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OFFER TO EXCHANGE
11 1/4% SERIES B SENIOR DISCOUNT NOTES DUE 2007 FOR ANY AND ALL OUTSTANDING 11
1/4% SENIOR DISCOUNT NOTES DUE 2007 OF
INTERMEDIA COMMUNICATIONS INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON SEPTEMBER 11, 1997, UNLESS EXTENDED
----------------
Intermedia Communications Inc., a Delaware corporation (the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange $1,000 principal amount at
maturity of 11 1/4% Series B Senior Discount Notes due 2007 (the "Senior
Discount Notes") of the Company for each $1,000 principal amount at maturity
of the issued and outstanding 11 1/4% Senior Discount Notes due 2007 (the "Old
Notes" and collectively with the Senior Discount Notes, the "Notes") of the
Company. As of the date of this Prospectus, $649,000,000 principal amount at
maturity of the Old Notes were outstanding. The terms of the Senior Discount
Notes are substantially identical in all material respects (including interest
rate and maturity) to the terms of the Old Notes except for certain transfer
restrictions and registration rights relating to the Old Notes.
The Exchange Offer is being made to satisfy certain obligations of the
Company under the Registration Rights Agreement, dated July 9, 1997, among the
Company and the other signatories thereto (the "Registration Rights
Agreement"). Upon consummation of the Exchange Offer, holders of Old Notes
that were not prohibited from participating in the Exchange Offer and did not
tender their Old Notes will not have any registration rights under the
Registration Rights Agreement covering such Old Notes not tendered and such
Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. If the Exchange Offer is not consummated, or
the Shelf Registration Statement is not filed or is not declared effective or,
after either this Exchange Registration Statement or the Shelf Registration
Statement has been declared effective, such registration statement thereafter
ceases to be effective or usable (subject to certain exceptions) in connection
with resales of Old Notes or Senior Discount Notes in accordance with and
during the periods specified in the Registration Rights Agreement, additional
interest will accrue and be payable on the Notes until so declared effective
or consummated. See "The Exchange Offer; Description of the Senior Discount
Notes--Registration Rights."
Based on interpretations by the staff of the Securities and Exchange
Commission (the "SEC" or the "Commission") with respect to similar
transactions, the Company believes that Senior Discount Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder
which is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act of 1933, as amended (the "Securities Act")) without
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that the Senior Discount Notes are acquired in the
ordinary course of the holders' business, the holders have no arrangement with
any person to participate in the distribution of the Senior Discount Notes and
neither the holder nor any other person is engaging in or intends to engage in
a distribution of the Senior Discount Notes. Each broker-dealer that receives
Senior Discount Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
Senior Discount Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Senior Discount Notes received in exchange for Old Notes acquired as a result
of market-making activities or other trading activities. The Company has
agreed that, for a period of 365 days after the Exchange Date (as defined
herein), it will make this Prospectus available to any broker-dealer for use
in connection with any such resale. See "Plan of Distribution."
The Senior Discount Notes will evidence the same debt as the Old Notes and
will be entitled to the benefits of the Indenture (as defined). For a more
complete description of the terms of the Senior Discount Notes, see
"Description of the Senior Discount Notes." There will be no cash proceeds to
the Company from the Exchange Offer. The Senior Discount will be senior
obligations of the Company, will rank pari passu in right of payment with all
existing and future senior indebtedness of the Company, including the Existing
Senior Notes and the Old Notes, and will rank senior in right of payment to
any future subordinated indebtedness of the Company. Holders of secured
indebtedness of the Company will, however, have claims that are prior to the
claims of the holders of the Senior Discount Notes with respect to the assets
securing such other indebtedness. See "Description of the Senior Discount
Notes". As of March 31, 1997, on a pro forma basis after giving effect to the
Offering (as defined herein) and the Concurrent Offering (as defined herein),
the total amount of senior indebtedness outstanding of the Company, including
trade payables, was approximately $624 million and the Company's subsidiaries
would have had approximately $34 million of indebtedness outstanding.
(continued on next page)
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DESCRIPTION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS AUGUST 12, 1997
<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 and other information with the Commission. Such
reports, proxy and other information can be inspected and copied without
charge at the Public Reference Room maintained by the Commission at 450 Fifth
Street, N.W., Room 1024, Washington D.C. 20549. In addition, upon request,
such reports, proxy statements and other information will be made available
for inspection and copying at the Commission's public reference facilities at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at Seven
World Trade Center, 13th floor, New York, New York 10048. Copies of such
material can be obtained at prescribed rates upon request from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington D.C.
20549. The Commission also maintains a site on the World Wide Web
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants, like the Company, that file
electronically with the Commission. The Company's common stock is listed on
the Nasdaq National Market under the symbol "ICIX". Reports, proxy statements
and other information concerning the Company may be inspected and copied at
the offices of the National Association of Securities Dealers, Inc. 1735 K
Street, N.W., Washington D.C. 20006.
In the event that the Company ceases to be subject to the informational
reporting requirements of the Exchange Act, the Company has agreed that,
whether or not it is required to do so by the rules and regulations of the
Commission, for so long as any of the securities offered hereby remain
outstanding, it will furnish to the holders of the securities and file with
the Commission (unless the Commission will not accept such a filing) (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such forms, including a "Management's Discussion
and Analysis of Results of Operations and Financial Condition" and, with
respect to the annual information only, a report thereon by the Company's
certified independent public accountants and (ii) all reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports. In addition, for so long as any of the
securities offered hereby remain outstanding, the Company has agreed to make
available to any prospective purchaser of the securities or beneficial owner
of the securities in connection with any sale thereof the information required
by Rule 144A(d)(4) under the Securities Act.
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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,
1996.
The Company's Annual Report on Form 10-K/A for the year ended December
31, 1996 filed with the Commission on May 15, 1997.
The portions of the Proxy Statement for the Annual Meeting of
Stockholders of the Company held on May 22, 1997 that have been
incorporated by reference into the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
The Company's Current Report on Form 8-K filed with the Commission on
February 24, 1997.
The Company's Current Report on Form 8-K filed with the Commission on
March 14, 1997.
The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997.
The Company's Current Report on Form 8-K filed with the Commission on
June 5, 1997.
The Company's Current Report on Form 8-K filed with the Commission on
July 9, 1997.
The Company's Current Report on Form 8-K filed with the Commission on
July 17, 1997.
The Company's Current Report on Form 8-K/A filed with the Commission on
August 4, 1997.
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 will provide without charge to each person to whom a copy of
this Prospectus has been delivered, including any beneficial owner, upon the
written or oral request of such person to Intermedia Communications Inc., 3625
Queen Palm Drive, Tampa, Florida 33619 (telephone 813-829-0011), 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.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and in the Consolidated
Financial Statements and the Notes thereto incorporated herein by reference.
References in this Prospectus to the "Company" or "Intermedia" mean Intermedia
Communications Inc. together with its subsidiaries, except where the context
otherwise requires. Certain terms used herein are defined in the Glossary
attached hereto as Annex A. This Prospectus contains certain "forward-looking
statements" concerning the Company's operations, economic performance and
financial condition, which are subject to inherent uncertainties and risks,
including those identified under "Risk Factors." Actual results could differ
materially from those anticipated in this Prospectus. When used in this
Prospectus, the words "estimate," "project," "anticipate," "expect," "intend,"
"believe" and similar expressions are intended to identify forward-looking
statements.
THE COMPANY
Intermedia is a rapidly growing integrated communications services provider
("ICP"), offering a full suite of local, long distance and enhanced data
telecommunications services to business and government end user customers, long
distance carriers, Internet service providers ("ISPs"), resellers and wireless
communications companies. Founded in 1987, the Company is currently the third
largest (based on annualized telecommunications services revenues) among
providers generally referred to as competitive local exchange carriers
("CLECs") after MFS Communications Company, Inc. and Teleport Communications
Group Inc. The Company has sales offices in 32 cities throughout the eastern
half of the United States and offers a full product package of
telecommunications services in 16 metropolitan statistical areas. In April
1996, Intermedia became one of the first ICPs in the United States to provide
integrated switched local and long distance service and now has six local/long
distance voice switches in service and six long distance voice switches in
service, three of which the Company plans to upgrade to local/long distance
voice switches by the end of 1997. The Company provides enhanced data services,
including frame relay, asynchronous transfer mode ("ATM") and Internet access
services, primarily to business and government customers (including over 100
ISPs), in approximately 2,500 cities nationwide, utilizing 100 Company-owned
data switches. Intermedia also serves as a facilities-based interexchange
carrier to approximately 14,000 customers nationwide. Intermedia continues to
increase its customer base and network density in the eastern half of the
United States and is pursuing attractive opportunities to add additional
services and expand into complementary geographic markets. The total United
States annual market for the Company's local, long distance and enhanced data
services is estimated to be approximately $165 billion, of which the Company
estimates that approximately $34 billion will be addressable by the Company by
the end of 1997.
The Company's annualized revenue based on the first quarter of 1997 (before
giving pro forma effect to the acquisition of DIGEX, Incorporated ("DIGEX")
which is described below) was $175.8 million. See "--Recent Developments." The
Company's revenues have grown from $14.3 million in 1994 to $103.4 million in
1996 and $43.9 million for the first quarter of 1997. During the period January
1, 1994 through March 31, 1997, the Company has increased its sales force from
approximately 45 to approximately 200, increased the number of sales offices
from four to 23 and grown its customer base from 8,148 to 15,921. The Company
has positioned itself as a provider of integrated telecommunications services
to its customers by (i) obtaining CLEC certification in 19 states and the
District of Columbia (with 20 applications pending), (ii) completing
interconnection co-carrier agreements with six incumbent local exchange
carriers ("ILECs"), (iii) deploying five local/long distance voice switches and
(iv) deploying a total of 100 data switches, as of March 31, 1997.
As of March 31, 1997, Intermedia had invested $274.4 million (or 68% of its
total invested capital) in gross property, plant and equipment, principally
telecommunications equipment. Intermedia expects to continue to
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grow its networks and has identified expansion opportunities in other selected
markets. Management believes that this expansion will enable the Company to (i)
increase the size of its addressable market and reach a significant number of
new potential customers, (ii) achieve economies of scale in network operations
and sales and marketing and (iii) more effectively service customers that have
a presence in multiple metropolitan areas. The Company has also undertaken a
major expansion of its intercity network, principally to satisfy the growing
demand for interexchange services, including enhanced data services such as
frame relay networking and Internet services. As a result, frame relay nodes
have grown from approximately 2,700 nodes, serving customer locations in 700
cities as of March 31, 1996, to approximately 12,500 nodes, serving customer
locations in 2,500 cities as of March 31, 1997.
Management believes that a well trained team of direct sales and engineering
support professionals, offering customers a full suite of telecommunications
services, is critical in achieving its goal of capturing meaningful market
share in the newly competitive local telecommunications market. By initiating
local exchange services in markets where its sales and engineering support team
is already in place, Intermedia reached a significant milestone toward
attaining this goal. Management believes that being one of the few ICPs
offering integrated local, long distance and enhanced data services to its
customers provides the Company with a competitive advantage in pursuing the
estimated $99 billion national market for local exchange services. The
Company's strategy is to systematically secure a growing portion of a
customer's telecommunications business and through the provision of additional
integrated services, increase the customer's reliance on, and sense of
partnership with, the Company.
The Company believes that a significant portion of business and government
customers prefer a single source telecommunications provider that delivers a
full range of efficient and cost effective solutions to their
telecommunications needs. These customers require maximum reliability, high
quality, broad geographic coverage, end-to-end service, solutions-oriented
customer service and the timely introduction of new and innovative services.
The Company is well-positioned to satisfy such customer requirements due to (i)
its specialized sales and service approach employing engineering and sales
professionals who design and implement cost-effective telecommunications
solutions, (ii) the ongoing development and integration of new
telecommunications services, (iii) its local/long distance voice switch and
transmission network deployment program, (iv) the implementation of 100
enhanced data switches and nearly 300 network to network interfaces ("NNIs")
for frame relay data transmission throughout the continental United States and
(v) its interconnection co-carrier agreements with six ILECs.
As part of the implementation of its single source strategy, on July 11, 1997
the Company consummated the final step in its acquisition of 100% of the
outstanding equity of DIGEX for a cash purchase price of approximately $155
million (the "DIGEX Acquisition"). DIGEX, headquartered in suburban Washington,
D.C., is a national ISP, which provides a comprehensive range of industrial
strength Internet solutions, including Internet connectivity, Web site
management and private network solutions, primarily to business and government
customers. The Company estimates that the DIGEX Acquisition will increase its
addressable market by approximately $2 billion in 1997. For the quarter ended
March 31, 1997, DIGEX's revenues were approximately $8.7 million and the
combined pro forma revenues of DIGEX and the Company were approximately $52.7
million for such quarter. See "Risk Factors--Class Action by DIGEX
Stockholders."
Enhanced data services, such as those provided on the Company's frame
relay/ATM network, are specialized connectivity, management and applications
services designed for customers with data intensive telecommunications needs.
According to industry sources, the frame relay services market is projected to
grow from $753 million in 1995 to $2.7 billion in 1999; however, there can be
no assurance that such market growth will be realized or that the assumptions
underlying such projections are reliable. While the Company has concentrated
its frame relay sales in the eastern half of the United States, Intermedia is
currently the fifth largest national provider of frame relay networking
services (based on number of nodes) after AT&T, Inc. ("AT&T"),
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MCI Communications Corporation ("MCI"), Sprint Corporation ("Sprint") and
WorldCom, Inc. ("WorldCom"). In order to satisfy its customers' desire for end-
to-end frame relay services from a single provider, the Company has deployed
its network and made arrangements with other frame relay service providers to
offer national and international service.
The Company believes that it can effectively utilize its competitive
advantages as a provider of enhanced data services to communications intensive
customers in order to acquire and retain these customers as local exchange and
long distance customers throughout its markets. As Intermedia continues the
deployment of local/long distance voice switches, it will make more efficient
use of its intercity network. Combining long distance voice traffic between
such switches with the intercity data traffic increases the overall amount of
voice and data traffic that remains completely on the Company's network. The
Company is developing additional applications and deploying technologies that
will provide even greater efficiencies in the use of its intercity network.
The Company has developed and intends to introduce a voice product over its
enhanced data network which will provide a competitive service offering to
customers seeking a lower cost alternative to voice services currently provided
over traditional circuit switched telecommunications networks. The Company
believes that packet switched data networks, such as the Company's, will
displace a significant portion of the estimated $130 billion telecommunications
market which is currently provided over traditional circuit switched networks.
The Company believes this proposed new service offering will accelerate its
penetration of the traditional voice services market.
The Company has developed operating strategies, important components of which
are described below, to increase market share and operating margins.
CUSTOMER STRATEGY
Provide Single-Source Telecommunications Services. The Company's service
portfolio includes: local exchange, enhanced data (i.e., frame relay and ATM,
Internet, Intranet and Web site management), interexchange long distance,
integration and private line services. Management believes that its ability to
deliver all of these services provides significant advantages for both 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. Intermedia also
believes that by offering expanded, single-source services through existing
networks and customer connections, it can leverage 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 represents a broad range of
industries, including firms in the retail, financial services, Internet,
healthcare, merchandising, manufacturing and other industry segments.
Intermedia has a dedicated sales and engineering support group focused
exclusively on providing service to government agencies. The Company has long-
term contracts with the States of Florida and New York pursuant to which the
Company provides various telecommunications services, including frame relay and
other data services (as well as certain voice services under the New York
contract). In addition, the Company was recently awarded a contract to provide
Internet services to the State of New York.
Develop Interexchange Carrier and Value-Added Reseller Relationships. As a
result of recent changes in state and federal regulation which have provided
ILECs with mandates that foster local exchange competition,
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Intermedia has accelerated its entry into the local exchange services market.
As interexchange carriers ("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 Intermedia a candidate for joint ventures
and preferred vendor arrangements with IXCs, ILECs and other telecommunications
related companies. Such arrangements would benefit the Company by enabling
Intermedia to more rapidly recover its capital investment in switches and other
network infrastructure by increasing the traffic through its networks. These
IXC relationships typically began with the Company providing special access
services on behalf of these IXCs and have recently evolved to include local
access transport and local exchange services. These arrangements should enable
Intermedia to achieve greater market share and reach new market segments more
rapidly than it could otherwise. The Company has also begun soliciting these
IXCs, out of region ILECs, cable companies and other value added resellers to
resell the Company's local exchange and other services. Intermedia has recently
established a preferred vendor relationship with Cable & Wireless, Inc., which
includes the resale of Intermedia's local exchange service by Cable & Wireless,
Inc.
Maintain and Develop Long-Term Relationships. By providing customized
telecommunications solutions to its customers, the Company develops a sense of
partnership with its customers. This, together with the provision of an
integrated package of services (local, long distance and enhanced data
services), fosters the development of long-term customer relationships. As an
example, the group of Intermedia's top 42 customers as of December 31, 1994
(representing approximately 68% of Intermedia's billings for the month of
December 1994) had increased their aggregate billings in excess of 100% for the
month of December 1996. At December 31, 1996, 37 of these 42 customers were
still customers of Intermedia and, in the aggregate, represented approximately
17% of Intermedia's monthly billings for December 1996.
Provide Cost-Effective 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
Intermedia's services. Each of the Company's individually packaged services is
competitively priced, and when integrated into a comprehensive
telecommunications package, typically provides significant savings to such
customers over a combination of ILEC and IXC service offerings.
Expand Solutions-Oriented Sales Effort. The Company has rapidly expanded, and
intends to continue to expand, its direct sales and support team consisting of
engineering and sales professionals. The sales and support teams have complete
product knowledge and technical, integration and program or project management
skills. This team approach promotes a close working relationship between the
Company and the customers' telecommunications, information services and user
constituencies. The Company believes such relationships improve its ability to
sell more of its services and maintain longer relationships with its customers.
Since January 1, 1996, Intermedia has increased the number of its sales offices
by 20 and substantially increased its engineering support personnel and sales
representatives. The Company believes that the continued deployment of its
skilled end user engineering support and sales team will allow Intermedia to
establish service in new markets and maintain a competitive position in
existing markets. By focusing first on establishing customer relationships in
both new and existing markets, the Company believes it can efficiently deploy
capital in response to actual customer demand.
NETWORK STRATEGY
Control Franchise Points of the Networks. Connections to customers and
building entries represent an important component of Intermedia's network
strategy. These connections provide the Company with the platform to sell a
variety of services to existing and additional potential customers within a
building, analogous to those provided by traditional shared tenant services
providers. Intermedia 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.
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Extend Coverage to Provide End-to-End Service. The Company believes that an
important aspect of satisfying its customers is its ability to provide and
support services from end to end. This requires network interconnection with
other carriers and operational support systems and tools to "manage" the
customer's total service. The Company has entered into interconnection co-
carrier agreements with BellSouth Telecommunications Inc. ("BellSouth"),
Sprint, GTE Corporation ("GTE"), NYNEX Corporation ("NYNEX"), SBC
Communications, Inc. ("SBC") and Bell Atlantic Inc. ("Bell Atlantic"). This
will allow the Company to access a large number of business and government
telephones in its service territory. The Company anticipates entering into
similar arrangements with ILECs in other markets. The Company has also
interconnected its frame relay network to various ILECs, thereby substantially
expanding the reach of its networks. Intermedia now provides originating and
terminating transport services in 45 states and maintains points of presence
("POPs") for interexchange and enhanced data services in most major cities in
the United States. As a result of the DIGEX Acquisition, the Company has
peering relationships with other Internet carriers at six U.S. peering points.
The Company has deployed, and continues to integrate, network monitoring and
control tools to insure high levels of service quality and reliability.
Utilize ILEC Resale and Unbundled Network Elements. Recent regulatory changes
have enabled the Company to resell ILEC services and to utilize unbundled ILEC
network elements at discounted rates. The Company intends to use resold
services and unbundled network elements to provide rapid market entry and
develop its customer base in advance of capital deployment. Once thresholds of
customer density have been achieved, the Company intends to systematically
replace these resold and unbundled elements with its own facilities, where
economical.
Deploy Capital Cost Effectively on a Demand Driven Basis. In addition to the
use of ILEC resale and unbundling, the Company has the ability to lease network
capacity from other carriers at competitive rates. This has led the Company to
lease network capacity in various areas prior to, or as an economic alternative
to, building additional capacity. As a result of its most favored nation
pricing from Advanced Radio Telecom Corp. ("ART") in the Northeast, the Company
from time to time leases 38 GHz wireless services as one such economic
alternative. Utilizing leased facilities enables the Company to (i) meet
customers' needs more rapidly, (ii) improve the utilization of Intermedia's
existing networks, (iii) add revenue producing customers before building
networks, thereby reducing the risks associated with speculative network
construction and (iv) subsequently focus its capital expenditures in geographic
areas where network construction or acquisition will provide a competitive
advantage. The Company focuses its capital deployment on the segments of its
networks that the Company believes will provide it with the highest revenue and
cash flow potential and the greatest long-term competitive advantage. For the
12 months ended March 31, 1997, the Company recorded $.69 in revenue for each
average dollar of plant, property and equipment invested.
GROWTH STRATEGY
Accelerate Internal Growth. By focusing on business and government customers
and maintaining high-quality and cost-effective services, the Company has
generated a compound annual internal revenue growth rate of 63% for the two
year period ended December 31, 1996. The Company's internal revenue growth rate
for the quarter ended March 31, 1997 over the quarter ended March 31, 1996 was
81%. The Company believes that its customer and network strategies will
continue to enable Intermedia to expand its services and markets, increase its
revenue base and effectively compete in a dynamic marketplace. In order to
achieve such growth, it is essential to continue to add to the Company's highly
skilled, broadly deployed end user sales and engineering support team.
Accelerate Provision of Local Exchange Services. The Telecommunications Act
of 1996 (the "1996 Act") significantly improved the opportunity for competition
in the local exchange market by mandating that ILECs enter into arrangements
with competitors such as the Company for central office collocation and
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unbundling of local services. The Company believes that implementation of such
pro-competitive policies creates favorable opportunities to more aggressively
pursue the provision of local exchange services. The Company has a total of six
local/long distance voice switches in operation and is currently marketing, to
existing and new customers, local dial tone, switched access termination and
origination services, centrex and desktop products bundled with the Company's
other service offerings. The Company expects to offer such integrated services
in 23 metropolitan areas by the end of 1997.
Selectively Acquire Existing Networks and Services. Over the past few years,
a portion of the Company's growth has been accomplished through acquisitions
and joint ventures or selling relationships. The Company continues to examine
various acquisition and joint venture proposals to accelerate its rate of
growth. In addition to the usual financial considerations, Intermedia assesses
each opportunity to determine if either: (i) current network traffic into and
out of the geographic areas served by the potential joint venture or
acquisition candidate warrants developing a presence in those geographic areas
or (ii) such candidate offers services consistent with the Company's strategy.
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. 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 certain
goals by creating operating synergies and providing for a more rapid expansion
of the Company's networks and services. The Company is currently evaluating
various acquisition opportunities. No assurance can be given that any potential
acquisition will be consummated.
RECENT DEVELOPMENTS
Regulatory Changes. The 1996 Act and the issuance by the Federal
Communications Commission ("FCC") of rules governing local competition,
particularly those requiring the interconnection of all networks and the
exchange of traffic among the ILECs and CLECs, as well as pro-competitive
policies already developed by state regulatory commissions, have caused
fundamental changes in the structure of the local exchange markets. The U.S.
Court of Appeals for the Eighth Circuit initially issued a partial stay of the
FCC's rules relating to pricing of interconnection and a competitor's ability
to impose "most favored nation" requirements on ILECs. On July 18, 1997, the
Court issued a final decision in the case vacating the FCC's pricing and "most
favored nation" rules, as well as certain other of the FCC's interconnection
rules. Despite this action, the Company's analysis shows that interconnection
arrangements that have been approved or mandated by state regulatory
commissions have been consistent with the intent of the 1996 Act and the
Company's business plan. These regulatory developments create opportunities for
new entrants offering local exchange services to capture a portion of the
ILECs' nearly 100% market share. Due to the rapid development and continuing
growth of the Company's sales force and its competitive advantages in providing
integrated telecommunications services, the Company believes that it is well
positioned to capitalize on the new market opportunities emerging in the local
exchange market.
On May 16, 1997, the FCC released an order that fundamentally restructured
the "access charges" that ILECs charge to interexchange carriers and end user
customers. The Company believes that the FCC's new access charge rules do not
adversely affect the Company's business plan, and that they in fact present
significant new opportunities for new entrants, including the Company. Aspects
of the access charge order may be changed in the future. At least three parties
have filed appeals with federal courts, and numerous parties are expected to
ask the FCC to reconsider portions of its new rules.
Acquisitions. On July 11, 1997, the Company consummated the final step in the
DIGEX Acquisition. DIGEX, headquartered in suburban Washington, D.C., is a
national ISP, which provides a comprehensive range
6
<PAGE>
of industrial strength Internet solutions, including Internet connectivity, Web
site management and private network solutions, primarily to business and
government customers. For the quarter ended March 31, 1997, DIGEX's revenues
were approximately $8.7 million and the combined pro forma revenues of DIGEX
and the Company were approximately $52.7 million for such quarter. DIGEX
presently serves approximately 2,000 customers in 50 metropolitan areas. DIGEX
has approximately 450 employees of whom approximately one third are in sales
and marketing. The Company believes that the DIGEX Acquisition will enhance its
strategic position and provide cost savings opportunities. The strategic
benefits include: (i) expansion of the Company's service portfolio to include
nationwide business Internet connectivity, Web site management and private
network solutions; (ii) expansion of the Company's customer base with the
addition of approximately 2,000 new business and government customers; and
(iii) cross marketing of the expanded service portfolio to the combined
customer base. Cost savings opportunities include: (i) elimination of redundant
facilities on over 75% of DIGEX's network routes, which routes it has in common
with the Company; (ii) reduction of local access costs by utilizing
Intermedia's local networks and interconnection agreements; and (iii)
elimination of duplicative administrative costs. See "Risk Factors--Class
Action by DIGEX Stockholders."
On June 24, 1997, the Company purchased from Telco Communications Group, Inc.
("Telco") five long distance voice switches and ancillary network equipment
located in Atlanta, Chicago, Dallas, Los Angeles and New York (the "Telco
Acquisition"). Three of these switches will be upgraded to local/long distance
voice switches, consistent with the Company's planned deployment of fifteen
local/long distance voice switches by the end of 1997. As part of the Telco
Acquisition, the Company also acquired certain network transport services for a
three year period. The aggregate purchase price of the Telco Acquisition was
approximately $38 million, which was substantially included in the Company's
planned capital expenditures for 1997. The Company believes that the Telco
Acquisition will allow the Company to more rapidly deploy local/long distance
voice switches in these markets and to do so at a lower overall cost. In
addition, the transport services acquired as part of the Telco Acquisition will
permit the Company to accelerate its deployment of ATM in its intercity and
intracity networks. Implementation of ATM will facilitate additional enhanced
data and voice services and network efficiencies.
