes, serving customer locations in 336 cities as of December 31, 1994.
Enhanced network services, which are currently provided primarily on the
Company's frame relay network, are specialized interexchange services offered
by the Company for customers that need to transport large amounts of data
among multiple locations. To address the growing demand for end-to-end
connectivity and interoperability throughout the United States, in 1994, ICI
created, in conjunction with EMI and three other regional telecommunications
companies, the UniSPAN(C) consortium. This consortium, along with ICI's
relationship with certain other carriers, allows the Company to terminate
traffic both nationally and internationally utilizing other companies'
networks and provides a flow of traffic onto the Company's networks. In
addition, to further increase efficient access to a greater customer base, ICI
and EMI have successfully established approximately 100 NNIs which
interconnect their frame relay networks to those of BellSouth, Bell Atlantic
Telephone Companies, Sprint-United, NYNEX Corporation, Ameritech Operating
Companies, Southern New England Telephone Company, GTE and other carriers.
According to industry sources, the frame relay services market is projected to
grow at the rate of 84% per year through 1997 from its 1993 base of $144
million; however, there can be no assurance that such market growth will be
realized or that the assumptions underlying such projections are reliable.
ICI was incorporated in the State of Delaware on November 9, 1987, as the
successor to a Florida corporation that was founded in 1986. The Company's
principal offices are located at 3625 Queen Palm Drive, Tampa, Florida 33619,
and its telephone number is (813) 621-0011.
CORPORATE STRATEGY
The Company's goals, and its strategy for achieving them, distinguish the
Company from many of its competitors. The Company's goal is to be a provider
of a comprehensive set of integrated telecommunications services to a broad
range of business and government customers, both directly and through
resellers. The Company has developed the staff and knowledge-based skills
required to market its services directly to business and government customers,
as well as to resellers. The Company believes this strategy reduces the risk
that accompanies the dependence on a few large customers. In addition, the
Company has a substantial base of customers to whom it can market local
exchange services when introduced. The significant capacity inherent in the
Company's networks also provides the Company with the opportunity to offer
additional services without a
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commensurate increase in operating expenses. ICI provides its customers with a
specialized sales and service approach that enhances the cost effectiveness,
value and reliability of the Company's service offerings to its customers.
In order to become the single source provider of comprehensive
telecommunications services to its customers, ICI has developed operating
strategies designed to attract and retain customers, optimize the operational
and cost structure of its networks and achieve desired growth. Below are the
important components of these strategies.
Customer Strategy
-----------------
Provide Single-Source Telecommunications Services. The Company's service
portfolio currently includes: high capacity access and private line services,
high speed data networking (i.e., frame relay and ATM), Internet services,
interexchange long distance services, switched access transport and
integration services. The Company intends to continue to expand its service
offerings to customers, including providing local exchange services beginning
in 1996, in order to become a single-source provider of telecommunications
services. Recent state and federal legislation has opened the local exchange
services market to competition which until recently could only be provided by
the LECs. See "Business--Government Regulation." A single-source capability
provides significant advantages for the customer and for the Company. Not only
does this capability address customers' complex requirements associated with
integration of diverse networks and technologies at various locations, but it
also reduces customers' administrative burdens associated with service
charges, billing, network monitoring, implementation, coordination and
maintenance. The Company also believes that expanding its service offerings
will be advantageous operationally as the Company is able to introduce
additional services through existing networks and customer connections thereby
leveraging the significant capacity inherent in its digital networks.
Focus on Business and Government Customers. The Company's portfolio of
service offerings, customer service approach, highly reliable networks, broad
geographic coverage and integration capabilities are well-suited to serve the
demands of telecommunications-intensive business and government customers. The
Company's existing business customer base includes firms in the retail,
financial services, grocery, manufacturing and other industry segments. The
Company has entered into a contract with the State of Florida to provide frame
relay based network services for the State Division of Communications. These
services will be deployed statewide and utilized by many of the State's
agencies. In addition, upon the consummation of the EMI Acquisition, the
Company would be a provider of telecommunications services to the State of New
York's Empire Net which connects numerous agencies within the State. The
Company believes that its success in providing these services to government
agencies will be replicated in other states within the Company's service
territory.
Develop IXC and Value-Added Reseller Relationships. Recent changes in state
and federal regulation have accelerated ICI's ability to deliver local
exchange services and have provided LECs with incentives to foster local
exchange competition. In addition, as the IXCs enter the local exchange
business, the Company believes that they will seek to gain access to the local
exchange services market by either developing local network capacity or by
purchasing such capacity from alternative service providers. The Company
believes that these developments are likely to make ICI an attractive choice
for joint ventures and preferred vendor arrangements with the IXCs, LECs and
other telecommunications related companies. Such arrangements would benefit
the Company by enabling ICI to more rapidly recover its capital investment in
switches by increasing the traffic through its networks. These arrangements
should enable ICI to achieve greater market share and reach new market
segments more rapidly than it could otherwise. The Company intends to solicit
IXCs, out of region LECs, cable companies and other value added resellers to
resell its local exchange services, when available.
Maintain and Develop Long-Term Relationships. By providing customized
telecommunications solutions to its customers, the Company develops a sense of
partnership with its customers. As a result, the Company believes that a
growing portion of its revenue base will be associated with long-term customer
relationships.
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Provide Cost-Effective Service Offerings. ICI has developed a number of
innovative services designed to provide cost-effective telecommunications
solutions to its customers. Each of the Company's individually packaged
services is competitively priced and when integrated into a comprehensive
telecommunications package provides significant value over comparable LEC and
IXC service offerings. The Company believes that the introduction of its
services at competitive market rates has stimulated demand from small to
medium-sized customers thereby broadening the market for ICI's services.
Expand Solutions-Oriented Sales Effort. The Company has rapidly expanded and
intends to continue to expand the utilization of its direct sales and support
team consisting of engineering and sales professionals to (i) increase the
level of integration between the Company's and the customer's operations thus
making the customer more reliant on the Company's services and (ii) broaden
the services that can be offered by the Company. During 1995, ICI increased
its sales representatives from 39 to 57. The Company believes its solutions-
oriented sales approach enables the Company to provide customers with
effective customized solutions to their telecommunications requirements.
Network Strategy
----------------
Control Franchise Points of the Networks. The Company focuses its capital
deployment on the segments of its networks that the Company believes will
provide it with the highest revenue potential and the greatest long-term
competitive advantage. The Company believes that connections to customers and
building entries represent an important strategic component of its networks.
These connections provide the Company with the platform to sell a variety of
services to existing or potential customers within a building. ICI also
believes that the deployment of switching technology and advanced network
electronics enables the Company to better configure its networks to provide
cost effective and customized solutions to its customers. The ability to offer
these types of solutions differentiates ICI from commodity transport service
providers.
Extend Coverage to Provide End-to-End Connectivity. The Company has entered
into interconnection co-carrier agreements with the large LECs in Florida,
which allow the Company access to substantially all business and government
telephones in Florida. The Company anticipates entering into similar
arrangements with LECs in other markets. To better serve its end user
customers, the Company has also interconnected its frame relay network to
those of BellSouth, GTE, Bell Atlantic and several other carriers, thereby
substantially expanding the reach of its networks. Upon consummation of the
EMI Acquisition, ICI would provide originating and terminating transport
services in 45 states and maintain POPs for interexchange and enhanced network
services in most major cities in these states.
Deploy Capital Cost Effectively on a Demand Driven Basis. The increasing
geographic coverage of the Company's services and the growing availability of
leased capacity at competitive rates have led the Company to lease network
capacity in various areas prior to, or in lieu of, building additional
capacity. Utilizing leased facilities enables the Company to (i) meet
customers' needs more rapidly, (ii) improve the utilization of ICI's existing
networks, (iii) add revenue producing customers before building networks
thereby reducing the risks associated with network construction and (iv) focus
its capital expenditures in geographic areas where network construction or
acquisition will provide a competitive advantage.
Growth Strategy
---------------
Accelerate Internal Growth. By focusing on business and government customers
and maintaining high-quality and cost-effective services, the Company
generated significant internal growth. The Company believes that its customer
and network strategies will continue to enable ICI to expand its services and
markets, increase its revenue base and effectively compete in a dynamic
marketplace.
Selectively Acquire Existing Networks and Services. Over the past few years,
a portion of the Company's growth has been accomplished through acquisitions
(such as FiberNet, Phone One and EMI (pending)) and joint ventures or selling
relationships (such as those ICI has with its UniSPAN(C) partners). The
Company continues to
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examine from time to time various acquisition and joint venture proposals to
accelerate its rate of growth. In addition to the usual financial
considerations, ICI assesses each opportunity to determine if either: (i)
current network traffic into and out of the geographic areas served by the
target company warrant developing a presence in those geographic areas or (ii)
the target company offers services consistent with the Company's service
portfolio which are not currently offered by ICI utilizing technology
compatible with that utilized by ICI. Furthermore, ICI carefully evaluates the
target company's corporate culture to assess its ability to integrate the
target company's personnel and systems into the Company. While management does
not believe that acquisitions are necessary to achieve the Company's strategic
goals, strategic alliances with or acquisitions of appropriate companies may
accelerate achievement of those goals by creating operating synergies and more
rapid expansion of the Company's networks or services. Although the Company
considers potential acquisitions from time to time, other than the EMI
Acquisition, no agreement or agreement in principle has been reached for any
acquisition.
SERVICES PROVIDED AND MARKET
With the commencement of its operations in Orlando, Florida, the Company
became one of the first CAPs in the United States and has developed into an
integrated telecommunications services provider in its territory. The Company
currently provides a broad array of local and long distance telecommunications
services and, as requisite approvals are obtained, these services will be
expanded into additional markets. See "Risk Factors--Uncertainty of Future
Regulation" and "--Government Regulation." Below is a summary of services the
Company currently provides or (where indicated below) intends to provide:
Enhanced Network Services. Digital data network services provided on ICI's
network platform, which currently utilizes frame relay technology, including
flexible bandwidth connectivity and multi-protocol support.
Internet Services. Access to the Internet and hosted applications including
world wide web page, e-mail and file transfer protocol (FTP) support.
Local Exchange Services. Switched services providing local telephone
service, including local dial tone service, to business and government
customers or to carriers and other value-added resellers (beginning in the
second half of 1996).
Long Distance Services. Switching and transport, billed on a minutes of use
basis, of interexchange traffic including voice and data.
Switched Access Services. Switched services, generally offered to IXCs
billed on a minutes of use basis, that connect a customer to a POP of an IXC
(beginning in the second half of 1996).
Special Access and Private Line Services. Non-switched dedicated connections
including high capacity interconnections between (i) the POPs of an IXC, (ii)
the POPs of different IXCs, (iii) the POPs of an IXC and LEC end offices, (iv)
large customers and their selected IXCs and (v) different locations of
particular customers. These services are billed at a flat, non-usage
sensitive, monthly rate.
Integration Services. Provision and customized configuration of customer
premise equipment (CPE), provision of network equipment and related support,
application design support and other consulting services.
The following table sets forth the Company's estimates, based upon an
analysis of industry sources including industry projections, and FCC data, of
the market size nationally of the services described above. Only a limited
amount of direct information is currently available and therefore a
significant portion of the information set forth below is based upon estimates
and assumptions made by the Company. The Company believes that its estimates
are based upon reliable information and that its assumptions are reasonable.
There can be no assurance, however, that the estimates will not vary from the
actual market data and that these variances will not be substantial.
The size of the market for these services is not intended to provide an
indication of the Company's total addressable market or the revenue potential
for the Company's services. ICI has obtained all certifications
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<PAGE>
necessary to permit the Company to provide local exchange service in the State
of Florida and is in the process of obtaining the necessary certifications in
seven other states where the Company operates or plans to operate. In
addition, the Company's ability to offer services in Florida and in other
states is limited by the size and coverage of the Company's networks and
competitive factors. Investors should not place undue reliance on this
information in making an investment decision with respect to the securities
offered hereby.
<TABLE>
<CAPTION>
1995 COMPANY ESTIMATES
(DOLLARS IN MILLIONS)
U.S.
----------------------
<S> <C>
LOCAL NETWORK SERVICES
Special Access and Private Line Services............... $ 7,400
Switched Access Services............................... 18,900
Local Exchange Services(1)............................. 45,400
Other(2)............................................... 22,900
--------
Total Local Network Services......................... 94,600
ENHANCED NETWORK SERVICES................................ 700
INTEREXCHANGE SERVICES................................... 62,700
--------
Total Additional Services............................ 63,400
--------
TOTAL MARKET SIZE........................................ $158,000
========
</TABLE>
- --------
(1)The Company is currently permitted to offer these services in Florida and
has applied for certification to offer these services in Alabama, Georgia,
Louisiana, Mississippi, North Carolina, Ohio and South Carolina.
(2)Other includes revenue from pay phones, billing services and intraLATA
calling services.
ICI's services generally fall into three categories: (i) local network
services, which include local exchange services, special and switched access
services and local private line services, (ii) enhanced network services,
which include frame relay based data transport, ATM and Internet services and
(iii) interexchange (long distance) services.
The Company's local network services consist of traditional CAP services,
which the Company has been offering since 1987, and will include switched
access and local exchange service, which the Company plans to begin offering
in 1996. The Company provides customers traditional CAP services either by
building network facilities or leasing extended network facilities to the
customer's premises. In the markets where the Company has digital, fiber optic
networks, the addition of local exchange services allows the Company to
increase its revenue generating product mix with minimal additional capital
costs and allows a more integrated service to be offered to the customer. The
initial circuit used to reach the customer establishes a platform that can be
utilized to offer additional services. Due to the significant bandwidth
inherent in fiber optic cable, a single connection can support a large number
of service types.
The Company has consistently built its base of local network service
customers by offering highly reliable, high quality services that compete
primarily with the LECs. In 1995, local network services accounted for
approximately 28% of the Company's total revenues. The Company believes that
the market for these services will continue to exhibit growth through the
introduction of switched access services, expansion of networks within
existing markets, addition of new markets, and through increased penetration
of existing customers in these markets with new incremental services. Local
exchange services, which the Company expects will continue to open for
competition around the country as the telecommunications industry deregulation
continues, will offer large, new opportunities to utilize the Company's
existing networks and customer connections. The Company's services and
networks position the Company to take advantage of this deregulation.
Enhanced network services consist of (a) interexchange data networks
utilizing frame relay technology, (b) application services, such as Internet,
which utilize the frame relay network and (c) interexchange private line
services. Enhanced network services enable customers to economically and
securely transmit large volumes of data typically sent in large bursts from
one site to another. Previously, customers had to utilize low speed dedicated
private lines or dial up circuits for interconnecting remote LANs and other
customer locations. These
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methods had numerous disadvantages including (i) low transmission speeds, (ii)
systems that required the utilization of complementary protocols and line
speeds which significantly increased the cost of implementing networks, (iii)
limited security placing customers' entire networks at risk to tampering from
outside sources and (iv) high costs due to the necessity to pay for a full
time dedicated line despite infrequent use. Enhanced network services are
utilized for LAN interconnection, remote site, point of sale and branch office
communications solutions.
The typical ICI customer for enhanced network services has multiple business
locations, many of which are in the Southeast, and requires communication for
one or more data applications among these locations. The customer may also
have a number of locations served by ICI's fiber optic networks; however,
provision of enhanced network services is not dependent on the provision of
local network services at any specific location. All of the customers'
locations, whether domestic or international, are monitored by the Company and
can be served through the Company's own operations or through the use of
partner networks (e.g., UniSPAN(C)).
In 1995, the Company's enhanced network services accounted for approximately
18% of the Company's total revenue. The market for enhanced network services,
according to industry sources, is expected to grow at a rapid pace over the
next several years. There can be no assurance, however, that such market
growth will be realized or that the assumptions underlying such projections
are reliable.
Interexchange long distance services have been offered by the Company since
December 1994. Interexchange long distance services include inbound (800)
service, outbound service and calling card telephone service. The Company
currently provides interLATA long distance services in Florida and Georgia and
interstate long distance services nationwide. The Company intends to expand
its service offerings to include intraLATA long distance services as
regulation permits and interLATA long distance services in additional states.
The enhanced network services and the interexchange services provided by the
Company are supported by a common backbone network allowing ICI to offer
interexchange private line services at a competitive price. See "--Network."
The Company's integration services are applicable to all three categories of
services described above and are made available to end user and carrier
customers. A team of sales professionals and engineers will develop
specialized solutions for a customer's specific telecommunications needs. Some
of these integration services include the sale and installation of third party
equipment to handle certain telecommunications and monitoring functions and
the development of private networks. The Company believes that such services
increase the level of linkage between the Company's and the customer's
operations thereby increasing the customer's reliance on the Company.
The Company plans to continue to expand its domestic geographic reach by
acquiring and integrating high quality value added companies, such as EMI. In
addition, the Company, through the pursuit of strategic alliances, plans to
expand its ability to originate and terminate voice and data traffic in
certain Latin American markets during 1996. ICI believes these markets are
important to its business because, not only is there a significant community
of interest between many of these countries and the cities of Miami and Tampa
as a result of the large Spanish speaking populations in these cities, but
there are also a number of businesses that have operations in both Latin
America and Florida. In addition, Miami has become an important center of
commerce for Latin American businesses.
SALES, MARKETING AND SERVICE DELIVERY
ICI's marketing activities are primarily directed to business and government
customers with a presence in the Company's service territory. The Company's
customers include large corporations, financial services companies, government
departments and agencies, and academic, scientific and other major
institutions as well as small and medium sized businesses and IXCs.
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The Company's sales and marketing approach is to build long-term business
relationships with its customers, with the intent of becoming the single
source provider of all of their telecommunications services. In an effort to
leverage its recent success in obtaining government contracts, the Company has
created a sales group whose focus is the marketing of ICI's telecommunications
services to government departments and agencies. More generally, the ICI sales
force includes specialized resources who focus on sales to wholesale, retail
and alternate channel (agents and value added resellers) consumers of the
Company's telecommunications services. The Company's sales staff works to gain
a better understanding of the customer's operations in order to develop
innovative application specific solutions to each customer's needs. The sales
staff also works with customers that have large bases of services with the LEC
to convert these to services provided by ICI. Sales personnel locate potential
business customers by several methods, including customer referral, market
research, cold calling and other networking alliances.
Enhanced network services, like all other ICI services, are sold through the
Company's existing sales force, supported by sales engineers, and often in
cooperation with agents and value added resellers (independent providers of
communications hardware to customers), and other business associates. This
approach enables the Company to (i) emphasize the applications solutions
aspects of enhanced network services and (ii) utilize the expertise and
resources of other vendors. The Company intends to expand its sales and
engineering support staff and other technical specialists in order to meet the
growing demand for enhanced network services. Since these services are also
sold to extended network customers of the Company, this sales effort offers
the Company a means of expanding its network. See "--Network."
The Company's service delivery staff is primarily responsible for
coordinating service and installation activities. Delivery service activities
include surveying the site to assess ambient conditions and power and space
requirements, as well as coordinating installation dates and equipment
delivery and testing. ICI's customer service and technical staff plans,
engineers, monitors and maintains the integrity, quality and availability of
the Company's networks. ICI's customer service and technical staff are
available to customers 24 hours every day.
To support all of its network based services, the Company has implemented an
automated ordering, provisioning and billing system similar to that used by
the LECs. This automated system makes it easy for the Company's IXC customers
to track their orders with ICI, and similarly allows ICI to track its orders
with the LECs. ICI has also implemented an integrated network management
system which enhances the Company's ability to monitor, test, track trouble
and dispatch repair resources. This system monitors the performance of ICI's
networks 24 hours every day.
NETWORK
The Company has deployed its network infrastructure selecting the most
economical alternative of constructing or leasing facilities or a combination
thereof. The Company generally chooses to own facilities where (i) there is no
fiber optic network alternative and the Company can be the incumbent network
provider, (ii) ownership creates strategic value for the Company, (iii) large
concentrations of telecommunications traffic are accessible to justify network
construction and (iv) network construction can create significant barriers to
entry for subsequent competitors who may wish to enter the Company's markets.
In addition to the "build" vs. "lease" decision for network deployment, the
Company also considers potential network acquisitions from time to time (e.g.
the acquisition of FiberNet and the pending EMI Acquisition). The Company
believes that acquisitions will generally provide it with (i) immediate access
to incremental customers, (ii) reduction of network construction and
implementation risks, (iii) elimination of an incumbent competitor, (iv)
immediate access to additional qualified management, sales and technical
personnel and (v) a network platform for the provision of incremental value
added services.
In those markets where ICI chooses to deploy broadband fiber networks, the
Company's strategy is to first develop the IXC "carrier ring" portion of its
network, a high capacity network designed to be accessible to all the major
long distance carriers in the area. This portion of the network allows the
Company to provide services
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to these long distance carriers, initially, and over time to connect business
and government customers to such long distance carriers. Second, the Company
designs a larger "backbone ring" extending from the carrier ring, with a view
toward making the network accessible to the largest concentration of
telecommunications-intensive, business and government customers in the area.
Hubs are strategically located on the backbone rings to allow for the
collection and distribution of telecommunications traffic onto and off of the
backbone ring. Third, the Company concentrates its sales and marketing efforts
on adding business and government customers located on or very near its
backbone network and hub locations. Once ICI determines that there is
sufficient customer demand in a particular area, it extends "distribution
rings" from the backbone ring to reach specific business customers in that
area.
ICI's city-based networks are comprised of fiber optic cables, integrated
switching facilities, advanced electronics, data switching equipment (e.g.
frame relay), transmission equipment and associated wiring and equipment. By
virtue of its state-of-the-art equipment and ring-like architecture, the
Company's networks offer electronic redundancy and diverse access routing.
Through automatic protection switching, if any electrical component or fiber
optic strand fails, the signal is instantaneously switched to a "hot standby"
component or fiber. Since network outages and transmission errors can be very
disruptive and costly to long distance carriers and other customers,
consistent reliability is critical to customers. In addition, ICI monitors its
networks 24 hours every day.
The Company currently has fiber optic networks in service in Orlando, Tampa,
Miami, St. Petersburg, Jacksonville, and West Palm Beach, Florida, Cincinnati,
Ohio, Raleigh-Durham, North Carolina and Huntsville, Alabama and under
development in St. Louis, Missouri. ICI continues to expand these metropolitan
area networks and has identified network expansion opportunities in other
selected markets.
In addition, the Company has undertaken a significant network expansion to
satisfy the demands of the Company's market driven growth in enhanced network
service offerings. The Company has deployed resources, primarily switching
equipment, to develop an extensive network to provide these data services to
customers with multiple locations. Excess capacity on this leased network can
be used to provide incremental telecommunications services such as
interexchange long distance services. Often, the Company offers these enhanced
services in geographic markets where it has not deployed its own fiber optic
network by leasing facilities from a variety of entities, including LECs,
utilities, IXCs, local governments, cable companies and various
transit/highway authorities. With these networks (including EMI), the Company
currently serves approximately 500 cities located east of the Mississippi
River. These networks and the leased facilities connected to them, comprise
the network platform which the Company utilizes to offer its broad array of
telecommunications services to its customers. Finally, the Company also has
agreements with certain third parties and the carriers in the UniSPAN(C)
consortium, to deliver enhanced network services nationwide or internationally
through a seamless data network.
The Company's telecommunications equipment vendors actively participate in
planning and developing electronic equipment for use in ICI's networks. The
Company does not believe it is dependent on any single vendor for equipment.
Because the Company uses existing telecommunications technology rather than
developing it, ICI's research and development expenditures are not material.
COMPETITION
The Company faces competition in three distinct market segments--local
network services (local exchange, special access and private line and switched
access services), enhanced network services and interexchange services
(traditional long distance services).
The Company believes that various legislative initiatives, including the
recently enacted 1996 Act, have removed remaining legislative barriers to
local exchange competition. While the Company currently competes with AT&T,
MCI and others in the interexchange services market, the recent federal
legislation permits the RBOCs to provide interexchange services under certain
circumstances. If the RBOCs begin to provide such
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services, they will be in a position to offer single source service similar to
that being offered by ICI. In addition, Sprint-United currently offers, and
various LECs and IXCs, including BellSouth and GTE, have announced their
intent to offer, integrated telecommunication services in areas currently
served by ICI. AT&T and MCI have also announced their intent to enter into the
local exchange services market. The Company cannot predict the number of
competitors that will emerge as a result of any new federal and state
regulatory or legislative actions. Competition from integrated
telecommunications services provided by the RBOCs, AT&T or MCI could have a
material adverse effect on the Company's business.
Competition in each of the market segments served by the Company, as well as
for systems integration which is common to all market segments, is discussed
below.
Local Network Services. In each of its geographic markets, the Company faces
significant competition for the local network services it offers from RBOCs
and other LECs, which currently dominate their local telecommunications
markets. These companies all have long-standing relationships with their
customers and have financial, personnel and technical resources substantially
greater than those of ICI.
The Company also faces competition in most markets in which it operates from
one or more CAPs operating fiber optic networks. Other local network service
providers have operations or are initiating operations within one or more of
the Company's service areas. ICI expects MFS Communications Company ("MFS"),
MCI, Teleport Communications Group, Inc. ("Teleport"), Jones Lightwave and
certain cable television providers, many of which are substantially larger and
have substantially greater financial resources than the Company, to enter some
or all of the Florida markets that the Company presently serves. At least two
of these competitors, MFS and Teleport, have entered or announced plans to
enter a number of ICI's service areas. ICI also understands that other
entities have indicated their desire to enter the local exchange services
market within specific metropolitan areas of Florida. With respect to the
markets outside of Florida, including those to be accessed through the
acquisition of EMI, there is currently similar local network service
competition in substantially all of such markets.
In addition, a continuing trend toward consolidation and strategic alliances
within the telecommunications industry could result in significant new
competition for the Company. AT&T and MCI have announced their intent to enter
into the local network services market. Other potential competitors of the
Company include utility companies, long distance carriers, wireless telephone
systems and private networks built by individual business customers. The
Company cannot predict the number of competitors that will emerge as a result
of any new federal and state regulatory or legislative actions.
The Company believes it has competitive advantages over other local network
service providers in Florida because of ICI's incumbent status, existing
Network Agreements (as defined) and customer relationships.
Competition in all of the Company's geographic market areas is based on
quality, reliability, customer service and responsiveness, service features
and price. The Company has kept its prices at levels competitive with those of
the LECs while providing, in the opinion of the Company, a higher level of
service and responsiveness to its customers. ICI's broadband fiber ring
networks provide both diverse routing and redundant electronics, high quality
design features not fully deployed in the local telephone companies' networks.
Although the LECs are generally subject to greater pricing and regulatory
constraints than other local network service providers, LECs are achieving
increasing pricing flexibility for their local services as a result of recent
legislative and regulatory developments. The LECs have continued to lower
rates, resulting in downward pressure on certain dedicated and switched access
transport rates. This price erosion has decreased operating margins for these
services. However, the Company believes this effect will be more than offset
by the increased revenues available as a result of access to customers
provided through interconnection co-carrier agreements and the opening of
local exchange service to competition. In addition, the Company believes that
lower rates for dedicated access will benefit other services offered, or
planned to be offered, by the Company.
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Enhanced Network Services. The Company faces competition in its enhanced
network services business from LECs, IXCs, VSAT providers and others. Many of
the Company's existing and potential competitors have financial, personnel and
other resources significantly greater than those of the Company.
The Company competes with the larger IXCs on the basis of service
responsiveness, rapid response to technology and service trends, and a
regional focus borne of early market successes. All of the major IXCs,
including AT&T, MCI, Sprint Communications Company L.P. and LDDS Worldcom,
Inc. offer frame relay services and several of the major IXCs have announced
plans to provide Internet services. The Company believes it competes favorably
with these providers in its markets, based on the high density of its
networks, relatively greater experience and in-house expertise. Continued
aggressive pricing is expected to support continued rapid growth, but will
place increasing pressure on operating margins.
The Company also competes with VSAT services on the basis of price and data
capacity. The Company believes that the relatively low bandwidth of each VSAT
terminal and the cost of purchasing and installing VSAT equipment limits the
ability of VSAT to compete with the frame relay services provided by the
Company.
Many of the LECs now offer services similar to ICI's enhanced network
services, but offer them only on an intraLATA basis. While the LECs generally
cannot interconnect their frame relay networks with each other, both ICI and
EMI have interconnected their frame relay networks with those of various LECs.
As a result, ICI can use certain LEC services to keep its own costs down when
distributing into areas that cannot be more economically serviced on its own
networks. ICI expects the LECs to aggressively expand their enhanced network
services as regulatory developments permit them to deploy interLATA long
distance networks. When the LECs are permitted to provide such services, they
will be in a position to offer single source service similar to that being
offered by ICI.
Interexchange Services. The Company currently competes with AT&T, MCI and
others in the interexchange services market. In providing interexchange
services, the Company focuses on quality service and economy to distinguish
itself in a very competitive marketplace. ICI has built a loyal customer base
by emphasizing its customer service. The additional new services that may be
offered as the Company begins to implement local exchange service should
further support this position by allowing the Company to market a wide array
of fully integrated telecommunications services.
Systems Integration. The Company faces competition in its systems
integration business from equipment manufacturers, the RBOCs and other LECs,
long distance carriers and systems integrators, many of which have financial,
personnel and other resources significantly greater than those of the Company.
GOVERNMENT REGULATION
Overview. The Company's services are subject to varying degrees of federal,
state and local regulation. The FCC exercises jurisdiction over all facilities
of, and services offered by, telecommunications common carriers to the extent
those facilities are used to provide, originate or terminate interstate or
international communications. The state regulatory commissions retain
jurisdiction over most of the same facilities and services to the extent they
are used to originate or terminate intrastate communications. In addition,
many of the regulations issued by these regulatory bodies may be subject to
judicial review, the result of which ICI is unable to predict.
Federal Regulation. The Company must comply with the requirements of common
carriage under the Communications Act of 1934 (the "Communications Act"), as
amended. Comprehensive amendments to the Communications Act were made by the
1996 Act, which was signed into law on February 8, 1996. The 1996 Act effected
plenary changes in regulation at both the federal and state levels that affect
virtually every segment of the telecommunications industry. The stated purpose
of the 1996 Act is to promote competition in all areas of telecommunications
and to reduce unnecessary regulation to the greatest extent possible. While it
will take years for the industry to feel the full impact of the 1996 Act, it
is immediately clear that the legislation provides the Company with both new
opportunities and new challenges.
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The 1996 Act gives the FCC the authority to forebear from regulating
companies if it finds that such regulation does not serve the public interest,
and directs the FCC to review its regulations for continued relevance on a
regular basis. As a result of this directive, a number of the regulations that
currently apply to the Company may be eliminated in the future. While it is
therefore expected that a number of regulations that were developed prior to
the 1996 Act will be eliminated in time, those which still apply to the
Company at present are discussed below.
The FCC has established different levels of regulation for dominant and non-
dominant carriers. Of domestic common carrier services, only GTE Corporation
(including its subsidiary, GTE Florida Incorporated) and the RBOCs are
classified as dominant carriers, and all other providers of domestic common
carrier services, including the Company, are classified as non-dominant
carriers. While the recently enacted 1996 Act provides the FCC with the
authority to forebear from imposing any regulations it deems unnecessary,
including requiring non-dominant carriers to file tariffs, there can be no
assurance that the FCC will so forebear. Challenges to tariffs by third
parties may cause the Company to incur significant legal and administrative
expenses.
The FCC's Interconnection Decisions restructured the interstate competitive
access services market. On September 17, 1992, the FCC ordered the RBOCs and
all but one of the local telephone companies having in excess of $100 million
in gross annual revenue for regulated services to provide expanded
interconnection and collocation in local telephone company central offices and
serving wire centers to any CAP, long distance carrier or end user seeking
such interconnection for the provision of interstate access services. Subject
to few exceptions, local telephone companies must offer interconnection in
their central offices at cost-based rates. The FCC's Interconnection Decisions
require local telephone companies to provide central office transmission
equipment dedicated to interconnectors' use to terminate interconnectors'
circuits. Consequently, the Company can reach most business customers in its
metropolitan service areas, and thereby significantly expand its customer
base.
A decision by a federal appeals court invalidated some aspects of the FCC's
initial collocation rules, thereby making collocation somewhat more costly and
administratively difficult. As discussed below, however, the 1996 Act
effectively overturns the appeals court decision and expands interconnection
for both interstate and intrastate services.
The 1996 Act greatly expands the FCC's collocation requirements on the LECs
and may greatly increase the value and function of collocation to the Company
and other interconnectors. The 1996 Act requires the LECs to: (i) provide
physical collocation, which allows companies such as ICI and other
interconnectors to install and maintain their own network termination
equipment in LEC central offices; (ii) unbundle components of their local
service networks so that other providers of competitive local service can
compete for a wider range of local services customers; (iii) establish
"wholesale" rates for their services to promote resale by CAPs and other
competitors; (iv) establish number portability, which will allow a customer to
retain its existing phone number if it switches from the LEC to a competitive
local service provider; (v) establish dialing parity, which ensures that
customers will not detect a quality difference in dialing telephone numbers or
accessing operators or emergency services; and (vi) provide nondiscriminatory
access to telephone poles, ducts, conduit and rights-of-way. In addition, the
1996 Act requires LECs to compensate competitive carriers for traffic
originated by LEC's and terminated on the competitive carriers' networks. The
FCC must establish regulations governing all of these conditions by August
1996. Although these requirements are intended to benefit new entrants in the
local exchange market, such as ICI, the Company is unable to determine how
effective they will be until the FCC completes its rulemaking proceedings and
state regulators begin to implement the FCC's requirements.
As part of its procompetitive policies, the 1996 Act frees the RBOCs from
the judicial orders that prohibited their provision of interLATA services.
Specifically, the Act permits RBOCs to provide long distance services outside
of their local service regions immediately, and will permit them to provide
in-region interLATA service upon demonstrating to the FCC and State regulatory
agencies that they have adhered to the FCC's interconnection regulations.
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As a result of these provisions of the 1996 Act, the Company will likely
gain access to an expanded customer base, and should be able to realize a
reduction in its costs of interconnection. At the same time, the Act also
makes competitive entry more attractive to RBOCs, other LECs, interexchange
carriers and other companies, and likely will increase the level of
competition that the Company faces.
The 1996 Act also repeals the telecommunications/cable television cross-
ownership prohibition which generally had prohibited LECs from providing in-
region cable television service.
The 1996 Act's interconnection requirements also apply to interexchange
carriers and all other providers of telecommunications services, although the
terms and conditions for interconnection provided by these carriers are not
regulated as strictly as interconnection provided by the LECs. This may
provide the Company with the ability to reduce its own access costs by
interconnecting directly with non-LECs, but may also cause the Company to
incur additional administrative and regulatory expenses in reply to
interconnection requests.