Intermedia 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) 829-0011.
7
<PAGE>
THE EXCHANGE OFFER
Securities Offered.......... Up to $649,000,000 principal amount at maturity
of 11 1/4% Series B Senior Discount Notes due
2007 of the Company (the "Senior Discount Notes"
and collectively with the Old Notes, the
"Notes"). The terms of the Senior Discount Notes
and the Old Notes are substantially identical in
all material respects, except for certain
transfer restrictions and registration rights
relating to the Old Notes which do not apply to
the Senior Discount Notes. See "Description of
the Senior Discount Notes."
The Exchange Offer.......... The Company is offering to exchange $1,000
principal amount at maturity of Senior Discount
Notes for each $1,000 principal amount at
maturity of Old Notes. See "The Exchange Offer"
for a description of the procedures for tendering
Old Notes. The Exchange Offer satisfies the
registration obligations of the Company under the
Registration Rights Agreement. Upon consummation
of the Exchange Offer, holders of Old Notes that
were not prohibited from participating in the
Exchange Offer and did not tender their Old Notes
will not have any registration rights under the
Registration Rights Agreement with respect to
such non-tendered Old Notes and, accordingly,
such Old Notes will continue to be subject to the
restrictions on transfer contained in the legend
thereon.
Tenders, Expiration Date;
Withdrawal................. The Exchange Offer will expire at 5:00 p.m., New
York City time, on September 11, 1997, or such
later date and time to which it is extended.
Tender of Old Notes pursuant to the Exchange
Offer may be withdrawn and retendered at any time
prior to the Expiration Date. Any Old Notes not
accepted for exchange for any reason will be
returned without expense to the tendering holder
as promptly as practicable after the expiration
or termination of the Exchange Offer.
Federal Income Tax
Considerations............. The Exchange Offer will not result in any income,
gain or loss to the holders or the Company for
federal income tax purposes. See "Certain Federal
Income Tax Considerations."
Use of Proceeds............. There will be no proceeds to the Company from the
exchange of the Old Notes for the Senior Discount
Notes pursuant to the Exchange Offer.
Exchange Agent.............. SunTrust Bank, Central Florida, National
Association, the trustee (the "Trustee") under
the Indenture (as defined herein), is serving as
Exchange Agent in connection with the Exchange
Offer.
CONSEQUENCES OF EXCHANGING OLD NOTES PURSUANT TO THE EXCHANGE OFFER
Generally, holders of Old Notes (other than any holder who is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act) who
exchange their Old Notes for Senior Discount Notes pursuant
8
<PAGE>
to the Exchange Offer may offer their Senior Discount Notes for resale, resell
their Senior Discount Notes, and otherwise transfer their Senior Discount Notes
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided such Senior Discount Notes are acquired in the
ordinary course of the holders' business, such holders have no arrangement with
any person to participate in a distribution of such Senior Discount Notes and
neither the holder nor any other person is engaging in or intends to engage in
a distribution of the Senior Discount Notes. Each broker-dealer that receives
Senior Discount Notes for its own account in exchange for Old Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
its Senior Discount Notes. Broker-dealers may not exchange Old Notes which are
part of an unsold original allotment in the Exchange Offer. See "Plan of
Distribution." To comply with the securities laws of certain jurisdictions, it
may be necessary to qualify for sale or register the Senior Discount Notes
prior to offering or selling such Senior Discount Notes. The Company is
required, under the Registration Rights Agreement, to register the Senior
Discount Notes in any jurisdiction reasonably requested by the holders, subject
to certain limitations. Upon consummation of the Exchange Offer, holders that
were not prohibited from participating in the Exchange Offer and did not tender
their Old Notes will not have any registration rights under the Registration
Rights Agreement with respect to such non-tendered Old Notes and, accordingly,
such Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, the Old Notes may not be offered
or sold (except in private transactions), unless registered under the
Securities Act and applicable state securities laws. See "The Exchange Offer--
Consequences of Failure to Exchange".
9
<PAGE>
SUMMARY DESCRIPTION OF THE SENIOR DISCOUNT NOTES
Securities Offered.......... Up to $649 million principal amount at maturity
of 11 1/4% Series B Senior Discount Notes due
July 15, 2007 of the Company. The terms of the
Senior Discount Notes and the Old Notes are
substantially identical in all material aspects,
except for certain transfer restrictions and
registration rights relating to the Old Notes
which do not apply to the Senior Discount Notes.
See "Description of the Senior Discount Notes."
Issue Price................. $1,000 stated principal amount at maturity of the
Old Notes per $1,000 stated principal amount at
maturity of the Senior Discount Notes.
Maturity Date............... July 15, 2007.
Interest.................... Commencing as of July 9, 1997, the Senior
Discount Notes will accrete at a rate of 11 1/4%,
compounded semi-annually, to an aggregate
principal amount of $649 million by July 15,
2002. No interest will be payable on the Senior
Discount Notes prior to July 15, 2002. The Senior
Discount Notes will accrue interest at a rate of
11 1/4% per annum from July 15, 2002, payable
semi-annually in arrears on July 15 and January
15, commencing January 15, 2003.
Yield....................... 11 1/4% per annum, computed on a semi-annual bond
equivalent basis and calculated from July 9,
1997.
Optional Redemption......... The Senior Discount Notes may be redeemed at the
option of the Company, in whole or in part, on or
after July 15, 2002, at a premium declining to
par in 2005, plus accrued and unpaid interest, if
any, through the redemption date.
In the event of the sale by the Company prior to
July 15, 2000 of its capital stock (other than
Disqualified Stock (as defined herein)) (i) to a
Strategic Investor (as defined herein), in a
single transaction or a series of related
transactions, for an aggregate purchase price
equal to or exceeding $50.0 million or (ii) in
one or more Public Offerings (as defined herein)
of Common Stock, up to a maximum of 25% of the
aggregate principal amount at maturity of the
Senior Discount Notes originally issued will, at
the option of the Company, be redeemable from the
net cash proceeds of such sale (but only to the
extent such proceeds consist of cash or readily
marketable cash equivalents received in respect
of the capital stock (other than Disqualified
Stock) so sold) at a redemption price equal to
111 1/4% of the Accreted Value (as defined
herein) thereof, with respect to the Senior
Discount Notes to be redeemed on the redemption
date, provided that at least 75% of the aggregate
principal amount at maturity of Senior Discount
Notes originally issued remains outstanding
immediately after the occurrence of such
redemption.
Change of Control........... In the event of a Change of Control (as defined
herein) prior to July 15, 2002, the holders of
the Senior Discount Notes will have the right to
require the Company to purchase their Senior
Discount
10
<PAGE>
Notes at a price equal to 101% of the Accreted
Value thereof or, in the case of any such
purchase on or after July 15, 2002, at 101% of
the aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase.
Original Issue Discount..... The Senior Discount Notes will have the same
issue date and issue price as the Old Notes,
which were issued with original issue discount
for federal income tax purposes. Thus, although
no interest will accrue on the Senior Discount
Notes prior to July 15, 2002, and there will be
no periodic payments of interest prior to July
15, 2002, original issue discount (that is, the
excess of the sum of the principal amount and all
cash interest payments over the issue price of
the Senior Discount Notes) will accrue from July
9, 1997 and will be includible periodically as
interest income in a holder's gross income for
federal income tax purposes in advance of receipt
of the cash payments to which the income is
attributable. See "Certain Federal Income Tax
Considerations."
Ranking..................... The Senior Discount Notes will be senior
obligations of the Company, will rank pari passu
in right of payment with all existing and future
senior indebtedness of the Company, including the
Existing Senior Notes and the Old Notes, and will
rank senior in right of payment to any future
subordinated indebtedness of the Company. Holders
of secured indebtedness of the Company will,
however, have claims that are prior to the claims
of the holders of the Senior Discount Notes with
respect to the assets securing such other
indebtedness. As of March 31, 1997, on a pro
forma basis after giving effect to the July 9,
1997 private placement of the Old Notes including
the subsequent exercise of the over-allotment
option in connection therewith (collectively, the
"Offering") and the July 9, 1997 private
placement of 6,900,000 depositary shares, each
representing a one-hundredth interest in a share
of 7% Series D Junior Convertible Preferred
Stock, liquidation preference $2,500 per share,
par value $1.00 per share (each a "Depositary
Share"), including the subsequent exercise of the
over-allotment option in connection therewith
(collectively, the "Concurrent Offering"), the
total amount of senior indebtedness outstanding
of the Company, including trade payables, was
approximately $624 million and the Company's
subsidiaries would have had approximately $34
million of indebtedness outstanding.
Certain Covenants........... The indenture governing the Senior Discount Notes
(the "Indenture") contains certain covenants
that, among other things, limit the ability of
the Company and its subsidiaries to make certain
restricted payments, incur additional
indebtedness and issue preferred stock, pay
dividends or make other distributions, repurchase
equity interests or subordinated indebtedness,
engage in sale and leaseback transactions, create
certain liens, enter into certain transactions
with affiliates, sell assets of the Company or
its subsidiaries, conduct certain lines of
business, issue or sell equity interests of the
Company's subsidiaries or enter into certain
mergers
11
<PAGE>
and consolidations. In addition, under certain
circumstances, the Company will be required to
offer to purchase the Senior Discount Notes at a
price equal to 100% of the Accreted Value
thereof, if such circumstances occur prior to
July 15, 2002, or at 100% of the principal amount
thereof, if such circumstances occur on or after
July 15, 2002, plus accrued and unpaid interest,
if any, to the date of purchase, with the
proceeds of certain asset sales. See "Description
of the Senior Discount Notes."
For additional information regarding the Senior Discount Notes and the
definitions of certain capitalized terms used above, see "Description of the
Senior Discount Notes."
12
<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, 1996 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 summary financial data presented below as of and for the
quarters ended March 31, 1996 and 1997 have been derived from unaudited
financial statements of the Company. In the opinion of management, the
unaudited financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments, which consist only of
normal recurring adjustments, necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the full year.
The operating results of EMI Communications Corp. ("EMI") are included in the
Company's consolidated operating results commencing July 1, 1996. The operating
results of Universal Telecom Inc. ("UTT") and NetSolve Incorporated
("NetSolve") are included in the Company's consolidated operating results
commencing December 1, 1996. The 1996 pro forma operating information gives
effect to the EMI, UTT, NetSolve and DIGEX acquisitions as if they occurred on
January 1, 1996. The 1997 pro forma operating information gives effect to the
DIGEX Acquisition as if it occurred on January 1, 1997. Both 1996 and 1997 pro
forma operating information give effect to the March 1997 sale of $300 million
of preferred stock, as if it occurred at the beginning of the respective
periods. 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) QUARTER PRO FORMA(2)
YEAR ENDED ENDED QUARTER ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
-------------------------------------------- ------------ ----------------- -------------
1992 1993 1994 1995 1996 1996 1996 1997 1997
------ ------- ------- -------- -------- ------------ ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues............... $7,030 $ 8,292 $14,272 $ 38,631 $103,397 $ 167,644 $13,503 $ 43,938 $ 52,679
Costs and Expenses:
Facilities
administration and
maintenance and line
costs................. 1,760 2,843 5,396 22,989 81,105 128,023 9,258 36,907 44,239
Selling, general and
administrative........ 2,607 3,893 6,412 14,993 36,610 59,597 5,920 19,526 27,036
Depreciation and
amortization.......... 2,190 3,020 5,132 10,196 19,836 47,277 3,281 8,294 15,267
------ ------- ------- -------- -------- --------- ------- -------- --------
6,557 9,756 16,940 48,178 137,551 234,897 18,459 64,727 86,542
------ ------- ------- -------- -------- --------- ------- -------- --------
Income (loss) from
operations............ 473 (1,464) (2,668) (9,547) (34,154) (67,253) (4,956) (20,789) (33,863)
Other income (expense)
Interest expense...... (1,031) (844) (1,218) (13,767) (35,213) (36,779) (5,382) (11,089) (11,435)
Interest and other
income............... 323 234 819 4,060 12,168 2,024 1,445 4,474 2,231
Income tax benefit.... -- -- -- 97 -- -- -- -- --
------ ------- ------- -------- -------- --------- ------- -------- --------
Loss before
extraordinary item... (235) (2,074) (3,067) (19,157) (57,199) (102,008) (8,893) (27,404) (43,067)
Extraordinary loss on
early extinguishment
of debt.............. -- -- -- (1,592) -- -- -- -- --
------ ------- ------- -------- -------- --------- ------- -------- --------
Net loss............. $ (235) $(2,074) $(3,067) $(20,749) $(57,199) $(102,008) $(8,893) $(27,404) $(43,067)
Preferred stock
dividends and
accretions............ (267) -- -- -- -- (41,340) -- (3,375) (10,335)
------ ------- ------- -------- -------- --------- ------- -------- --------
Net loss attributable
to common
stockholders.......... $ (502) $(2,074) $(3,067) $(20,749) $(57,199) $(143,348) $(8,893) $(30,779) $(53,402)
====== ======= ======= ======== ======== ========= ======= ======== ========
Net loss per common
share:
Loss before
extraordinary item... $ (.10) $ (.29) $ (.34) $ (1.91) $ (4.08) $ (9.87) $ (.86) $ (1.89) $ (3.28)
Extraordinary loss.... -- -- -- (.16) -- -- -- -- --
------ ------- ------- -------- -------- --------- ------- -------- --------
Net loss.............. $ (.10) $ (.29) $ (.34) $ (2.07) $ (4.08) $ (9.87) $ (.86) $ (1.89) $ (3.28)
====== ======= ======= ======== ======== ========= ======= ======== ========
Weighted average number
of shares
outstanding........... 4,797 7,077 8,956 10,036 14,018 14,518 10,383 16,297 16,297
OTHER DATA:
Book value per common
share................. 3.09 5.18 5.39 3.89 7.01 4.26 3.02 5.14 6.26
Ratio of earnings to
combined fixed charges
and preferred stock
dividends(3).......... -- -- -- -- -- -- -- -- --
Earnings before
interest, income
taxes, depreciation
and amortization
("EBITDA")(4)......... $2,663 $ 1,556 $ 2,464 $ 649 $(14,318) $ (19,976) $(1,675) $(12,495) $(18,596)
Capital expenditures,
including acquisitions
of businesses, net of
cash acquired......... $8,818 $10,486 $13,731 $ 31,915 $143,615 $ 309,391 $17,625 $ 33,333 $190,787
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------- -------------
1992 1993 1994 1995 1996 1996 1997
----- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
NETWORK DATA:(5)
Buildings connected(6)........ 161 234 293 380 487 387 1,157
Route miles................... 240 335 378 504 655 561 679
Fiber miles................... 6,184 10,239 11,227 17,128 24,122 20,541 29,841
Number of city-based networks
in service................... 4 5 6 9 9 9 9
ENHANCED DATA SERVICES:(5)
Nodes(7)...................... -- 100 900 2,300 9,500 2,700 12,500
Cities(8)..................... -- 37 336 600 2,200 700 2,500
Switches...................... -- 4 12 31 89 36 100
EMPLOYEES(5)................... 49 58 146 287 874 387 1,026
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED
DECEMBER 31, MARCH 31, MARCH 31, (9)
----------------------------------------- --------- -------------
1992 1993 1994 1995 1996 1997 1997
------- ------- ------- -------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents(10)....... $ 1,775 $27,954 $10,208 $ 50,997 $189,546 $435,859 $ 498,625
Working capital(11).... 8,999 25,712 9,588 70,353 206,029 448,890 455,983
Total assets........... 36,174 61,219 74,086 216,018 512,940 787,388 1,028,475
Long-term obligations
and redeemable
preferred stock
(including current
maturities)........... 11,742 11,614 16,527 165,545 358,508 656,730 885,995
Total stockholders'
equity................ 21,257 45,987 52,033 40,254 114,230 83,866 57,812
</TABLE>
- --------
1. The pro forma operating information gives effect to the EMI, UTT and
NetSolve acquisitions, which occurred effective June 30, 1996, December 1,
1996 and December 1, 1996, respectively, and the DIGEX Acquisition as if
they occurred on January 1, 1996. The pro forma operating information also
gives effect to the March 1997 sale of $300 million of preferred stock.
2. The pro forma operating information gives effect to the DIGEX Acquisition
as if it occurred on January 1, 1997. The pro forma operating information
also gives effect to the March 1997 sale of $300 million of preferred
stock.
3. For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends: (i) earnings consist of loss before income
taxes, plus fixed charges excluding capitalized interest and preferred
stock dividends and (ii) fixed charges consist of interest expensed and
capitalized, plus amortization of deferred financing costs, preferred stock
dividends, plus a portion of rent expense under operating leases deemed by
the Company to represent an interest factor plus dividends on the Series B
Preferred Stock. For the years ended December 31, 1992, 1993, 1994, 1995
and 1996 and the quarters ended March 31, 1996 and 1997 the Company's
earnings were insufficient to cover combined fixed charges and preferred
stock dividends by $622, $2,288, $3,324, $19,931, $59,978, $9,289 and
$31,557, respectively. For the year ended December 31, 1996 and the quarter
ended March 31, 1997, the Company's pro forma earnings, after giving effect
to the acquisitions described in Notes 1 and 2 above and the Offering, were
insufficient by $167,531 and $59,215, respectively, to cover pro forma
combined fixed charges and preferred stock dividends. For the year ended
December 31, 1996 and the quarter ended March 31, 1997 the Company's pro
forma earnings, after giving effect to the acquisitions and the sale of
preferred stock described in Notes 1 and 2 above, the Offering, and the
Concurrent Offering, were insufficient by $179,606 and $62,234 to cover pro
forma combined fixed charges and preferred stock dividends.
4. EBITDA consists of earnings before interest, income taxes, depreciation,
and amortization. In addition, 1995 EBITDA excludes an extraordinary charge
of $1,592 related to the early extinguishment of debt. EBITDA is provided
in the Summary of Financial and Other Operating Data 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 present cash flow for the periods presented. See the
Consolidated Statements of Cash Flows included in the Company's
Consolidated Financial Statements and the Notes thereto included elsewhere
in this Prospectus.
5. Amounts as reflected in the table are based upon information contained in
the Company's operating records.
6. Beginning in January 1997, the Company changed its definition of "Buildings
connected" to include buildings connected to the Company's network via
leased facilities controlled by the Company in addition to those connected
to the Company's network via facilities constructed by the Company. The
Company believes the new definition is consistent with industry practice.
7. Amount represents an individual point of origin and termination of data
served by the Company's enhanced data network. In the opinion of management
of the Company, all node numbers are appropriate.
8. Represents the number of discrete postal cities to which enhanced data
services are provided by the Company.
9. Gives effect to the DIGEX Acquisition and the Offering. See
"Capitalization" for additional information on the Concurrent Offering.
10. Cash and cash equivalents excludes investments of $20,954, $26,675, and
$27,102 for the years ended December 31, 1995 and 1996 and the quarter
ended March 31, 1997, respectively, restricted under the terms of various
notes and other agreements.
11. Working capital includes the restricted investments referred to in Note 10,
above.
14
<PAGE>
RISK FACTORS
In addition to other information set forth elsewhere in this Prospectus,
before tendering their Old Notes for Senior Discount Notes, holders should
consider carefully the following factors which (other than "Consequences of
Failure to Exchange") are generally applicable to the Old Notes as well as to
the Senior Discount Notes.
Consequences of Failure to Exchange. Upon consummation of the Exchange
Offer, holders of Old Notes that were not prohibited from participating in the
Exchange Offer and did not tender their Old Notes will not have any
registration rights under the Registration Rights Agreement with respect to
such non-tendered Old Notes and, accordingly, such Old Notes will continue to
be subject to the restrictions on transfer contained in the legend thereon. In
general, the Old Notes may not be offered or sold, unless registered under the
Securities Act and applicable state securities laws, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not intend to register the
Old Notes under the Securities Act.
Based on interpretations by the staff of the SEC with respect to similar
transactions, the Company believes that Senior Discount Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold or otherwise transferred by holders (other than any holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that the Senior Discount Notes are
acquired in the ordinary course of the holders' business, the holders have no
arrangement with any person to participate in the distribution of the Senior
Discount Notes and neither the holder nor any other person is engaging in or
intends to engage in a distribution of the Senior Discount Notes. Each broker-
dealer that receives Senior Discount Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of the Senior Discount Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Senior Discount Notes received in exchange for Old Notes
acquired by the broker-dealer as a result of market-making activities or other
trading activities. Broker-dealers may not exchange Old Notes which are part
of an unsold original allotment in the Exchange Offer. The Company has agreed
that, for a period of 365 days after the Exchange Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale of the Senior Discount Notes. See "Plan of Distribution." The Senior
Discount Notes may not be offered or sold unless they have been registered or
qualified for sale under applicable state securities laws or an exemption from
registration or qualification is available and is complied with. The
Registration Rights Agreement requires the Company to register or qualify the
Senior Discount Notes for resale in any state as may be reasonably requested
by their holders, subject to certain limitations.
Lack of Public Market. Prior to this Exchange Offer, there has been no
public market for the Notes. If a market for the Senior Discount Notes should
develop, the Senior Discount Notes may trade at a discount from their Accreted
Value depending upon prevailing interest rates, the market for similar
securities and other factors including general economic conditions and the
financial condition of the Company. The Company does not currently intend to
list the Senior Discount Notes on any securities exchange or to seek approval
for quotation through any automated quotation system. No assurance can be
given as to the liquidity of the trading market for the Senior Discount Notes.
The liquidity of, and trading market for, the Senior Discount Notes also may
be adversely affected by general declines in the market for similar
securities. Such a decline may adversely affect such liquidity and trading
markets independent of the financial performance of, and prospects for, the
Company.
Substantial Indebtedness; Insufficiency of Earnings to Cover Fixed
Charges. The Company is highly leveraged. At March 31, 1997, after giving pro
forma effect to the Offering and the Concurrent Offering and the application
of the net proceeds of the Offering and the Concurrent Offering (including the
Retirement), the
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Company would have had outstanding approximately $658 million in aggregate
principal amount of indebtedness and other liabilities on a consolidated basis
(including trade payables), approximately $303 million of obligations with
respect to dividend payments and the mandatory redemption of the Series B
Preferred Stock and $172 million of obligations with respect to the Series D
Preferred Stock in the event of a change of control of the Company. The degree
to which the Company is leveraged could have important consequences to holders
of the Senior Discount Notes, including the following: (i) a substantial
portion of the Company's cash flow from operations will be dedicated to
payment of the principal and interest on its indebtedness, to payment of
dividends on and the redemption of the Series B Preferred Stock and the
payment of dividends on the Series D Preferred Stock, thereby reducing funds
available for other purposes; (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 quarter ended March 31, 1997, and on a pro forma basis after giving
effect to the Offering and the Concurrent Offering and the application of the
proceeds therefrom (including the Retirement), the Company's pro forma
earnings would have been inadequate to cover its pro forma combined fixed
charges including the Series D Preferred Stock dividend requirements by $62
million. The Company anticipates that earnings will be insufficient to cover
fixed charges for the next several years. In order for the Company to meet its
debt service obligations, its dividend and redemption obligations with respect
to the Series B Preferred Stock and its dividend obligations with respect to
the Series D Preferred Stock, 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, its dividend and redemption obligations with respect to
the Series B Preferred Stock and its dividend obligations with respect to the
Series D Preferred Stock. 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 Intermedia 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."
Effective Subordination of the Senior Discount Notes. The Senior Discount
Notes are not secured by any of the assets of the Company. Holders of secured
indebtedness of the Company will have claims that are prior to the claims of
the holders of the Senior Discount Notes to the extent of the assets securing
such other indebtedness. The Indenture and the indenture governing the 12 1/2%
Notes (the "12 1/2% Notes Indenture") will permit certain indebtedness of the
Company to be secured. In addition, the Senior Discount Notes will be
effectively subordinated to $34 million of indebtedness and other liabilities
and commitments (including trade payables) of the Company's subsidiaries.
Limited Operations of Certain Services; History of Net Losses. The Company's
business commenced in 1987. Substantially all of the Company's revenues are
derived from local exchange services, enhanced data services, long distance
services, integration services and certain local network services. Many of
these services have only recently been initiated or their availability only
recently expanded in new market areas. The Company is expecting to increase
substantially the size of its operations 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 expansion of its networks
require significant capital, operational and administrative expenditures, a
substantial portion of which are incurred before the realization of revenues.
These capital expenditures will result in negative cash flow until an adequate
customer base is established. Although its revenues have increased in each of
the last three years, Intermedia has incurred significant increases in
expenses associated with the installation of local/long distance voice
switches and expansion of its fiber optic networks, services and customer
base. Intermedia reported net losses of approximately $3.1 million, $20.7
million, $57.2 million and $27.4 million for the years ended December 31,
1994, 1995 and
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1996 and the quarter ended March 31, 1997, respectively. The Company
anticipates recording a significant net loss in 1997 that is expected to be
substantially greater than the loss in 1996 and expects net losses to continue
for the next several years. In addition, the Company expects to have negative
EBITDA in 1997. There can be no assurance that Intermedia will achieve or
sustain profitability or positive EBITDA in the future.
Class Action by DIGEX Stockholders. On June 5, 1997, the Company announced
that it had agreed to acquire 100% of the outstanding equity of DIGEX. The
acquisition was consummated through a tender offer for all of the outstanding
shares of DIGEX, which closed on July 9, 1997, followed by a cash merger
effective on July 11, 1997 (the "Merger").
On June 20, 1997, two purported class action complaints were filed in the
Court of Chancery of the State of Delaware in and for New Castle County
respectively By TAAM Associates, Inc. and David and Chaile Steinberg (the
"Complaints"), purported stockholders of DIGEX, on behalf of all non-
affiliated common stockholders of DIGEX against Intermedia, DIGEX and the
Directors of DIGEX (the "DIGEX Directors"). The Complaints allege that the
DIGEX Directors violated their fiduciary duties to the public stockholders of
DIGEX by agreeing to vote in favor of the Merger and that Intermedia knowingly
aided and abetted such violation by offering to retain DIGEX management in
their present positions and consenting to stock option grants to certain
executive officers of DIGEX. The Complaints seek a preliminary and permanent
injunction enjoining the Merger and cash damages from the DIGEX Directors. No
application was made for a preliminary injunction prior to the consummation of
the Merger.
These cases are in their very early stages and no assurance can be given as
to their ultimate outcome. Intermedia, after consultation with its counsel,
believes that there are meritorious factual and legal defenses to the claims
in the Complaints. Intermedia intends to defend vigorously the claims in the
Complaints.