While the 1996 Act reduces regulation to which non-dominant local exchange
carriers are subject, it also reduces the level of regulation that applies to
the LECs, and increases their ability to respond quickly to competition from
the Company and others. Specifically, the 1996 Act will subject the LECs to
"streamlined" tariff regulation, which greatly accelerates the time in which
tariffs that change service rates take effect, and eliminates the requirement
that LECs obtain FCC authorization before constructing new domestic
facilities. These actions will allow LECs to change service rates more quickly
in response to competition. Similarly, the FCC has initiated a proceeding to
review its price cap rules that may permit significant new pricing flexibility
to LECs. To the extent that such increased pricing flexibility is provided,
the Company's ability to compete with LECs for certain services may be
adversely affected.
The 1996 Act directs the FCC, in cooperation with state regulators, to
establish a Universal Service Fund that will provide subsidies to carriers
that provide service to underserved individuals and high cost areas. These
proceedings, which must be concluded by May, 1997, may require the Company to
contribute to the Universal Service Fund, but may also allow the Company to
receive payments from the Fund if it is deemed eligible. The Company also may
provide service to underserved customers in lieu of making Universal Service
Fund payments. The net revenue effect of these regulations on the Company
cannot be determined at this time.
In an order released on October 18, 1995, the FCC found that the transport
of frame relay service should be classified as a "basic" service. Previously,
it was common practice in the industry for many carriers to consider frame
relay an "enhanced" service. This decision is significant because the FCC
requires that basic services be tariffed, but permits enhanced services to be
offered on an off-tariff basis. As a result of the FCC's decision, all
carriers that provide frame relay transport must include the service in their
federal tariffs by May 6, 1996. The Company has included its frame relay
service in its federal tariff. The "basic" and "enhanced" terminology used by
the FCC is a regulatory term of art denoting the classification of services
for tariffing purposes. This regulatory use of the term should not be confused
with the Company's description of a class of services--frame relay, ATM and
Internet services--as "enhanced" elsewhere in this document.
State Regulation. To the extent that the Company provides intrastate
service, it is subject to the jurisdiction of the relevant state public
service commissions. The Company currently provides some intrastate services
in Florida, Missouri and Ohio and is subject to regulation by the public
service commissions of those states. The Company also has a network providing
interstate service in North Carolina, but is not currently certified to
provide intrastate services. The Company anticipates providing local service
in that state by the end of the year, however, and will become subject to
regulation by the state regulatory commission at that time. EMI provides local
access services and enhanced network services in New Jersey, New York and
Pennsylvania, and is subject to the jurisdiction of the regulatory commissions
in those states. In addition, Phone One is authorized in certain states to
offer intrastate long distance service.
The 1996 Act preempts state statutes and regulations that restrict the
provision of competitive local services. As a result of this sweeping
legislation, the Company will be free to provide the full range of intrastate
local and long distance services in all states in which it currently operates,
and any states into which it may expand. While this action greatly increases
the Company's addressable customer base, it also increases the amount of
competition to which the Company may be subject.
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While all of the states listed above have recently enacted legislation or
regulations that have permitted, or will permit, local service competition,
the 1996 Act will require most of the states to modify these policies to bring
them into conformance with federal standards. The 1996 Act also authorizes the
states to adopt additional regulations to the extent that they do not conflict
with the federal standards. It is unclear at this time how the states will
respond to the new federal legislation, and what additional regulations they
my adopt. While the 1996 Act's prohibition of state barriers to competitive
entry took effect on February 8, 1996, there likely will be significant
procedural delays before the new federal policies are fully implemented.
Summaries of the currently applicable state regulations are set forth below.
Florida. In Florida, the Company is subject to regulation by the Florida
Public Service Commission ("FPSC"). Currently, the FPSC has authorized the
Company to provide all intrastate services, including local exchange service.
The Company is authorized to provide a full array of local exchange, enhanced
data and long distance services in Florida.
The FPSC does not require the Company to file tariffs or to meet any
services standards for any of its intrastate CAP or local exchange services.
The Florida Legislature in 1995 approved changes to the Florida
telecommunications statute to permit the Company to operate on the same basis
and with the same rights as the LECs. This is commonly referred to as being a
"co-carrier." As a result of co-carrier status, the Company will be able to
provide a greatly increased array of services subject to minimal regulatory
oversight.
Ohio. In Ohio, the Company is subject to regulation by the Public Utilities
Commission of Ohio. As a certified carrier, ICI may provide intrastate special
access and private line services. Additionally, the Company may resell CENTREX
services subject to certain conditions.
Missouri. In Missouri, the Company is subject to regulation by the Missouri
Public Service Commission. As a certified carrier, ICI may provide intrastate
private line and special access services.
North Carolina. Due to state regulations, the Company is limited to
operating as an interstate carrier in North Carolina, providing access to and
between IXCs and between customers and their IXCs. A legislative initiative
was recently passed in North Carolina which will permit the Company to provide
intrastate services under the jurisdiction of the North Carolina Utilities
Commission beginning in July 1996. The Company is in the process of being
certified to provide a full array of telecommunications in North Carolina.
Alabama. Due to state regulations, the Company is limited to operating as an
interstate carrier in Alabama, providing access to and between IXCs and
between customers and their IXCs. The Company is in the process of being
certified to provide a full array of telecommunications services in Alabama.
New Jersey. EMI is subject to regulation by the New Jersey Board of Public
Utilities. Upon the consummation of the EMI Acquisition, the Company would be
certified to provide intrastate access and enhanced network services in New
Jersey.
New York. EMI is subject to regulation by the New York Public Service
Commission. Upon the consummation of the EMI Acquisition, the Company would be
certified to provide a full array of intrastate telecommunications services
including local exchange services in New York.
Pennsylvania. EMI is subject to regulation by the Pennsylvania Utility
Commission. Upon the consummation of the EMI Acquisition, the Company would be
certified to provide intrastate access and enhanced network services in
Pennsylvania.
As the Company expands its operations into other states, it may become
subject to the jurisdiction of their respective public service commissions for
certain services offered by ICI. The Company does not believe that the
services currently provided by it in other states are subject to regulation by
the public service commissions of those states. The Company does not believe
that its relationship with Latin American or other international service
providers currently subjects it to (or will subject it to) regulation outside
the United States.
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Local Government Authorizations. The Company may be required to obtain from
municipal authorities street opening and construction permits to install and
expand its fiber optic networks in certain cities. In some cities, local
partners or subcontractors may already possess the requisite authorizations to
construct or expand the Company's networks.
In some of the areas where the Company provides service, it may be subject
to municipal franchise requirements and to pay license or franchise fees based
on a percent of gross revenue. There are no assurances that certain
municipalities that do not currently impose fees will not seek to impose fees
in the future, nor is there any assurance that, following the expiration of
existing franchises, fees will remain at their current levels. In many
markets, other companies providing local telecommunications services,
particularly the LECs, currently are excused from paying license or franchise
fees or pay fees that are materially lower than those required to be paid by
the Company. The 1996 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 competitive access
provider.
If any of the existing Network Agreements were terminated prior to their
expiration date and the Company was 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.
AGREEMENTS
Interconnection Co-carrier Agreements. The Company has recently entered into
interconnection co-carrier agreements with BellSouth, GTE and Sprint-United.
Each of these agreements provides for mutual compensation and sets forth the
other terms and conditions upon which the carriers may terminate traffic on
each other's networks. The agreements further provide that to the extent that
the agreement fails to contemplate issues arising during the implementation
thereof, additional terms and conditions will be set by negotiation between
the parties or set by the FPSC upon request of the parties. Each of these
agreements expires on December 31, 1997.
Network Agreements. The Company has built its digital fiber optic networks
pursuant to various rights-of-way, conduit and dark fiber leases, utility pole
attachment agreements and purchase arrangements (collectively, the "Network
Agreements"). Substantially all of the Network Agreements (other than utility
pole attachment agreements, which typically can be terminated on 90 days
notice) are for a long-term and include renewal options.
Although none of the Network Agreements are exclusive, the Company believes
that conduit space, fiber availability and other physical constraints make it
unlikely that the lessors under the various Network Agreements could easily
make similar arrangements available to others. The Company believes that its
relationships with its lessors are satisfactory. Certain of the Network
Agreements require ICI to make revenue sharing payments or, in some cases, to
provide a fixed price alternative or dark fiber to the lessor without an
additional charge. In addition, the Company has various other performance
obligations under its Network Agreements, the breach of which could result in
the termination of such agreements. Further, actions by government regulatory
bodies could, in certain instances, also result in the termination of certain
Network Agreements. The cancellation of any of the material Network Agreements
could materially adversely affect the Company's business in the affected
metropolitan area. See "Risk Factors--Risk of Cancellation or Non-Renewal of
Network Agreements."
Interexchange Agreements. ICI, from time to time, enters into purchase
agreements with interexchange carriers for the transport and/or termination of
long distance calls outside of its territory. These contracts are typically
one year in duration and cancelable within 90 days. ICI has entered into two
purchase agreements which include minimum purchase amounts. The contract with
Sprint Communications Company L.P. (expiring January 1, 1997) requires ICI to
maintain a minimum monthly billing amount of $170,000 on the purchase of
interstate transport and 1-800 services and the contract with The Carrier
Group requires ICI to purchase a minimum of 850,000 minutes per month of
domestic interstate transport at rates specified in the contract. The Carrier
Group contract expires no later than August 31, 1996 and may expire earlier
upon the occurrence of certain events specified in the contract.
45
<PAGE>
UniSPAN(C). In order to provide end-to-end connectivity and interoperability
throughout the United States to its enhanced network services customers, ICI
entered into a frame relay service agreement (the "UniSPAN Agreement") in
September 1994 with EMI, PacNet, Inc., Integrated Network Services, Inc. and
MRC Telecommunications, Inc. In September 1995, Telemedia International, Inc.,
an international telecommunications company, became a party to the UniSPAN
Agreement. Pursuant to the UniSPAN Agreement, each of the parties agreed to
(i) provide frame relay services on its networks to each of the other parties,
subject to available capacity and agreement as to certain terms including
price and access to facilities, and (ii) use reasonable efforts to utilize the
services of the other parties in the event that such party requires frame
relay services in a geographic location not served by its own networks. The
UniSPAN Agreement has an initial three year term with successive one year
renewal periods until terminated by a majority vote of the parties. However,
any party may withdraw from the agreement as of the expiration of any term by
giving 60 days prior written notice thereof. Throughout the term of the
UniSPAN Agreement and for one year thereafter, or for a period of one year
after the withdrawal of any party, none of the parties may solicit to provide
frame relay services to customers which were brought in to the UniSPAN(C)
program by another party or for which frame relay services were requested by
another party.
EMPLOYEES
As of March 31, 1996, ICI employed a total of 387 full-time employees and
EMI employed 144 full-time employees. In addition, the Company anticipates
that the number of employees will increase significantly throughout the year.
The Company believes that its future success will depend in large part on its
continued ability to attract and retain highly skilled and qualified
personnel. ICI has nondisclosure agreements with all of its employees. The
Company also regularly uses the services of contract technicians for the
installation and maintenance of its networks. None of ICI's employees is
represented by a collective bargaining agreement. ICI believes that its
relations with its employees are good.
PROPERTIES
The Company leases its principal administrative, marketing, warehouse and
service development facility located in Tampa, Florida, and leases other space
for storage of its electronics equipment and for sales and engineering in
other cities where the Company operates networks. EMI leases office space
and/or other space for storage of its electronics equipment in various cities
where it operates. The Company believes that its properties and those of EMI
are adequate and suitable for their intended purpose.
As of December 31, 1995, the Company's total telecommunications equipment in
service consists of fiber optic telecommunications equipment (52%), fiber
optic cable (29%), furniture and fixtures (5%), leasehold improvements (1%)
and construction in progress (13%). Such properties do not lend themselves to
description by character and location of principal units. Fiber optic cable
plant used in providing service is primarily on or under public roads,
highways or streets, with the remainder being on or under private property.
Substantially all of the Company's telecommunications equipment is housed in
multiple leased facilities in various locations throughout the metropolitan
areas served by the Company.
Equipment additions over the past five years include gross additions to
telecommunications equipment having an estimated service life of one year or
more. Additions, including capital leases, since January 1, 1991 were as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- -------
<S> <C>
1991...................................... $ 3,746
1992...................................... $ 9,687
1993...................................... $10,767
1994(1)................................... $18,289
1995...................................... $34,873
</TABLE>
- --------
(1) Excludes $855 of capital lease obligations assumed in connection with the
acquisition of Phone One.
LEGAL PROCEEDINGS
On May 3, 1995, the Company asserted a claim for indemnification against the
former shareholder of Phone One (the "Former Shareholder") for approximately
$1 million on account of various breaches of representations and warranties
made by the Former Shareholder to the Company in the agreement for the
acquisition of Phone
46
<PAGE>
One (the "Phone One Acquisition Agreement"). The Former Shareholder has
objected to the indemnification claim, which is subject to arbitration under
the Phone One Acquisition Agreement. On July 27, 1995, the Company commenced
an arbitration to recover $1,055,859 from the Former Shareholder. On October
9, 1995, the Former Shareholder filed an answer and counterclaims contesting
liability and claiming damages for alleged breach of contract,
misrepresentation, interference with business relations, and violations of
state and federal statutes and regulations. The Former Shareholder claims
damages in excess of $2 million and attorneys' fees on the principle assertion
that the Company fraudulently induced the Former Shareholder to consummate the
Phone One Acquisition Agreement by failing to disclose its alleged intention
not to honor its obligations under a related long distance services agreement.
While the indemnification claims and the counterclaims are in their earliest
stages, the Company, after consultation with counsel, believes that it has
meritorious defenses to the counterclaims, which it will vigorously contest,
and that its indemnification claims are meritorious. On April 4, 1996, the
Former Shareholder accepted a settlement proposal, subject to documentation,
pursuant to which mutual general releases will be exchanged and ICI will
deliver a portion of the shares placed in escrow as a hold back, pursuant to
the terms of the Phone One Acquisition Agreement, however, no assurance can be
given as to the ultimate outcome of the indemnification claim or the
counterclaims.
The Company is not a party to any other pending legal proceedings except for
various claims and lawsuits arising in the normal course of business. The
Company does not believe that these normal course of business claims or
lawsuits will have a material effect on the Company's financial condition or
results of operations.
47
<PAGE>
MANAGEMENT
The directors and executive officers of ICI, their respective ages,
positions and biographies are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
David C. Ruberg................ 50 Chairman of the Board, President and
Chief Executive Officer
Barbara L. Samson.............. 34 Senior Vice President, Investor Relations
Ronald L. Tolliver............. 48 Senior Vice President, Chief Financial
Officer and Secretary
J. Christopher Brown........... 44 Senior Vice President, Marketing and
Strategic Planning
James F. Geiger................ 37 Senior Vice President, Sales
Michael A. Viren............... 53 Senior Vice President, Engineering and
Information Systems
Robert A. Ruh.................. 51 Senior Vice President, Human Resources
Mark A. Masi................... 39 Vice President, Field Operations
Timothy N. Tuck................ 41 Vice President, Customer Operations
Jeanne M. Walters.............. 33 Controller and Chief Accounting Officer
John C. Baker.................. 46 Director
George F. Knapp................ 64 Director
</TABLE>
David C. Ruberg has served as President, Chief Executive Officer and a
director of the Company since May 1993, and as Chairman of the Board since
March 1994. From September 1991 to May 1993, Mr. Ruberg was an independent
consultant to the computer and telecommunications industries. From 1989 to
September 1991, Mr. Ruberg served as Vice President and General Manager of the
Telecommunications Division and then of the Personal Computer/Systems
Integration Division of Data General Corporation, a computer manufacturer.
From 1984 to 1989, Mr. Ruberg served as a Vice President of TIE
Communications, Inc., a manufacturer of telecommunications equipment. Mr.
Ruberg received his B.A. in mathematics from Middlebury College and his M.S.
in computer science from the University of Michigan.
Barbara L. Samson, a co-founder of the Company, has served as a Vice
President since June 1987, and as a Senior Vice President since October 1992.
She served as President of the Company's predecessor from September 1986 to
June 1987. Ms. Samson recently served two terms as Chairman of the Association
of Local Telecommunications Services (ALTS), a national trade association. Ms.
Samson received her B.S. degree in telecommunications from the University of
Florida and her M.B.A. degree from the University of South Florida.
Ronald L. Tolliver has served as a Senior Vice President of the Company
since June 1993, Chief Financial Officer since June 1992 and Secretary since
June 1993. He also served as Vice President of Government and Regulatory
Affairs from July 1991 through June 1993. Mr. Tolliver joined the Company as
Director of Government and Regulatory Affairs in January 1991. From July 1989
to January 1991, Mr. Tolliver was owner and founder of Tolliver and Company (a
consulting company). Prior to starting his own company, Mr. Tolliver was a
Vice President at Gold Key Incentives (a marketing incentives company) from
April 1989 to July 1989. From 1981 to 1989, Mr. Tolliver held various
executive positions in government and regulatory affairs at United Telephone
System most recently Manager of New Services Pricing from 1986 to April 1989.
Mr. Tolliver received his B.S. degree in management and finance from Florida
Southern College and his M.B.A. at the University of South Florida.
J. Christopher Brown has served as the Senior Vice President, Marketing and
Strategic Planning of the Company since September 1994. Mr. Brown worked for
British Telecom's Syncordia Outsourcing Unit from September 1991 until
September 1994, most recently as the Marketing Department head. Mr. Brown
worked for Sprint and its predecessors from May 1981 until September 1991,
most recently as the Director of Market Development for Sprint's National
Accounts Division. Mr. Brown earned a B.S.E.E. in electronics from the
University of South Florida in 1974, and an M.B.A. from Emory University in
1987.
James F. Geiger has served as Senior Vice President, Sales of the Company
since August 1995, as the Vice President of Alternate Channel Sales from March
1995 through August 1995 and as the President of FiberNet since its inception.