Possible Default Under the 13 1/2% Notes Indenture. In connection with the
Offering, the Company defeased a portion of the Company's outstanding 13 1/2%
Series B Senior Notes due 2005 (the "13 1/2% Notes" and together with the 12
1/2% Notes, the "Existing Senior Notes"). Such defeasance will not become
effective until the 91st day after the deposit with SunTrust Bank, Central
Florida, National Association, as trustee ("SunTrust") of the funds necessary
to defease the covenants in the indenture (the "13 1/2% Notes Indenture" and
together with the 12 1/2% Notes Indenture, the "Existing Senior Notes
Indentures") governing the 13 1/2% Notes. Until such time as the defeasance
becomes effective, the issuance by the Company of the Old Notes in the
Offering will constitute an event which could be declared an Event of Default
under the 13 1/2% Notes Indenture 30 days after the receipt of notice from
SunTrust or the holders of 25% of the outstanding principal amount of the 13
1/2% Notes. If such an Event of Default were declared and the maturity of the
13 1/2% Notes were accelerated, this would constitute an Event of Default
under the 12 1/2% Notes Indenture and under the Certificate of Designation
(the "Series B Certificate of Designation") setting forth the rights of the 13
1/2% Series B Redeemable Exchangeable Preferred Stock due 2009 (the "Series B
Preferred Stock"). If the 13 1/2% Notes were accelerated, a portion of the
funds deposited with SunTrust could be used to repay the 13 1/2% Notes. If the
12 1/2% Notes were also accelerated the Company would have available funds to
pay the 12 1/2% Notes, but such payment would significantly deplete the funds
available for the Company's capital expansion plan. An Event of Default would
not lead to acceleration of the Series B Preferred Stock. The Company's 13
1/2% Notes will be classified as current liabilities on the Company's balance
sheet until such time as the defeasance becomes effective.
Significant Capital Requirements and Need for Additional
Financing. Expansion of the Company's existing networks and services and the
development of new networks and services require significant capital
expenditures. Intermedia expects to fund its capital requirements through
existing resources, joint ventures, debt or equity financing, including
capital raised through the Offering and Concurrent Offering, and internally
generated funds. The Company expects that to continue to expand its business
will require raising substantial additional equity and/or debt capital in the
year 2000. Depending on market conditions, the Company may determine to raise
additional capital before such time. There can be no assurance, however, that
Intermedia will be successful in 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
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competitive conditions, government regulation and capital costs. Failure to
generate sufficient funds may require Intermedia 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.
Effect of Substantial Additional Indebtedness on the Company's Ability to
Repay the Senior Discount Notes. The Existing Senior Notes Indentures, the
Indenture and the Series B Certificate of Designation limit, but do not
prohibit, the incurrence of additional indebtedness by the Company and its
subsidiaries, and the Company may incur substantial additional indebtedness
during the next few years to finance the construction of networks and purchase
of network electronics, including local/long distance voice and data switches.
Additional indebtedness of the Company may rank pari passu with the Senior
Discount Notes in certain circumstances. See "Description of the Senior
Discount Notes." The debt service requirements of any additional indebtedness
could make it more difficult for the Company to make principal and interest
payments on the Senior Discount Notes. No guarantees have been issued with
respect to the Senior Discount Notes; thus the Company's subsidiaries are not
directly obligated under the Senior Discount Notes. Earnings generated by any
of the Company's subsidiaries, as well as the existing assets of such
subsidiaries, will have to be used first by such subsidiaries to fulfill their
debt service requirements. See "--Effective Subordination of the Senior
Discount Notes."
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 or will not impair the
Company's ability to service its outstanding obligations.
Regulatory Approval of the Offering and the Concurrent Offering. Ten of the
states in which the Company is certificated provide for prior approval of the
issuance of debt and equity securities by the Company. One additional state in
which the Company is certificated provides for prior approval of the issuance
of preferred stock which is convertible into common stock. The requirement for
such approvals may have been pre-empted by the National Securities Market
Improvement Act of 1996, although there is no case law on this point. Because
of time constraints, the Company was not able to obtain such approval from any
of the eleven states prior to consummation of the Offering or the Concurrent
Offering. The Company has filed the required applications or notifications in
each of the states and approval has been obtained in three of the states. In
six of these states, the Company's intrastate revenues for the first quarter
of 1997 were less than $1,000 per state and in only one state did such
revenues exceed $4,000 for the first quarter. After consultation with counsel,
the Company believes the remaining approvals will be granted and that
obtaining such approvals subsequent to the Offering and the Concurrent
Offering should not result in any material adverse consequences to the
Company, although there can be no assurance that such a consequence will not
result.
Maintenance of Peering Relationships. The Internet is comprised of many ISPs
who operate their own networks and interconnect with other ISPs at various
peering points. The establishment and maintenance of peering relationships
with other ISPs is necessary in order to exchange traffic with other ISPs
without having to pay settlement charges. Although DIGEX meets the industries
current standards for peering, there is no assurance that other national ISPs
will maintain peering relationships with DIGEX or with Intermedia. In
addition, there may develop increasing requirements associated with
maintaining peering with the major national ISPs with which DIGEX and the
Company may have to comply. There can be no assurance that DIGEX and the
Company will be able to expand or adapt their network infrastructure to meet
the industry's evolving standards on a timely basis, at a commercially
reasonable cost, or at all.
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Potential Liability of On-Line Service Providers. The law in the United
States relating to the liability of on-line service providers and ISPs for
information carried on, disseminated through or hosted on their systems is
currently unsettled. Several private lawsuits seeking to impose such liability
are currently pending. In one case brought against an ISP, Religious
Technology Center v. Netcom On-Line Communication Services, Inc., the United
States District Court for the Northern District of California ruled in a
preliminary phase that under certain circumstances ISPs could be held liable
for copyright infringement. The case has not reached final judgment. The 1996
Act prohibits and imposes criminal penalties and civil liability for using an
interactive computer service to transmit certain types of information and
content, such as indecent or obscene communications. On June 26, 1997, the
Supreme Court affirmed the decision of a panel of three federal judges which
granted a preliminary injunction barring enforcement of this portion of the
1996 Act to the extent that enforcement is based upon allegations other than
obscenity or child pornography as an impermissible restriction on the First
Amendment's right of free speech. In addition, numerous states have adopted or
are currently considering similar types of legislation. The imposition upon
ISPs or Web hosting sites of potential liability for materials carried on or
disseminated through their systems could require DIGEX and the Company to
implement measures to reduce their exposure to such liability, which may
require the expenditure of substantial resources or the discontinuation of
certain product or service offerings. The Company believes that it is
currently unsettled whether the 1996 Act prohibits and imposes liability for
any services provided by DIGEX and the Company should the content or
information transmitted be subject to the statute. The increased attention
focused upon liability issues as a result of these lawsuits, legislation and
legislative proposals could affect the growth of Internet use. Any such
liability or asserted liability could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence upon Network Infrastructure; Risk of System Failure; Security
Risks. The Company's success in marketing its services to business and
government users requires that the Company provide superior reliability,
capacity and security via its network infrastructure. The Company's networks
are subject to physical damage, power loss, capacity limitations, software
defects, breaches of security (by computer virus, break-ins or otherwise) and
other factors, certain of which have caused, and will continue to cause,
interruptions in service or reduced capacity for the Company's customers.
Similarly, the Company's ISP business, including the DIGEX business, relies on
the availability of its network infrastructure for the provision of Internet
connectivity. Interruptions in service, capacity limitations or security
breaches could have a material adverse effect on the Company's and DIGEX's
business, financial condition and results of operations.
Risks of Implementation; Need to Obtain Permits and Rights of Way. The
Company is continuing to expand its existing networks. The Company has
identified other expansion opportunities in the eastern half of the 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. In addition, the Company may require
pole attachment agreements with utilities and ILECs to operate existing and
future networks, and there can be no assurance that such agreements will be
obtained or obtainable on reasonable terms. 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, including local exchange services,
it offers from ILECs, which currently dominate their local telecommunications
markets. ILECs have long-standing relationships with their customers which
relationships may create competitive barriers. Furthermore, ILECs may have the
potential to subsidize competitive service
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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 ICPs and
CLECs operating fiber optic networks. In addition, the Company faces
competition in its integration services business from equipment manufacturers,
the RBOCs and other ILECs, long distance carriers and systems integrators, and
in its enhanced data services business (including Internet) from local
telephone companies, long distance carriers, very small aperture terminal
("VSAT") providers, certain ISPs and others. In particular, the market for
Internet services is extremely competitive and there are limited barriers to
entry. 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 ILECs with increased pricing
flexibility as competition increases. If ILECs are permitted to lower their
rates substantially or engage in excessive volume or term discount pricing
practices for their customers, the net income or cash flow of ICPs and CLECs,
including the Company, could be materially adversely affected. In addition,
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 once certain criteria are met. Once
the RBOCs begin to provide such services, they will be in a position to offer
single source service similar to that being offered by Intermedia. In
addition, AT&T and MCI have entered and other interexchange carriers have
announced their intent to enter into the local exchange services market, which
is facilitated by the 1996 Act's resale and unbundled network element
provisions. The Company cannot predict the number of competitors that will
emerge as a result of existing or new federal and state regulatory or
legislative actions. Competition from the RBOCs with respect to interexchange
services or from AT&T, MCI or others with respect to local exchange services
could have a material adverse effect on the Company's business.
Regulation. The Company is subject to varying degrees of federal, state and
local regulation. The Company is not currently subject to price cap or rate of
return regulation, nor is it currently required to obtain FCC authorization
for the installation, acquisition or operation of its network facilities.
Further, in October 1996 the FCC issued an order holding that non-dominant
carriers, such as the Company, are required to withdraw interstate tariffs for
domestic long distance service. That order has been stayed by a federal
appeals court and it is not clear at this time whether the detariffing order
will be implemented. Until further action is taken by the court, the Company
will continue to maintain tariffs for these services. In June 1997, the FCC
issued another order stating that non-dominant carriers, such as the Company,
could withdraw their tariffs for interstate access services. While the Company
has no immediate plans to withdraw its tariff, this FCC order allows the
Company to do so. The FCC also requires the Company to file interstate tariffs
on an ongoing basis for international traffic and access services. The Company
is generally subject to certification and tariff or price list filing
requirements for intrastate services by state regulators. Although passage of
the 1996 Act should result in increased opportunities for companies that are
competing with the ILECs, no assurance can be given that changes in current or
future regulations adopted by the FCC or state regulators or other legislative
or judicial initiatives relating to the telecommunications industry would not
have a material adverse effect on the Company. In addition, although the 1996
Act provides incentives to the ILECs that are subsidiaries of RBOCs to enter
the long distance service market by requiring ILECs to negotiate
interconnection agreements with local competitors, there can be no assurance
that these ILECs will negotiate quickly with competitors such as the Company
for the required interconnection of the competitor's networks with those of
the ILECs.
Potential Diminishing Rate of Growth. During the period from 1994 to 1996,
the Company's revenues have grown at a compound annual growth rate of 169%.
While the Company expects to continue to grow, as its size increases it is
likely that its rate of growth will diminish.
Risk of New Service Acceptance by Customers. The Company has recently
introduced a number of services, primarily local exchange 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
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the Company as the provider of such 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 Intermedia 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 Intermedia 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 a long-term
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
ILECs 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.
Dependence on Business from IXCs. For the year ended December 31, 1996,
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--Customer Strategy."
In addition, the Company's growth strategy assumes increased revenues from
IXCs from the deployment of local/long distance voice 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.
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 Intermedia and the investor within the rapidly consolidating
telecommunications industry. There can be no assurance that agreements for any
of the foregoing will be reached. An investment, business combination or
strategic alliance could constitute a change of control. The Indenture, the 12
1/2% Notes Indenture and the Series B Certificate of Designation provide that
a change of control would require the Company to repay the indebtedness and
redeem the Series B Preferred Stock 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 and redemption or could obtain
any additional debt or equity financing that could
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be necessary in order to repay the Senior Discount Notes and the 12 1/2 Notes
and to redeem the Series B Preferred Stock.
Certain Tax Considerations. For a discussion of certain material federal
income tax considerations which are relevant to the purchase, ownership and
disposition of the Senior Discount Notes, see "Certain Federal Income Tax
Considerations."
Forward Looking Statements. The statements contained in this Prospectus that
are not historical facts are "forward-looking statements" (as such term is
defined in the Private Securities Litigation Reform Act of 1995), which can be
identified by the use of forward-looking terminology such as "estimates,"
"projects," "anticipates," "expects," "intends," "believes," or the negative
thereof or other variations thereon or comparable terminology, or by
discussions of strategy that involve risks and uncertainties. Management wishes
to caution the reader that these forward-looking statements, such as the
Company's plans to expand its existing networks or to build and acquire
networks in new areas, the market opportunity presented by larger metropolitan
areas, its anticipation of installation of switches or the provision of local
exchange services and revenues from designated markets during 1997, and
statements regarding development of the Company's businesses, the estimate of
market sizes and addressable markets for the Company's services and products,
the Company's anticipated capital expenditures, regulatory reform and other
statements contained in this Prospectus regarding matters that are not
historical facts, are only estimates or predictions. No assurance can be given
that future results will be achieved; actual events or results may differ
materially as a result of risks facing the Company or actual results differing
from the assumptions underlying such statements. Such risks and assumptions
include, but are not limited to, the Company's ability to successfully market
its services to current and new customers, generate customer demand for its
services in the particular markets where it plans to market services, access
markets, identify, finance and complete suitable acquisitions, design and
construct fiber optic networks, install cable and facilities, including
switching electronics, and obtain rights-of-way, building access rights and any
required governmental authorizations, franchises and permits, all in a timely
manner, at reasonable costs and on satisfactory terms and conditions, as well
as regulatory, legislative and judicial developments that could cause actual
results to vary materially from the future results indicated, expressed or
implied, in such forward-looking statements.
Moreover, the Company presents certain data contained herein on an annualized
basis, based on quarterly or monthly data, because the Company believes that
such annualized data is a standard method to present certain data in the
telecommunications industry. However, actual annual results could differ
materially from annualized data because annualized data does not account for
factors such as seasonality, cyclicality, growth or decline. Consequently,
investors should not place undue reliance on the annualized data.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were originally issued and sold on July 9, 1997 in reliance
upon the exemptions from registration under Rule 144A and Section 4(2) of the
Securities Act. Pursuant to the Registration Rights Agreement, the Company
agreed to register with the SEC a series of notes with substantially identical
terms as the Old Notes, to be offered in exchange for the Old Notes. The
purpose of the Exchange Offer is to satisfy the Company's obligations under
the Registration Rights Agreement. Holders that are not prohibited from
participating in the Exchange Offer and do not tender all of their Old Notes
will no longer have any registration rights under the Registration Rights
Agreement.
TERMS OF THE EXCHANGE
The Company offers to exchange, subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal accompanying this Prospectus, the
same principal amount at maturity of Senior Discount Notes for the Old Notes
tendered for exchange. The terms of the Senior Discount Notes are
substantially identical to the Old Notes in all material respects (including
interest rate and maturity), except that (i) the Senior Discount Notes will
not be subject to the restrictions on transfer (other than with respect to
holders who are affiliates) and (ii) the Registration Rights Agreement
covenants regarding registration and the related Liquidated Damages (other
than those that have accrued and were not paid) with respect to Registration
Defaults will have been deemed satisfied. The Senior Discount Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits
of the Indenture. See "Description of the Senior Discount Notes." The Exchange
Offer is not conditioned upon any minimum aggregate principal amount of Old
Notes being tendered for exchange.
The Company believes that Senior Discount Notes received in exchange for Old
Notes may be offered for sale, sold and otherwise transferred by any holder
(other than any holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that the Senior Discount Notes are acquired in the ordinary course of
the holder's business, the holder has no arrangement or understanding with any
person to participate in the distribution of the Senior Discount Notes and
neither the holder nor any other person is engaging in or intends to engage in
a distribution of the Senior Discount Notes. Any holder who tenders in the
Exchange Offer for the purpose of participating in a public distribution of
the Senior Discount Notes must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with the
distribution. Broker-dealers may not exchange Old Notes which are part of an
unsold original allotment in the Exchange Offer.
Tendering holders of the Old Notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the Exchange Offer.
EXPIRATION DATE; EXTENSIONS, TERMINATION; AMENDMENT
The Exchange Offer will expire on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., New York City time, on September 11, 1997 or such later
date and time, if any, as extended by the Company, in its sole discretion. The
Company may extend the Exchange Offer at any time and from time to time by
giving oral or written notice to holders of the Old Notes and unless otherwise
required by applicable law or regulation, by timely public announcement, by
making a release to the Dow Jones News Service on or before the Expiration
Date. During any extension of the Exchange Offer, all Old Notes tendered for
exchange will remain subject to the Exchange Offer. In connection with the
Exchange Offer, the Company will comply with all applicable requirements of
the federal securities laws, including, but not limited to, Rule 14e-1 under
the Exchange Act.
23
<PAGE>
The Exchange Date will be the first business day following the Expiration
Date. The Company expressly reserves the right to (i) terminate the Exchange
Offer and not accept for exchange any Old Notes if either of the events set
forth under "Conditions to the Exchange Offer" shall have occurred and shall
not have been waived by the Company and (ii) amend the terms of the Exchange
Offer in any manner which, in its good faith judgment,
is advantageous to the holders of the Old Notes, whether before or after any
tender of the Old Notes. Unless the Company terminates the Exchange Offer
prior to 5:00 p.m., New York City time, on the Expiration Date, the Company
will exchange the Senior Discount Notes for the Old Notes on the Exchange
Date.
PROCEDURES FOR TENDERING OLD NOTES
The Exchange Offer is subject to the terms and conditions set forth in this
Prospectus and the Letter of Transmittal.
Old Notes may be tendered by properly completing and signing the Letter of
Transmittal and delivering the Letter of Transmittal to the Exchange Agent at
its address set forth in this Prospectus on or prior to the Expiration Date,
together with (i) the certificate or certificates representing the Old Notes
being tendered and any required signature guarantees, (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of the Old
Notes, if such procedure is available, into the Exchange Agent's account at
The Depository Trust Company (the "Book-Entry Transfer Facility" or
"Depository") pursuant to the procedure for book-entry transfer described
below, or (iii) the completion of the procedures for guaranteed delivery set
forth below. See "Guaranteed Delivery Procedures."
If the Senior Discount Notes are to be issued in the name of the registered
holder and the registered holder has signed the Letter of Transmittal the
holder's signature need not be guaranteed. In any other case, the tendered Old
Notes must be endorsed or accompanied by written instruments of transfer in
form satisfactory to the Exchange Agent and duly executed by the registered
holder and the signature on the endorsement or instrument of transfer must be
guaranteed by a commercial bank or trust company located or having an office
or correspondent in the United States, or by a member firm of a national
securities exchange or of the National Association of Securities Dealers, Inc.
(an "Eligible Institution"). If the Senior Discount Notes and/or Old Notes not
exchanged are to be delivered to an address other than that of the registered
holder appearing on the register for the Old Notes, the signature on the
Letter of Transmittal must be guaranteed by an Eligible Institution.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER
INSURANCE OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE
EXPIRATION DATE. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal,
the Old Notes or a Book-Entry Confirmation and all other required documents
are received by the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the right to reject any or all tenders
not in proper form or the acceptance for exchange of which may, in the opinion
of the Company's counsel, be unlawful. The Company also reserves the right to
waive any of the conditions of the Exchange Offer or any defect, withdrawal,
rejection of tender or irregularity in the tender of any Old Notes. Neither
the Company, the Exchange Agent nor any other person will be under any duty to
give notification of any defects, withdrawals, rejections or irregularities or
incur any liability for failure to give any such notification.
24
<PAGE>
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The holder tendering Old Notes exchanges, assigns and transfers the Old
Notes to the Company and irrevocably constitutes and appoints the Exchange
Agent as the holder's agent and attorney-in-fact to cause the Old Notes to be
assigned, transferred and exchanged. The holder represents and warrants that
(i) it has full power and authority to tender, exchange, assign and transfer
the Old Notes and to acquire Senior Discount Notes in exchange for the Old
Notes, (ii) when the Old Notes are accepted for exchange, the Company will
acquire good and unencumbered title to the Old Notes, free and clear of all
liens, restrictions, charges and encumbrances and not subject to any adverse
claim and (iii) it will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
exchange, assignment and transfer of tendered Old Notes. The holder further
agrees that acceptance of any tendered Old Notes by the Company and the
issuance of Senior Discount Notes in exchange therefor shall constitute
performance in full by the Company of its obligations under the Registration
Rights Agreement and that the Company shall have no further obligations or
liabilities thereunder (except with respect to accrued and unpaid Liquidated
Damages, if any). All authority conferred by the holder will survive the death
or incapacity of the holder and every obligation of the holder shall be
binding upon the heirs, legal representatives, successors assigns, executors
and administrators of the holder.
Each holder will also certify that it (i) is not an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act or that, if it
is an "affiliate," it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable, (ii) is
acquiring the Senior Discount Notes offered in the ordinary course of its
business and (iii) has no arrangement with any person to participate in the
distribution of the Senior Discount Notes.
WITHDRAWAL RIGHTS
Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date.
To be effective, a written notice of withdrawal must be timely received by
the Exchange Agent at its address set forth in this Prospectus by mail,
courier, telegraphic, telex or facsimile transmission. Any notice of
withdrawal must specify the person named in the Letter of Transmittal as
having tendered Old Notes to be withdrawn, the certificate numbers of Old
Notes to be withdrawn, the principal amount of Old Notes to be withdrawn, a
statement that the holder is withdrawing its election to tender the Old Notes
for exchange, and the name of the registered holder of the Old Notes, and must
be signed by the holder in the same manner as the original signature on the
Letter of Transmittal (including any required signature guarantees) or be
accompanied by evidence satisfactory to the Exchange Agent that the person
withdrawing the tender has succeeded to the beneficial ownership of the Old
Notes being withdrawn. The Exchange Agent will return the properly withdrawn
Old Notes promptly following receipt of notice of withdrawal. If Old Notes
have been tendered pursuant to a book-entry transfer, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of the Book-Entry Transfer Facility. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by the Company, and such determination will be final and binding on
all parties. Any Old Notes which have been tendered for exchange but which are
not exchanged will be returned to the holder thereof without cost to the
holder (or, in the case of Old Notes tendered by book-entry transfer by
crediting an account maintained with the Book-Entry Transfer Facility for the
Old Notes) as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be re-
tendered at any time on or prior to the Expiration Date. Any Old Notes so
withdrawn and not re-tendered will not be exchanged for Senior Discount Notes
under the Exchange Offer.
25
<PAGE>
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF SENIOR DISCOUNT NOTES
Upon terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Old Notes validly rendered and not withdrawn and
issuance of the Senior Discount Notes will be made on the Exchange Date. For
the purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange validly tendered Old Notes when, as and if the Company
has given oral or written notice thereof to the holders.
The Exchange Agent will act as agent for the tendering holders of Old Notes
for the purpose of causing the Old Notes to be assigned, transferred and
exchanged for Senior Discount Notes. Upon the terms and subject to the
conditions of the Exchange Offer, delivery of Senior Discount Notes in
exchange for Old Notes will be made by the Exchange Agent promptly after
acceptance of the tendered Old Notes by the Company. Tendered Old Notes not
accepted for exchange by the Company will be returned without expense to the
tendering holders (or, in the case of Old Notes tendered by book-entry
transfer crediting an account maintained with the Depository) promptly
following the Expiration Date or, if the Company terminates the Exchange Offer
prior to the Expiration Date, promptly after the Exchange Offer is terminated.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account at the Book-Entry Transfer
Facility for purposes of the Exchange Offer within two business days after the
date of this Prospectus, and any financial institution that is a participant
in the Book-Entry Transfer Facility's systems may make book-entry delivery of
Old Notes by causing the Book-Entry Transfer Facility to transfer the Old
Notes into the Exchange Agent's account at the Book-Entry Transfer Facility in
accordance with the Book-Entry Transfer Facility's procedure for transfer. The
Letter of Transmittal with any required signature guarantees and any other
required documents, must be received by the Exchange Agent on or prior to the
Expiration Date for any book-entry transfers.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other documents required hereby to the Exchange Agent
prior to the Expiration Date must tender their Old Notes and follow the
guaranteed delivery procedures. Pursuant to such procedures: (i) such tender
must be made by or through an Eligible Institution; (ii) prior to the
Expiration Date, the Exchange Agent must have received form the Eligible
Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the holder of the Old Notes, the certificate number or
numbers of such Old Notes and the principal amount of Old Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
five business days after the Expiration Date, the Letter of Transmittal (or
facsimile thereof) together with the certificate(s) representing the Old Notes
(or a confirmation of electronic delivery of book-entry delivery into the
Exchange Agent's account at the Depository) and any of the required documents
will be deposited by the Eligible Institution with the Exchange Agent; and
(iii) such properly completed and executed Letter of Transmittal (or facsimile
hereof), as well as all other documents required by the Letter of Transmittal
and the certificate(s) representing all tendered Old Notes in proper form for
transfer (or a confirmation of electronic mail delivery or book-entry delivery
into the Exchange Agent's account at the Depository) must be received by the
Exchange Agent within five business days after Expiration Date. Any holder of
Old Notes who wishes to tender his Old Notes pursuant to the guaranteed
delivery procedures described above must ensure that the Exchange Agent
receives the Notice of Guaranteed Delivery prior to 5:00 P.M., New York City
time, on the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company will
not be required to issue Senior Discount Notes in exchange for any properly
tendered Old Notes not previously accepted and may terminate the Exchange
Offer (by oral or written notice to the holders and by timely public
announcement communicated, unless otherwise required by applicable law or
regulation, by making a release to the Dow Jones News Service), or, at its
option, modify or otherwise amend the Exchange Offer, if any of the following
events occur:
26
<PAGE>
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (ii) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of
the Old Notes pursuant to the Exchange Offer, or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of
the transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the sole judgment of the
Company might directly or indirectly result in any of the consequences
referred to in clause (i) or (ii) above or, in the sole judgment of the
Company, might result in the holders of Senior Discount Notes having
obligations with respect to resales and transfers of Senior Discount Notes
which are greater than those described in the interpretation of the SEC
referred to on the cover page of this Prospectus, or would otherwise make
it inadvisable to proceed with the Exchange Offer; or
(b) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospectus of the Company, taken as a whole, that, in the sole judgment of
the Company is or may be adverse to the Company, or the Company shall have
become aware of facts that, in the sole judgment of the Company have or may
have adverse significance with respect to the value of the Old Notes or the
Senior Discount Notes; which, in the sole judgment of the Company in any
case, and regardless of the circumstances (including any action by the
Company) giving rise to any such condition, makes it unlawful to proceed
with the Exchange Offer and/or with such acceptance for exchange or with
such exchange.
The Company expressly reserves the right to terminate the Exchange Offer and
not accept for exchange any Old Notes upon the occurrence of any of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date
if any of the conditions set forth above occur. Moreover, regardless of
whether any of such conditions has occurred, the Company may amend the
Exchange Offer in any manner which, in its good faith judgment, is
advantageous to holders of the Old Notes.
These conditions are for the sole benefit of the Company and may be waived
by the Company, in whole or in part, in its sole discretion. Any determination
made by the Company that any of these conditions has occurred will be final
and binding on all holders, absent manifest error.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no Senior Discount Notes will be issued in exchange for any such
Old Notes, if at such time any stop order shall be threatened or in effect
with respect to the Registration Statement of which this Prospectus
constitutes a part or the qualification of the Indenture under the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act").