Mr. Geiger was one of the founding principals of FiberNet, initially serving
as Vice President
48
<PAGE>
of Sales & Marketing and subsequently serving as President. From April 1989 to
April 1990, Mr. Geiger served as Director of Marketing for Associated
Communications, a cellular telephone company. Mr. Geiger received his B.S.
degree from Clarkson University in accounting.
Michael A. Viren has served as Senior Vice President, Engineering and
Information Systems since January, 1996, and as Vice President, Product
Development from December 1992 through January 1996. Mr. Viren joined the
Company in February 1991 as Director of Product Development. Mr. Viren worked
for GTE from August 1986 to February 1991 as a specialist in wide and local
area networking. Prior to that he operated his own consulting firm
concentrating in WAN and LAN design; was Senior Vice President of Criterion,
Inc., an economic consulting firm in Dallas, Texas; and served as the Director
of the Utility Division of the Missouri Public Service Commission. Mr. Viren
taught economics for 10 years, most recently as an Associate Professor of
Economics at the University of Missouri-Columbia and prior to that at the
University of Kansas. Mr. Viren received a Ph.D. in economics from the
University of California-Santa Barbara and a B.S. in mechanical engineering
from the California State University at Long Beach.
Robert A. Ruh has served as Senior Vice President, Human Resources of ICI
since March 1, 1996. From January 1991 through February 1996, Mr. Ruh founded
and operated his own consulting company, specializing in human resource
development. Prior to starting his own business, from 1975 to 1990, Mr. Ruh
held corporate and group executive positions in human resources with Baxter
Healthcare Corporation and American Hospital Supply Corporation. From 1973 to
1975, Mr. Ruh served as a consulting psychologist for Medina and Thompson,
Inc., providing clients with assistance on executive assessment, selection and
development. From 1970 to 1972, Mr. Ruh was on the corporate organization
development staff at Corning Glass Works. Mr. Ruh received a B.A. in
psychology from Valparaiso University and an M.A. and a Ph.D in
industrial/organizational psychology from Michigan State University. Mr. Ruh
served as Assistant Professor of Psychology of Michigan State University from
1970 to 1972.
Mark A. Masi has served as Vice President, Operations and Customer Service
of the Company since March 1995. Mr. Masi was one of the founders of FiberNet
and, from November 1989 to March 1994, he served as FiberNet's Executive Vice
President and Chief Financial Officer, responsible for funding and developing
CAP operations. From March 1982 until November 1989, Mr. Masi held various
management positions with Frontier Communications, Inc. (formerly Rochester
Telephone Corporation). Mr. Masi is a graduate of the State University of New
York College at Oswego with a degree in economics and the State University of
New York at Binghamton with an M.B.A. in finance and management information
systems.
Timothy N. Tuck has served as Vice President, Customer Operations of the
Company since January 1996 and served as President and Chief Operating Officer
of Phone One from December 1994 until December 1995. From 1993 until the
Company's acquisition of Phone One, Mr. Tuck served as the Chief Executive
Officer and from 1989 to 1993 he served as the Chief Financial Officer of
Phone One. From 1987 to 1989, Mr. Tuck served as a Vice President and Chief
Financial Officer of Advantage Companies, Inc., a telecommunications company.
Mr. Tuck received his B.S. degree and his M.B.A. from the University of
Tennessee.
Jeanne M. Walters has served as Controller and Chief Accounting Officer of
the Company since May 1993. From November 1992 until May 1993 she served as
Assistant Controller. From June 1988 to November 1992, Ms. Walters was an
auditor at Ernst & Young LLP, a certified public accounting firm in Tampa,
Florida. Ms. Walters received her B.S. in accounting and an M.B.A. from Wilkes
University. She is licensed in the State of Florida as a certified public
accountant.
Mr. Baker has been a director of the Company since February 1988. Mr. Baker
has been the principal at Baker Capital Corp., a multi-national venture
capital firm, since October 1995. He was a Senior Vice President of Patricof &
Co. Ventures, Inc., a multi-national venture capital firm from 1988 until
September 1995. Mr. Baker is currently a director of Xpedite Systems, Inc.,
FORE Systems, Inc., American Mobile Satellite Corporation and Resource
Bancshares Mortgage Group, Inc., all of which are publicly traded
corporations.
49
<PAGE>
Mr. Knapp has been a director of the Company since February 1988. He has
been a principal of Communications Investment Group, an investment banking
firm, since June 1990. From January 1988 until June 1989, Mr. Knapp was an
associate at MBW Management, Inc., a venture capital firm. Prior to that time,
he held various executive positions at ITT Corporation and its subsidiaries,
most recently as Corporate Vice President of ITT Corporation.
No family relationship exists between any of the directors and executive
officers of the Company.
Ronald L. Tolliver, Senior Vice President, Chief Financial Officer and
Secretary of the Company, has advised the Company of his intention to resign
his positions with the Company effective May 26, 1996 in order to pursue other
opportunities. The Company is continuing its previously instituted search for
a new Chief Financial Officer. Upon Mr. Tolliver's resignation becoming
effective, Mr. Oscar Williams, a financial Vice President of the Company, will
assume the additional position of Chief Financial Officer of the Company on an
interim basis.
50
<PAGE>
THE SELLING STOCKHOLDERS
The following table sets forth, as of March 29, 1996, certain information
regarding the Selling Stockholders' ownership of the Shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
-------------------------- ---------------------------
NUMBER OF NUMBER OF NUMBER OF
NAME OF SELLING STOCKHOLDER SHARES PERCENT SHARES OFFERED SHARES PERCENT
- --------------------------- ------------ --------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
APA Excelsior Venture
Capital Holdings
(Jersey) Ltd........... 171,818(1) 1.6% 171,166 652(1) *
Air Canada, Trustee for
Air Canada Pension
Trust Fund............. 10,267 * 10,267 0 0
Anchor National Life
Ins. Co. .............. 5,162 * 5,162 0 0
Wilmington Trust Company
as Trustee of
Du Pont Pension Trust.. 25,977 * 25,977 0 0
Landmark Venture
Partners............... 20,591 * 20,591 0 0
Crossroads Capital
Limited Partnership by
Bigler Lattimer &
Siegle................. 17,561 * 17,561 0 0
Landmark Equity Partners
II..................... 5,162 * 5,162 0 0
LWG Family Partners..... 5,190 * 5,190 0 0
RAJ Family Partners..... 5,190 * 5,190 0 0
The Kerr Foundation,
Inc. .................. 1,963 * 1,963 0 0
Grayce B. Kerr Fund,
Inc. .................. 1,963 * 1,963 0 0
The Robert S. and Grayce
B. Kerr Foundation,
Inc. .................. 1,963 * 1,963 0 0
Charles P. Lazarus...... 10,379 * 10,379 0 0
Brinson Trust Company as
Trustee for The Venture
Partnership Acquisition
Fund................... 24,406 * 24,406 0 0
Brinson Trust/IVCF...... 1,571 * 1,571 0 0
The Bank of N.Y. as
Trustee for the
Metromedia Company
Employee Master Pension
Trust ................. 6,480 * 6,480 0 0
The Bank of N.Y. as
Trustee for the
Metromedia Company
Employee Pension Plan
as Amended
as of Jan. 1, 1987..... 6,480 * 6,480 0 0
Metropolitan Life Ins.
Co. ................... 25,977 * 25,977 0 0
New York State Teachers'
Retirement System...... 77,089 * 77,089 0 0
Unisys Corp. ........... 51,393 * 51,393 0 0
TI Employees' Pension
Trust, The Northern
Trust Co. ............. 20,759 * 20,759 0 0
</TABLE>
- --------
* Less than one percent.
(1) Includes 1992 Warrants to purchase up to 652 shares of Common Stock held
by APA Excelsior Venture Capital Holdings (Jersey) Ltd. ("APA Venture").
Excludes 1992 Warrants to purchase up to 2,605 shares of Common Stock and
44,573 shares of Common Stock held by certain affiliates of APA Venture.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
ICI's authorized capital stock consists of 20,000,000 shares of Common
Stock, par value $.01 per share, and 500,000 shares of Preferred Stock, par
value $1.00 per share ("Preferred Stock"). As of March 29, 1996, there were
10,386,218 shares of Common Stock issued and outstanding. On a fully-diluted
basis, at that date, the Company had outstanding 13,195,077 shares of Common
Stock after giving effect to (a) the exercise of the Outstanding Warrants
(defined below), (b) the consummation of the EMI Acquisition and the issuance
of 937,500 shares of Common Stock in connection therewith and (c) the exercise
of all outstanding options with an exercise price below $17.50 issued pursuant
to the Company's employee stock option plans. The Company has reserved (i)
1,240,257 shares (as of March 29, 1995) of Common Stock for issuance pursuant
to the Company's 1992 Stock Option Plan and (ii) 674,332 shares of Common
Stock for issuance upon exercise of warrants (the "Outstanding Warrants")
issued to (x) NYL on June 5, 1991 (317,460 shares), (y) certain parties that
made a bridge loan to the Company on March 7, 1992 (6,472 shares) and (z)
certain investors in the Company's June 1995 private placement (350,400
shares). The Company intends to reserve 1,500,000 shares for issuance pursuant
to the Long-Term Incentive Plan, which plan is subject to stockholder approval
at the Company's annual meeting. All outstanding shares of Common Stock are
fully paid and non-assessable. No shares of Preferred Stock are outstanding.
The Company has proposed increasing the authorized Common Stock from
20,000,000 to 50,000,000 shares. This proposal will be voted upon at the
annual meeting of the stockholders to be held on May 24, 1996.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Holders of
Common Stock do not have cumulative rights, so that holders of more than 50%
of the shares of Common Stock are able to elect all of ICI's directors
eligible for election in a given year. For a description of the classification
of the Board, see "--Delaware Law and Certain Provisions of ICI's Certificate
of Incorporation and Bylaws." Subject to the preferences that may be
applicable to any then outstanding Preferred Stock, holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board out of funds legally available therefor. See
"--Dividend Restrictions." Upon any liquidation, dissolution or winding up,
whether voluntary or involuntary, of ICI, holders of Common Stock are entitled
to receive pro rata all assets available for distribution to stockholders
after payment or provision for payment of the debts and other liabilities of
ICI and the liquidation preferences of any then outstanding Preferred Stock.
There are no preemptive of other subscription rights, conversion rights, or
redemption or sinking fund provisions with respect to shares of Common Stock.
All outstanding shares of Common Stock are, and all shares of Common Stock to
be outstanding upon exercise of the Outstanding Warrants will be, fully paid
and non-assessable.
PREFERRED STOCK
The Preferred Stock may be issued at any time or from time to time in one or
more series with such designations, powers, preferences, rights,
qualifications, limitations and restrictions (including dividend, conversion
and voting rights) as may be fixed by the Board, without any further vote or
action by the stockholders. Although ICI has no present plans to issue any
Preferred Stock, the ownership and control of ICI by the holders of the Common
Stock would be diluted if ICI were to issue Preferred Stock that had voting
rights or that was convertible into Common Stock. In addition, the holders of
Preferred Stock issued by ICI would be entitled by law to vote on certain
transactions such as a merger or consolidation, and thus the issuance of
Preferred Stock could dilute the voting rights of the holders of the Common
Stock on such issues. The issuance of Preferred Stock could also have the
effect of delaying, deferring or preventing a change in control of ICI.
DELAWARE LAW AND CERTAIN PROVISIONS OF ICI'S CERTIFICATE OF INCORPORATION AND
BYLAWS
General. The Certificate of Incorporation and the Bylaws of ICI contain
certain provisions that could make more difficult the acquisition of ICI by
means of a tender offer, a proxy contest or otherwise. These provisions
52
<PAGE>
are expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control
of ICI first to negotiate with ICI. Although such provisions may have the
effect of delaying, deferring or preventing a change in control of ICI, the
Company believes that the benefits of increased protection of ICI's potential
ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure the Company outweigh the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms. The description set
forth below is intended as a summary only and is qualified in its entirety by
reference to the Certificate of Incorporation and Bylaws of ICI.
Board of Directors. ICI's Certificate of Incorporation provides that (i) the
Board be divided into three classes of directors, with each class having a
number as nearly equal as possible and with the term of each class expiring in
a different year and (ii) the Board shall consist of not less than three nor
more than seven members, the exact number to be determined from time to time
by the Board. The Board has set the number of directors at three and the size
of each class at one. Subject to any rights of holders of Preferred Stock, a
majority of the Board then in office will have the sole authority to fill any
vacancies on the Board. Stockholders can remove members of the Board only for
cause.
Stockholder Action and Special Meetings. ICI's Certificate of Incorporation
provides that (i) any action required or permitted to be taken by ICI's
stockholders must be effected at a duly called annual or special meeting of
Stockholders and may not be effected by any consent in writing and (ii) the
authorized number of directors may be changed only by resolution of the Board.
The Company's Bylaws provide that, subject to any rights of holders of any
series of Preferred Stock, special meetings of stockholders may be called only
by the Chairman of the Board or the President of ICI, by a majority of the
Board or by stockholders owning shares representing at least a majority of the
capital stock of ICI issued and outstanding and entitled to vote.
Stockholder's Rights Plan. ICI's Board of Directors has adopted a
Stockholder's Rights Plan, pursuant to which rights to acquire a newly created
series of Preferred Stock, exercisable upon the occurrence of certain events,
including the acquisition by a person or group of a specified percentage of
the Common Stock, were distributed to its stockholders.
Anti-Takeover Statute. Subject to certain exceptions, Section 203 of the
Delaware General Corporation Law (the "GCL") prohibits a publicly held
Delaware corporation, such as ICI, from engaging in any "business combination"
with an "interested stockholder" for a three-year period following the date on
which such person became an interested stockholder, unless (i) prior to such
date, the board of directors of the corporation approved either such business
combination or the transaction that resulted in such person becoming an
interested stockholder, (ii) upon consummation of the transaction that
resulted in such person becoming an interested stockholder, such person owned
at least 85% of the voting stock of the corporation outstanding immediately
prior to such transaction (excluding certain shares) or (iii) on or subsequent
to such date, such business combination is approved by the board of directors
of the corporation and by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder. A
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is essentially a person who, together with affiliates and
associates, owns (or within the past three years has owned) 15% or more of the
corporation's voting stock. It is anticipated that the provisions of Section
203 of the GCL may encourage any person interested in acquiring ICI to
negotiate in advance with the Board since the stockholder approval requirement
would be avoided if a majority of ICI's directors then in office approved
either the business combination or the transaction that resulted in such
person becoming an interested stockholder.
DIVIDEND RESTRICTIONS
The terms of the Indenture and the indenture governing the Existing Senior
Notes restrict ICI's ability to pay dividends on the Common Stock. The payment
of dividends on the Common Stock is also subject to the preference that may be
applicable to any then outstanding Preferred Stock.
53
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
OUTSTANDING WARRANTS
NYL currently holds warrants (the "NYL Warrants") to purchase up to 317,460
shares of Common Stock at an exercise price of $4.20 per share. The NYL
Warrants will expire, to the extent not theretofore exercised, on June 2,
1997. Certain other stockholders of the Company hold warrants (the "1992
Warrants") to purchase an aggregate of 6,472 shares of Common Stock at an
exercise price of $4.20 per share (subject to anti-dilution adjustments). The
1992 Warrants will expire, to the extent not theretofore exercised, on March
4, 1997. In addition, 160,000 warrants (the "Public Warrants"), each to
purchase 2.19 shares of Common Stock, at an exercise price of $10.86 per share
(subject to anti-dilution adjustments) were issued as part of a June 1995
private placement. The Public Warrants may be exercised after the earlier to
occur of (i) June 1, 1996 or (ii) in the event of a change in control, the
date the Company mails notice thereof to the holders. Unless exercised, the
Public Warrants will expire on June 1, 2000.
EXISTING REGISTRATION RIGHTS
The Company is a party to several agreements pursuant to which certain
stockholders have the right, among other matters, to require the Company to
register their shares of Common Stock under the Securities Act under certain
circumstances. These rights cover approximately 5,046,124 shares of Common
Stock (including shares of Common Stock issuable in connection with the EMI
Acquisition), and approximately 1,750,331 of such shares are covered by an
effective registration statement. In addition, certain stockholders have
exercised the right to include certain of their shares of Common Stock in the
Registration Statement of which this Prospectus forms a part.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") among the Company, the Selling Stockholders and
the underwriters listed below (the "Underwriters"), the Company and the
Selling Stockholders have agreed to sell to each of the Underwriters, and each
of the Underwriters has severally agreed to purchase the respective number of
Shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc.................................... 1,373,897
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.......................................... 1,373,896
Morgan Stanley & Co. Incorporated.......................... 1,373,896
Smith Barney Inc. ......................................... 125,000
Robert W. Baird & Co. Incorporated......................... 125,000
Wheat, First Securities, Inc. ............................ 125,000
---------
Total.................................................. 4,496,689
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
thereunder are subject to certain conditions precedent and that the
Underwriters are severally committed to take and pay for all of the Shares if
any are taken. If any of the Shares are purchased by the Underwriters pursuant
to the Underwriting Agreement, all such Shares (other than the shares of
Common Stock covered by the over-allotment option described below) must be so
purchased. The Underwriting Agreement also provides that the Company and the
Selling Stockholders will indemnify the Underwriters against certain
liabilities in connection with the offer and sale of the Shares, including
liabilities under the Securities Act of 1933, as amended, and contribute to
payments that the Underwriters may be required to make in respect thereof.
The Company and the Selling Stockholders have been advised by the
Underwriters that they propose initially to offer the Common Stock to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $0.85 per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $0.10 per share on sales to certain
other dealers. After the initial public offering of the Shares, the public
offering price and other selling terms may be changed by the Underwriters.
The Company has granted to the Underwriters an option to purchase up to an
aggregate of 674,503 additional shares of Common Stock, at the initial public
offering price less underwriting discounts and commissions, solely to cover
over-allotments. Such option may be exercised at any time until 30 days after
the date of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment as indicated in the preceding table.
55
<PAGE>
The Company and the Selling Stockholders have agreed not to issue, sell or
otherwise dispose of any Common Stock or any security convertible into or
exchangeable or exercisable for Common Stock of the Company, and to cause all
directors, officers and certain stockholders of the Company and other
affiliates not to sell or otherwise dispose of any Common Stock or any
security convertible into or exchangeable or exercisable for Common Stock of
the Company for a period of 120 days (or, in the case of certain institutional
stockholders, for periods ranging from 30 to 90 days) from the date of
execution of the Underwriting Agreement, subject to certain exceptions
specified in the Underwriting Agreement.
Each of Bear, Stearns & Co. Inc. and Morgan Stanley & Co. Incorporated acted
as an initial purchaser in connection with the offering by the Company of
units each consisting of $1,000 principal amount of the Existing Senior Notes
and one Public Warrant in June 1995. In addition, Bear, Stearns & Co. Inc. has
from time to time provided, and may in the future provide, financial advisory
services to the Company for which it has received, and may in the future
receive, customary compensation.
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon for the
Company by Kronish, Lieb, Weiner & Hellman LLP, 1114 Avenue of the Americas,
New York, New York 10036-7798. Ralph J. Sutcliffe, a partner of Kronish, Lieb,
Weiner & Hellman LLP, beneficially owns 5,745 shares of the Common Stock.
Certain legal matters in connection with the sale of securities offered hereby
will be passed upon for the Underwriters by their counsel Latham & Watkins,
885 Third Avenue, New York, New York 10022.
EXPERTS
The consolidated financial statements of the Company at December 31, 1994
and 1995 and for each of the three years in the period ended December 31,
1995, appearing in this Prospectus and Registration Statement, have been
audited by Ernst & Young LLP, independent certified public accountants, as set
forth in their report thereon appearing elsewhere herein and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of the Telecommunications Division of EMI
Communications, Inc. at July 31, 1994 and 1995, and for the years then ended,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent certified public accountants, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of FiberNet USA, Inc. and the
Subsidiaries as of June 30, 1994 and for the period September 17, 1993
(inception) to June 30, 1994, appearing in the Company's Annual Report (Form
10-K) for the year ended December 31, 1995 have been audited by Mendelsohn
Kary Bell & Natoli, P.C., independent auditors, as stated in their report
thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of FiberNet Telecommunications
Cincinnati, Inc., as of June 30, 1993 and 1994 and for the year ended June 30,
1994 and for the period August 20, 1992 (inception) to June 30, 1993 appearing
in the Company's Annual Report (Form 10-K) for the year ended December 31,
1995 have been audited by Mendelsohn Kary Bell & Natoli, P.C., independent
auditors, as stated in their reports thereon included therein and incorporated
herein by reference. Such consolidated financial statements are incorporated
herein by reference in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing.
56
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
Unaudited Pro Forma Condensed Consolidated Financial Statements.......... F-2
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
Report of Independent Certified Public Accountants....................... F-6
Consolidated Financial Statements for each of the Three Years in the
Period Ended
December 31, 1995....................................................... F-7
EMI COMMUNICATIONS, INC.
Report of Independent Certified Public Accountants....................... F-22
Financial Statements for the Telecommunications Division for the Years
Ended July 31, 1994 and 1995, and for the Six-Month Periods Ended
January 31, 1995 and 1996 (unaudited)................................... F-23
</TABLE>
F-1
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated balance sheet as
of December 31, 1995 includes the historical effects of the pending
acquisition of the telecommunication assets of EMI Communications Corporation
(EMI), a wholly-owned subsidiary of Newhouse Broadcasting Corporation. The
accompanying unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1995 has been prepared to reflect
the acquisition of FiberNet USA, Inc. and Subsidiaries and FiberNet
Telecommunications Cincinnati, Inc. (collectively, FiberNet) and EMI as if
they were consummated on January 1, 1995.
The pro forma information is based on the historical financial statements of
the acquired businesses giving effect to the transactions under the purchase
method of accounting and the assumptions and adjustments described in the
accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
The pro forma information does not purport to be indicative of the actual
results that would have been achieved had the acquisitions actually been
completed as of the dates indicated. The unaudited pro forma condensed
consolidated financial statements should be read in conjunction with the
respective historical financial statements of Intermedia Communications of
Florida, Inc. (ICI or the Company), FiberNet and EMI included elsewhere
herein.
F-2
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL
--------------------------- PRO FORMA PRO FORMA
CONSOLIDATED(1) EMI(2) ADJUSTMENTS TOTALS
--------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 50,996,919 $ -- $ 50,996,919
Restricted
investments.......... 18,854,015 -- 18,854,015
Short-term
investments.......... 2,100,000 -- 2,100,000
Accounts receivable,
net.................. 7,954,194 8,238,646 $ (8,238,646)(3) 7,954,194
Prepaid expenses,
deposits and other
current assets....... 1,832,186 464,302 (464,302)(3) 1,832,186
------------ ----------- ------------ ------------
Total current assets.... 81,737,314 8,702,948 (8,702,948) 81,737,314
Restricted investments.. 30,869,001 -- 30,869,001
Telecommunications
equipment, net......... 76,169,589 10,040,740 7,084,260 (4) 93,294,589
Intangibles, net........ 26,986,915 -- 26,986,915
Other assets............ 255,306 429,054 (429,054)(3) 255,306
------------ ----------- ------------ ------------
Total assets........ $216,018,125 $19,172,742 $ (2,047,742) $233,143,125
============ =========== ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 4,810,175 $ 9,466,725 $ (9,466,725)(3) $ 4,810,175
Accrued interest...... 1,800,000 -- 1,800,000
Other accrued
expenses............. 1,861,682 1,280,528 (1,280,528)(3) 2,111,682
250,000 (4)
Advance billings...... 1,747,081 50,187 (50,187)(3) 1,747,081
Current portion of
long-term debt....... 107,757 -- 107,757
Current portion of
capital lease
obligations.......... 1,057,927 -- 1,057,927
------------ ----------- ------------ ------------
Total current
liabilities........ 11,384,622 10,797,440 (10,547,440) 11,634,622
Long-term debt:
Long-term debt........ 159,199,226 -- 159,199,226
Capital lease
obligations.......... 5,179,914 -- 5,179,914
Other liabilities..... 574,961 (574,961)(3) --
------------ ----------- ------------ ------------
Total liabilities... 175,763,762 11,372,401 (11,122,401) 176,013,762
Stockholders' equity:
Common stock.......... 103,597 -- 9,375 (4) 112,972
Additional paid-in
capital.............. 74,093,476 -- 16,865,625 (4) 90,959,101
Divisional equity..... -- 7,800,341 (7,800,341)(3)
Accumulated deficit... (33,942,710) -- (33,942,710)
------------ ----------- ------------ ------------
Total stockholders'
equity............. 40,254,363 7,800,341 9,074,659 57,129,363
------------ ----------- ------------ ------------
Total liabilities
and stockholders'
equity............. $216,018,125 $19,172,742 $ (2,047,742) $233,143,125
============ =========== ============ ============
</TABLE>
F-3
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------
(A) (B) (C) PRO FORMA PRO FORMA
CONSOLIDATED FIBERNET EMI ADJUSTMENTS TOTALS
------------ --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 38,630,574 $ 38,790 $43,369,515 $ (351,796)(d) $ 81,687,083
Expenses:
Facilities
administration and
maintenance and line
costs................. 22,989,195 29,849 39,936,405 (351,796)(d) 62,603,653
Selling, general and
administrative........ 14,992,458 236,572 3,065,864 18,294,894
Depreciation and
amortization.......... 10,195,871 75,518 4,736,679 (2,290,250)(e) 12,808,073
90,255 (f)
------------ --------- ----------- ---------- ------------
48,177,524 341,939 47,738,948 (2,551,791) 93,706,620
------------ --------- ----------- ---------- ------------
Income (loss)from
operations............. (9,546,950) (303,149) (4,369,433) 2,199,995 (12,019,537)
Interest expense........ (13,766,639) (59,793) (532,320) 532,320 (g) (13,826,432)
Interest and other
income................. 4,060,040 -- 21,831 4,081,871
------------ --------- ----------- ---------- ------------
Income (loss) before
income taxes........... (19,253,549) (362,942) (4,879,922) 2,732,315 (21,764,098)
Income taxes (benefit).. (96,952) -- (1,776,076) 1,776,076 (h) (96,952)
------------ --------- ----------- ---------- ------------
Income (loss) before
extraordinary item..... $(19,156,597) $(362,942) $(3,103,846) $ 956,239 $(21,667,146)
============ ========= =========== ========== ============
Loss per share before
extraordinary item..... $ (1.91) $ (1.95)
============ ============
Weighted average number
of shares outstanding.. 10,035,774 11,087,205 (i)
============ ============
</TABLE>
F-4
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET ADJUSTMENTS
(1) Represents the historical condensed consolidated balance sheet of ICI as
of December 31, 1995.
(2) Represents the historical condensed balance sheet of EMI as of January 31,
1996. EMI currently has a fiscal year end of July 31.
(3) To reflect the elimination of all EMI assets, liabilities and divisional
equity that are not being acquired by ICI as part of the purchase of EMI.
Under the terms of the EMI purchase agreement, ICI is only acquiring the
telecommunications assets of EMI which principally consist of
telecommunications equipment and existing telecommunications service
contracts.
(4) To reflect the issuance of ICI common stock in exchange for the
telecommunications assets of EMI. Under the terms of the EMI purchase
agreement, ICI has agreed to issue 937,500 shares of common stock for such
assets. For pro forma purposes, the stock has been valued at $18 per share
which represents an average of the selling price of ICI's common stock for
a period before and after the date of the acquisition agreement, February
20, 1996. The Company has initially allocated all of the estimated fair
value of the common stock plus $250,000 in estimated acquisition-related
costs to the telecommunications equipment pending final analysis of the
value of the equipment and any acquired intangible assets. The purchase
price allocation does not include a contingent cash payment of $594,000 if
certain planned network expansion is completed by EMI prior to closing.
STATEMENT OF OPERATIONS ADJUSTMENTS
(a) Represents the historical condensed consolidated statement of operations
of ICI for the year ended December 31, 1995, which include the operations
of FiberNet from March 1, 1995.
(b) Represents the historical condensed statement of operations of FiberNet
for the two months ended February 28, 1995.
(c) Represents the historical condensed statement of operations of EMI for the
twelve months ended January 31, 1996.
(d) Represents the elimination of revenues between ICI and EMI.
(e) Represents the reduction in historical depreciation expense of EMI's
telecommunications equipment as a result of the allocation of estimated
purchase price. In addition, the assets are being depreciated on a
straight-line basis using an estimated weighted average remaining life of
seven years for pro forma purposes versus the original estimated lives and
the accelerated depreciation method historically followed.
(f) To reflect the two months of goodwill amortization related to the FiberNet
acquisition not included in ICI's historical consolidated financial
statements.
(g) Represents the elimination of interest costs which would not have been
incurred because of the proposed acquisition of EMI's telecommunications
assets with ICI Common Stock.
(h) Represents the elimination of EMI's historical income tax benefit as a
result of ICI's significant net operating losses.
(i) The pro forma weighted average number of shares outstanding has been
adjusted to reflect the issuance of Common Stock for the FiberNet and EMI
acquisitions as if they occurred at the beginning of the indicated period.
F-5
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Intermedia Communications of Florida, Inc.
We have audited the accompanying consolidated balance sheets of Intermedia
Communications of Florida, Inc. as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Intermedia Communications of Florida, Inc. at December 31, 1994 and 1995,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Tampa, Florida
February 20, 1996
F-6
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1995
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $10,208,187 $ 50,996,919
Restricted investments............................ -- 18,854,015
Short-term investments............................ 50,000 2,100,000
Accounts receivable, less allowance for doubtful
accounts of $545,400 in 1994 and $869,000 in
1995............................................. 5,321,276 7,954,194
Prepaid expenses and other current assets......... 1,021,493 1,832,186
----------- ------------
Total current assets................................ 16,600,956 81,737,314
Restricted investments.............................. -- 30,869,001
Telecommunications equipment, net................... 44,665,937 76,169,589
Intangibles, net.................................... 12,414,618 26,986,915
Other assets........................................ 404,641 255,306
----------- ------------
Total assets........................................ $74,086,152 $216,018,125
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 3,354,844 $ 4,810,175
Accrued taxes..................................... 537,452 285,757
Accrued interest.................................. 85,658 1,800,000
Other accrued expenses............................ 395,388 1,575,925
Advance billings.................................. 1,056,035 1,747,081
Current portion of long-term debt................. 101,326 107,757
Current portion of capital lease obligations...... 1,481,815 1,057,927
----------- ------------
Total current liabilities........................... 7,012,518 11,384,622
Long-term debt payable to a stockholder............. 9,646,927 --
Long-term debt...................................... 323,306 159,199,226
Capital lease obligations........................... 4,973,086 5,179,914
Deferred income taxes............................... 96,952 --
Stockholders' equity:
Preferred stock, $1.00 par value; 500,000 shares
authorized; no shares issued..................... -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; 9,659,188 and 10,359,771 shares is-
sued in 1994 and 1995............................ 96,592 103,597
Additional paid-in capital........................ 65,130,839 74,093,476
Accumulated deficit............................... (13,194,068) (33,942,710)
----------- ------------
Total stockholders' equity.......................... 52,033,363 40,254,363
----------- ------------
Total liabilities and stockholders' equity.......... $74,086,152 $216,018,125
=========== ============
</TABLE>
See accompanying notes.
F-7
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1993 1994 1995
----------- ------------ ------------
<S> <C> <C> <C>
Revenues.............................. $ 8,292,291 $ 14,272,396 $ 38,630,574
Expenses:
Facilities administration and main-
tenance and line costs............. 2,843,077 5,395,932 22,989,195
Selling, general, and administra-
tive............................... 3,892,842 6,412,287 14,992,458
Depreciation and amortization....... 3,020,471 5,131,940 10,195,871
----------- ------------ ------------
9,756,390 16,940,159 48,177,524
----------- ------------ ------------
Loss from operations.................. (1,464,099) (2,667,763) (9,546,950)
Other income (expense):
Interest expense.................... (843,782) (1,218,876) (13,766,639)
Interest and other income........... 233,629 819,260 4,060,040
----------- ------------ ------------
Loss before income tax benefit and ex-
traordinary item..................... (2,074,252) (3,067,379) (19,253,549)
Income tax benefit.................... -- -- 96,952
----------- ------------ ------------
Loss before extraordinary item........ (2,074,252) (3,067,379) (19,156,597)
Extraordinary loss on early extin-
guishment of debt.................... -- -- (1,592,045)
----------- ------------ ------------
Net loss.............................. $(2,074,252) $ (3,067,379) $(20,748,642)
=========== ============ ============
Earnings (loss) per share:
Loss before extraordinary item...... $ (0.29) $ (0.34) $ (1.91)
Extraordinary loss.................. -- -- (0.16)
----------- ------------ ------------
Net loss per share.................. $ (0.29) $ (0.34) $ (2.07)
=========== ============ ============
Weighted average number of shares out-
standing............................. 7,077,203 8,955,993 10,035,774
=========== ============ ============
</TABLE>
See accompanying notes.
F-8
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1993................... 6,872,163 $ 68,722 $29,240,377 $ (8,052,437) $21,256,662
Proceeds from public
offering, net of
issuance costs........ 2,000,000 20,000 26,661,859 -- 26,681,859
Exercise of stock
options for 22,076
shares of Common Stock
at prices ranging from
$6.60 to $9.13 per
share................. 22,076 220 145,910 -- 146,130
Exercise of stock
warrants for 1,246
shares of Common Stock
at $4.20 per share.... 1,246 12 5,221 -- 5,233
Forfeiture of 14,695
shares of Common Stock
at $.01 per share..... (14,695) (147) 147 -- --
Purchase and retirement
of 3,358 shares of
Common Stock.......... (3,358) (33) (28,173) -- (28,206)
Net loss............... -- -- -- (2,074,252) (2,074,252)
---------- -------- ----------- ------------ -----------
Balance at December 31,
1993................... 8,877,432 88,774 56,025,341 (10,126,689) 45,987,426
Issuance of shares of
Common Stock for
business combination,
net of issuance
costs................. 740,000 7,400 8,836,100 -- 8,843,500
Exercise of stock
options for 41,756
shares of Common Stock
at prices ranging from
$6.25 to $10.63 per
share................. 41,756 418 269,398 -- 269,816
Net loss............... -- -- -- (3,067,379) (3,067,379)
---------- -------- ----------- ------------ -----------
Balance at December 31,
1994................... 9,659,188 96,592 65,130,839 (13,194,068) 52,033,363
Issuance of shares of
Common Stock for
business combination,
net of issuance
costs................. 683,583 6,836 7,854,369 -- 7,861,205
Return and cancellation
of escrowed shares
issued for 1994
business combination.. (22,357) (224) (279,239) -- (279,463)
Exercise of stock
options and warrants
for 39,357 shares of
Common Stock at prices
ranging from $4.20 to
$12.20 per share...... 39,357 393 336,307 -- 336,700
Issuance of detachable
stock purchase
warrants, net of
issuance costs........ -- -- 1,051,200 -- 1,051,200
Net loss............... -- -- -- (20,748,642) (20,748,642)
---------- -------- ----------- ------------ -----------
Balance at December 31,
1995................... 10,359,771 $103,597 $74,093,476 $(33,942,710) $40,254,363
========== ======== =========== ============ ===========
</TABLE>
See accompanying notes.