EXCHANGE AGENT
SunTrust Bank, Central Florida, National Association, the Trustee under the
Indenture, has been appointed as the Exchange Agent for the Exchange Offer.
All executed Letters of Transmittal, questions and requests for assistance and
requests for additional copies of this Prospectus or of the Letter of
Transmittal should be directed to the Exchange Agent, addressed as follows:
SunTrust Bank, Central Florida, National Association
225 East Robinson St.
Suite 350
Orlando, FL 32801
Attention: Alice Springer
Facsimile: (407) 237-5299
Confirm by telephone: (407) 237-5179
27
<PAGE>
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY
SOLICITATION OF TENDERS; EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those
contained in this Prospectus and the Letter of Transmittal. If given or made,
such information or representations should not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any
exchange made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the
respective dates as of which information is given herein. The Exchange Offer
is not being made to (nor will tenders be accepted from or on behalf of)
holders of Old Notes in any jurisdiction in which the making of the Exchange
Offer or the acceptance thereof would not be in compliance with the laws of
such jurisdiction. The Company may, however, at the reasonable request of any
holder, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Old Notes
in such jurisdiction.
TRANSFER TAXES
Holders who tender their Old Notes in exchange for Senior Discount Notes
will not be obligated to pay any transfer taxes in connection therewith,
except that holders who instruct the Company to register Senior Discount Notes
in the name of, or request that Old Notes not tendered or not accepted in the
Exchange Offer be returned to, a person other than the registered tendering
holder will be responsible for the payment of any applicable transfer tax
thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes that were not
prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration Rights
Agreement with respect to such non-tendered Old Notes and, accordingly such
Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, the Old Notes may not be offered
or sold, unless registered under the Securities Act and the applicable state
securities laws, except pursuant to an exception from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The
Company does not intend to register the Old Notes under the Securities Act.
Based on interpretations by the staff of the SEC, Senior Discount Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by holders (other than any holder
which is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery requirements of Securities Act provided that the Senior Discount
Notes are acquired in the ordinary course of the holders' business, the
holders have no arrangement with any person to participate in the distribution
of the Senior Discount Notes and neither the holder nor any other person is
engaging in or intends to engage in a distribution of the Senior Discount
Notes. If any holder has any arrangement or understanding with respect to the
distribution of the Senior Discount Notes to be acquired pursuant to the
Exchange Offer, the holder (i) could not rely on the applicable
interpretations of the staff of the SEC and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Senior Discount Notes for its own account in exchange for Old Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
the Senior Discount Notes. See "Plan of Distribution." In addition, to comply
with the securities laws of certain jurisdictions, if applicable, the Senior
Discount Notes may not be offered or sold unless they have been registered or
qualified for sale in such jurisdiction or an exemption from registration or
qualification is available and is complied with. The Company has agreed under
the Registration Rights Agreement to register or qualify the Senior Discount
Notes for resale in any jurisdictions reasonably requested by any holder,
subject to certain limitations.
28
<PAGE>
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
Upon consummation of the Exchange Offer, holders of Old Notes that were not
prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration Rights
Agreement with respect to such non-tendered Old Notes and, accordingly, such
Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon.
The Company has not entered into any arrangement or understanding with any
person to distribute the Senior Discount Notes to be received in the Exchange
Offer and to the best of the Company's information and belief, each person
participating in the Exchange Offer is acquiring the Senior Discount Notes in
its ordinary course of business and has no arrangement or understanding with
any person to participate in the distribution of the Senior Discount Notes to
be received in the Exchange Offer. In this regard, the Company will make each
person participating in the Exchange Offer aware (through this Prospectus or
otherwise) that if the Exchange Offer is being registered for the purpose of
secondary resale, any holder using the Exchange Offer to participate in a
distribution of Senior Discount Notes to be acquired in the registered
Exchange Offer (1) may not rely on the staff position enunciated in Morgan
Stanley and Co. Inc. (avail. June 5, 1991) and Exxon Capital Holding Corp.
(avail. May 13, 1988) or similar letters and (2) must comply with registration
and prospectus delivery requirements of the Securities Act in connection with
a secondary resale transaction.
ACCOUNTING TREATMENT
The Senior Discount Notes will be recorded at the same carrying value as the
Old Notes, as reflected in the Company's accounting records on the Exchange
Date. Accordingly, no gain or loss for accounting purposes will be recognized
by the Company. The expenses of the Exchange Offer will be amortized over the
term of the Senior Discount Notes.
29
<PAGE>
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1997, the pro forma capitalization which gives effect
to the DIGEX Acquisition and the capitalization of the Company for both the
Offering and the Concurrent Offering. This table should be read in conjunction
with the Consolidated Financial Statements of the Company and the Notes
thereto, the Unaudited Pro Forma Condensed Consolidated Financial Statements
and other information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
--------------------------------------------------
PRO PRO FORMA PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED(2) AS ADJUSTED(3)
---------- --------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash
equivalents(4)............ $ 435,859 $ 304,051 $498,625 $ 665,725
========== ========= ======== ==========
Long-term debt (including
current maturities):
13 1/2% Senior Notes due
2005.................... $ 159,141 $ 159,141 $ -- $ --
12 1/2% Senior Discount
Notes due 2006.......... 200,114 200,114 200,114 200,114
11 1/4% Senior Discount
Notes due 2007.......... -- -- 374,785 374,785
Other long-term debt..... 96 13,717 13,717 13,717
Capital lease
obligations............. 5,129 5,129 5,129 5,129
---------- --------- -------- ----------
Total long-term debt... 364,480 378,101 593,745 593,745
---------- --------- -------- ----------
Series B redeemable
exchangeable preferred
stock due 2009............ 292,250 292,250 292,250 292,250
Series D junior convertible
preferred stock........... -- -- -- 167,100
Stockholders' equity:
Common stock and
additional paid-in
capital................. 210,081 230,081 230,081 230,081
Accumulated deficit...... (121,921) (121,921) (167,975) (167,975)
Deferred compensation.... (4,294) (4,294) (4,294) (4,294)
---------- --------- -------- ----------
Total stockholders'
equity.................... 83,866 103,866 57,812 57,812
---------- --------- -------- ----------
Total capitalization....... $ 740,596 $ 774,217 $943,807 $1,110,907
========== ========= ======== ==========
</TABLE>
- --------
(1) This column gives effect to the DIGEX Acquisition as if it had occurred on
March 31, 1997.
(2) This column gives effect to the DIGEX Acquisition and the Offering.
(3) This column gives effect to the DIGEX Acquisition, the Offering, the
Concurrent Offering, and the defeasance of the 13 1/2% Notes with the
estimated $46,000 loss on early extinguishment of debt which increases the
accumulated deficit.
(4) Excludes restricted cash.
30
<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, 1996 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 selected financial data presented below as of and for
the quarters ended March 31, 1996 and 1997 have been derived from unaudited
financial statements of the Company. In the opinion of management, the
unaudited financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments, which consist only
of normal recurring adjustments, necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the full year.
The operating results of EMI are included in the Company's consolidated
operating results commencing July 1, 1996. The operating results of UTT and
NetSolve are included in the Company's consolidated operating results
commencing December 1, 1996. The 1996 pro forma operating information gives
effect to the EMI, UTT, NetSolve and DIGEX acquisitions as if they occurred on
January 1, 1996. The 1997 pro forma operating information gives effect to the
DIGEX Acquisition as if it occurred on January 1, 1997. Both 1996 and 1997 pro
forma operating information give effect to the March 1997 sale of $300 million
of preferred stock, as if it occurred at the beginning of the respective
periods. 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 PRO
FORMA(1) FORMA(2)
YEAR QUARTER
ENDED QUARTER ENDED ENDED
YEAR ENDED DECEMBER 31, DECEMBER, 31 MARCH 31, MARCH 31,
--------------------------------------------- ------------ ----------------- ---------
1992 1993 1994 1995 1996 1996 1996 1997 1997
------- ------- ------- -------- -------- ------------ ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS:
Revenues.............. $ 7,030 $ 8,292 $14,272 $ 38,631 $103,397 $167,644 $13,503 $ 43,938 $ 52,679
Costs and Expenses:
Facilities
administration and
maintenance and line
costs................ 1,760 2,843 5,396 22,989 81,105 128,023 9,258 36,907 44,239
Selling, general and
administrative....... 2,607 3,893 6,412 14,993 36,610 59,597 5,920 19,526 27,036
Depreciation and
amortization......... 2,190 3,020 5,132 10,196 19,836 47,277 3,281 8,294 15,267
------- ------- ------- -------- -------- --------- ------- -------- --------
6,557 9,756 16,940 48,178 137,551 234,897 18,459 64,727 86,542
------- ------- ------- -------- -------- --------- ------- -------- --------
Income (loss) from
operations........... 473 (1,464) (2,668) (9,547) (34,154) (67,253) (4,956) (20,789) (33,863)
Other income (expense)
Interest expense..... (1,031) (844) (1,218) (13,767) (35,213) (36,779) (5,382) (11,089) (11,435)
Interest and other
income.............. 323 234 819 4,060 12,168 2,024 1,445 4,474 2,231
Income tax benefit... -- -- -- 97 -- -- -- -- --
------- ------- ------- -------- -------- --------- ------- -------- --------
Loss before
extraordinary item.. (235) (2,074) (3,067) (19,157) (57,199) (102,008) (8,893) (27,404) (43,067)
Extraordinary loss on
early extinguishment
of debt............. -- -- -- (1,592) -- -- -- -- --
------- ------- ------- -------- -------- --------- ------- -------- --------
Net loss.............. $ (235) $(2,074) $(3,067) $(20,749) $(57,199) $(102,008) $(8,893) $(27,404) $(43,067)
Preferred stock
dividends and
accretions........... (267) -- -- -- -- (41,340) -- (3,375) (10,335)
------- ------- ------- -------- -------- --------- ------- -------- --------
Net loss attributable
to common
stockholders......... $ (502) $(2,074) $(3,067) $(20,749) $(57,199) $(143,348) $(8,893) $(30,779) $(53,402)
======= ======= ======= ======== ======== ========= ======= ======== ========
Net loss per common
share:
Loss before
extraordinary item.. $ (.10) $ (.29) $ (.34) $ (1.91) $ (4.08) $ (9.87) $ (.86) $ (1.89) $ (3.28)
Extraordinary loss... -- -- -- (.16) -- -- -- --
------- ------- ------- -------- -------- --------- ------- -------- --------
Net loss............. $ (.10) $ (.29) $ (.34) $ (2.07) $ (4.08) $ (9.87) $ (.86) $ (1.89) $ (3.28)
======= ======= ======= ======== ======== ========= ======= ======== ========
Weighted average
number of shares
outstanding.......... 4,797 7,077 8,956 10,036 14,018 14,518 10,383 16,297 16,297
OTHER DATA:
Book value per common
share ............... 3.09 5.18 5.39 3.89 7.01 4.26 3.02 5.14 6.26
Ratio of earnings to
combined fixed
charges and preferred
stock dividends(3)... -- -- -- -- -- -- -- -- --
Earnings before
interest, income
taxes, depreciation
and amortization
("EBITDA")(4)........ $ 2,663 $ 1,556 $ 2,464 $ 649 $(14,318) $ (19,976) $(1,675) $(12,495) $(18,596)
Capital expenditures,
including
acquisitions of
businesses, net of
cash acquired........ $ 8,818 $10,486 $13,731 $ 31,915 $143,615 $ 309,391 $17,625 $ 33,333 $190,787
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------- -------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
NETWORK DATA:(5)
Buildings connected(6).... 161 234 293 380 487 387 1,157
Route miles............... 240 335 378 504 655 561 679
Fiber miles............... 6,184 10,239 11,227 17,128 24,122 20,541 29,841
Number of city-based
networks in service...... 4 5 6 9 9 9 9
ENHANCED DATA SERVICES:(5)
Nodes(7).................. -- 100 900 2,300 9,500 2,700 1,250
Cities(8)................. -- 37 336 600 2,200 700 2,500
Switches.................. -- 4 12 31 89 36 100
EMPLOYEES(5)............... 49 58 146 287 874 387 1,026
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED
DECEMBER 31, MARCH 31, MARCH 31,(9)
----------------------------------------- --------- ------------
1992 1993 1994 1995 1996 1997 1997
------- ------- ------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents(10)....... $ 1,775 $27,954 $10,208 $ 50,997 $189,546 $435,839 $ 498,625
Working capital(11).... 8,999 25,712 9,588 70,353 206,029 448,890 455,983
Total assets........... 36,174 61,219 74,086 216,018 512,940 787,388 1,028,475
Long-term obligations
and redeemable
preferred stock
(including current
maturities)........... 11,742 11,614 16,527 165,545 358,508 656,730 885,995
Total stockholders'
equity................ 21,257 45,987 52,033 40,254 114,230 83,866 57,812
</TABLE>
- --------
1. The pro forma operating information gives effect to the EMI, UTT and
NetSolve acquisitions, which occurred effective June 30, 1996, December 1,
1996 and December 1, 1996, respectively, as if they occurred on January 1,
1996. The pro forma operating information also gives effect to the DIGEX
Acquisition and the March 1997 sale of $300 million of preferred stock.
2. The pro forma operating information gives effect to the DIGEX Acquisition
as if it occurred on January 1, 1997. The pro forma operating information
also gives effect to the March 1997 sale of $300 million of preferred
stock.
3. For purposes of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends: (i) earnings consist of loss before
income taxes, plus fixed charges excluding capitalized interest and
preferred stock dividends and (ii) fixed charges consist of interest
expensed and capitalized, plus amortization of deferred financing costs,
preferred stock dividends, plus a portion of rent expense under operating
leases deemed by the Company to represent an interest factor plus
dividends on the Series B Preferred Stock. For the years ended December
31, 1992, 1993, 1994, 1995, and 1996 and the quarters ended March 31, 1996
and 1997 the Company's earnings were insufficient to cover combined fixed
charges and preferred stock dividends by $622, $2,288, $3,324, $19,931,
$59,978, $9,289 and $31,557, respectively. For the year ended December 31,
1996 and the quarter ended March 31, 1997, the Company's pro forma
earnings, after giving effect to the acquisitions described in Notes 1 and
2, above and the Offering were insufficient by $167,531 and $59,215,
respectively to cover pro forma combined fixed charges and preferred stock
dividends. For the year ended December 31, 1996 and the quarter ended
March 31, 1997 the Company's pro forma earnings, after giving effect to
the acquisitions and the sale of preferred stock described in Notes 1 and
2 above, the Offering and the Concurrent Offering, were insufficient by
$179,606 and $62,234 to cover pro forma combined fixed charges and
preferred stock dividends.
4. EBITDA consists of earnings before interest, income taxes, depreciation
and amortization. In addition, 1995 EBITDA excludes an extraordinary
charge of $1,592 related to the early extinguishment of debt. EBITDA is
provided in the Summary of Financial and Other Operating Data 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 present cash flow for the periods presented. See
the Consolidated Statements of Cash Flows included in the Company's
Consolidated Financial Statements and the Notes thereto included elsewhere
in this Prospectus.
5. Amounts as reflected in the table are based upon information contained in
the Company's operating records.
6. Beginning in January 1997, the Company changed its definition of
"Buildings connected" to include buildings connected to the Company's
network via leased facilities controlled by the Company in addition to
those connected to the Company's network via facilities constructed by the
Company. The Company believes the new definition is consistent with
industry practice.
7. Amount represents an individual point of origin and termination of data
served by the Company's enhanced network. In the opinion of management of
the Company, all node numbers are appropriate.
8. Represents the number of discrete postal cities to which enhanced data
services are provided by the Company.
9. Gives effect to the DIGEX Acquisition and the Offering. See
"Capitalization" for additional information on the Concurrent Offering.
10. Cash and cash equivalents excludes investments of $20,954, $26,675, and
$27,102 for the years ended December 31, 1995 and 1996 and the quarters
ended March 31, 1996 and 1997, respectively, restricted under the terms of
various notes and other agreements.
11. Working capital includes the restricted investments referred to in Note
10, above.
The Company's unaudited revenues, EBITDA, and net loss attributable to
common stock holders for the three months ended June 30, 1997 were
approximately $50.1 million, $(14.1) million and $(39.5) million,
respectively, as compared to $16.9 million, $(2.7) million and $(12.2)
million, respectively, for the three months ended June 30, 1996.
32
<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 Consolidated Financial Statements and the Notes thereto incorporated
herein by reference.
OVERVIEW
Since its inception in 1987, the Company has experienced substantial growth.
Building from its original base in Florida, Intermedia now provides integrated
telecommunications services to customers that have a presence in the eastern
half of the United States. The Company currently has nine digital, fiber optic
networks in service and one under development. In addition, the Company's
frame relay network serves customers in approximately 2,500 cities and
provides end-to-end connectivity throughout the United States and many
international markets. As its networks and service offerings have expanded,
the Company has experienced significant year to year growth in revenues and
customers.
Intermedia competes with the ILECs and IXCs in its service territory and
offers a full range of voice and data telecommunications services.
Intermedia's customers include a broad range of business and government end
users and IXCs. The Company delivers local network services, including local
exchange service, 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 data 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. This intercity network combined with the Company's local/long
distance voice switches allows the Company to provide interexchange long
distance service domestically and internationally.
At its inception, Intermedia provided special access and private line
services to IXCs. In 1988, Intermedia was the first telecommunications service
provider in Florida to begin providing special access and private line
services to business customers. In 1991, Intermedia began offering integration
services in response to customers' needs and in 1992, Intermedia introduced
its first enhanced data services to provide flexible capacity and highly
reliable end-to-end data service for its business and government customers.
The Company began offering interexchange long distance service in December
1994, Internet services in 1995 and local exchange services in 1996. 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 Intermedia's 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.
From 1992 through 1995, the Company had achieved positive EBITDA and
increased its revenue base substantially. However, as a result of significant
investments in resources necessary to launch local exchange services and
expand enhanced data services, EBITDA decreased as a percentage of revenue and
the Company's EBITDA was negative for 1996 and the first quarter of 1997. This
was due to the 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 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 is
experiencing 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 are incurred even though
these customers are expected to generate recurring revenue for the Company for
several
33
<PAGE>
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.
RECENT ACQUISITIONS
The Company believes that expanding its strong leadership position in
enhanced data services is fundamental to its success in capturing business
telecommunications market share. In pursuit of this strategy, on July 11,
1997, the Company consummated the final step in its acquisition of 100% of the
outstanding equity of DIGEX for a cash purchase price of approximately $155
million ($13 a share). DIGEX, headquartered in suburban Washington, D.C., is a
national ISP, which provides a comprehensive range of "industrial" strength
Internet solutions, including Internet connectivity, Web site management and
private network solutions, primarily to business and government customers. For
the quarter ended March 31, 1997, DIGEX's revenues were approximately $8.7
million and the combined pro forma revenues of DIGEX and the Company were
approximately $52.7 million for such quarter. DIGEX presently serves
approximately 2,000 customers in 50 metropolitan areas. DIGEX has
approximately 450 employees of which approximately one third are in sales and
marketing. The Company believes that the DIGEX Acquisition will enhance its
strategic position and provide cost savings opportunities. The strategic
benefits include: (i) expansion of the Company's service portfolio to include
nationwide business Internet connectivity, Web site management and private
network solutions; (ii) expansion of the Company's customer base with the
addition of approximately 2,000 new business and government customers; and
(iii) cross marketing of the expanded service portfolio to the combined
customer base. Cost savings opportunities include: (i) elimination of
redundant facilities on over 75% of DIGEX's network routes, which routes it
has in common with the Company; (ii) reduction of local access costs by
utilizing Intermedia's local networks and interconnection agreements; and
(iii) elimination of duplicative administrative costs. See "Risk Factors--
Class Action by DIGEX Stockholders."
On June 24, 1997, the Company purchased from Telco five long distance voice
switches and ancillary network equipment located in Atlanta, Chicago, Dallas,
Los Angeles and New York. Three of these switches will be upgraded to
local/long distance voice switches, consistent with the Company's planned
deployment of fifteen local/long distance voice switches by the end of 1997.
As part of the Telco Acquisition, the Company also acquired certain network
transport services for a three year period. The aggregate purchase price of
the Telco Acquisition was approximately $38 million which was substantially
included in the Company's planned capital expenditures for 1997. The Company
believes that the Telco Acquisition will allow the Company to more rapidly
deploy local/long distance voice switches in these markets and to do so at a
lower overall cost. In addition, the transport services acquired as part of
the Telco Acquisition will permit the Company to accelerate its deployment of
ATM in its intercity and intracity networks. Implementation of ATM will
facilitate additional enhanced data and voice services and network
efficiencies.
PLAN OF OPERATION
During the remainder of 1997 and beyond, the Company believes that its
growth will be balanced among its local exchange, long distance and enhanced
data services. In addition to anticipated internal growth, the DIGEX
Acquisition will substantially increase the Company's enhanced data services
offerings, particularly its Internet and Intranet offerings. Based on the
Company's analysis of FCC data and its knowledge of the industry, the Company
estimates that the market for local exchange, long distance and data services
was approximately $25 billion in 1996 in the Company's service territory. As a
result of the Company's planned expansion in 1997, the Company expects to be
positioned to provide these services in markets with a total opportunity of
approximately $34 billion by the end of 1997, exclusive of the opportunities
provided by the DIGEX Acquisition.
In order to develop its businesses more rapidly and efficiently utilize its
capital resources, Intermedia plans to use the existing fiber optic
infrastructure of other providers in addition to using its existing networks.
While the Company will use significant amounts of capital to deploy enhanced
data and voice switches on a demand
34
<PAGE>
driven basis in selected markets, Intermedia 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.
REVENUE AND CUSTOMER BASE ANALYSIS
Since the Company's founding in 1987, Intermedia has continually introduced
new services. Due to these efforts, Intermedia's customer and revenue base has
expanded substantially in recent years. The Company believes that the
continued aggressive expansion of its enhanced data and interexchange voice
services and the continued deployment 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) lowered the Company's reliance
on any one customer, (ii) increased the total addressable market for the
Company's services and (iii) reduced the Company's percentage of revenue
associated with services to IXCs. 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) PRO FORMA(1)
YEAR ENDED QUARTER ENDED QUARTER ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
--------------------------- ------------ -------------- -------------
1994 1995 1996 1996 1996 1997 1997
-------- ------- -------- ------------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Customer revenue:
Non-IXCs................ 77% 90% 90% 91% 90% 92% 92%
IXCs.................... 23 10 10 9 10 8 8
-------- ------- -------- ------ ------ ------ ------
Total................... 100% 100% 100% 100% 100% 100% 100%
======== ======= ======== ====== ====== ====== ======
Number of customers
served (at end of
period)(2)............. 8,148 9,530 14,133 15,638 10,782 15,921 17,876
Revenue sources:
Local network
services............. 57% 28% 13% 8% 24% 12% 10%
Enhanced data
services............. 16 18 31 31 26 26 38
Interexchange
services............. 9 49 51 58 39 58 48
Integration services.. 18 5 5 3 11 4 4
-------- ------- -------- ------ ------ ------ ------
100% 100% 100% 100% 100% 100% 100%
======== ======= ======== ====== ====== ====== ======
</TABLE>
- --------
(1) Gives effect to the acquisitions of EMI, UTT, NetSolve and DIGEX as if
they had occurred at the beginning of the period presented.
(2) Excludes long distance customers for whom billings were less than $5.00.
35
<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) QUARTER PRO FORMA(1)
YEAR ENDED ENDED QUARTER
YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, ENDED
--------------------------- ------------ ------------- MARCH 31,
1994 1995 1996 1996 1996 1997 1997
------- ------- ------- ------------ ----- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. 100.0% 100.0% 100.0% 100.0% 100% 100% 100%
Facilities
administration and
maintenance and line
cost................... 37.8 59.5 78.4 76.4 68.6 84.0 83.9
Selling, general and ad-
ministrative........... 44.9 38.8 35.4 35.5 43.8 44.4 51.3
Depreciation and amorti-
zation................. 36.0 26.4 19.2 28.2 24.3 18.9 29.1
------- ------- ------- ----- ----- ----- -----
Operating loss.......... (18.7) (24.7) (33.0) (40.1) (36.7) (47.3) (64.3)
Interest expense........ (8.5) (35.6) (34.1) (21.9) (39.9) (25.3) (21.7)
Interest and other in-
come................... 5.7 10.5 11.8 1.2 10.7 10.2 4.2
Income tax benefit...... -- 0.2 -- -- -- -- --
------- ------- ------- ----- ----- ----- -----
Loss before extraordi-
nary item.............. (21.5) (49.6) (55.3) (60.8) (65.9) (62.4) (81.8)
Extraordinary loss on
early extinguishment of
debt................... -- (4.1) -- -- -- -- --
------- ------- ------- ----- ----- ----- -----
Net loss................ (21.5)% (53.7)% (55.3)% (60.8)% (65.9)% (62.4)% (81.8)%
======= ======= ======= ===== ===== ===== =====
</TABLE>
- --------
(1) Gives effect to the acquisitions EMI, UTT, NetSolve and DIGEX as if they
had occurred at the beginning of the period presented.
QUARTER ENDED MARCH 31, 1997 VS. QUARTER ENDED MARCH 31, 1996
The Company's revenue increased from $13.5 million for the first quarter of
1996 to $43.9 million for the same period of 1997. Revenues for each of the
product lines were as follows:
<TABLE>
<CAPTION>
QUARTER
ENDED
MARCH 31,
-----------
1996 1997 INCREASE
----- ----- --------
<S> <C> <C> <C>
Local network services................................ $ 3.2 $ 5.2 $ 2.0
Enhanced data services................................ 3.6 11.3 7.7
Interexchange services................................ 5.3 25.5 20.2
Integration services.................................. 1.4 1.9 0.5
----- ----- -----
$13.5 $43.9 $30.4
===== ===== =====
</TABLE>
The increase in revenue was derived principally from growth in the Company's
local network services, enhanced data services and interexchange services. The
inclusion of EMI contributed $13.9 million to the growth. The Company acquired
the telecommunications division of EMI in June 1996. The Company's annualized
monthly recurring revenue increased to $14.3 million at March 31, 1997 from
$3.9 million at March 31, 1996, an increase of 267%. Monthly recurring revenue
represents the monthly service charges billable to telecommunications service
customers as of the last day of the period indicated and excludes nonrecurring
revenues for certain one-time charges, such as installation fees or equipment
sales. The increase in the level of enhanced data services was evidenced by
the increase in nodes which grew approximately 360% from approximately 2,700
at March 31, 1996 to approximately 12,500 at March 31, 1997. Monthly recurring
revenue in the backlog (booked sales that have yet to be installed) at March
31, 1997 was approximately $6.5 million annualized, a 4.5% increase from the
prior year. From March 31, 1996 to March 31, 1997, the number of fiber
36
<PAGE>
miles in the Company's networks increased from 20,541 to 29,841; route miles
increased from 561 to 679; and the number of customers served by Intermedia
increased from 10,782 to 15,921.
Total operating expenses increased 251% to $64.7 million for the first
quarter of 1997 compared to $18.5 million for the same period in 1996. The
increase was principally from the costs associated with the significant
expansion of the Company's owned and leased networks and the continued
expansion in personnel to sustain and support the Company's growth. Of the
increase, approximately $11.9 million was attributable to the inclusion of
EMI's operating results for the first quarter of 1997.
Network operations, facilities administration and maintenance and cost of
goods sold increased 297% to $36.9 for the first quarter of 1997, from $9.3
million for the same period in 1996. Of the increase, approximately $8.4
million was attributable to the inclusion of EMI's operating results in the
quarter ended March 31, 1997. In addition, increases in leased network
capacity associated with the growth in revenues, increases in maintenance
expense due to the network expansion, and increases in payroll expense
resulting from the hiring of additional engineering and operations staff
contributed to the change.
Selling, general and administrative expenses increased 230% to $19.5 million
for the first quarter of 1997 compared to $5.9 million for the same period in
1996. This increase was principally from the Company's continued growth and a
major increase in the sales, marketing, management information services and
customer service personnel, one time expenditures for employee recruitment,
relocation, training and increased commissions relating to the rise in
revenues for these periods. Of the increase, approximately $2.4 million was
attributable to the inclusion of EMI's operating results for the first quarter
of 1997.
Depreciation and amortization expenses increased 153% to $8.3 million for
the first quarter of 1997 compared to $3.3 million for the same period in
1996. This increase was principally from additions to telecommunications
equipment placed in service during 1996 and the first quarter of 1997,
relating to ongoing network expansion.
Interest expense increased 106% to $11.1 million for the first quarter of
1997 compared to $5.4 million for the same period in 1996. This increase
resulted from interest expense related to $330 million principal amount of
12.5% Notes issued in May 1996.
Interest and other income increased 210% to $4.5 million for the first
quarter of 1997 compared to $1.4 million for the same period in 1996. This
increase was the result of interest earned on the cash available from the
excess proceeds from May 1996 issuance of $330 million principal amount of
12.5% Notes, the May 1996 issuance of 4,674,503 shares of Common Stock at
$26.00 per share and the March 1997 issuance of 30,000 shares (aggregate
liquidation preference $300 million) of the Company's 13 1/2% Series A
Redeemable Exchangeable Preferred Stock due 2009 (the "Series A Preferred
Stock").
Net loss, before consideration of dividends payable with respect to the
Series A Preferred Stock, increased 208% to $27.4 million for the first
quarter of 1997 compared to $8.9 million for the same period in 1996. This
increase was due primarily to the increased operating expenses resulting from
the expansion of the network and increased interest costs.
Preferred stock dividends and accretions resulted from the March 1997
issuance of 30,000 shares of Series A Preferred Stock. The accretion for the
21 day period for which the Series A Preferred Stock was outstanding during
the first quarter of 1997 was immaterial for recognition.
EBITDA decreased 635% to $(12.5) million for the first quarter of 1997
compared to $(1.7) million for the same period in 1996. This decline was the
result of the acceleration in the deployment of Intermedia's capital expansion
plan which significantly increased growth oriented expenses, such as increases
in sales, customer service and market development costs, prior to realizing
revenues associated with these expenditures.
37
<PAGE>
YEAR ENDED 1996 VS. YEAR ENDED 1995
The Company's revenue grew from $38.6 million to $103.4 million or 168% from
1995 to 1996. Revenues in 1995 and 1996 for each of the product lines were as
follows:
<TABLE>
<CAPTION>
1995 1996 INCREASE
----- ------ --------
<S> <C> <C> <C>
Local network services............................... $10.8 $ 13.5 $2.7
Enhanced data services............................... 6.9 31.7 24.8
Interexchange services............................... 18.9 53.1 34.2
Integration services................................. 2.0 5.1 3.1
----- ------ -----
$38.6 $103.4 $64.8
===== ====== =====
</TABLE>
The increase in revenue was derived principally from growth in the Company's
local network services, enhanced data services and interexchange services. EMI
contributed $27.8 million to the growth during the last six months of 1996, of
which $20.5 million related to interexchange services and $7.3 million related
to enhanced data services. The Company acquired the telecommunications
division of EMI in June 1996. The Company's annualized monthly recurring
revenue increased to $12.3 million at December 31, 1996 from $3.3 million at
December 31, 1995, an increase of 273%. Monthly recurring revenue represents
the monthly service charges billable to telecommunications service customers
as of the last day of the period indicated and excludes nonrecurring revenues
for certain one-time charges, such as installation fees or equipment sales.
The increase in the level of enhanced data services was evidenced by the
increase in nodes which grew approximately 313% from approximately 2,300 at
December 31, 1995 to approximately 9,500 at December 31, 1996. The geographic
coverage of the Company's networks also grew in 1996 primarily through the
acquisitions of EMI, UTT and NetSolve 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, 1996 was approximately $4.8 million
annualized, a 14.3% increase from the prior year. From December 31, 1995 to
December 31, 1996, the number of fiber miles in the Company's networks
increased from 17,128 to 24,122; route miles increased from 504 to 655; and
the number of customers served by Intermedia increased from 9,530 to 14,133.
Operating expenses in total increased by 186% from $48.2 million for 1995 to
$137.6 million in 1996, a $89.4 million increase. Of the increase,
approximately $25.9 million, $1.9 million and $.5 million were attributable to
the inclusion of EMI, NetSolve and UTT operating expenses, respectively. The
operating results of EMI have been included in the consolidated results since
July 1, 1996. NetSolve and UTT operating results have been included in the
consolidated results since December 1, 1996. The balance of the increase was
consistent with the significant expansion of the Company's owned and leased
networks and equipment sales to customers.
Facilities administration and maintenance and line costs increased $58.1
million or 253% to $81.1 million in 1996 from $23.0 million in 1995. Of the
increase, approximately $20.9 million, $.9 million and $.4 million were
attributable to the inclusion of EMI, NetSolve and UTT operating results,
respectively. In addition, increases in leased network capacity associated
with the growth of local network service, enhanced data service and
interexchange service revenues, increases in maintenance expense due to
network expansion, payroll expense increases due to hiring additional
engineering and operations staff along with increased cost of goods sold
related to equipment sold to customers contributed to the change.
Selling, general and administrative expenses increased to $36.6 million in
1996 from $15.0 million in 1995, an increase of $21.6 million or 144%. The
increase in expense is primarily related to increased sales commissions as a
result of increases in sales bookings, in addition to increased sales,
customer service, marketing and management information systems and payroll
expense along with related costs, including one-time recruitment, relocation
and training expenses. Of the increase, approximately $2.7 million was
attributable to the inclusion of EMI operating results. Selling, general and
administrative expenses in 1996 include $.9 million of amortization of
deferred compensation expense related to the Company's 1996 Long-Term
Incentive Plan. Unamortized deferred compensation to be amortized into expense
over approximately the next 5 years amounts to $7.6 million.
38
<PAGE>
Depreciation and amortization expense increased to $19.8 million in 1996
from $10.2 million in 1995, an increase of $9.6 million or 95%. These
increases are directly related to the $149.6 million and $34.9 million of
telecommunications equipment additions (including capital leases and business
acquisitions) in 1996 and 1995, respectively, relating to ongoing network
expansion.
Interest expense increased to $35.2 million in 1996 from $13.8 million in
1995, an increase of $21.4 million or 156%. This increase is the result of
interest expense on the May 1996 issuance of $330 million principal amount of
the 12.5% Notes and the effect of a full year of interest expense on the June
1995 issuance of $160 million principal amount of the 13.5% Notes. Included in
the $35.2 million of interest expense for 1996 was $14.3 million of interest
on the 12 1/2% Notes which was accreted into principal without a cash outlay.
Interest and other income increased to $12.2 million in 1996 from $4.1
million in 1995, an increase of $8.1 million or 200%, resulting from interest
income earned on the excess proceeds of the May 1996 issuance of $330 million
principal amount of 12.5% Notes and the issuance of 4,674,503 common shares,
par value $.01 per share, at $26.00 per share, combined with a full year of
interest income earned on the excess proceeds of the June 1995 issuance of
$160 million principal amount of 13.5% Notes.
Extraordinary loss of $1.6 million in 1995 reflects $1.2 million in
prepayment penalties related to certain indebtedness which was repaid from the
proceeds of the June 1995 issuance of $160 million principal amount of 13.5%
Notes and the write-off of the unamortized deferred financing costs associated
with the indebtedness repaid.
EBITDA for 1996 decreased $15.0 million in 1996 from $.6 million in 1995 to
$(14.3) million in 1996. As a percentage of revenue, 1996 and 1995 EBITDA were
approximately (13.8%) and 2.0%, respectively. This decline was the result of
the acceleration in the deployment of Intermedia's capital expansion plan
which significantly increased growth oriented expenses (such as increases in
sales, customer service and market development costs) prior to realizing
revenues associated with these expenditures.
YEAR ENDED 1995 VS. YEAR ENDED 1994
The Company's revenue grew from $14.3 million to $38.6 million or 171% from
1994 to 1995. Revenues in 1995 and 1994 for each of the product lines were as
follows:
<TABLE>
<CAPTION>
1994 1995 INCREASE
----- ----- --------
<S> <C> <C> <C>
Local network services................................ $ 8.2 $10.8 $ 2.6
Enhanced data services................................ 2.3 6.9 4.6
Interexchange services................................ 1.3 18.9 17.6
Integration services.................................. 2.5 2.0 (0.5)
----- ----- -----
$14.3 $38.6 $24.3
===== ===== =====
</TABLE>
A substantial portion of the increase in revenue was derived from growth in
the Company's enhanced data services and the revenues of Phone One, Inc.
("Phone One") (interexchange services) for the full year in 1995. The Company
acquired all of the outstanding common stock of Phone One on December 2, 1994.
Monthly recurring revenue increased to $2.9 million at December 31, 1995 from
$2 million at December 31, 1994, an increase of 45%. Monthly recurring revenue
represents the monthly service charges billable to telecommunications service
customers as of the last day of the period indicated and excludes nonrecurring
revenues for certain one-time charges, such as installation fees or equipment
charges. The increase in the level of enhanced data services was evidenced by
the increase in nodes which grew approximately 156% 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 USA, Inc. and FiberNet Telecommunications of
Cincinnati, Inc. (collectively, "FiberNet") and the expansion of the
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Company's intercity network. Monthly recurring revenue in the backlog at
December 31, 1995 was approximately $4.2 million annualized, an approximately
45% increase 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
serviced by Intermedia (including interexchange customers) increased from
8,148 to 9,530.
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 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 expansion and increases in the
amortization of intangibles associated with the acquisitions of Phone One and
FiberNet.
Interest and other income increased 396% 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 13 1/2% 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 13 1/2% 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 13 1/2% 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.
40
<PAGE>
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 $13.7 million, $30.0 million, $131.2 million and $32.9 million in 1994,
1995, 1996 and the first quarter of 1997, 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 data services. In addition, following the first quarter of
1997 the Company utilized approximately $155.0 million of its available
capital to consummate the DIGEX Acquisition.
The Company has funded a substantial portion of these expenditures through
the public sale of debt and equity securities and, to a lesser extent,
privately placed debt. From inception through December 31, 1996, the Company
raised approximately $212.6 million from the sale of Common Stock, including
Common Stock issued in connection with the acquisitions of FiberNet, Phone
One, EMI and UTT, and $324.6 million from the sale of the Existing Senior
Notes.
In March 1997, the Company sold 30,000 shares of Series A Preferred Stock
(aggregate liquidation preference $300.0 million) in a private placement
transaction. Net proceeds to the Company amounted to approximately $288.9
million. On June 5, 1997, all of the outstanding shares of Series A Preferred
Stock were exchanged for 300,000 shares of Series B Preferred Stock (aggregate
liquidation preference $300.0 million) in a registered exchange offer.
In July 1997, the Company sold the Old Notes in the Offering, generating net
proceeds to the Company of approximately $375 million, and 6,900,000
Depositary Shares in the Concurrent Offering, generating net proceeds to the
Company of approximately $167 million.
The substantial capital investment required to build the Company's networks
has resulted in negative cash flow from operations after consideration of
investing activities over the last five year period. This negative cash flow
after investing activities is a result of the requirement to build a
substantial portion of the Company's network in anticipation of connecting
revenue generating customers. The Company expects to continue to produce
negative cash flow after investing activities for the next several years due
to expansion activities associated with the development of the Company's
networks. Until sufficient cash flow after investing activities is generated
from operation, the Company will be required to utilize its current and future
capital resources to meet its cash flow requirements, including the issuance
of additional debt and/or equity securities.
In response to the new pro-competitive telecommunications environment (See
"Business--Government Regulation"), the Company has accelerated and expanded
its capital deployment plan to allow for an increased level of demand-driven
capital spending necessary to more rapidly exploit the market opportunity in
the local exchange market. The Company expects to expend substantial amounts
to upgrade its existing networks in order to switch traffic within the local
service area in those states where it is currently permitted to provide such
services. As of March 31, 1997, the Company was certified as a CLEC in 19
states and the District of Columbia, allowing the Company to provide local
exchange services in those markets, and had CLEC certification applications
pending in 20 states. In addition, the Company expects to expend capital
toward the further development of the Company's enhanced data service and
interchange service offerings. The Company currently estimates that it will
require approximately $190 million to fund anticipated capital requirements
during 1997 (of which $32.9 million had been utilized as of March 31, 1997),
which it expects to fund from its existing operations and cash on hand
(including the proceeds of the Offering and the Concurrent Offering). The
Company does not believe that the DIGEX Acquisition will have a material
impact on its capital expenditure requirements.
41
<PAGE>
The Company expects that its available cash, including proceeds from the
Offering and the Concurrent Offering, will be sufficient to fund its
accelerated and expanded capital deployment plan through 1999 and part of
2000. The Company expects to require additional financing to continue its
capital deployment plan in the year 2000. Depending on market conditions, the
Company may determine to raise additional capital before such time. 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 Existing Senior Notes, the Old
Notes and the Series B Preferred Stock impose, and the Senior Discount Notes
will impose, certain restrictions upon the Company's ability to incur
additional indebtedness or issue additional preferred stock.
The Company has from time to time held, and continues to hold, preliminary
discussions with (i) potential strategic investors (i.e., investors in the
same or a related business) who have expressed an interest in making an
investment in or acquiring the Company, (ii) potential joint venture partners
looking toward formation of strategic alliances that would expand the reach of
the Company's network or services without necessarily requiring an additional
investment in the Company and (iii) companies that represent potential
acquisition opportunities for the Company. There can be no assurance that any
agreement with any potential strategic investor, joint venture partner or
acquisition target will be reached nor does management believe that any
thereof is necessary to successfully implement its strategic plans.
42
<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 did not provide for competition in the local
exchange market; however, it did provide for direct open competition in the
long distance segment, as a consequence of which, new entrants, including MCI
and Sprint, now have captured approximately 47% of the business long distance
market. Nonetheless, several factors have served to promote competition in the
local exchange market, including (i) the ILECs' monopoly position and
regulated pricing structure, which provided little incentive for the ILECs to
reduce prices, improve service or upgrade their networks, (ii) customers'
desire for an alternative to the ILEC 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 introduction 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 the
ILECs' copper-based networks and (iv) the significant fees, called "access
charges," IXCs were required to pay to the ILECs for access to the ILEC
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 ILECs. In addition,
CAPs offered shorter installation and repair intervals and improved service
reliability in comparison to the ILECs.
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 resellers).
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 ILEC networks at the ILEC 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 ILEC central
offices, CAPs were able to use the extensive ILEC networks to reach additional
customers, thus conserving their own capital while significantly expanding
their potential markets.
By the summer of 1995, several states began opening their markets to local
exchange competition, thus permitting CAPs to become CLECs. On February 8,
1996, the 1996 Act was signed into law. The 1996 Act provides a framework by
which all states must allow competition for local exchange services. The
Company believes that the 1996 Act will benefit the Company by, among other
things, (i) increasing market access, (ii) requiring network interconnections,
(iii) establishing number portability and (iv) providing standards for
reciprocal compensation, unbundling of network elements and resale of ILEC
network services. The current federal law is intended to create incentives for
ILECs to facilitate access to their networks by CLECs in order to
43
<PAGE>
develop "meaningful competition" in the local exchange market. Under the 1996
Act, the RBOCs will not be permitted to provide interLATA service until they
have demonstrated compliance with the foregoing to the FCC. See "--Government
Regulation." The estimated market for telecommunications services in the
United States was approximately $165 billion in 1996.
This opening of the long distance and local exchange markets has also
coincided with a rapid expansion of Internet use. The Internet is a global
collection of computer networks that enables businesses, government agencies,
other institutional customers and individuals to communicate, access and share
information and conduct business remotely. Use of the Internet has grown
rapidly since the early 1990s, due in large part to increasing personal
computer and modem penetration, the development of the World Wide Web, the
introduction of easy-to-use navigational tools and utilities for the Web and
the availability of informational, entertainment and commercial applications.
Rapid technological advances relating to the Internet continue to occur,
resulting in a more robust, lower-cost infrastructure, improved security and
increased value-added services and content. IDC has estimated that the market
for internet services will reach approximately $18.3 billion in 2000, from
approximately $3.3 billion in 1996.
While there has been significant media interest in the use of the Internet
by consumers, business customers currently account for a more significant
percentage of Internet use. According to IDC approximately 71%, or $2.4
billion, of the $3.3 billion in total Internet service revenue generated in
1996 were attributable to corporate access, value-added, and wholesale
services. Internet capabilities, including corporate Internet sites, are
becoming an increasingly important part of doing business. According to
Netcraft, Ltd., the number of corporate Internet sites, defined as domain
names ending in ".com," has increased from approximately 4,912 in August 1995
to approximately 650,000 in June 1997.
Because Internet and corporate Intranet solutions are increasingly achieving
"mission critical" status, business customers are demanding advanced, highly
reliable solutions designed specifically for the needs of business.
Furthermore, as the use of the Internet expands, business customers are
requiring that providers offer a comprehensive range of services, including
connectivity, Web server hosting and security and other network products.
Finally, business customers often require knowledgeable and highly responsive
sales and customer service representatives in order to determine their optimal
Internet strategy quickly and to resolve any problems with their current
solutions.
The Company refers to itself as an ICP to distinguish itself from CLECs that
do not offer a full range of integrated telecommunications service offerings,
including long distance and enhanced data services.
THE COMPANY
Intermedia is a rapidly growing integrated communications services provider,
offering a full suite of local, long distance and enhanced data
telecommunications services to business and government end user customers,
long distance carriers, ISPs, resellers and wireless communications companies.
Founded in 1987, the Company is currently the third largest (based on
annualized telecommunications services revenues) among providers generally
referred to as CLECs after MFS Communications Company, Inc. and Teleport
Communications Group Inc. The Company has sales offices in 32 cities
throughout the eastern half of the United States and offers a full product
package of telecommunications services in 16 metropolitan statistical areas.
In April 1996, Intermedia became one of the first ICPs in the United States to
provide integrated switched local and long distance service and now has six
local/long distance voice switches in service and six long distance voice
switches in service, three of which the Company plans to upgrade to local/long
distance voice switches by the end of 1997. The Company provides enhanced data
services, including frame relay, ATM and Internet access services, primarily
to business and government customers (including over 100 ISPs), in
approximately 2,500 cities nationwide, utilizing 100 Company-owned data
switches. Intermedia also serves as a facilities-based interexchange carrier
to approximately 14,000 customers nationwide. Intermedia continues to increase
its customer base and network density in the eastern half of the United States
and is pursuing attractive opportunities to add additional services and expand
into complementary geographic markets. The total United States annual market
for the Company's
44
<PAGE>
local, long distance and enhanced data services is estimated to be
approximately $165 billion, of which the Company estimates that approximately
$34 billion will be addressable by the Company by the end of 1997.
The Company's annualized revenue based on the first quarter of 1997 (before
giving pro forma effect to the DIGEX Acquisition) was $175.8 million. See
"Prospectus Summary--Recent Developments." The Company's revenues have grown
from $14.3 million in 1994 to $103.4 million in 1996 and $43.9 million for the
first quarter of 1997. During the period January 1, 1994 through March 31,
1997, the Company has increased its sales force from approximately 45 to
approximately 200, increased the number of sales offices from four to 23 and
grown its customer base from 8,148 to 15,921. The Company has achieved a
significant milestone by introducing local exchange services in its product
portfolio and has positioned itself as a provider of integrated
telecommunications services to its customers by (i) obtaining CLEC
certification in 19 states and the District of Columbia (with 20 applications
pending), (ii) completing interconnection co-carrier agreements with six
ILECs, (iii) deploying five local/long distance voice switches and (iv)
deploying a total of 100 data switches, as of March 31, 1997.
Management believes that a well trained team of direct sales and engineering
support professionals, offering customers a full suite of telecommunications
services, is critical to achieving its goal of capturing meaningful market
share in the newly competitive local telecommunications market. By initiating
local switched services in markets where its sales and engineering support
team is already in place, Intermedia reached a significant milestone toward
attaining this goal. Management believes that being one of the few ICPs
offering integrated local, long distance and enhanced data services to its
customers provides the Company with a competitive advantage in pursuing the
estimated $99 billion national market for local exchange services. The
Company's strategy is to systematically secure a growing portion of a
customer's telecommunications business and through the provision of additional
integrated services, increase the customer's reliance on, and sense of
partnership with, the Company.
The Company believes that a significant portion of business and government
customers prefer a single source telecommunications provider that delivers a
full range of efficient and cost effective solutions to their
telecommunications needs. These customers require maximum reliability, high
quality, broad geographic coverage, end-to-end service, solutions-oriented
customer service and the timely introduction of new and innovative services.
The Company is well positioned to satisfy such customer requirements due to
(i) its specialized sales and service approach employing engineering and sales
professionals who design and implement cost-effective telecommunications
solutions, (ii) the ongoing development and integration of new
telecommunications services, (iii) its local/long distance voice switch and
transmission network deployment program, (iv) the implementation of 100
enhanced data switches and nearly 300 NNIs for frame relay data transmission
throughout the continental United States and (v) its interconnection co-
carrier agreements with six ILECs.
In addition to its CLEC certifications, as of March 31, 1997 Intermedia was
certified as a long distance carrier in 45 states and the District of
Columbia. The Company has nine digital, fiber optic networks in service and
one under development. As of March 31, 1997, this infrastructure was comprised
of 29,841 fiber miles and 679 route miles and was connected to 1,157
buildings. As of March 31, 1997, Intermedia had invested $274.4 million (or
68% of its total invested capital) in gross plant, property and equipment,
principally telecommunications equipment. Intermedia expects to continue to
grow its networks and has identified expansion opportunities in other selected
markets. Management believes that this expansion will enable the Company to
(i) increase the size of its addressable market and reach a significant number
of new potential customers, (ii) achieve economies of scale in network
operations and sales and marketing and (iii) more effectively service
customers that have a presence in multiple metropolitan areas. The Company has
also undertaken a major expansion of its intercity network, principally to
satisfy the growing demand for interexchange services, including enhanced data
services such as frame relay networking and Internet services. As a result,
frame relay nodes have grown from approximately 2,700 nodes, serving customer
locations in 700 cities as of March 31, 1996, to approximately 12,500 nodes,
serving customer locations in 2,500 cities as of March 31, 1997.
45
<PAGE>
Enhanced data services, such as those provided on the Company's frame
relay/ATM network, are specialized connectivity, management and applications
services designed for customers with data intensive telecommunication needs.
According to industry sources, the frame relay services market is projected to
grow from $753 million in 1995 to $2.7 billion in 1999; however, there can be
no assurance that such market growth will be realized or that the assumptions
underlying such projections are reliable. While the Company has concentrated
its frame relay sales in the eastern half of the United States, Intermedia is
currently the fifth largest national provider of frame relay networking
services (based on number of nodes) after AT&T, MCI, Sprint and WorldCom. In
order to satisfy its customers' desire for end-to-end frame relay services
from a single provider, the Company has deployed its network and made
arrangements with other frame relay service providers to offer national and
international service.
Intermedia founded the UniSPAN(C) consortium in 1994 with three other
carriers to enable the Company to provide end-to-end frame relay services
throughout the United States and Canada. Because of the high volume of
telecommunications traffic between Intermedia's target markets and certain
Latin American markets, the Company has entered into international frame relay
operating agreements with ImpSat of Columbia S.A., TresCom International,
Telecom Holdings Panama and Americatel Corporation for the provision of frame
relay services to and from Columbia, Puerto Rico, Panama, Chile & Costa Rica.
Intermedia plans to pursue similar arrangements to enter other Latin American
markets. The Company has pioneered the interconnection of its frame relay
network with those of the ILECs, allowing pervasive, cost-efficient
termination for its customers. Nearly 300 such NNIs have been implemented with
BellSouth, Sprint, GTE, NYNEX, Bell Atlantic and Southern New England
Telecommunications Corp.
The Company recently acquired 100% of the outstanding equity of DIGEX, a
national ISP. As a result of the DIGEX Acquisition, the Company is one of
fewer than approximately 15 national ISPs with full peering and extensive
expertise in internet protocol ("IP") network development and operation. DIGEX
currently provides (1) Internet connectivity and fault tolerant network to
commercial customers in 50 metropolitan areas, (2) Web site management
services to businesses whose Web sites perform mission critical functions and
(3) turnkey wholesale service offerings to other telecommunications providers
to facilitate the extension of product lines. The Company operates a national
Internet network comprised of bi-directional DS-3s and an OC-12 ring and the
world's largest dedicated server Web site management facility.
The Company believes that it can effectively utilize its competitive
advantages as a provider of enhanced data services to communications intensive
customers in order to acquire and retain these customers as local exchange and
long distance customers throughout its markets. As Intermedia continues the
deployment of local/long distance voice switches, it will make more efficient
use of its intercity network. Combining long distance voice traffic between
such switches with the intercity data traffic increases the overall amount of
voice and data traffic that remains completely on the Company's network. The
Company is developing additional applications and deploying technologies that
will provide even greater efficiencies in the use of its intercity network.
The Company has developed and intends to introduce a voice product over its
enhanced data network which will provide a competitive service offering to
customers seeking a lower cost alternative to voice services currently
provided over traditional circuit switched telecommunications networks. The
Company believes that packet switched data networks, such as the Company's
frame relay network, will displace a significant portion of the estimated $130
billion telecommunications market which is currently provided over traditional
circuit switched networks. The Company believes this proposed new service
offering will accelerate its penetration of the traditional voice services
market.
The Company has developed operating strategies, important components of
which are described below, to increase market share and operating margins.
46
<PAGE>
CUSTOMER STRATEGY
Provide Single-Source Telecommunications Services. The Company's service
portfolio includes: local exchange, enhanced data (i.e., frame relay and ATM,
Internet, Intranet and Web site management), interexchange long distance,
integration and private line services. Management believes that its ability to
deliver all of these services provides significant advantages for both 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. Intermedia also
believes that by offering expanded, single-source services through existing
networks and customer connections, it can leverage 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 represents a broad range of
industries, including firms in the retail, financial services, Internet,
healthcare, merchandising, manufacturing and other industry segments.