F-9
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.............................. $(2,074,252) $(3,067,379) $(20,748,642)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization....... 3,020,471 5,131,940 10,607,666
Extraordinary loss.................. -- -- 1,592,045
Deferred tax benefit................ -- -- (96,952)
Provision for doubtful accounts..... 48,524 80,222 856,055
Changes in operating assets and lia-
bilities:
Accounts receivable................ (903,129) (1,273,985) (3,442,940)
Prepaid expenses and other current
assets............................ (64,991) (741,888) (204,824)
Other assets....................... -- -- 159,751
Accounts payable................... 91,564 (552,512) (591,955)
Other accrued expenses and taxes... 200,233 (360,073) 1,483,878
Advance billings................... 150,830 367,290 691,046
----------- ----------- ------------
Net cash provided by (used in) operat-
ing activities....................... 469,250 (416,385) (9,694,872)
INVESTING ACTIVITIES
Purchase of restricted investments.... -- -- (58,902,496)
Maturities of restricted investments.. -- -- 9,179,480
Purchase of business, net of cash ac-
quired............................... -- -- (1,952,268)
Purchases of short-term investments... -- -- (2,050,000)
Purchases of telecommunications equip-
ment................................. (10,485,577) (13,730,693) (29,962,419)
Sales of short-term investments....... 9,800,000 -- --
Other investing activities............ -- 201,701 --
----------- ----------- ------------
Net cash used in investing activi-
ties................................. (685,577) (13,528,992) (83,687,703)
FINANCING ACTIVITIES
Issuance of common stock, net of issu-
ance costs........................... 26,681,859 -- --
Exercise of stock warrants and op-
tions................................ 151,363 269,816 336,700
Purchase of treasury stock............ (28,206) -- --
Payments on long-term debt............ -- (3,143,782) (14,804,457)
Net proceeds from issuance of senior
notes and warrants................... -- -- 153,766,848
Payments on capital leases............ (410,055) (926,318) (5,127,784)
----------- ----------- ------------
Net cash provided by (used in) financ-
ing activities....................... 26,394,961 (3,800,284) 134,171,307
----------- ----------- ------------
Increase (decrease) in cash and cash
equivalents.......................... 26,178,634 (17,745,661) 40,788,732
Cash and cash equivalents at beginning
of year.............................. 1,775,214 27,953,848 10,208,187
----------- ----------- ------------
Cash and cash equivalents at end of
year................................. $27,953,848 $10,208,187 $ 50,996,919
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid......................... $ 1,178,884 $ 1,481,679 $ 12,318,014
=========== =========== ============
</TABLE>
See accompanying notes.
F-10
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Intermedia Communications of Florida, Inc. (ICI) provides integrated
telecommunications services to business and government customers primarily in
the Southeastern United States. The Company provides data and video
telecommunications services, frame relay, Internet access services, local
exchange services, long distance services and telecommunications equipment.
Effective December 2, 1994, ICI acquired 100% of the outstanding stock of
Phone One, Inc. Phone One, Inc. provides long distance telephone service to
business and residential customers. During 1995, the Company acquired all of
the outstanding stock of FiberNet USA, Inc. and FiberNet Telecommunication
Cincinnati, Inc. (collectively, FiberNet), which resulted in the expansion of
ICI's network. See Note 2.
A significant portion of the Company's revenue in 1993 and 1994 was from
several long distance carriers (IXCs), including MCI and AT&T. Revenues from
the IXCs include revenues from services used by the IXCs as well as services
used by the IXCs' end users. Revenues from MCI totaled 19% and 11% of total
revenues in 1993 and 1994, respectively. Revenues from AT&T represented 11%
and 6% of total revenues in 1993 and 1994, respectively. Revenues from MCI and
AT&T together totaled less than 10% for 1995.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Intermedia
Communications of Florida, Inc. and its wholly-owned subsidiaries, Phone One,
Inc. and FiberNet (collectively, the Company), from the respective dates of
acquisition. All material intercompany transactions and balances have been
eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments consist of certificates of deposit with maturities of
more than three months when purchased and are stated at cost.
RESTRICTED INVESTMENTS
Restricted investments are U.S. Treasury Notes which are restricted for the
repayment of interest on certain debt and are stated at amortized cost.
Management designated these investments as held-to-maturity securities in
accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
See Notes 5 and 9.
F-11
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TELECOMMUNICATIONS EQUIPMENT
Telecommunications equipment is stated at cost. Depreciation expense is
calculated using the straight-line method over the estimated useful lives of
the assets as follows:
<TABLE>
<S> <C>
Telecommunications equipment.................................. 3-7 years
Fiber optic cable............................................. 20 years
Furniture and fixtures........................................ 5-7 years
</TABLE>
Leasehold improvements are amortized using the straight-line method over the
shorter of the term of the lease or the estimated useful life of the
improvements.
INTANGIBLES
Intangible assets are stated at cost and include purchased customer lists,
deferred debt issuance costs, and the excess of cost over the fair value of
identifiable net assets acquired (goodwill). Customer lists represent records
and files obtained from acquired businesses that contain information on
customers and the related information essential to contract renewals. Customer
lists are being amortized using the straight-line method over their estimated
useful lives of eight years. Goodwill is amortized using the straight-line
method over periods of eight to forty years.
Deferred debt issuance costs relate to the issuance of debt and are
amortized using the effective interest method over the term of the related
agreements. The related amortization is included as a component of interest
expense in the accompanying consolidated statements of operations.
The carrying value of goodwill and customer list will be reviewed if
circumstances suggest that it may be impaired. If this review indicates that
the intangible assets will not be recoverable, as determined based on the
undiscounted cash flows of the entity acquired over the remaining amortization
period, the Company's carrying value of the goodwill will be reduced by the
estimated shortfall of cash flows.
REVENUE RECOGNITION
The Company recognizes revenue in the period the service is provided or the
goods are shipped for equipment product sales. Unbilled revenues represent
revenues earned for telecommunications services provided which will be billed
in the succeeding month and totaled $532,000 and $636,257 as of December 31,
1994 and 1995, respectively. Unbilled revenues are included as a component of
accounts receivable in the accompanying consolidated balance sheets.
INCOME TAXES
The Company has applied the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," which requires an asset and
liability approach in accounting for income taxes for all years presented.
Deferred income taxes are provided for in the consolidated financial
statements and principally relate to net operating losses and basis
differences for customer lists and telecommunications equipment.
F-12
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk, as defined by Statement of Financial Accounting Standards No.
105, "Disclosure of Information About Financial Instruments with Off-Balance-
Sheet Risk and Financial Instruments with Concentrations of Credit Risk," are
primarily cash and cash equivalents and accounts receivable.
The Company places its cash and temporary cash investments with high-quality
institutions. As of December 31, 1995, cash equivalents totaling approximately
$51.3 million were held by a single financial institution. Such amounts were
collateralized by government-backed securities.
Accounts receivable are due from residential and commercial
telecommunications customers primarily located in Florida. Credit is extended
based on evaluation of the customer's financial condition and generally
collateral is not required. Anticipated credit losses are provided for in the
consolidated financial statements and have been within management's
expectations.
STATEMENT OF CASH FLOWS
The operating, investing and financing activities included in the 1994 and
1995 consolidated statements of cash flows are presented net of the assets and
liabilities acquired in connection with business combinations. See Note 2.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (FAS
121), which requires impairment losses to be recognized for long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows are not sufficient to recover the assets' carrying
amount. The impairment loss is measured by comparing the fair value of the
asset to its carrying amount. During 1995, the Company adopted the provisions
of FAS 121 with no impact to the consolidated financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting and Disclosure of Stock-Based Compensation," which
encourages but does not require companies to recognize stock awards based on
their fair value at the date of grant. The Company currently follows, and
expects to continue to follow, the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and
related interpretations in accounting for its employee stock options. Under
APB 25, no compensation expense is recognized when the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant.
RECLASSIFICATIONS
Certain amounts in the 1993 and 1994 financial statements have been
reclassified to conform to 1995 presentations.
F-13
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS
Effective December 2, 1994, the Company acquired all of the common stock of
Phone One, Inc. in exchange for 740,000 shares of common stock of the Company
valued at approximately $8.8 million. The acquisition has been accounted for
by the purchase method of accounting, with the purchase price allocated based
on fair values of assets acquired and liabilities assumed. Under the terms of
the purchase agreement, 60,000 of the 740,000 shares were held in escrow
pending the resolution of certain indemnified items. Of the 60,000 shares,
22,357 shares were canceled during 1995 to settle one indemnified item.
Settlement of the remaining escrowed shares is contingent upon the resolution
of a claim for indemnification (see Note 12).
The operating results of Phone One, Inc. are included in the Company's
consolidated financial statements from the date of acquisition.
On February 15, 1995, ICI acquired FiberNet in exchange for 683,583 shares
of the Company's common stock and a note payable of $1.2 million which was
paid on July 17, 1995, upon final closing.
The Company has accounted for the FiberNet transaction as if it occurred on
March 1, 1995. The Company determined that FiberNet's estimated operating
results for the period February 16, 1995 to February 28, 1995 were not
material to its operations. The operating results of FiberNet are included in
the Company's consolidated financial statements since March 1, 1995.
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisitions of Phone One, Inc. and FiberNet had
occurred at the beginning of the periods presented, and do not purport to be
indicative of the results that actually would have occurred if the acquisition
had been acquired as of those dates or of results which may occur in the
future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1994 1995
----------- ------------
<S> <C> <C>
Revenue....................................... $28,426,815 $ 38,669,364
Loss before extraordinary item................ (7,978,825) (19,609,794)
Net loss...................................... (7,978,825) (21,201,839)
Net loss per share............................ $ (.77) $ (2.09)
</TABLE>
3. TELECOMMUNICATIONS EQUIPMENT
Telecommunications equipment consisted of:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Telecommunications equipment.................. $ 28,429,370 $ 50,506,651
Fiber optic cable............................. 18,362,936 27,891,274
Furniture and fixtures........................ 1,899,597 5,223,389
Leasehold improvements........................ 588,823 985,876
Construction in progress...................... 8,122,837 12,830,122
------------ ------------
57,403,563 97,437,312
Less accumulated depreciation................. (12,737,626) (21,267,723)
------------ ------------
$ 44,665,937 $ 76,169,589
============ ============
</TABLE>
F-14
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. TELECOMMUNICATIONS EQUIPMENT (CONTINUED)
Depreciation expense totaled $2,931,405, $4,911,001 and $7,940,173 in 1993,
1994 and 1995, respectively.
Telecommunications equipment and construction in progress included
$7,890,234 and $7,264,534 of equipment recorded under capitalized lease
arrangements at December 31, 1994 and 1995, respectively. Accumulated
amortization of assets recorded under capital leases amounts to $1,340,006 and
$1,007,802 at December 31, 1994 and 1995, respectively. Telecommunications
equipment purchases financed through capital lease obligations totaled
$281,836, $4,558,761 and $4,910,724 in 1993, 1994 and 1995, respectively. The
amortization of assets recorded under capital leases is included in
depreciation expense.
In connection with network expansion, the Company had commitments for
capital expansion of approximately $8 million at December 31, 1995.
4. INTANGIBLES
Intangibles consisted of:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Customer lists.................................. $10,096,975 $10,096,975
Goodwill........................................ 2,277,225 13,210,045
Debt issuance costs............................. 599,307 6,233,152
----------- -----------
12,973,507 29,540,172
Less accumulated amortization................... (558,889) (2,553,257)
----------- -----------
$12,414,618 $26,986,915
=========== ===========
</TABLE>
Amortization expense amounted to $89,066 in 1993, $220,939 in 1994 and
$2,011,508 in 1995.
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1995
----------- ------------
<S> <C> <C>
Senior Notes................................... $ -- $158,983,840
Senior Secured Notes........................... 6,000,000 --
Senior Subordinated Debentures................. 3,646,927 --
Other notes payable............................ 424,632 323,143
----------- ------------
10,071,559 159,306,983
Less current portion........................... (101,326) (107,757)
----------- ------------
$ 9,970,233 $159,199,226
=========== ============
</TABLE>
During June 1995, ICI issued $160 million principal amount of 13.5% Senior
Notes due 2005 which were subsequently exchanged for 13 1/2% Series B Senior
Notes due 2005 (the Senior Notes) and warrants to purchase 350,400 shares of
the Company's common stock. The Company has allocated $1,051,200 of the
proceeds to the warrants, representing the estimated fair value at the date of
issuance. The Senior Notes are limited in aggregate principal amount to $160
million and mature on June 1, 2005. The Senior Notes may be redeemed at the
option of the Company, in whole or in part, on or after June 1, 2000, at a
premium of 106.75% of par and declining to
F-15
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
par in 2003, plus accrued and unpaid interest and liquidated damages, if any,
through the redemption rate. The Senior Notes bear interest at the rate of
13.5% per annum payable semiannually in arrears on June 1 and December 1. The
Senior Notes agreement contains certain covenants including limits on the
issuance of additional indebtedness, with which the Company is in compliance
at December 31, 1995.
The Company used a portion of the proceeds to retire its other long-term
indebtedness and to repay certain capital lease obligations. The remaining
proceeds will be used for capital expenditures in connection with the
Company's expansion, for working capital and to purchase securities for an
interest repayment fund. See Note 9. In connection with the repayment of
certain indebtedness, the Company incurred a prepayment penalty of
approximately $1,156,000. This amount, plus the write-off of the related
unamortized financing costs have been reported as an extraordinary loss in the
accompanying consolidated statement of operations.
Long-term debt maturities as of December 31, 1995 for the next five years
are as follows:
<TABLE>
<S> <C>
1996............................................................. $107,757
1997............................................................. 103,816
1998............................................................. 56,555
1999............................................................. 55,015
2000............................................................. --
</TABLE>
For the years ended December 31, 1993, 1994 and 1995, the Company
capitalized interest cost of $213,668, $257,058 and $677,512, respectively.
The Company is a party to various capital lease agreements for strands of
fiber optic cable, underground conduit and utility poles for the Company's
telecommunication uses which extend through the year 2015.
Future minimum lease payments for assets under the capital leases at
December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996......................................................... $ 1,751,890
1997......................................................... 1,223,010
1998......................................................... 1,061,638
1999......................................................... 1,022,896
2000......................................................... 991,696
Thereafter................................................... 6,413,704
-----------
12,464,834
Less amount representing interest............................ (6,226,993)
-----------
Present value of future minimum lease payments............... 6,237,841
Less current portion......................................... (1,057,927)
-----------
$ 5,179,914
===========
</TABLE>
F-16
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
CARRYING
AMOUNT FAIR VALUE
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents................... $ 50,996,919 $ 50,996,919
Short-term investments...................... 2,100,000 2,100,000
Restricted investments, current and
noncurrent................................. 49,723,016 49,964,050
Accounts receivable......................... 7,954,194 7,954,194
LIABILITIES:
Long-term debt:
Senior Notes............................... $158,983,840 $179,200,000
Other notes payable........................ 323,143 323,143
</TABLE>
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents, short-term investments, accounts receivable and
other notes payable: The carrying amount of these items are a reasonable
estimate of their fair value.
Restricted investments: As of December 31, 1995, these investments are
classified as held-to-maturity, in accordance with SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities." The fair value of these
investments is estimated from quoted market prices.
Senior Notes: The estimated fair value is based on negotiated trades for the
securities including the related detachable warrants at year end as provided
by the Company's investment banker.
7. OPTIONS AND WARRANTS
At December 31, 1995 warrants to purchase the following shares of the
Company's common stock were outstanding:
<TABLE>
<CAPTION>
SHARES PRICE PER SHARE EXPIRATION DATE
------ --------------- ---------------
<S> <C> <C>
6,472 $ 4.20 March 4, 1997
317,460 4.20 June 2, 1997
350,400 10.86 June 1, 2000
</TABLE>
F-17
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. OPTIONS AND WARRANTS (CONTINUED)
The Company has a Stock Option Plan (the Plan) under which options to
acquire an aggregate of 1,346,000 shares of Common Stock may be granted to
employees, officers, directors and consultants of the Company. The Plan
authorizes the Board of Directors (the Board) to issue incentive stock options
(ISOs), as defined in Section 422A(b) of the Internal Revenue Code, and stock
options that do not conform to the requirements of that Code section (Non-
ISOs). The Board has discretionary authority to determine the types of stock
options to be granted, the persons among those eligible to whom options will
be granted, the number of shares to be subject to such options, and the terms
of the stock option agreements. The exercise price of each ISO shall not be
less than the fair market value of the Common Stock at the time of the grant.
The exercise price of each Non-ISO will be determined by the Board at the time
of the grant. Options may be exercised in the manner and at such times as
fixed by the Board, but may not be exercised after the tenth anniversary of
the grant of such options.