Intermedia has a dedicated sales and engineering support group focused
exclusively on providing service to government agencies. The Company has long-
term contracts with the States of Florida and New York pursuant to which the
Company provides various telecommunications services, including frame relay
and other data services (as well as certain voice services under the New York
contract). In addition, the Company was recently awarded a contract to provide
Internet services to the State of New York.
Develop Interexchange Carrier and Value-Added Reseller Relationships. As a
result of recent changes in state and federal regulation which have provided
ILECs with mandates that foster local exchange competition, Intermedia has
accelerated its entry into the local exchange services market. As 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
Intermedia a candidate for joint ventures and preferred vendor arrangements
with IXCs, ILECs and other telecommunications related companies. Such
arrangements would benefit the Company by enabling Intermedia to more rapidly
recover its capital investment in switches and other network infrastructure by
increasing the traffic through its networks. These IXC relationships typically
began with the Company providing special access services on behalf of these
IXCs and have recently evolved to include local access transport and local
exchange services. These arrangements should enable Intermedia to achieve
greater market share and reach new market segments more rapidly than it could
otherwise. The Company has also begun soliciting these IXCs, out of region
ILECs, cable companies and other value added resellers to resell the Company's
local exchange and other services. Intermedia has recently established a
preferred vendor relationship with Cable & Wireless, Inc., which includes the
resale of Intermedia's local exchange service by Cable & Wireless, Inc.
Maintain and Develop Long-Term Relationships. By providing customized
telecommunications solutions to its customers, the Company develops a sense of
partnership with its customers. This, together with the provision of an
integrated package of services (local, long distance and enhanced data
services), fosters the development of long-term customer relationships. As an
example, the group of Intermedia's top 42 customers as of December 31, 1994
(representing approximately 68% of Intermedia's billings for the month of
December 1994) had increased their aggregate billings in excess of 100% for
the month of December 1996. At December 31, 1996, 37 of these 42 customers
were still customers of Intermedia and, in the aggregate, represented
approximately 17% of Intermedia's monthly billings for December 1996.
Provide Cost-Effective 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
Intermedia's services. Each of the Company's individually packaged services is
competitively priced, and when integrated into a comprehensive
telecommunications package, typically provides significant savings to such
customers over a combination of ILEC and IXC service offerings.
47
<PAGE>
Expand Solutions-Oriented Sales Effort. The Company has rapidly expanded,
and intends to continue to expand, its direct sales and support team
consisting of engineering and sales professionals. The sales and support teams
have complete product knowledge and technical, integration and program or
project management skills. This team approach promotes a close working
relationship between the Company and the customers' telecommunications,
information services and user constituencies. The Company believes such
relationships improve its ability to sell more of its services and maintain
longer relationships with its customers. Since January 1, 1996, Intermedia has
increased the number of its sales offices by 20 and substantially increased
its engineering support personnel and sales representatives. The Company
believes that the continued deployment of its skilled end user engineering
support and sales team will allow Intermedia to establish service in new
markets and maintain a competitive position in existing markets. By focusing
first on establishing customer relationships in both new and existing markets,
the Company believes it can efficiently deploy capital in response to actual
customer demand.
NETWORK STRATEGY
Control Franchise Points of the Networks. Connections to customers and
building entries represent an important component of Intermedia's network
strategy. These connections provide the Company with the platform to sell a
variety of services to existing and additional potential customers within a
building, analogous to those provided by traditional shared tenant services
providers. Intermedia 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.
Extend Coverage to Provide End-to-End Service. The Company believes that an
important aspect of satisfying its customers is its ability to provide and
support services from end to end. This requires network interconnection with
other carriers and operational support systems and tools to "manage" the
customer's total service. The Company has entered into interconnection co-
carrier agreements with BellSouth, Sprint, GTE, NYNEX, SBC and Bell Atlantic.
This will allow the Company to access a large number of business and
government telephones in its service territory. The Company anticipates
entering into similar arrangements with ILECs in other markets. The Company
has also interconnected its frame relay network to various ILECs, thereby
substantially expanding the reach of its networks. Intermedia now provides
originating and terminating transport services in 45 states and maintains POPs
for interexchange and enhanced data services in most major cities in the
United States. As a result of the DIGEX Acquisition, the Company has peering
relationships with other ISPs at six U.S. peering points. The Company has
deployed, and continues to integrate, network monitoring and control tools to
insure high levels of service quality and reliability.
Utilize ILEC Resale and Unbundled Network Elements. Recent regulatory
changes have enabled the Company to resell ILEC services and to utilize
unbundled ILEC network elements at discounted rates. The Company intends to
use resold services and unbundled network elements to provide rapid market
entry and develop its customer base in advance of capital deployment. Once
thresholds of customer density have been achieved, the Company intends to
systematically replace these resold and unbundled elements with its own
facilities, where economical.
Deploy Capital Cost Effectively on a Demand Driven Basis. In addition to the
use of ILEC resale and unbundling, the Company has the ability to lease
network capacity from other carriers at competitive rates. This has led the
Company to lease network capacity in various areas prior to, or as an economic
alternative to, building additional capacity. As a result of its most favored
nation pricing from ART in the Northeast, the Company from time to time leases
38 GHz wireless services as one such economic alternative. Utilizing leased
facilities enables the Company to (i) meet customers' needs more rapidly, (ii)
improve the utilization of Intermedia's existing networks, (iii) add revenue
producing customers before building networks, thereby reducing the risks
associated with speculative network construction and (iv) subsequently focus
its capital expenditures in geographic areas where network construction or
acquisition will provide a competitive advantage. The Company focuses its
capital deployment on the segments of its networks that the Company
48
<PAGE>
believes will provide it with the highest revenue and cash flow potential and
the greatest long-term competitive advantage. For the 12 months ended March
31, 1997, the Company recorded $.69 in revenue for each average dollar of
plant, property and equipment invested.
GROWTH STRATEGY
Accelerate Internal Growth. By focusing on business and government customers
and maintaining high-quality and cost-effective services, the Company has
generated a compound annual internal revenue growth rate of 63% for the two
year period ended December 31, 1996. The Company's internal revenue growth
rate for the quarter ended March 31, 1997 over the quarter ended March 31,
1996, was 81%. The Company believes that its customer and network strategies
will continue to enable Intermedia to expand its services and markets,
increase its revenue base and effectively compete in a dynamic marketplace. In
order to achieve such growth, it is essential to continue to add to the
Company's highly skilled, broadly deployed end user sales and engineering
support team.
Accelerate Provision of Local Exchange Services. The 1996 Act significantly
improved the opportunity for competition in the local exchange market by
mandating that ILECs enter into arrangements with competitors such as the
Company for central office collocation and unbundling of local services. The
Company believes that implementation of such pro-competitive policies creates
favorable opportunities to more aggressively pursue the provision of local
exchange services. The Company has a total of six local/long distance voice
switches in operation and is currently marketing, to existing and new
customers, local dial tone, switched access termination and origination
services, centrex and desktop products bundled with the Company's other
service offerings. The Company expects to offer such integrated services in 23
metropolitan areas by the end of 1997.
Selectively Acquire Existing Networks and Services. Over the past few years,
a portion of the Company's growth has been accomplished through acquisitions
and joint ventures or selling relationships. The Company continues to examine
various acquisition and joint venture proposals to accelerate its rate of
growth. In addition to the usual financial considerations, Intermedia assesses
each opportunity to determine if either: (i) current network traffic into and
out of the geographic areas served by the potential joint venture or
acquisition candidate warrants developing a presence in those geographic areas
or (ii) such candidate offers services consistent with the Company's strategy.
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 certain goals by creating
operating synergies and providing for a more rapid expansion of the Company's
networks and services. The Company is currently evaluating various acquisition
opportunities. No assurance can be given that any potential acquisition will
be consummated.
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<PAGE>
SERVICES PROVIDED AND MARKETS
Local Exchange Services. Telephone services that connect a customer's
telephone or PBX to the public network. These local services also provide the
customer with access to long distance services, operator and directory
assistance services, 911 service, and enhanced local features, which are
described by example below.
<TABLE>
<CAPTION>
SERVICE OR FEATURE DESCRIPTION TYPICAL APPLICATION
------------------ ----------- -------------------
<S> <C> <C>
PBX Trunk Connects a customer PBX to the 24 trunks for both incoming and
public network, shared by outgoing calls -- allow a call to
multiple users connected to the be directed to a specific user
PBX, for making or receiving connected to the PBX (known as
local (and long distance) calls. direct inward dial, or DID
service).
Business Access Line Connects a business customer's A small sales office utilizes 5
telephone to the public network, business lines, each with a
for making and completing local unique telephone number,
(and long distance) calls. connected to five telephones in
the office.
ISDN A specialized digital switching A small office utilizes a single
technology that allows voice and ISDN line to simultaneously
data to share a digital channel. transport data at 64 kbps and
talk to another location with a
similar service.
Voice Mail A service offered by Intermedia's A business customer uses
switch, providing full, Intermedia's voicemail service to
personalized answering service avoid the cost and upkeep on an
for a business customer. answering machine in their
office.
</TABLE>
Enhanced Data Services. Switching and transport of digitized data (or voice)
over a seamless network, designed to provide highly reliable, flexible service
and support of many data transmission protocols. Intermedia's enhanced data
services are provided over its network of frame relay and ATM data switches,
located throughout its service territory. Examples of these services are
listed below:
<TABLE>
<CAPTION>
SERVICE OR FEATURE DESCRIPTION TYPICAL APPLICATION
------------------ ----------- -------------------
<S> <C> <C>
Frame Relay Network Connection of data communications A firm has several data networks
devices at numerous locations (one for point of sale, one for
over Intermedia's enhanced data finance and accounting, one for
network. LAN to LAN connection) that all
consist of a large "host" site
and numerous remote sites,
currently connected by a large
number of dedicated private
lines. It is converted to
Intermedia's frame relay network,
with a single connection to each
location, and the multiple
networks operating over this
single connection.
A small, multi-location firm has
LANs at each location, but has
not been able to provide company-
wide email and file access,
without using dial up
connections. The establishment of
a frame relay network allows an
affordable means to interconnect
all offices, for full time access
to company-wide email and shared
files.
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
SERVICE OR FEATURE DESCRIPTION TYPICAL APPLICATION
- ------------------ ----------- -------------------
<S> <C> <C>
ViewSPAN Allows customers to monitor Customer monitors end to end
data traffic across frame relay service data
Intermedia's network and throughput for traffic that flows
certain data networks of other through Intermedia's frame relay
carriers. network and those of a ILEC and
IXC.
</TABLE>
Internet and Intranet Services. Intermedia offers access to the Internet and
provides additional services that utilize the Internet via its frame relay
network. Examples of these services (whose scope and features will be
significantly enhanced as a result of the recent DIGEX Acquisition) are listed
below:
<TABLE>
<CAPTION>
SERVICE OR FEATURE DESCRIPTION TYPICAL APPLICATION
------------------ ----------- -------------------
<S> <C> <C>
Business Internet Full time connection of a A business provides Internet
Connectivity business LAN to the Company's connectivity to its employees for
network. e-mail and Web access.
Web Site Management Deploy, manage, and provide A business wishes to outsource
high-speed connectivity to the connectivity and site
customer-dedicated Internet management requirements
servers containing mission- associated with a complex Web
critical Web presences. presence used to enhance and
streamline communications and
transactions with customers and
suppliers.
Intranet Service Private equivalent of the Intermedia provides a large
Internet. corporation with "private"
equivalents of the Internet,
allowing secure, closed user
access to the company's private
web sites, file transfer
capabilities, etc.
</TABLE>
Long Distance Services. The origination and termination of telephone calls
between users in different cities or exchanges. The Company provides these
services on a usage basis, utilizing its local/long distance switches, its
intercity network and services provided by other carriers. Examples are listed
below:
<TABLE>
<CAPTION>
SERVICE OR FEATURE DESCRIPTION TYPICAL APPLICATION
------------------ ----------- -------------------
<S> <C> <C>
Outbound Long Distance Completion of long distance An Intermedia customer of local
calls originated by Intermedia exchange services makes a "1+"
customers. call, domestic or international,
which is processed and delivered
to its destination by the
Intermedia network as part of an
integrated local/long distance
service package.
Inbound Long Distance "800" or "888" number service. An Intermedia customer receives
"toll free" calls, handled over
Intermedia-provided dedicated
lines to the customer, or over
the customer's Intermedia local
exchange service lines.
Calling Card Nationwide long distance An Intermedia customer dials a
calling without cash. nationwide 800 number, and
completes a long distance call
using the Intermedia calling
card; billing is aggregated with
the customer's other services.
</TABLE>
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<PAGE>
Private Line Services. Dedicated channels connecting discreet end points.
These non-switched services can be provided to two locations within the same
city, or between locations in different cities (interexchange private lines).
Examples are listed below:
<TABLE>
<CAPTION>
SERVICE OR FEATURE DESCRIPTION TYPICAL APPLICATION
------------------ ----------- -------------------
<S> <C> <C>
Special Access An intra-city private line that An IXC customer of Intermedia
connects a customer to an IXC orders a special access circuit
for the purpose of delivering to one of its customers in an
long distance calls to the Intermedia city.
IXC--does not carry local
traffic.
Interexchange Private An inter-city private line, for An Intermedia customer needs a
Line voice or data, of a fixed 1.544 Mbps connection between two
bandwidth, connecting to two computers in Miami and Boston.
locations of the same customer. The full 1.544 Mbps is used
constantly.
IXC End Office Transport Connecting an IXC to the end An IXC customer of Intermedia
office of an ILEC or CLEC. needs circuits to the end office
of a LEC, to allow the IXC's
customers to obtain "1+" long
distance dialing from that IXC.
</TABLE>
Integration Services. Provision and custom configuration of network devices,
normally located at the customer's location, which may include any special
engineering, installation, or service function provided by Intermedia.
Examples are listed below:
<TABLE>
<CAPTION>
SERVICE OR FEATURE DESCRIPTION TYPICAL APPLICATION
- ------------------ ----------- -------------------
<S> <C> <C>
CPE Integration Provision, configuration, Intermedia designs a router-based
installation, and monitoring of data network for a customer,
specialized telecom equipment. procures, configures, installs
and maintains both hardware and
software for the customer,
packaged into a single service
invoice.
Campus LAN Construction of a private fiber Intermedia designs, constructs
network. and optionally monitors a private
fiber "loop" built on a campus of
buildings.
Design Service Provision of engineering Intermedia provides hardware and
services in support of a software engineering services to
customer application. support a customer's Internet
"web" site.
</TABLE>
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<PAGE>
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.
<TABLE>
<CAPTION>
UNITED STATES COMPETITIVE
TELECOMMUNICATIONS MARKET
OPPORTUNITY
1996 COMPANY ESTIMATES
(DOLLARS IN MILLIONS)
-------------------------
<S> <C>
Local Network Services
Special Access and Private Line Services............ $ 7,800
Switched Access Services............................ 19,700
Local Exchange Services(1).......................... 47,200
Other(2)............................................ 23,800
--------
Total Local Network Services...................... 98,500
--------
Enhanced Data Services................................ 1,300
Interexchange Services(3)............................. 65,200
--------
Total Additional Services......................... 66,500
--------
Total Market Size............................... $165,000
========
</TABLE>
- --------
(1) As of July 30, 1997, the Company is permitted to offer these services in
Alabama, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Maryland,
Massachusetts, Mississippi, Nevada, New York, North Carolina,
Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Wisconsin
and Washington, D.C. and had applied for certification to offer these
services in 21 additional states.
(2) Other includes revenue from pay phones, billing services and intraLATA
calling services.
(3) As of July 30, 1997, the Company is permitted to offer these services in
the District of Columbia and in all states except Minnesota.
The market sizes set forth in the above table are not intended to provide an
indication of the Company's total addressable market or the revenue potential
for the Company's services. As of July 30, 1997, Intermedia had obtained all
certifications necessary to permit the Company to provide local exchange
service in 27 states and the District of Columbia and is in the process of
obtaining the necessary certifications in 21 other states where the Company
operates or plans to operate. In addition, the Company's ability to offer
services in its territory is limited by the size and coverage of the Company's
networks and competitive factors. The Company derives its addressable market
estimates by multiplying the total national market size estimated above by the
percentage of the population (as derived from U.S. Census Bureau information)
residing in the Company's market areas. This estimate assumes that per capita
telecommunications services usage is the same in various regions of the United
States. The Company estimates that by the end of 1997 its addressable market,
computed under this methodology, will be approximately $34 billion. Investors
should not place undue reliance on this information in making an investment
decision with respect to the securities offered hereby.
Intermedia'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 data services,
which include frame relay based data transport, ATM and Internet and Intranet
services and (iii) interexchange (long distance) services.
The Company's local network services consist of local private line services,
which the Company has been offering since 1987, and local exchange service,
which the Company began offering in 1996. The Company provides customers local
private line services either by building network facilities or leasing
extended network
53
<PAGE>
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 without having to
acquire additional transport facilities 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 and a large number of
customers.
The Company has built its base of local network service customers by
offering highly reliable, high quality services that compete primarily with
the ILECs. In 1996 and in the first quarter of 1997 local network services
accounted for approximately 13% (or approximately $13.5 million) and 12% (or
approximately $5.2 million), respectively, of the Company's total revenues.
The Company believes that the market for these services will grow through the
introduction of local exchange services, expansion of networks within existing
markets, addition of new markets, and increased penetration of existing
customers through provision of new incremental services.
Enhanced data services consist of interexchange data networks utilizing
frame relay technology and application services, such as Internet, which
utilize the frame relay network. Enhanced data 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 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 data services are utilized for
LAN interconnection, remote site, point of sale and branch office
communications solutions.
The typical Intermedia customer for enhanced data services has multiple
business locations and requires communication for one or more data
applications among these locations. The customer may also have a number of
locations served by Intermedia's fiber optic networks; however, provision of
enhanced data 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)).
As a consequence of a significantly increased volume of traffic and number
of Internet customers connected to Intermedia's network, many of these
customers connect to other users or Internet hosts without ever leaving
Intermedia's network. Over 100 ISPs utilize Intermedia's network for access to
their customers and other Internet sites.
In 1996 and in the first quarter of 1997 the Company's enhanced data
services accounted for approximately 31% (or approximately $31.7 million) and
26%, (or approximately $11.3 million) respectively, of the Company's total
revenue. The market for enhanced data services, according to industry sources,
is expected to grow from $1.3 billion in 1996 to $2.7 billion in 1999. There
can be no assurance, however, that such market growth will be realized or that
the assumptions underlying such projections are reliable.
Long distance services have been offered by the Company since December 1994.
Long distance services include inbound (800) service, outbound service and
calling card telephone service. The Company currently provides interLATA long
distance services in 45 states, interstate long distance services nationwide
and international termination worldwide. In 1996 and in the first quarter of
1997 the Company's long distance services accounted for approximately 51% (or
approximately $53.1 million) and 58% (or approximately $25.5 million),
respectively, of the Company's total revenues.
The Company's integration services are applicable to all three categories of
service described above and are made available to end user and carrier
customers. A team of sales professionals and engineers develop
54
<PAGE>
specialized solutions for a customer's specific telecommunications needs. Some
of these integration services include the sale, configuration 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 and
geographic density by acquiring and integrating high quality, value added
companies. 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 beyond those recently
established in Panama, Columbia, Puerto Rico, Chile and Costa Rica. Intermedia
believes these markets are important to its business because, not only is
there a significant community of interest between many of these countries and
certain key cities in Intermedia's service territory 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 in the Company's
southeastern markets.
SALES, MARKETING AND SERVICE DELIVERY
Intermedia's marketing efforts focus on business and government entities.
The Company's current customers include large industrial and retail firms,
financial services companies, state government agencies and departments, and
large academic and scientific organizations. The Company also serves a broad
range of small to medium sized businesses, and numerous IXCs.
Intermedia possesses a unique targeted marketing approach. As Intermedia
enters a market, the sales force has clearly defined geographic boundaries
within which it is economical to be a provider of service. Intermedia's sales
force is compensated with higher incentives when they sell within these higher
margin zones.
Intermedia's marketing is organized around its three major service
categories, local exchange, enhanced data and long distance. Integration
services are offered in support of all three categories. The Company expects
DIGEX's services to be marketed as part of and become a major component of the
Company's enhanced data services category.
The Company's marketing and sales strategy is to build long-term business
relationships with customers by providing a full range of service offerings,
leveraging one or two of the Company's three major service categories into a
broad relationship, in which Intermedia becomes the single source provider of
all the customer's telecommunications services. For example, during 1996 the
Company created approximately 2,800 new long distance customer relationships
that now are targeted for follow-on sale of local exchange, enhanced data, and
Internet services.
The Company's sales efforts utilize a broad range of strategies including
direct sales to end users and carriers, indirect sales through various channel
partners and, following the recent DIGEX acquisition, targeted telemarketing.
The Company's direct end-user sales force is composed of three major groups:
. Account Executives and Account Managers--whose focus is small to medium-
sized companies whose initial service offering is generally local and
long distance voice.
. Major Account Managers--whose focus is medium sized companies with both
voice and enhanced data service needs.
. National Account Managers--whose focus is on the largest, multi-location
companies whose interests usually begin with the Company's enhanced data
services.
In addition to the three end user sales groups, the Company has created
other specialized sales forces that focus on:
. Public sector markets, particularly state governments and their
agencies.
. Interexchanges carriers and other carriers.
55
<PAGE>
. Value-added resellers and other wholesalers.
. Internet connectivity.
All of the Company's sales groups are backed by highly experienced technical
personnel, including sales engineers and project managers, who are deployed
throughout the Company's service territory.
The Company's service delivery staff is organized around the delivery of
total solutions to each customer. This includes the proper coordination of
service components provided by supporting vendors, the preparation of the
customers' site, if needed, and the total installation, testing, and delivery
to the customer of the service solution. Thereafter, the Company monitors and
maintains the quality and integrity of the service through its customer
service and technical support staff, available 24 hours per day, 365 days per
year. Services are monitored at locations in Tampa, Florida, Albany, New York,
and suburban Washington, DC.
Information systems are vital components in Intermedia's service delivery
process. To support all its network services, the Company has implemented
automated ordering, provisioning, operations, and billing systems, as steps in
a comprehensive systems restructure that the Company believes will provide
both customers and the Company the benefits of a flexible unified information
systems structure. This structure will allow the Company to interface with
both standards-based and proprietary systems used by ILECs, IXCs, and other
providers, integrating these into a single data repository.
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, or have been
secured, 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. 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. The Company has demonstrated such strategy
with its acquisitions of FiberNet, EMI, NetSolve and DIGEX and its acquisition
of certain assets from Telco.
In those markets where Intermedia chooses to deploy broadband fiber
networks, the Company's strategy is to first develop the "carrier ring"
portion of its network, a high capacity network designed to be accessible to
all the major long distance carriers and key ILEC central offices in the area.
This portion of the network allows the Company to provide access to these long
distance carriers, provide connectivity to the ILEC network for
interconnection and use of unbundled ILEC network elements, 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 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 Intermedia 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. The Company's emphasis is on the building and
expansion of these city-based networks to reach end user customers in
buildings or office parks with substantial telecommunications opportunity. The
establishment of a "franchise point" at a customer's location is a key
strategic design element of these networks.
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<PAGE>
Intermedia's city-based networks are comprised of fiber optic cables,
integrated switching facilities, advanced electronics, data switching
equipment (e.g. frame relay and ATM), 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.
The Company currently has fiber optic networks in service in the Orlando,
Tampa, Miami, St. Petersburg, Jacksonville, and West Palm Beach, Florida,
Cincinnati, Ohio, Raleigh-Durham, North Carolina, and Huntsville, Alabama
metropolitan areas and one under development in St. Louis, Missouri.
Intermedia continues to expand these networks and has identified similar
network expansion opportunities in other selected markets.
As a result of its acquisition of EMI in 1996, Intermedia also utilizes
certain wireless technologies as a part of its provision of services.
Intermedia owns a long-haul microwave transmission system comprising
approximately 5,000 route miles in the Northeast, which is principally used
for transporting digital interexchange trunking and analog video signals.
Additionally, as a part of a 1995 Asset Purchase Agreement between EMI and
ART, Intermedia has access to 38 GHz licenses in most metropolitan areas in
the Northeast at the lowest rate charged by ART for such services. The Company
uses this technology from time to time to connect its customers to its
network, allowing rapid initiation of service.
In addition, the Company has undertaken a significant network expansion to
satisfy the demands of the Company's market driven growth in interexchange
data and voice offerings. The Company has deployed resources, primarily
switching equipment, to develop an extensive network to provide these
services. Excess capacity on this primarily leased network can be used to
provide incremental telecommunications services such as interexchange long
distance services.
The Company has recently undertaken the deployment of ATM networking
technology in its intercity network, allowing the network capacity to be
efficiently shared between multiple platforms. Often, the Company offers
interexchange services in geographic markets where it has not deployed its own
fiber optic network by leasing facilities from a variety of entities,
including ILECs, utilities, IXCs, local governments, cable companies and
various transit/highway authorities. In many cases, such capacity is obtained
through the capital lease or purchase of "dark fiber." The combination of the
Company's city-based networks and its intercity capacity comprise the seamless
network platform which the Company utilizes to offer its broad array of
telecommunications services to its customers. The Company also has agreements
with certain third parties and the carriers in the UniSPAN(C) consortium to
deliver enhanced data 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 Intermedia'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, Intermedia's research and development expenditures
are not material.
COMPETITION
The Company faces intense competition in each of its three service
categories--local services, enhanced data services and long distance services.
The Company believes that various legislative initiatives, including the
recently enacted 1996 Act and certain state initiatives, will result in the
removal of the remaining regulatory barriers to local exchange competition.
While the Company currently competes with AT&T, MCI and others in the
interexchange services market, the 1996 Act also permits the RBOCs to provide
interexchange services upon meeting certain requirements described in the 1996
Act. When the RBOCs begin to provide such services, they will be in a
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position to offer single source service similar to that being offered by
Intermedia. In addition, Sprint and GTE offer, and various ILECs and IXCs,
including BellSouth, have announced their intent to offer, integrated
telecommunication services in areas currently served by Intermedia. AT&T and
MCI have begun to enter the local exchange services market. The Company cannot
predict the number of competitors that will emerge as a result of existing and
any new federal and state regulatory or legislative actions. Competition from
integrated telecommunications services provided by the RBOCs, AT&T, MCI,
Sprint, WorldCom and others could have a material adverse effect on the
Company's business.
Competition in each of the service categories provided by the Company, as
well as for integration services which are common to all market segments, is
discussed below.
Local Services. In each of its geographic markets, the Company faces
significant competition for the local services it offers from RBOCs and other
ILECs, 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 Intermedia.
The Company also faces competition in most markets in which it operates from
one or more CLECs or ICPs operating fiber optic networks. Other local service
providers have operations or are initiating operations within one or more of
the Company's service areas. Intermedia expects WorldCom, MCI, Teleport
Communications Group, Inc. ("Teleport"), 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
markets that the Company presently serves. At least two of these competitors,
WorldCom and Teleport, have entered or announced plans to enter a number of
Intermedia's service areas. Intermedia also understands that other entities
have indicated their desire to enter the local exchange services market within
specific metropolitan areas served or targeted by Intermedia.
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 begun to enter the local
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 existing or any new
federal and state regulatory or legislative actions.
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 ILECs while providing, in the opinion of the Company, a higher level of
service and responsiveness to its customers.
Although the ILECs are generally subject to greater pricing and regulatory
constraints than other local network service providers, ILECs are achieving
increasing pricing flexibility for their local services as a result of recent
legislative and regulatory developments. The ILECs 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 by the
Company.
Enhanced Data Services. The Company faces competition in its enhanced data
services business from ILECs, IXCs, VSAT providers, other ISPs and others. In
particular, the market for Internet services is extremely competitive and
there are limited barriers to entry. Many of the Company's existing and
potential competitors have financial 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,
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including AT&T, MCI, Sprint and WorldCom 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 features and functions of its services, 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.
As a result of the DIGEX Acquisition, the Company will compete with other
ISPs on the basis of service quality, technical acumen, and customer-
responsiveness, facilitated by a highly-focused, business unit-based
organizational structure.
Many of the ILECs now offer services similar to Intermedia's enhanced data
services, but are allowed to offer them only on an intraLATA basis. While the
ILECs generally cannot interconnect their frame relay networks with each
other, Intermedia has interconnected its frame relay network with those of
various ILECs. As a result, Intermedia can use certain ILEC services to keep
its own costs down when distributing into areas that cannot be more
economically serviced on its own network. Intermedia expects the ILECs to
aggressively expand their enhanced data services as regulatory developments
permit them to deploy interLATA long distance networks. When the ILECs are
permitted to provide such services, they will be in a position to offer single
source service similar to that being offered by Intermedia. As part of its
various interconnection agreements, Intermedia has negotiated favorable rates
for unbundled ILEC frame relay service elements. The Company expects such
negotiations to decrease its costs, positively impacting margins for this
service.
Interexchange Services. The Company currently competes with AT&T, MCI and
others in the interexchange services market. Many of the Company's competitors
have longstanding relationships with their customers and have financial,
personnel and technical resources substantially greater than those of
Intermedia. In providing interexchange services, the Company focuses on
quality service and economy to distinguish itself in a very competitive
marketplace. Intermedia has built a loyal customer base by emphasizing its
customer service. The additional new services that are offered as the Company
implements its local exchange services should further support this position by
allowing the Company to market a wide array of fully integrated
telecommunications services. While these services are subject to highly
competitive pricing pressures, the Company's cost to provide these services is
decreasing as it deploys more local/long distance voice switches and
interexchange network facilities.
Integration Services. The Company faces competition in its integration
services business from equipment manufacturers, the RBOCs and other ILECs,
long distance carriers and systems integrators, many of which have financial,
and other resources significantly greater than those of the Company. Because
the Company is not highly dependent on integration services revenues and
because the Company typically provides integration services to customers who
purchase other services of the Company, Intermedia's integration services
competitors should not pose a significant threat to Intermedia's overall
business.
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 Intermedia is unable to predict.
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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 already clear that the legislation provides the Company with both new
opportunities and new challenges.
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
historically applied to the Company have been and may continue to 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 service providers, only GTE, the
RBOCs and other ILECs are classified as dominant carriers, and all other
providers of domestic common carrier services, including the Company, are
classified as non-dominant carriers. 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. In October 1996, in
its first major exercise of regulatory forbearance authority granted by the
1996 Act, the FCC issued an order detariffing domestic interexchange services.
The order requires mandatory detariffing and gives carriers such as Intermedia
nine months to withdraw federal tariffs and move to contractual relationships
with its customers. This order subsequently was stayed by a federal appeals
court and it is unclear at this time whether the detariffing order will be
implemented. The FCC also has issued an order, subject to appellate review,
which allows providers of interstate exchange access services, other than
ILECs, the option to cease filing tariffs. The FCC has tentatively concluded
that complete detariffing of exchange access services would serve the public
interest and has sought comment on the issue.
The 1996 Act greatly expands the FCC's interconnection requirements on the
ILECs. The 1996 Act requires the ILECs to: (i) provide physical collocation,
which allows companies such as Intermedia and other interconnectors to install
and maintain their own network termination equipment in ILEC central offices,
and virtual collocation only if requested or if physical collocation is
demonstrated to be technically infeasible; (ii) unbundle components of their
local service networks so that other providers of local service can compete
for a wider range of local services customers; (iii) establish "wholesale"
rates for their services to promote resale by CLECs and other competitors;
(iv) establish number portability, which will allow a customer to retain its
existing phone number if it switches from the ILEC 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, conduits and rights-of-way. In addition, the 1996 Act
requires ILECs to compensate competitive carriers for traffic originated by
the ILECs and terminated on the competitive carriers' networks. The FCC is
charged with establishing national guidelines to implement the 1996 Act. The
FCC issued its Interconnection Order on August 8, 1996, after which, six
separate motions were filed with the Eighth Circuit Court of Appeals in St.
Louis for a stay of the FCC's Interconnection Order. On October 15, 1996, the
court stayed the pricing and "most favored nation" provisions contained in the
Interconnection Order while leaving in place the structural aspects of the
order. On July 18, 1997, the Eighth Circuit Court issued its final decision,
which vacated the FCC's pricing and "most favored nation" rules, and certain
other interconnection rules promulgated by the FCC. This decision is expected
to be appealed to the Supreme Court of the United States of America.
As part of its pro-competitive 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
their local service regions immediately, and will permit them to provide in-
region interLATA
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service upon demonstrating to the FCC and state regulatory agencies that they
have adhered to the FCC's interconnection regulations. To date, ILECs in two
states have filed applications for in-region long distance authority with the
FCC--Ameritech Corporation in Michigan, and Southwestern Bell Corporation in
Oklahoma. The Southwestern Bell Corporation petition has been rejected by the
FCC and the Ameritech Corporation petition currently is pending FCC review. In
addition, ILECs in a number of other states have asked state regulatory
commissions to evaluate their petitions for in-region long distance authority,
in anticipation of filing similar applications with the FCC. The FCC is
expected to scrutinize these and future applications to ensure that the
interconnection requirements have been met.
As a result of these provisions of the 1996 Act, the Company has taken the
steps necessary to be a provider of local exchange services and has positioned
itself as a full service, integrated telecommunications services provider. As
of July 30, 1997, Intermedia had obtained certification to provide local
service in 21 states and the District of Columbia and had applications pending
for local certification in 21 additional states. The Company is also
authorized to provide long distance service in the District of Columbia and 49
states. In addition, the Company has successfully negotiated interconnection
agreements that meet the interconnection provisions contained in the 1996 Act
with seven LECs. At the same time, the 1996 Act also makes competitive entry
more attractive to RBOCs, other ILECs, 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 ILECs 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 ILECs. This may
provide the Company with the ability to reduce its own access costs by
interconnecting directly with non-ILECs, but may also cause the Company to
incur additional administrative and regulatory expenses in replying 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 ILECs, and increases their ability to respond quickly to competition from
the Company and others. For example, in accordance with the 1996 Act, the FCC
has applied "streamlined" tariff regulation to the ILECs, which greatly
accelerates the time in which tariffs that change service rates take effect,
and eliminates the requirement that ILECs obtain FCC authorization before
constructing new domestic facilities. These actions will allow ILECs to change
service rates more quickly in response to competition. Similarly, the FCC is
expected to release an order later this year that may permit significant new
pricing flexibility to ILECs. To the extent that such increased pricing
flexibility is provided, the Company's ability to compete with ILECs for
certain services may be adversely affected.
On May 8, 1997, in compliance with the requirements of the 1996 Act, the FCC
released an order establishing new Universal Service support funds, which
provide subsidies to carriers that provide service to under-served individuals
and customers in high cost areas, and to companies that provide
telecommunications services and wiring for schools and libraries. The Company
has to pay a contribution into the Universal Service fund, but may also obtain
subsidies for services that it provides. The new Universal Service rules will
be administered jointly by the FCC and state regulatory authorities, many of
which are still in the process of establishing their administrative rules. The
net revenue effect of these regulations on the Company cannot be determined at
this time.
On May 16, 1997, the FCC released an order that fundamentally restructured
the "access charges" that ILECs charge to interexchange carriers and end user
customers. The Company's analysis of the FCC's order leads it to believe that
the FCC's new access charge rules do not adversely affect the Company's
business plan, and that they do in fact present significant new opportunities
for new entrants, including the Company. Aspects of the order may be changed
in the future. At least three parties have filed appeals with federal courts,
and numerous parties are expected to ask the FCC to reconsider portions of its
new rules.
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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 was 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 were required to 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 36 states and is subject to regulation by the public service commissions of
those states. As of July 30, 1997, the Company was certificated (or
certification was not required) in 49 states and the District of Columbia to
provide toll services and was seeking certification in the one remaining
state. As of July 30, 1997, the Company was certified as a CLEC in 27 states
and the District of Columbia and was seeking CLEC certification in 21
additional states. The Company is constantly evaluating the competitive
environment and may seek to further expand its intrastate certifications into
additional jurisdictions.
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.
Many of the states in which the Company operates have also 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 conformity with federal standards. The 1996 Act
also authorizes the states to adopt additional regulations to the extent that
they do not conflict with federal standards. This aspect of the FCC's order
has been challenged and is awaiting resolution in court. It is unclear at this
time how the states will respond to the new federal legislation, and what
additional regulations they may adopt.
While the 1996 Act's prohibition of state barriers to competitive entry took
effect on February 8, 1996, there have been numerous procedural delays which
must be resolved before the 1996 Act's policies are fully implemented. The
Company continues to support efforts at the state government level to
encourage competition in their markets under the federal law and to permit
ICPs and CLECs to operate on the same basis and with the same rights as the
ILECs. In addition, the Company has been successful in its pursuit of local
certificates from state Commissions and negotiated interconnection agreements
with the ILECs, which permit the Company to meet its business objectives
despite the uncertain regulatory environment.
In most states, the Company is required to file tariffs setting forth the
terms, conditions and prices for services that are classified as intrastate
(local, toll and enhanced). Most states require the Company to list the
services provided and the specific rate for each service. Under different
forms of regulatory flexibility, the Company may be allowed to set price
ranges for specific services, and in some cases, prices may be set on an
individual customer basis. The Company is not subject to price cap or rate of
return regulation in any state in which it is currently certificated to
provide local exchange service.
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 Intermedia. 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.
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.
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In some of the areas where the Company provides service, it may be subject
to municipal franchise requirements and may be required 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 ILECs, currently are excused from paying license or franchise
fees or pay fees that are materially lower than those required to be paid by
the 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 ICP or CLEC.
If any of the Company's 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.
The Company also must obtain licenses to attach facilities to utility poles
in order to build and expand facilities. Because utilities that are owned by
cooperatives or municipalities are not subject to federal pole attachment
regulation, there is no assurance that the Company will be able to obtain pole
attachment from these utilities at reasonable rates, terms and conditions.
AGREEMENTS
Interconnection Co-carrier Agreements. The Company has recently entered into
interconnection co-carrier agreements with Ameritech, BellSouth, NYNEX, SBC,
GTE, Sprint and Bell Atlantic. As of July 30, 1997, the Company is arbitrating
terms for transport and termination of frame relay services with Ameritech in
Indiana and Ohio. On July 2, 1997, the Company filed to withdraw its
arbitration petition in Illinois as a result of a settlement reached with
Ameritech, and expects to take similar action in Ohio and Indiana in the near
future. Each of these agreements, among other things, provides for mutual and
reciprocal compensation, local interconnection, resale of local exchange
services, access to unbundled network elements, service provider number
portability and access to operator service, directory service and 911 service,
as provided for in the 1996 Act. The agreements further provide that
additional terms and conditions will be set by negotiation between the parties
relating to issues which arise that were not originally contemplated by the
agreements. These agreements were executed within the past year and have terms
ranging from two to three years.
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 Intermedia 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
governmental 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, Licenses and Permits."
Interexchange Agreements. Intermedia, 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 two years in duration and customarily include minimum purchase
amounts.
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UniSPAN (C). In order to provide end-to-end connectivity and
interoperability throughout the United States to its enhanced data services
customers, Intermedia entered into a frame relay service agreement (the
"UniSPAN Agreement") in September 1994 with EMI (since acquired by
Intermedia), 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 provision
of 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, 1997, Intermedia employed a total of 1,026 full-time
employees. The Company anticipates that the number of employees will increase
significantly throughout the remainder of 1997. 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. Intermedia 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 Intermedia's employees is represented by a collective
bargaining agreement. Intermedia believes that its relations with its
employees are good.
PROPERTIES
The Company leases its principal administrative, marketing, warehouse and
service development facilities in Tampa, Florida and leases other space for
storage of its electronics equipment and for administrative, sales and
engineering functions in other cities where the Company operates networks
and/or performs sales functions. The Company believes that its properties are
adequate and suitable for their intended purposes.
As of March 31, 1997, the Company's total telecommunications and equipment
in service consisted of fiber optic telecommunications equipment (62%), fiber
optic cable (18%), furniture and fixtures (2%), leasehold improvements (3%)
and construction in progress (15%). 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 and excluding equipment acquired and
capital leases assumed in business acquisitions, since January 1, 1992 were as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- -------
<S> <C>
1992................................................................ $ 9,687
1993................................................................ 10,767
1994................................................................ 18,289
1995................................................................ 34,873
1996................................................................ 131,466
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------
<S> <C>
1997................................................................ 32,924
</TABLE>
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LEGAL PROCEEDINGS
Except as described below, the Company is not a party to any 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.
On June 20, 1997, two purported class action complaints were filed in the
Court of Chancery of the State of Delaware in and for New Castle County
respectively by TAAM Associates, Inc. and David and Chaile Steinberg (the
"Complaints"), purported stockholders of DIGEX, on behalf of all non-
affiliated common stockholders of DIGEX, against Intermedia, DIGEX and the
directors of DIGEX (the "DIGEX Directors"). The Complaints allege that the
DIGEX Directors violated their fiduciary duties to the public stockholders of
DIGEX by agreeing to vote in favor of the Merger and that Intermedia knowingly
aided and abetted such violation by offering to retain DIGEX management in
their present positions and consenting to stock option grants to certain
executive officers of DIGEX. The Complaints seek a preliminary and permanent
injunction enjoining the Merger and cash damages from the DIGEX Directors. No
application was made for a preliminary injunction prior to the consummation of
the Merger.
These cases are in their very early stages and no assurance can be given as
to their ultimate outcome. Intermedia, after consultation with its counsel,
believes that there are meritorious factual and legal defenses to the claims
in the Complaints. Intermedia intends to defend vigorously the claims in the
Complaints.
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MANAGEMENT
The directors and executive officers of Intermedia, their respective ages,
positions and biographies, as of June 30, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
David C. Ruberg....... 51 Chairman of the Board, President and Chief Executive
Officer
Robert A. Rouse....... 48 Executive Vice President, Operations, Engineering
and Information Systems
James F. Geiger....... 38 Senior Vice President, Sales
Robert M. Manning..... 37 Senior Vice President, Chief Financial Officer
Robert A. Ruh......... 52 Senior Vice President, Human Resources
Barbara L. Samson(1).. 35 Senior Vice President, Public Relations and Public
Affairs
Michael A. Viren...... 56 Senior Vice President, Strategic Planning,
Regulatory and Industry Relations
Patricia A. Kurlin.... 42 Vice President, Corporate Counsel
Jeanne M. Walters..... 35 Controller and Chief Accounting Officer
John C. Baker......... 47 Director
Philip A. Campbell.... 60 Director
George F. Knapp....... 65 Director
</TABLE>
- --------
(1) Commencing April 1, 1997, Ms. Samson has been on a sabbatical leave in
order to chair the Florida NetDay 2000 program.
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.
Robert A. Rouse has served as Executive Vice President, Operations and
Systems of the Company since October 1996. Prior to joining the Company, Mr.
Rouse was Senior Vice President of Concert, a joint venture company of British
Telecommunications and MCI where he managed the engineering and operations of
the Concert Global Networks from 1991 to 1996. Mr. Rouse held various
executive management positions at MCI from 1986 to 1991, with responsibilities
including product and network design, network and systems development, network
planning, operations, provisioning, and customer services. Prior to that, he
managed several subsidiaries of Rochester Telephone, now a part of Frontier
Corporation. Mr. Rouse received his B.A. from the University of Rochester.
James F. Geiger has served as Senior Vice President, Sales of the Company
since August 1995. Mr. Geiger served as the Vice President of Alternate
Channel Sales of Intermedia from March 1995 through August 1995. Mr. Geiger
was one of the founding principals of FiberNet, and was serving as President
of FiberNet when it was acquired by Intermedia. 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.
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Robert M. Manning has served as Senior Vice President, Chief Financial
Officer of the Company since September 1996. Mr. Manning joined Intermedia
from DMX Inc., a Los Angeles-based cable programmer, where he was Executive
Vice President, Senior Financial Executive and a director of DMX-Europe from
October 1991 to September 1996. Prior to his tenure at DMX, Mr. Manning spent
ten years in the investment banking field in corporate finance and mergers and
acquisitions, most recently with Oppenheimer and Co., Inc. as Vice President,
Corporate Finance, managing their Entertainment/Leisure Time Group from
October 1988 to October 1991. Mr. Manning is a graduate of Williams College,
Williamstown, Massachusetts.
Robert A. Ruh has served as Senior Vice President, Human Resources of the
Company since March 1, 1996. From January 1991 through February 1996, Dr. Ruh
founded and operated his own consulting company, specializing in human
resource development. Prior to starting his own business, from 1975 to 1990,
Dr. Ruh held corporate and group executive positions in human resources with
Baxter Healthcare Corporation and American Hospital Supply Corporation. From
1973 to 1975, Dr. 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, Dr. Ruh was on the corporate
organization development staff at Corning Glass Works. Dr. Ruh received a B.A.
in psychology from Valparaiso University in 1966. He received an M.A. (1967)
and a Ph.D. (1970) in industrial/organizational psychology from Michigan State
University. Dr. Ruh served as Assistant Professor of Psychology at Michigan
State University from 1970 to 1972.
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.
Michael A. Viren has served as Senior Vice President, Strategic Planning,
Regulatory and Industry Relations of the Company since October 1996. Prior to
his present position, he was Senior Vice President, Engineering and
Information Systems of the Company from January 1996 to October 1996 and was
Vice President, Product Development of the Company from December 1992 through
January 1996. Dr. Viren joined Intermedia in February 1991 as Director of
Product Development. Dr. 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. Dr. Viren taught economics for ten years,
most recently as an Associate Professor of Economics at the University of
Missouri-Columbia and prior to that at the University of Kansas. Dr. 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.
Patricia A. Kurlin has served as Vice President, Corporate Counsel of the
Company since June 1996. From September 1995 until June 1996, Ms. Kurlin
served as Corporate Counsel and served as Director of Governmental and Legal
Affairs for the Company from September 1993 to September 1995. Prior to
joining the Company, Ms. Kurlin served as Senior Telecommunications Attorney
at the Florida Public Service Commission from May 1990 to September 1993. Ms.
Kurlin received her J.D. from the Florida State University and a B.S. degree
from the University of South Florida.
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.
John C. Baker has been a director of the Company since February 1988. Mr.
Baker has been the principal at Baker Capital Corp., a private equity
investment firm, since October 1995. He was a Senior Vice President of
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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. and Resource Bancshares Mortgage Group, Inc., all of
which are publicly traded corporations.
Philip A. Campbell has been a director of the Company since September 1996.
Mr. Campbell retired from Bell Atlantic as director, vice chairman and chief
financial officer in 1991. Previously, he was president of New Jersey Bell,
Indiana Bell and Bell Atlantic Network Services. While at Bell Atlantic, Mr.
Campbell was the company's principal representative to Wall Street and is well
known in the domestic and international financial communities. Mr. Campbell is
currently a director of Xpedite Systems, Inc., a publicly traded corporation.
George F. 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. Mr. Knapp is
currently a member of the Manhattan College Board of Trustees and Chairman of
its Finance Committee.
No family relationship exists between any of the directors and executive
officers of the Company.
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DESCRIPTION OF OUTSTANDING INDEBTEDNESS
In addition to the Old Notes, the Company has outstanding the following
indebtedness:
13 1/2% NOTES
As of March 31, 1997, the Company had outstanding an aggregate principal
amount of $159,115,000 of 13 1/2% Series B Senior Notes due 2005. The 13 1/2%
Notes mature on June 1, 2005 and pay interest semi-annually in arrears on June
1 and December 1 of each year. The 13 1/2% Notes may be redeemed at the
Company's option at any time after June 1, 2000 upon payment of the redemption
price plus accrued and unpaid interest, if any, to the date of redemption. The
13 1/2% Notes are secured, in an amount sufficient to provide payment in full
of the scheduled interest payments on such notes through June 1, 1998, by a
pledge of United States government securities. In the event of a change of
control of the Company, holders of the 13 1/2% Notes have the right to require
the Company to purchase their 13 1/2% Notes, in whole or in part, at a price
equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase.
On April 26, 1996 the Company and SunTrust Bank, Central Florida, National
Association, as trustee, executed an amended and restated indenture governing
the 13 1/2% Notes. The 13 1/2% Notes Indenture contains certain covenants
that, among other things, limit the ability of the Company and its
subsidiaries to make certain restricted payments, incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness,
engage in sale and leaseback transactions, create certain liens, enter into
certain transactions with affiliates, sell assets of the Company or its
subsidiaries, conduct certain lines of business, issue or sell equity
interests of the Company's subsidiaries or enter into certain mergers and
consolidations. In addition, under certain circumstances, the Company is
required to offer to purchase 13 1/2% Notes at a price equal to 100% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase, with the proceeds of certain asset sales. This description
of the 13 1/2% Notes is intended as a summary and is qualified in its entirety
by reference to the 13 1/2% Notes Indenture.
A portion of the proceeds of the Offering was used to defease or otherwise
retire the 13 1/2% Notes.
12 1/2% NOTES
The Company had outstanding an aggregate principal amount of $330,000,000 of
12 1/2% Senior Discount Notes due 2006, with an aggregate accreted value of
$200,114,000 as of March 31, 1997. The 12 1/2% Notes were issued at a
substantial discount from their principal amount and mature on May 15, 2006.
Cash interest does not accrue on the 12 1/2% Notes prior to May 15, 2001.
Commencing November 15, 2001, cash interest on the 12 1/2% Notes will be
payable semi-annually in arrears on May 15 and November 15 of each year at a
rate of 12 1/2% per annum. The 12 1/2% Notes may be redeemed at the Company's
option at any time, in whole or in part, on or after May 15, 2001 upon payment
of the redemption price plus accrued and unpaid interest, if any, to the date
of redemption. The 12 1/2% Notes are unsecured obligations of the Company
ranking pari passu in right of payment of principal and interest with all
other existing and future senior indebtedness of the Company, including the 13
1/2% Notes and the Senior Discount Notes, and rank senior to any future
subordinated indebtedness. In the event of a change of control of the Company
prior to May 15, 2001, holders of the 12 1/2% Notes have the right to require
the Company to repurchase their 12 1/2% Notes, in whole or in part, at a price
equal to 101% of the accreted value thereof or, in the case of any such
purchase on or after May 15, 2001, at 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the date of purchase.
The covenants in the 12 1/2% Notes are substantially similar to the
covenants in the Indenture governing the Senior Discount Notes. The 12 1/2%
Notes Indenture contains certain covenants that, among other things, limit the
ability of the Company and its subsidiaries to make certain restricted
payments, incur additional indebtedness and issue preferred stock, pay
dividends or make other distributions, repurchase equity interests or
subordinated indebtedness, engage in sale and leaseback transactions, create
certain liens, enter
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into certain transactions with affiliates, sell assets of the Company or its
subsidiaries, conduct certain lines of business, issue or sell equity
interests of the Company's subsidiaries or enter into certain mergers and
consolidations. In addition, under certain circumstances, the Company is
required to offer to purchase 12 1/2% Notes at a price equal to 100% of the
accreted value thereof, if such circumstances occur prior to May 15, 2001, or
at 100% of the principal amount thereof, if such circumstances occur on or
after May 15, 2001, plus accrued and unpaid interest, if any, to the date of
purchase with the proceeds of certain asset sales. This description of the 12
1/2% Notes is intended as a summary and is qualified in its entirety by
reference to the 12 1/2% Notes Indenture.
CAPITAL LEASE OBLIGATIONS
As of March 31, 1997, the Company had outstanding approximately $5 million
aggregate principal amount of capital lease obligations arising primarily from
three agreements for leases of fiber optic cable used in various of the
Company's networks. The effective interest rates under these agreements range
from 10.5% to 13.5% and expire, subject to various Intermedia renewal options,
from 2001 to 2016. In addition, as of March 31, 1997, DIGEX had outstanding
approximately $11 million aggregate principal amount of capital lease
obligations arising primarily from 16 agreements for network equipment used at
various DIGEX service locations.
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DESCRIPTION OF THE SENIOR DISCOUNT NOTES
GENERAL
Set forth below is a summary of certain provisions of the Senior Discount
Notes. The Senior Discount Notes, like the Old Notes, will be issued pursuant
to the Indenture (the "Indenture") dated as of July 9, 1997 between the
Company and SunTrust Bank, Central Florida, National Association, as trustee
(the "Trustee"), a copy of the form of which has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part. The terms of
the Senior Discount Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Senior Discount Notes are subject to
all such terms, and holders of Senior Discount Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of certain provisions of the Indenture does not purport to be complete
and is qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. The definitions of certain
terms used in the following summary are set forth below under "--Certain
Definitions." As of the date of the Indenture, none of the Company's
Subsidiaries were Unrestricted Subsidiaries. However, under certain
circumstances, the Company will be able to designate current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not
be subject to many of the restrictive covenants set forth in the Indenture. As
used in this section, the term "Company" refers only to Intermedia
Communications Inc. and not to its Subsidiaries. The terms of the Senior
Discount Notes are substantially identical to the Old Notes in all material
respects (including interest rate and maturity), except that (i) the Senior
Discount Notes will not be subject to the restrictions on transfer (other than
with respect to holders who are affiliates) and (ii) the Registration Rights
Agreement covenants regarding registration and the related Liquidated Damages
(other than those that have accrued and were not paid) with respect to
Registration Defaults will have been deemed satisfied.
RANKING
The Senior Discount Notes will rank senior in right of payment to all
subordinated Indebtedness of the Company. The Senior Discount Notes will rank
pari passu in right of payment with all existing and future senior borrowings,
including the Existing Senior Notes and the Old Notes and borrowings under the
Credit Facility. Holders of secured Indebtedness of the Company will, however,
have claims that are prior to the claims of the holders of the Senior Discount
Notes with respect to the assets securing such other Indebtedness.