The following table summarizes the transactions for the three years ended
December 31, 1995 relating to the Plan:
<TABLE>
<CAPTION>
NUMBER OF PER SHARE
SHARES OPTION PRICE
--------- -------------
<S> <C> <C>
Outstanding, January 1, 1993.......................... 327,928 $ 6.06-$ 8.00
Granted.............................................. 408,251 $ 6.13-$12.13
Exercised............................................ (22,076) $ 6.60-$ 9.13
Canceled............................................. (86,364) $ 6.50-$ 9.13
---------
Outstanding, December 31, 1993........................ 627,739 $ 6.06-$12.13
Granted.............................................. 233,248 $10.25-$12.25
Exercised............................................ (41,756) $ 6.25-$10.63
Canceled............................................. (70,464) $ 6.06-$12.13
---------
Outstanding, December 31, 1994........................ 748,767 $ 6.06-$12.25
Granted.............................................. 549,057 $ 9.50-$15.56
Exercised............................................ (37,831) $ 6.38-$12.25
Canceled............................................. (121,019) $ 6.38-$12.25
---------
Outstanding, December 31, 1995........................ 1,138,974 $ 6.06-$15.56
=========
Exercisable, December 31, 1995........................ 321,843 $ 6.06-$15.56
</TABLE>
The Board of Directors has reserved 675,868 shares of common stock in
connection with Stock Purchase Warrants, and 1,244,337 shares of common stock
that may be issued to employees, officers, directors, and consultants of the
Company pursuant to stock options as may be determined by the Board of
Directors.
F-18
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES
At December 31, 1995, the Company had temporary differences between amounts
of assets and liabilities for financial reporting purposes and such amounts
measured by tax laws. The Company also has net operating loss (NOL)
carryforwards available to offset future taxable income. Significant
components of the Company's deferred tax assets and liabilities as of December
31 are as follows:
<TABLE>
<CAPTION>
DEFERRED TAX
ASSET (LIABILITY)
------------------------
1994 1995
----------- -----------
<S> <C> <C>
TEMPORARY DIFFERENCES/CARRYFORWARDS
Tax over book depreciation........................ $(2,777,874) $(3,410,117)
Intangibles....................................... (3,786,366) (3,324,225)
----------- -----------
Total deferred tax liabilities.................. (6,564,240) (6,734,342)
Net operating loss carryforwards.................. 6,450,977 14,198,845
Other............................................. 16,311 300,746
----------- -----------
Total deferred tax assets....................... 6,467,288 14,499,591
Less valuation allowance.......................... -- 7,765,249
----------- -----------
Net deferred tax assets......................... 6,467,288 6,734,342
----------- -----------
Net deferred tax liabilities...................... $ (96,952) $ --
=========== ===========
</TABLE>
The Company's NOL carryforwards expire as follows:
<TABLE>
<CAPTION>
YEAR INCURRED AMOUNT EXPIRES
------------- ----------- -------
<S> <C> <C>
1988.................................................. $ 1,091,000 2003
1989.................................................. 1,835,000 2004
1990.................................................. 2,908,000 2005
1991.................................................. 1,713,000 2006
1992.................................................. 1,292,000 2007
1993.................................................. 4,548,000 2008
1994.................................................. 4,757,000 2009
1995.................................................. 19,719,000 2010
</TABLE>
Approximately $1,000,000 of the Company's net operating loss carryforward is
subject to the "ownership change" rules of Section 382 of the Internal Revenue
Code of 1986 and can only be utilized at the rate of approximately $500,000
per year.
9. RESTRICTED INVESTMENTS
The terms of the Company's Senior Note agreement (see Note 5) required the
Company to use a portion of the debt proceeds to purchase pledged securities
(Restricted Investments) sufficient to provide for the payment of interest on
the Senior Notes through June 1, 1998. The Company has purchased government
securities whose maturity coincides with the interest repayment dates.
F-19
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. RESTRICTED INVESTMENTS (CONTINUED)
The Company's restricted investments at December 31, 1995 are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury Notes............ $49,723,016 $241,034 $-- $49,964,050
=========== ======== ==== ===========
</TABLE>
The amortized cost and estimated fair value of the Company's restricted
investments at December 31, 1995 by contractual maturity are summarized as
follows:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
MATURITIES COST FAIR VALUE
---------- ----------- -----------
<S> <C> <C>
Due within one year................................. $18,854,015 $18,980,942
Due after one year through five years............... 30,869,001 30,983,108
----------- -----------
$49,723,016 $49,964,050
=========== ===========
</TABLE>
10. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) profit-sharing plan. Employees 21 years
or older with one year of service are eligible to participate in the plan.
Participants may elect to contribute, on a tax-deferred basis, up to 15% of
their compensation, not to exceed $9,240 in 1995. The Company will match one-
half of a participant's contribution, up to a maximum of 3% of the
participant's compensation. The Company's matching contribution fully vests
after five years of service. The Company's contributions to the plan were
approximately $23,000, $58,000, and $85,000 in 1993, 1994, and 1995,
respectively.
11. OPERATING LEASES
The Company leases rights-of-way and cable conduit space, fiber optic cable,
terminal facility space, and office space. The leases generally contain
renewal options which range from one year to fifteen years, with certain
rights-of-way and cable conduit space being renewable indefinitely after the
minimum lease term subject to cancellation notice by either party to the
lease. Lease payments in some cases may be adjusted for related revenues,
increases in property taxes, operating costs of the lessor, and increases in
the Consumer Price Index. Lease expense was $1,421,000, $908,000, and
$1,466,000 for 1993, 1994, and 1995, respectively.
Future minimum lease payments under noncancelable operating leases with
original terms of more than one year as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
RIGHTS-OF-WAY FIBER TERMINAL
AND CABLE OPTIC FACILITY OFFICE
CONDUIT SPACE CABLE SPACE SPACE TOTAL
------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1996............. $ 273,280 $ 375,340 $ 399,414 $1,628,659 $ 2,676,693
1997............. 273,280 291,168 345,056 1,515,859 2,425,363
1998............. 273,280 291,168 312,891 1,462,680 2,340,019
1999............. 273,280 120,791 257,398 1,380,860 2,032,329
2000............. 273,280 86,716 211,532 1,265,113 1,836,641
Thereafter....... 1,047,572 173,432 700,413 723,851 2,645,268
---------- ---------- ---------- ---------- -----------
$2,413,972 $1,338,615 $2,226,704 $7,977,022 $13,956,313
========== ========== ========== ========== ===========
</TABLE>
F-20
<PAGE>
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. CONTINGENCIES
On May 3, 1995, the Company asserted a claim for indemnification against the
former shareholder of Phone One Inc. (the "Former Shareholder") for
approximately $1 million on account of various breaches of representations and
warranties made by the Former Shareholder to the Company in the agreement for
the acquisition of Phone One Inc. (the "Phone One Acquisition Agreement"). The
Former Shareholder has objected to the indemnification claim, which is subject
to arbitration under the Phone One Acquisition Agreement. On July 27, 1995,
the Company commenced an arbitration to recover $1,055,859 from the Former
Shareholder. On October 9, 1995, the Former Shareholder filed an answer and
counterclaims contesting the liability and claiming damages for alleged breach
of contract, misrepresentation, interference with business relations, and
violations of state and federal statutes and regulations. The Former
Shareholder claims damages in excess of $2 million and attorneys' fees on the
principal assertion that the Company fraudulently induced the Former
Shareholder to consummate the Phone One Acquisition Agreement by failing to
disclose its alleged intention not to honor its obligations under a related
long distance services agreement. While the indemnification claims and the
counterclaims are in their earliest stages, the Company, after consultation
with counsel, believes that it has meritorious defenses to the counterclaims,
which it will vigorously contest, and that its indemnification claims are
meritorious. The Company is currently engaged in settlement negotiations with
the Former Shareholder. The Company believes that in no event will the action
have a material adverse impact on its financial condition, results of
operations or cash flows.
The Company is not a party to any other pending legal proceedings except for
various claims and lawsuits arising in the normal course of business. The
Company does not believe that these normal course of business claims or
lawsuits will have a material effect on the Company's financial condition,
results of operations or cash flows.
13. SUBSEQUENT EVENT
On February 20, 1996, the Company entered into an agreement to purchase the
telecommunications assets of EMI Communications Corp. (EMI) in exchange for
937,500 shares of the Company's common stock. Consummation of the acquisition
is subject to receipt of federal and state regulatory and municipal approvals
and certain other conditions. Management of the Company expects all of the
conditions to consummation will be satisfied by September 30, 1996, but there
can be no assurances.
F-21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Telecommunication Division of
EMI Communications Corporation
We have audited the accompanying balance sheets of Telecommunication
Division of EMI Communications Corporation as of July 31, 1994 and 1995, and
the related statements of operations and divisional equity and cash flows for
each of the two years in the period ended July 31, 1995. These financial
statements are the responsibility of the Division's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The Telecommunication Division is a part of EMI Communications Corporation
and has no separate legal status or existence. Transactions with EMI
Communications Corporation and its parent, Newhouse Broadcasting Corporation,
are described in the notes to financial statements.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Telecommunication Division
of EMI Communications Corporation at July 31, 1994 and 1995, and the results
of its operations and its cash flows for each of the years then ended, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Tampa, Florida
March 8, 1996
F-22
<PAGE>
TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31
----------------------- JANUARY 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable (less allowance for
doubtful accounts of $12,500 in 1994,
1995, and 1996, respectively)........... $ 3,737,927 $ 7,681,387 $ 8,238,646
Notes receivable and other assets........ 108,156 123,369 92,460
Prepaid expenses......................... 241,709 311,396 371,842
----------- ----------- -----------
Total current assets................... 4,087,792 8,116,152 8,702,948
Property and equipment, net................ 13,522,348 11,282,436 10,040,740
Deposits, deferred charges and other as-
sets...................................... 441,256 331,197 429,054
----------- ----------- -----------
Total assets......................... $18,051,396 $19,729,785 $19,172,742
=========== =========== ===========
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable......................... $ 4,028,815 $ 4,875,071 $ 4,910,025
Federal transfer surcharge (Note 7)...... 3,497,500 4,556,700 4,556,700
Accrued compensation, employee benefits,
pension, and related taxes.............. 367,892 355,501 175,795
Accrued sales and franchise tax.......... 91,092 609,845 1,058,264
Deferred revenue......................... 101,627 140,492 50,187
Other accrued liabilities................ 50,428 56,892 46,469
----------- ----------- -----------
Total current liabilities.............. 8,137,354 10,594,501 10,797,440
Accrued pension and postretirement bene-
fits...................................... 227,055 449,961 574,961
----------- ----------- -----------
8,364,409 11,044,462 11,372,401
Divisional equity.......................... 9,686,987 8,685,323 7,800,341
----------- ----------- -----------
Total liabilities and divisional eq-
uity................................ $18,051,396 $19,729,785 $19,172,742
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-23
<PAGE>
TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS AND DIVISIONAL EQUITY
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
YEAR ENDED JULY 31 JANUARY 31
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Communication service.... $32,920,416 $35,643,585 $17,869,789 $21,026,461
Microwave service........ 4,186,791 4,127,504 1,907,994 2,113,098
Other.................... 205,756 250,775 110,558 118,264
----------- ----------- ----------- -----------
37,312,963 40,021,864 19,888,341 23,257,823
EXPENSES
Facilities administration
and maintenance costs... 35,602,603 36,082,066 18,218,031 22,072,370
Selling, general, and ad-
ministrative............ 3,021,910 2,873,478 1,179,117 1,371,503
Depreciation and amorti-
zation.................. 5,140,841 5,122,796 2,391,077 2,004,960
----------- ----------- ----------- -----------
43,765,354 44,078,340 21,788,225 25,448,833
----------- ----------- ----------- -----------
Loss from operations....... (6,452,391) (4,056,476) (1,899,884) (2,191,010)
Interest expense, net...... (937,807) (790,452) (387,354) (129,222)
----------- ----------- ----------- -----------
Loss before income taxes... (7,390,198) (4,846,928) (2,287,238) (2,320,232)
Income tax benefit......... (2,711,889) (1,763,875) (832,928) (845,129)
----------- ----------- ----------- -----------
Net loss................... (4,678,309) (3,083,053) (1,454,310) (1,475,103)
Divisional equity, begin-
ning of year.............. 9,425,642 9,686,987 9,686,987 8,685,323
Distribution from parent... 4,939,654 2,081,389 1,540,701 590,121
----------- ----------- ----------- -----------
Divisional equity, end of
year...................... $ 9,686,987 $ 8,685,323 $ 9,773,378 $ 7,800,341
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-24
<PAGE>
TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
YEAR ENDED JULY 31 JANUARY 31
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................. $(4,678,309) $(3,083,053) $(1,454,310) $(1,475,103)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation and amorti-
zation................. 5,140,841 5,122,796 2,391,077 2,004,960
Gain on sale of proper-
ty, plant and equip-
ment................... (12,221) (21,831) -- --
Changes in operating as-
sets and liabilities:
Accounts receivable... 194,768 (3,943,460) (749,721) (557,259)
Notes receivable and
other assets......... (66,629) (15,213) 1,526 30,909
Prepaid expenses...... (70,709) (69,687) (341,629) (60,446)
Deposits, deferred
charges and other as-
sets................. (114,823) 7,228 (38,087) (148,857)
Accounts payable and
accrued liabilities.. (917,000) 1,359,082 (1,356,396) 293,244
Federal transfer sur-
charge............... 1,147,700 1,059,200 566,200 --
Deferred revenue...... (47,067) 38,865 (21,430) (90,305)
Accrued pension and
post-retirement
benefits............. 189,597 222,906 105,716 125,000
----------- ----------- ----------- -----------
Net cash provided by (used
in) operating activi-
ties..................... 766,148 676,833 (897,054) 122,143
INVESTING ACTIVITIES
Purchase of property and
equipment................ (5,727,699) (2,795,123) (643,647) (712,264)
Proceeds from sale of
property and equipment... 21,897 36,901 -- --
----------- ----------- ----------- -----------
Net cash used in investing
activities............... (5,705,802) (2,758,222) (643,647) (712,264)
FINANCING ACTIVITIES
Distribution from Parent.. 4,939,654 2,081,389 1,540,701 590,121
----------- ----------- ----------- -----------
Net cash provided by fi-
nancing activities....... 4,939,654 2,081,389 1,540,701 590,121
----------- ----------- ----------- -----------
Net increase (decrease) in
cash and cash equiva-
lents.................... -- -- -- --
Cash and cash equivalents,
beginning of year........ -- -- -- --
----------- ----------- ----------- -----------
Cash and cash equivalents,
end of year.............. $ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-25
<PAGE>
TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO JANUARY 31, 1996 AND FOR THE SIX-MONTH
PERIODS ENDED JANUARY 31, 1996 AND 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Telecommunication Division of EMI Communications Corporation (the
"Division") is a New York State based telecommunications company which
operates a digital network, offering full-service telecommunications including
systems engineering, interchange transmission facilities, end user
communication services and network management. The Division generally services
governmental entities, commercial end-users, as well as other corporations
primarily in the Northeast United States and Canada.
For the years ended July 31, 1994 and 1995 revenue of 70% and 67%,
respectively, was derived from the Division's primary customer, State of New
York's Office of General Services. In addition, for the years ended July 31,
1994 and 1995 74% and 75%, respectively, of accounts receivable were owed to
the Division by this customer. The Division does not normally obtain
collateral on accounts receivable.
FINANCIAL STATEMENT PRESENTATION
The financial statements include only those accounts related to the
Division's operations after elimination of significant intercompany
transactions. All other accounts of EMI Communications Corporation and its
parent, Newhouse Broadcasting Corporation (collectively, the "Parent"), have
not been included in the financial statements since they are not directly
related to the Division's operations.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is calculated over
the estimated useful lives of the assets using the straight-line and
accelerated methods for financial statement reporting and income tax purposes.
INCOME TAXES
The Division accounts for income taxes under the liability method as
prescribed by Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that may be in effect when the differences are expected to
reverse. Refer to Note 3.
POSTRETIREMENT BENEFITS
The Division accounts for postretirement benefits other than pensions in
accordance with Financial Accounting Standards Board Statement No. 106 by
accruing the estimated cost of retiree benefits other than pensions during the
employees' active service period. The Division is recognizing the transition
obligation over a 22-year period. Refer to Note 5.
DEFERRED REVENUE
Proceeds received from telecommunication customers in advance of services
are deferred at the time of receipt and are included in revenues on a pro rata
basis as the services are provided.
F-26
<PAGE>
TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
LONG LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-
lived assets that are expected to be disposed of. The Division will adopt
Statement No. 121 for the fiscal year ending July 31, 1997 and, due to the
significant amount of technical equipment maintained by the Division and the
extensive number of estimates to be made to assess the financial impact of
adoption of Statement No. 121, financial statement impact has not yet been
determined.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INTERCOMPANY ACCOUNTS
All balance sheet related intercompany balances, which resulted from various
transactions between the Division and its Parent, have been presented on a net
basis and included in divisional equity. The balance is primarily the result
of the Division's capitalization and participation in the Parent's central
cash management program.
INTERCOMPANY EXPENSE ALLOCATION
The Parent provides various administrative services to the Division
including legal assistance, cash management and management advisory services.
It is the Parent's policy to charge these expenses and all other operating
expense, on both a direct and indirect cost basis. These expenses (which are
included in operating expenses) were $197,550 and $197,550 for the years ended
July 31, 1994 and 1995, respectively. Interest charges have been allocated
based on the assets employed. For the years ended July 31, 1994 and 1995
interest paid was $568,757 and $668,743, respectively. Management believes
these allocation methods are reasonable.
INTERIM FINANCIAL STATEMENTS
The unaudited balance sheet at January 31, 1996 and the unaudited statements
of operations and divisional equity and cash flows for the six-month periods
ended January 31, 1995 and 1996 have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
F-27
<PAGE>
TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment and the related lives for depreciation purposes
consisted of the following:
<TABLE>
<CAPTION>
JULY 31
------------------------ DEPRECIABLE
1994 1995 LIVES
----------- ----------- -----------
<S> <C> <C> <C>
Land................................. $ 271,259 $ 271,259
Buildings and improvements........... 1,331,246 1,340,246 10-31 years
Technical equipment.................. 43,905,095 46,352,865 5-7 years
Other equipment, automobiles, furni-
ture and fixtures................... 3,970,720 3,953,279 5-7 years
----------- -----------
49,478,320 51,917,649
Less accumulated depreciation........ (37,050,275) (41,703,424)
----------- -----------
12,428,045 10,214,225
Leasehold improvements, net of
accumulated amortization of $810,242
and $860,206 at July 31, 1994 and
1995, respectively.................. 1,094,303 1,068,211 5-31 years
----------- -----------
$13,522,348 $11,282,436
=========== ===========
</TABLE>
3. INCOME TAXES
The Division's taxable income is included in the consolidated federal income
tax return filed by the Parent. For financial reporting purposes the
Division's income tax expense or benefit is computed on a separate company
basis, with the resulting current income taxes payable or receivable and
related deferred income taxes settled through the intercompany accounts.
Accordingly, all balance sheet related income tax balances have been presented
on a net basis and included in divisional equity.
The income tax benefit differs from the amount computed by applying the
federal statutory rate to loss before income taxes. The difference is
reconciled as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Loss before income taxes......................... $(7,390,198) $(4,846,928)
Federal statutory rate........................... 35% 35%
----------- -----------
(2,586,569) (1,696,425)
State and local income taxes, net of federal tax
effect.......................................... (132,872) (86,317)
Other............................................ 7,552 18,867
----------- -----------
Benefit based on loss............................ $(2,711,889) $(1,763,875)
=========== ===========
</TABLE>
Deferred income taxes arise principally from differences between financial
reporting and income tax reporting of the federal transfer surcharge, accrued
postretirement and pension benefits, asset valuation allowances and accrued
expenses.
4. PENSION PLAN
The Division participates in a Parent-sponsored noncontributory pension plan
which covers substantially all employees. The plan provides participating
employees with retirement benefits in accordance with benefit provision
formulas which are based on years of service and career pay. The Division's
funding policy is to contribute amounts to the plan sufficient to meet the
minimum funding requirements set forth in the Employee
F-28
<PAGE>
TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PENSION PLAN--(CONTINUED)
Retirement Income Security Act of 1974, plus additional amounts as the
Division may determine to be appropriate from time to time.
A summary of the components of net periodic pension costs is presented
below:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
-------------------
1994 1995
-------- ---------
<S> <C> <C>
Service cost-benefits earned during the period........ $119,689 $ 110,981
Interest cost on projected benefit obligation......... 117,086 127,169
Actual return on plan assets.......................... (20,672) (198,111)
Net amortization and deferral......................... (62,598) 90,725
-------- ---------
Net periodic pension cost............................. $153,505 $ 130,764
======== =========
</TABLE>
Actuarial assumptions used to determine pension costs include a discount
rate of 8.5%, expected long-term rate of return on assets of 9.5%, and
expected rate of increase in future compensation of 5% for all periods shown.
A summary of the Plan's funded status and amounts recognized in the
Division's balance sheets is as follows:
<TABLE>
<CAPTION>
JULY 31
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligations:
Vested...................................... $(1,186,458) $(1,330,453)
Nonvested................................... (43,423) (49,642)
----------- -----------
(1,229,881) (1,380,095)
Projected compensation increases.............. (309,397) (327,406)
----------- -----------
Projected benefit obligations................. (1,539,278) (1,707,501)
Plan assets at market value................... 1,156,268 1,400,566
----------- -----------
Projected benefit obligations in excess of
plan assets.................................. (383,010) (306,935)
Unrecognized net transition obligation........ 57,348 50,975
Unrecognized net loss......................... 190,795 104,322
----------- -----------
Pension liability recognized in the balance
sheets....................................... $ (134,867) $ (151,638)
=========== ===========
</TABLE>
The components of the pension liability recognized in the balance sheets are
as follows:
<TABLE>
<CAPTION>
JULY 31
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Current.............................................. $ (58,599) $ (52,745)
Long-term............................................ (76,268) (98,893)
--------- ---------
$(134,867) $(151,638)
========= =========
</TABLE>
The Plan's assets at July 31, 1994 and 1995 were primarily invested in fixed
income securities, equities and short-term securities.
F-29
<PAGE>
TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PENSION PLAN--(CONTINUED)
In addition to the defined benefit pension plan as described above, the
Division also participates in a defined contribution 401(k) plan covering
substantially all employees. Provisions of the plan allow employees to
contribute a portion of their salary or wages as prescribed under Section
401(k) of the Internal Revenue Code. The Division provides an employer
contribution based on a percentage of the employee's contribution. The
employer's contribution was $37,016 and $48,999 for the years ended July 31,
1994 and 1995, respectively.
5. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Division participates in a Parent-sponsored postretirement health care
and life insurance plan to retirees and eligible dependents. These benefits
are funded as incurred from the general assets of the Division. Prior to July
31, 1993, the cost of retiree health care and life insurance benefits was
charged to expense as premiums were paid (pay-as-you-go-basis).
Effective August 1, 1993, the Division adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." This Statement requires that the cost of
postretirement benefits be accrued during an employee's active working career
instead of recognizing this cost on the cash basis. In accordance with
Statement No. 106, the transition obligation, representing the unrecognized
accumulated past-service benefit obligation for all plan participants, may be
recognized as a cumulative effect of an accounting change or may be amortized
on a straight-line basis over the average remaining service period of active
plan participants. The Division has elected to amortize the $783,450 of
transitional obligation on a straight-line basis over 22 years. For the years
ended July 31, 1994 and 1995, the adoption of the statement resulted in an
increase in postretirement benefit cost of $150,787 and $200,281,
respectively.
A summary of the components of net periodic other postretirement benefit
costs relating to the Plan is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
-------------------
1994 1995
--------- ---------
<S> <C> <C>
Service cost--benefits earned during the year......... $ 62,305 $ 82,538
Interest cost on projected benefit obligation......... 62,299 88,144
Net amortization and deferral......................... 35,611 37,430
--------- ---------
Net postretirement benefit cost....................... $ 160,215 $ 208,112
========= =========
</TABLE>
Actuarial assumptions used to determine the liability for the postretirement
benefits other than pensions included the assumed weighted average discount
rate used in determining the actuarial present value of the accumulated
postretirement benefit obligation of 8.5% and the assumed weighted average
rate of increase in future compensation levels related to pay-related life
insurance benefits of 5.0% for all periods shown.
The future health care cost trend rate for the year ended July 31, 1995 was
approximately 14% and is assumed to decrease to 7% by the year 2006 and remain
at that approximate level thereafter. The health care trend rate assumption
has a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rate by one percentage point would increase the
accumulated postretirement benefit obligations by $299,627 and increase the
aggregate of the service and interest cost components of the net
postretirement benefit costs by $57,070 for the year ended July 31, 1995.
The Division has not prefunded any of its postretirement health and life
insurance liabilities, and consequently, there are no expected returns on
assets anticipated in the calculation of expense.
F-30
<PAGE>
TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS--(CONTINUED)
A schedule reconciling the accumulated benefit obligation with the
Division's recorded liability follows:
<TABLE>
<CAPTION>
JULY 31
----------------------
1994 1995
--------- -----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees....................................... $(112,698) $ (124,637)
Fully eligible active participants............. (173,328) (217,276)
Other active participants...................... (515,843) (861,851)
--------- -----------
Accumulated postretirement benefit obligation.... (801,869) (1,203,764)
Unrecognized net loss (gain)..................... (96,757) 140,469
Unrecognized transition obligation............... 747,839 712,227
--------- -----------
Accrued noncurrent postretirement benefit
recognized in the balance sheets................ $(150,787) $ (351,068)
========= ===========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
At July 31, 1994 and 1995, the Division has issued letters of credit
amounting to $6,023,000 and $5,780,000, respectively, related to performance
guarantees on contracts with a customer and a vendor.
The Division is obligated under long-term leases expiring at various dates
through 2008. Certain leases contain renewal options. The leases generally
provide that the Division shall pay adjustments for property taxes, insurance,
utilities, and other related charges.
Future minimum lease payments under noncancelable operating leases as of
July 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1996........................................................... $ 2,849,928
1997........................................................... 2,329,665
1998........................................................... 2,062,885
1999........................................................... 1,640,367
2000........................................................... 866,387
Thereafter..................................................... 981,529
-----------
$10,730,761
===========
</TABLE>
Rent expense under these leases totaled $2,557,546 and $2,371,905 for the
years ended July 31, 1994 and 1995, respectively.
F-31
<PAGE>
TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Aggregate future minimum rentals to be received under noncancelable
subleases, expiring on various dates through 2008, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ----------
<S> <C>
1996............................................................ $ 744,704
1997............................................................ 534,587
1998............................................................ 424,337
1999............................................................ 332,719
2000............................................................ 176,417
Thereafter...................................................... 151,925
----------
$2,364,689
==========
</TABLE>
7. FEDERAL TRANSFER SURCHARGE
During March 1995, the State of New York's Office of General Services
("OGS") contested the billing of certain Federal Transfer Surcharges from
January 1, 1991 through February 1995. The Division negotiated with OGS and on
December 14, 1995 a settlement was reached for the disputed surcharges.
Included in operations for the years ended July 31, 1994 and 1995 is
$1,147,700 and $1,059,200, respectively, including interest charges of
$137,000 and $127,000, respectively, in connection with this settlement. No
further charges to operations for this settlement are expected and the
settlement is expected to be paid beginning in April 1996.
8. SUBSEQUENT EVENT
On February 20, 1996, the Parent entered into an agreement to sell the
property and equipment of the Division, as well as assign customer lists,
certain contracts and leases, to Intermedia Communications of Florida, Inc.
(ICI) for 937,500 shares of ICI common stock. Consummation of the transaction
is subject to receipt of certain regulatory approvals and certain other
conditions.
F-32
<PAGE>
APPENDIX A TO PROSPECTUS
GLOSSARY
Access charges--The charges paid by long distance carriers to the local
telephone companies for accessing the local networks of the local telephone
companies to originate and terminate long distance calls.
ATM (Asynchronous Transfer Mode)--An information transfer standard that is
one of a general class of packet technologies that relay traffic by way of an
address contained within the first five bytes of a standard fifty-three byte-
long packet or cell. The ATM format can be used by many different information
systems, including LANs, to deliver traffic at varying rates, permitting a mix
of data, voice and video.
Bandwidth--The range of frequencies that can be passed through a medium,
such as glass fibers, without distortion. The greater the bandwidth, the
greater the information-carrying capacity of such medium. For fiber optic
transmission, electronic transmitting devices determine the bandwidth, not the
fibers themselves.
CAP (Competitive Access Provider)--A company that provides its customers
with an alternative to the local telephone company for local transport of
private line, special access and transport of switched access
telecommunications services. CAPs are also referred to in the industry as
alternative local telecommunications service providers (ALTS) and metropolitan
area network providers (MANs) and were formerly referred to as alternative
access vendors (AAVs).
Central office--The switching center or central switching facility of a
local telephone company.
CENTREX--Central office based alternative for a private business exchange.
Dark fiber--Refers to fiber optic cables absent the electronic components
that transmit telecommunications traffic through such cables.
Dedicated--Refers to telecommunications lines dedicated to or reserved for
use by particular customers along predetermined routes (in contrast to
telecommunications lines within the local telephone company's public switched
network).
Digital--Describes a method of storing, processing and transmitting
information through the use of distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital transmission and switching
technologies employ a sequence of these pulses to represent information, as
opposed to the continuously variable analog signal.
Diverse routing--Describes a telecommunications facility where the
telecommunications signals are transported simultaneously in two different
directions (either over the same cable or over different cables) so that, if
the cable is cut, the traffic can continue without interruption to its
destination. ICI's networks, like the networks of many carriers, provide
diverse routing by virtue of their ring-like architecture, which permits
traffic to be transported simultaneously to its destination in opposite
directions along the ring.
Enhanced network services--Telecommunications services providing digital
connectivity, primarily for data applications, via frame relay, ATM, or
digital interexchange private line facilities. Enhanced network services also
include applications on such networks, including Internet access and other
Internet services.
FCC--Federal Communications Commission.
Fiber mile--Refers to the number of route miles along a telecommunications
path multiplied by the number of fibers along that path. See the definition of
"route mile" below.
Frame relay--A wide area transport technology that organizes data into units
called frames instead of providing fixed bandwidth as with private lines.
A-1
<PAGE>
Hubs--Collection centers located centrally in an area where
telecommunications traffic can be aggregated at a central point for transport
and distribution.
Interconnection Decisions--Rulings by the FCC announced in September 1992,
August 1993 and July 1994 which require the RBOCs and most other LECs to
provide interconnection in LEC central offices to any CAP, long distance
carrier or end user seeking such interconnection for the provision of
interstate special access and switched access transport services.
Interexchange Services--Often called long distance services, these are
telecommunications services all offered through circuit switched network
devices. Interexchange Services include outbound and inbound calling services,
calling card and related features.
Interoperability--The ability of systems to interact in a seamless fashion.
IXC (IntereXchange Carrier)--A long distance carrier providing services
between local exchanges on an intrastate or interstate basis. A long distance
carrier may also be a long distance resale company.
LAN (Local Area Network)--Refers to the interconnection of computers for the
purpose of sharing files, programs and printers. LANs may include dedicated
computers or file servers that provide a centralized source of shared files
and programs.
LATA--Refers to a Local Access and Transport Area. A geographic area (one of
161 in the United States) established at the time AT&T divested the regional
Bell operating companies. LECs and competitive local exchange carriers (CLECs)
are authorized as the carriers of telecommunications within a LATA. IXCs
typically carry telecommunications traffic between or among LATAs. Regulations
vary from state to state.
LEC (Local Exchange Carrier)--A company providing local telephone services.
Local exchange--A geographic area determined by the appropriate state
regulatory authority in which calls generally are transmitted without toll
charges to the calling or called party.
Local Exchange Services--Switched telecommunications services that connect
telephone users to each other, within the metropolitan area. These services
include "local dial tone" services such as business lines, CENTREX services
and related features and switched access to IXC networks.
Local Network Services--Telecommunications services provided within a
metropolitan area. These services include local exchange, switched and special
access, and local private line services.
Node--An individual point of origination or termination of data on the ICI
enhanced data network.
POP (Point Of Presence)--Locations where a carrier has installed
transmission equipment in a service area that serves as, or relays calls to, a
network switching center of that carrier.
Private line--Refers to a dedicated telecommunications connection between
different locations.
RBOC--Regional Bell operating company.
Redundant electronics--Describes a telecommunications facility using two
separate electronic devices to transmit the telecommunications signal so that
if one device malfunctions, the signal may continue without interruption.
ICI's networks typically use redundant electronics.
Route mile--A geographical measure defined as one physical mile of fiber
optic cable, regardless of the number of telecommunications paths within that
cable. See the definition of "fiber mile" above.
SONET (Synchronous Optical NETwork)--A family of fiber optic transmission
rates created to provide the flexibility needed to transport many digital
signals with different capacities, and to provide a design standard for
manufacturers.
A-2
<PAGE>
Special access services--Refers to a private, dedicated telecommunications
lines or "circuits" along the network of a local telephone company or
alternative local exchange carrier (such as ICI), which line or circuit runs
to or from the POPs of long distance carriers. Examples of special access
services are telecommunications lines running between POPs of a single long
distance carrier, from one long distance carrier's POPs to the POPs of another
long distance carrier, or from the business or government customer to its long
distance carrier's POPs. Special access services do not require the use of
switches.
Switch--Refers to, in modern telephony, an electronic device that selects
and connects circuits together to create a path for a telecommunications
transaction. These devices are available to handle voice and data.
Switched access services--Refers to transportation of switched traffic along
dedicated lines between a local exchange providers' central offices and a long
distance carriers' POPs.
Switched local services--Refers to local "dial tone" services such as those
offered by the LECs. These services are now becoming open to competition in
many states.
Switched traffic--Refers to telecommunications traffic that traverse any
switched network (i.e., not on dedicated lines). This traffic is switched at a
carrier's facility.
Systems integration--Refers to a professional service comprised of
consulting, engineering, furnishing, installing, and/or maintaining various
hardware and software systems for a particular customer purpose.
VSAT (Very Small Aperture Terminal)--Refers to a means of transporting and
delivering data via satellite transmission.
A-3
<PAGE>
[DIAGRAM OF ICI INTEGRATED SERVICES]
<PAGE>
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFER OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPA-
NY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
ANY OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT
CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF ANY OFFER TO BUY, TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHO-
RIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALI-
FIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUN-
DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE IN-
FORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 4
Incorporation of Certain Documents by Reference.......................... 4
Prospectus Summary....................................................... 5
Risk Factors............................................................. 13
Use of Proceeds.......................................................... 18
Price Range of Common Stock.............................................. 19
Dividend Policy.......................................................... 19
Dilution................................................................. 19
Capitalization........................................................... 20
Selected Financial and Other Operating Data.............................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 30
Management............................................................... 48
The Selling Stockholders................................................. 51
Description of Capital Stock............................................. 52
Underwriting............................................................. 55
Legal Matters............................................................ 56
Experts.................................................................. 56
Index to Financial Statements............................................ F-1
Glossary................................................................. A-1
</TABLE>
================================================================================
================================================================================
[LOGO OF INTERMEDIA COMMUNICATIONS APPEARS HERE]
INTERMEDIA COMMUNICATIONS
OF FLORIDA, INC.
4,496,689 SHARES OF
COMMON STOCK
---------------
PROSPECTUS
---------------
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
May 8, 1996
================================================================================