Certain of the Company's operations are conducted through its Subsidiaries
and, therefore, the Company is dependent upon the cash flow of its
Subsidiaries to meet its obligations, including its obligations under the
Senior Discount Notes. The Senior Discount Notes will be effectively
subordinated to all indebtedness and other liabilities and commitments
(including trade payables and lease obligations) of the Company's
Subsidiaries. Any right of the Company to receive assets of any of its
Subsidiaries upon the latter's liquidation or reorganization (and the
consequent right of the holders of the Senior Discount Notes to participate in
those assets) will be effectively subordinated to the claims of that
Subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of such Subsidiary, in which case the claims of the
Company would still be subordinate to any security in the assets of such
Subsidiary and any indebtedness of such Subsidiary senior to that held by the
Company. As of March 31, 1997, on a pro forma basis after giving effect to the
Offering and the Concurrent Offering and the application of the proceeds
therefrom, the Company would have had approximately $624 million of senior
indebtedness outstanding, including trade payables, and the Company's
Subsidiaries would have had approximately $34 million of indebtedness
outstanding.
PRINCIPAL, MATURITY AND INTEREST
The Senior Discount Notes will be issued at a discount from their principal
amount and will mature on July 15, 2007. The Senior Discount Notes will
accrete at a rate of 11 1/4%, compounded semi-annually until July 15, 2002.
Interest on the Senior Discount Notes will not accrue prior to July 15, 2002.
Thereafter, interest will accrue at 11 1/4% per annum and will be payable
semi-annually on July 15 and January 15 of each year, commencing on
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January 15, 2003, to holders of record on the immediately preceding July 1 and
January 1. Interest on the Senior Discount Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from July 15, 2002. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. All references to the principal amount of
the Senior Discount Notes herein are references to the principal amount at
final maturity. The Senior Discount Notes will be payable both as to
principal, premium, if any, and interest and Liquidated Damages, if any, at
the office or agency of the Company maintained for such purpose within the
City and State of New York or, at the option of the Company, payment of
interest or Liquidated Damages may be made by check mailed to the holders of
the Senior Discount Notes at their respective addresses set forth in the
register of holders of the Senior Discount Notes. Until otherwise designated
by the Company, the Company's office or agency in New York will be the office
of the Trustee maintained for such purpose. The Senior Discount Notes will be
issued in registered form, without coupons, and in denominations of $1,000 and
integral multiples thereof.
OPTIONAL REDEMPTION
The Senior Discount Notes will not be redeemable at the Company's option
prior to July 15, 2002. Thereafter, the Senior Discount Notes will be subject
to redemption at the option of the Company, in whole or in part, upon not less
than 30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the applicable redemption
date, if redeemed during the twelve-month period beginning on July 15 of the
years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002.............................................................. 105.625%
2003.............................................................. 103.750%
2004.............................................................. 101.875%
2005 and thereafter............................................... 100.000%
</TABLE>
Notwithstanding the foregoing, in the event of the sale by the Company prior
to July 15, 2000 of its Capital Stock (other than Disqualified Stock) (i) to a
Strategic Investor in a single transaction or series of related transactions
for an aggregate purchase price equal to or exceeding $50.0 million or (ii) in
one or more Public Offerings, up to a maximum of 25% of the aggregate
principal amount at maturity of the Senior Discount Notes originally issued
will, at the option of the Company, be redeemable from the net cash proceeds
of such sale or sales (but only to the extent such proceeds consist of cash or
readily marketable cash equivalents received in respect of the Capital Stock,
other than Disqualified Stock, so sold) at a redemption price equal to 111
1/4% of the Accreted Value thereof with respect to the Senior Discount Notes
to be redeemed on the redemption date, provided that at least 75% of the
aggregate principal amount at maturity of the Senior Discount Notes originally
issued remains outstanding immediately after the occurrence of such redemption
and that such redemption occurs within 90 days of the date of the closing of
such sale.
MANDATORY REDEMPTION
The Company will not be required to make mandatory redemption or sinking
fund payments with respect to the Senior Discount Notes.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
make an offer (the "Change of Control Offer") to each holder of Senior
Discount Notes to repurchase all or any part (equal to $1,000 or an integral
multiple thereof) of such holder's Senior Discount Notes at a purchase price
equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest and Liquidated Damages, if any, thereon (or, in the case of
repurchases of Senior Discount Notes prior to July 15, 2002, at a purchase
price equal to 101% of the Accreted Value thereof), to the date of purchase
(the "Change of Control Payment"). The Change
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of Control Offer must be commenced within 30 days following a Change of
Control, must remain open for at least 30 and not more than 40 days (unless
required by applicable law) and must comply with the requirements of Rule 14e-
1 under the Exchange Act and any other applicable securities laws and
regulations.
Except as described above with respect to a Change of Control, the Indenture
will not contain provisions that permit the holders of the Senior Discount
Notes to require that the Company repurchase or redeem the Senior Discount
Notes in the event of a takeover, recapitalization or similar transaction.
Due to the leveraged structure of the Company and the effective
subordination of the Senior Discount Notes to secured Indebtedness of the
Company and Indebtedness of the Company's Subsidiaries, the Company may not
have sufficient funds available to purchase the Senior Discount Notes tendered
in response to a Change of Control Offer. In addition, the Existing Senior
Notes or other agreements relating to Indebtedness of the Company's
Subsidiaries may contain prohibitions or restrictions on the Company's ability
to effect a Change of Control Payment.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the Company's assets. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of Senior Discount Notes to require the Company to repurchase such
Senior Discount Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company to another
Person may be uncertain.
OFFER TO PURCHASE WITH EXCESS ASSET SALE PROCEEDS
When the cumulative amount of Excess Proceeds (as defined below under
"Certain Covenants--Asset Sales") exceeds $5.0 million, the Company will make
an offer to all holders of Senior Discount Notes and Pari Passu Notes (an
"Excess Proceeds Offer"), to purchase the maximum principal amount of Senior
Discount Notes and Pari Passu Notes that may be purchased out of such Excess
Proceeds, at an offer price in cash in an amount equal to 100% of the Accreted
Value of the Senior Discount Notes to the date fixed for the closing (if such
offer is prior to July 15, 2002) or 100% of the outstanding principal amount
of the Senior Discount Notes (if such offer is on or after July 15, 2002) and
100% of the accreted value or 100% of the outstanding principal amount, as
applicable, of the Pari Passu Notes, plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date fixed for the closing of such
offer, in accordance with the procedures specified in the Indenture.
If the Accreted Value and/or aggregate principal amount, as the case may be,
of Senior Discount Notes and Pari Passu Notes surrendered by holders thereof
exceeds the amount of Excess Proceeds, the Trustee will select the Senior
Discount Notes and Pari Passu Notes to be purchased on a pro rata basis based
upon their Accreted Value or applicable principal amount. To the extent that
the aggregate amount of Senior Discount Notes and Pari Passu Notes tendered
pursuant to an Excess Proceeds Offer is less than the amount of Excess
Proceeds, the Company may use such deficiency for general purposes. Upon
completion of an Excess Proceeds Offer, the amount of Excess Proceeds will be
reset at zero.
SELECTION OF SENIOR DISCOUNT NOTES FOR REDEMPTION OR OFFERS TO PURCHASE
If less than all of the Senior Discount Notes are to be redeemed or to be
purchased pursuant to any purchase offer required under the Indenture at any
time, selection of Senior Discount Notes for redemption or purchase will be
made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Senior Discount Notes are
listed, or, if the Senior Discount Notes are not so listed, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and
appropriate, provided that no Senior Discount Notes with a principal amount of
$1,000 or less shall be redeemed or purchased in part. A new Senior Discount
Note in principal amount equal to the unredeemed or unpurchased portion will
be issued in the name of the holder thereof upon cancellation of the original
Senior Discount Note. On and after the redemption or
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purchase date, interest will cease to accrue on the Senior Discount Notes (and
the Accreted Value will cease to accrete if prior to July 15, 2002) or
portions of them called for redemption or purchase.
NOTICE OF REDEMPTION
Notice of redemption shall be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each holder of Senior Discount
Notes to be redeemed at its registered address. If any Senior Discount Note is
to be redeemed in part only, the notice of redemption that relates to such
Senior Discount Note shall state the portion of the principal amount to be
redeemed.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company and its Subsidiaries may not,
directly or indirectly:
(i) declare or pay any dividend or make any distribution on account of
any Equity Interests of the Company or any of its Subsidiaries other than
dividends or distributions payable (A) in Equity Interests of the Company
that are not Disqualified Stock or (B) to the Company or any Subsidiary;
(ii) purchase, redeem, defease, retire or otherwise acquire for value
("Retire" and correlatively, a "Retirement") any Equity Interests of the
Company or any of its Subsidiaries or other Affiliate of the Company (other
than any such Equity Interests owned by the Company or any Subsidiary);
(iii) Retire for value any Indebtedness of (A) the Company that is
subordinate in right of payment to the Senior Discount Notes or (B) any
Subsidiary, except, with respect to clause (A) or (B) above, at final
maturity or in accordance with the mandatory redemption or repayment
provisions set forth in the original documentation governing such
Indebtedness; or
(iv) make any Restricted Investment (all such payments and other actions
set forth in clauses (i) through (iv) above being collectively referred to
as "Restricted Payments"), unless, at the time of such Restricted Payment:
(a) no Default or Event of Default has occurred and is continuing or
would occur as a consequence thereof;
(b) after giving effect to such Restricted Payment on a pro forma
basis as if such Restricted Payment had been made at the beginning of
the applicable four-quarter period, the Company could incur at least
$1.00 of additional Indebtedness pursuant to the Consolidated Cash Flow
Leverage Ratio test described under "--Incurrence of Indebtedness and
Issuance of Disqualified Stock;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the
Issue Date (including any Restricted Payments made pursuant to clauses
(i), (v) and (vi) of the next paragraph), is less than the sum of
(w) 50% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) from June 30, 1996 to the
end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such
period is a deficit, less 100% of such deficit), plus
(x) 100% of the aggregate net cash proceeds received by the
Company from the issue or sale of Equity Interests of the Company or
of debt securities or Disqualified Stock of the Company that have
been converted into such Equity Interests (other than Equity
Interests (or convertible debt securities) sold to a Subsidiary of
the Company and other than Disqualified Stock or debt securities
that have been converted into Disqualified Stock) after June 30,
1996 (other than any such Equity Interests, the proceeds of which
were used as set forth in clause (ii) below) plus
(y) 100% of the sum of, without duplication, (1) aggregate
dividends or distributions received by the Company or any Subsidiary
from any Joint Venture (other than dividends or distributions to pay
any obligations of such Joint Venture to Persons other than the
Company or
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any Subsidiary, such as income taxes), with non-cash distributions
to be valued at the lower of book value or fair market value as
determined by the Board of Directors, (2) the amount of the
principal and interest payments received since the Issue Date by the
Company or any Subsidiary from any Joint Venture and (3) the net
proceeds from the sale of an Investment in a Joint Venture received
by the Company or any Subsidiary; provided that there is no
obligation to return any such amounts to the Joint Venture, and
excluding any such dividend, distribution, interest payment or net
proceeds that constitutes a return of capital invested pursuant to
clause (vi) of the next succeeding paragraph, plus
(z) $10.0 million.
The foregoing provisions do not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) the Retirement of (A) any Equity Interests of the Company or any
Subsidiary of the Company, (B) Indebtedness of the Company that is
subordinate to the Senior Discount Notes or (C) Indebtedness of a
Subsidiary of the Company, in exchange for, or out of the proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company)
of, Equity Interests of the Company (other than Disqualified Stock);
(iii) the Retirement of any Indebtedness of the Company subordinated in
right of payment to the Senior Discount Notes in exchange for, or out of
the proceeds of the substantially concurrent incurrence of Indebtedness of
the Company (other than Indebtedness to a Subsidiary of the Company), but
only to the extent that such new Indebtedness is permitted under the
covenant described below under the caption, "Incurrence of Indebtedness and
Issuance of Disqualified Stock" and (1) is subordinated in right of payment
to the Senior Discount Notes at least to the same extent as, (2) has a
Weighted Average Life to Maturity at least as long as, and (3) has no
scheduled principal payments due in any amount earlier than, any equivalent
amount of principal under the Indebtedness so Retired;
(iv) the Retirement of any Indebtedness of a Subsidiary of the Company in
exchange for, or out of the proceeds of the substantially concurrent
incurrence of Indebtedness of the Company or any Subsidiary but only to the
extent that such incurrence is permitted under the covenant described below
under the caption "Incurrence of Indebtedness and Issuance of Disqualified
Stock" and only to the extent that such Indebtedness (1) is not secured by
any assets of the Company or any Subsidiary to a greater extent than the
Retired Indebtedness was so secured, (2) has a Weighted Average Life to
Maturity at least as long as the Retired Indebtedness and (3) if such
Retired Indebtedness was an obligation of the Company, is pari passu or
subordinated in right of payment to the Senior Discount Notes at least to
the same extent as the Retired Indebtedness;
(v) the Retirement of any Equity Interests of the Company or any
Subsidiary of the Company held by any member of the Company's (or any of
its Subsidiaries') management pursuant to any management equity
subscription agreement or stock option agreement; provided that the
aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed $1.0 million in any twelve-month
period plus the aggregate cash proceeds received by the Company during such
twelve-month period from any reissuance of Equity Interests by the Company
to members of management of the Company and its Subsidiaries; and
(vi) Investments in any Joint Venture; provided that at the time any such
Investment is made, such Investment will not cause the aggregate amount of
Investments at any one time outstanding under this clause (vi) to exceed
the greater of (x) $25 million and (y) 5% of the Total Common Equity of the
Company;
provided, however, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (i), (ii), (iii), (iv), (v) and
(vi), no Default or Event of Default shall have occurred and be continuing.
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The Indenture also provides that a Permitted Investment that ceases to be a
Permitted Investment pursuant to the definition thereof, shall become a
Restricted Investment, deemed to have been made on the date that it ceases to
be a Permitted Investment.
The Board of Directors may designate any Subsidiary to be an Unrestricted
Subsidiary if such designation would not cause a Default or an Event of
Default. For purposes of making such determination, all outstanding
Investments by the Company and its Subsidiaries (except to the extent repaid
in cash) in such Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the greatest of (x) the net book value of such Investments at the
time of such designation, (y) the fair market value of such Investments at the
time of such designation and (z) the original fair market value of such
Investments at the time they were made. Such designation will only be
permitted if such Restricted Payment would be permitted at such time.
The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Subsidiary; provided that such designation
shall be deemed to be an incurrence of Indebtedness by a Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and
such designation shall only be permitted if (i) such Indebtedness is permitted
under the covenant entitled "Incurrence of Indebtedness and Issuance of
Disqualified Stock," and (ii) no Default or Event of Default would be in
existence following such designation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "--Restricted Payments" were computed, which
calculations may be based upon the Company's latest available financial
statements.
Incurrence of Indebtedness and Issuance of Disqualified Stock
The Indenture provides that:
(i) the Company and its Subsidiaries may not, directly or indirectly,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable for the payment of (collectively, "incur" and,
correlatively, "incurred" and "incurrence") any Indebtedness (including,
without limitation, Acquired Debt) and
(ii) the Company and its Subsidiaries may not issue any Disqualified
Stock,
provided, however, that the Company and/or any of its Subsidiaries may incur
Indebtedness (including, without limitation, Acquired Debt) or issue shares of
Disqualified Stock if, after giving effect to the incurrence of such
Indebtedness or the issuance of such Disqualified Stock, the Consolidated Cash
Flow Leverage Ratio for the Company's most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date of such incurrence or issuance (A) does not exceed 5.5 to 1
if such incurrence or issuance occurs on or prior to June 1, 1999 and (B) does
not exceed 5.0 to 1 if such occurrence or issuance occurs after June 1, 1999,
in each case, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock had been issued, as the case may
be, at the beginning of such four-quarter period. If the Company incurs any
Indebtedness or issues or redeems any Preferred Stock subsequent to the
commencement of the period for which such ratio is being calculated but prior
to the event for which the calculation of the ratio is made, then the ratio
will be calculated giving pro forma effect to any such incurrence of
Indebtedness, or such issuance or redemption of Preferred Stock, as if the
same had occurred at the beginning of the applicable period. In making such
calculation on a pro forma basis, interest attributable to Indebtedness
bearing a floating interest rate shall be computed as if the rate in effect on
the date of computation had been the applicable rate for the entire period.
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The foregoing limitation does not apply to (with each exception to be given
independent effect):
(a) the incurrence by the Company and/or any of its Subsidiaries of
Indebtedness under the Credit Facility in an aggregate principal amount at
any one time outstanding (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of the Company
and/or any of its Subsidiaries thereunder) not to exceed $75.0 million in
the aggregate at any one time outstanding, less the aggregate amount of all
Net Proceeds of Asset Sales applied to permanently reduce the commitments
with respect to such Indebtedness pursuant to the covenant described above
under the caption "Asset Sales;"
(b) the incurrence by the Company and/or any of its Subsidiaries of
Vendor Indebtedness, provided that the aggregate amount of such Vendor
Indebtedness incurred does not exceed 80% of the total cost of the
Telecommunications Related Assets financed therewith (or 100% of the total
cost of the Telecommunications Related Assets financed therewith if such
Vendor Indebtedness was extended for the purchase of tangible physical
assets and was so financed by the vendor thereof or an affiliate of such
vendor);
(c) the incurrence by the Company and/or any of its Subsidiaries of the
Existing Indebtedness, including the Existing Senior Notes;
(d) the incurrence by the Company and/or any of its Subsidiaries of
Indebtedness in an aggregate amount not to exceed $25.0 million at any one
time outstanding;
(e) the incurrence by the Company of Indebtedness, but only to the extent
that such Indebtedness is expressly subordinate to the payment in full of
all Obligations with respect to the Senior Discount Notes and has a final
maturity no earlier than, and a Weighted Average Life to Maturity equal to
or greater than, the final maturity and Weighted Average Life to Maturity,
respectively, of the Senior Discount Notes, in an aggregate principal
amount not to exceed 2.0 times the net cash proceeds received by the
Company after June 30, 1996 from the issuance and sale of Equity Interests
of the Company (that are not Disqualified Stock) plus the fair market value
of Equity Interests (other than Disqualified Stock) issued after June 30,
1996 in connection with any acquisition of any Telecommunications Business;
(f) the incurrence (a "Permitted Refinancing") by the Company and/or any
of its Subsidiaries of Indebtedness issued in exchange for, or the proceeds
of which are used to refinance, replace, refund or defease ("Refinance" and
correlatively, "Refinanced" and "Refinancing") Indebtedness, other than
Indebtedness incurred pursuant to clause (a) above, but only to the extent
that:
(1) the net proceeds of such Refinancing Indebtedness do not exceed
the principal amount of and premium, if any, and accrued interest on
the Indebtedness so Refinanced (or if such Indebtedness was issued at
an original issue discount, the original issue price plus amortization
of the original issue discount at the time of the repayment of such
Indebtedness) plus the fees, expenses and costs of such Refinancing and
reasonable prepayment premiums, if any, in connection therewith;
(2) the Refinancing Indebtedness shall have a final maturity no
earlier than, and a Weighted Average Life to Maturity equal to or
greater than, the final maturity and Weighted Average Life to Maturity
of the Indebtedness being Refinanced; and
(3) if the Indebtedness being Refinanced is subordinated in right of
payment to the Senior Discount Notes, the Refinancing Indebtedness
shall be subordinated in right of payment to the Senior Discount Notes
on terms at least as favorable to the holders of Senior Discount Notes
as those contained in the documentation governing the Indebtedness
being so Refinanced;
(g) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Subsidiaries; and
(h) the incurrence by the Company or any of its Subsidiaries of Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate or foreign currency risk with respect to any floating rate
Indebtedness that is permitted by the terms of the Indenture to be
outstanding.
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For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness, Disqualified Stock or Preferred Stock meets the
criteria of more than one of the categories described in clauses (a) through
(h) above or is entitled to be incurred pursuant to the first paragraph of
this covenant, the Company shall, in its sole discretion, classify such item
in any manner that complies with this covenant and such item will be treated
as having been incurred pursuant to only one of such clauses or pursuant to
the first paragraph herein. Accrual of interest or dividends, the accretion of
accreted value or liquidation preference and the payment of interest or
dividends in the form or additional Indebtedness, Common Stock or Preferred
Stock will not be deemed to be an incurrence of Indebtedness for purposes of
this covenant.
Asset Sales
The Indenture provides that the Company and its Subsidiaries may not,
whether in a single transaction or a series of related transactions occurring
within any twelve-month period,
(i) sell, lease, convey, dispose or otherwise transfer any assets
(including by way of a Sale and Leaseback Transaction) other than sales,
leases, conveyances, dispositions or other transfers (A) in the ordinary
course of business, (B) to the Company by any Subsidiary of the Company or
from the Company to any Subsidiary of the Company, (C) that constitute a
Restricted Payment, Investment or dividend or distribution permitted under
the covenant described below under the caption "Restricted Payments" or (D)
that constitute the disposition of all or substantially all of the assets
of the Company pursuant to the covenant described below under the caption
"Merger, Consolidation or Sale of Assets" or
(ii) issue or sell Equity Interests in any of its Subsidiaries (other
than an issuance or sale of Equity Interests of any such Subsidiary to the
Company or a Subsidiary),
if, in the case of either (i) or (ii) above, in a single transaction or a
series of related transactions occurring within any twelve-month period, such
assets or securities
(x) have a Fair Market Value in excess of $2.0 million or
(y) are sold or otherwise disposed of for net proceeds in excess of $2.0
million (each of the foregoing, an "Asset Sale"), unless:
(a) no Default or Event of Default exists or would occur as a result
thereof;
(b) the Company, or such Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the Fair
Market Value (evidenced by a resolution of the Board of Directors of the
Company set forth in an Officers' Certificate delivered to the Trustee), of
the assets or securities issued or sold or otherwise disposed of; and
(c) at least 85% of the consideration therefor received by the Company or
such Subsidiary is in the form of cash, provided, however, that (A) the
amount of (x) any liabilities (as shown on the Company's or such
Subsidiary's most recent balance sheet or in the notes thereto), of the
Company or any Subsidiary of the Company (other than liabilities that are
by their terms subordinated to the Senior Discount Notes) that are assumed
by the transferee of any such assets and (y) any notes, obligations or
other securities received by the Company or any such Subsidiary from such
transferee that are immediately converted by the Company or such Subsidiary
into cash, shall be deemed to be cash (to the extent of the cash received
in the case of subclause (y)) for purposes of this clause (c); and (B) an
amount equal to the Fair Market Value (determined as set forth in clause
(b) above) of (1) Telecommunications Related Assets received by the Company
or any such Subsidiary from the transferee that will be used by the Company
or any such Subsidiary in the operation of a Telecommunications Business in
the United States and (2) the Voting Stock of any Person engaged in the
Telecommunications Business in the United States received by the Company or
any such Subsidiary (provided that such Voting Stock is converted to cash
within 270 days or such Person concurrently becomes or is a Subsidiary of
the Company) will be deemed to be cash for purposes of this clause (c).
The foregoing provisions do not apply to a sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company, which
are governed by the provisions of the Indenture described below under "Merger,
Consolidation, or Sale of Assets."
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The Indenture also provides that within 270 days after the receipt of net
proceeds of any Asset Sale, the Company (or such Subsidiary, as the case may
be) may apply the Net Proceeds from such Asset Sale to (i) permanently reduce
the amounts permitted to be borrowed by the Company under the terms of any of
its Senior Indebtedness or (ii) the purchase of Telecommunications Related
Assets or Voting Stock of any Person engaged in the Telecommunications
Business in the United States (provided that such Person concurrently becomes
a Subsidiary of the Company). Any Net Proceeds from any Asset Sales that are
not so applied or invested will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will be
required to make an Excess Proceeds Offer in accordance with the terms set
forth under "Offer to Purchase with Excess Asset Sale Proceeds."
Liens
The Indenture provides that the Company and its Subsidiaries may not,
directly or indirectly, create, incur, assume or suffer to exist any Lien on
any asset now owned or hereafter acquired, or any income or profits therefrom
or assign or convey any right to receive income therefrom, except for
Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company and its Subsidiaries may not,
directly or indirectly, create or otherwise cause to become effective any
consensual encumbrance or restriction on the ability of any Subsidiary to:
(i) pay dividends or make any other distributions to the Company or any
of its Subsidiaries on its Capital Stock or with respect to any other
interest or participation in, or measured by, its profits, or pay any
Indebtedness owed to the Company or any of its Subsidiaries;
(ii) make loans or advances to the Company or any of its Subsidiaries; or
(iii) transfer any of its properties or assets to the Company or any of
its Subsidiaries;
except for such encumbrances or restrictions existing as of the Issue Date
or under or by reason of:
(a) Existing Indebtedness;
(b) applicable law;
(c) any instrument governing Acquired Debt as in effect at the time
of acquisition (except to the extent such Indebtedness was incurred in
connection with, or in contemplation of, such acquisition), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired;
(d) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with
past practices;
(e) Indebtedness in respect of a Permitted Refinancing, provided that
the restrictions contained in the agreements governing such Refinancing
Indebtedness are not materially more restrictive than those contained
in the agreements governing the Indebtedness being refinanced;
(f) with respect to clause (iii) above, purchase money obligations
for property acquired in the ordinary course of business, Vendor
Indebtedness incurred in connection with the purchase or lease of
Telecommunications Related Assets or performance bonds or similar
security for performance which liens securing such obligations do not
cover any asset other than the asset acquired or, in the case of
performance bonds or similar security for performance, the assets
associated with the Company's performance;
(g) Indebtedness incurred under clause (a) of the covenant entitled
"Incurrence of Indebtedness and Issuance of Disqualified Stock;"
(h) the Indenture and the Senior Discount Notes; or
(i) in the case of clauses (a), (c), (e), (g) and (h) above, any
amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided
that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are not
materially more restrictive with respect to such dividend and other
payment restrictions than those contained in such instruments as in
effect on the date of their incurrence or, if later, the Issue Date.
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Merger, Consolidation or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving entity), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of
its properties or assets in one or more related transactions to, another
corporation, Person or entity unless:
(i) the Company is the surviving entity or the entity or Person formed by
or surviving any such consolidation or merger (if other than the Company)
or to which such sale, assignment, transfer, lease, conveyance or other
disposition has been made is a corporation organized or existing under the
laws of the United States, any state thereof or the District of Columbia;
(ii) the entity or Person formed by or surviving any such consolidation
or merger (if other than the Company) or the entity or Person to which such
sale, assignment, transfer, lease, conveyance or other disposition has been
made assumes all the obligations of the Company under the Senior Discount
Notes and the Indenture pursuant to a supplemental indenture in form
reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of Default
exists;
(iv) except in connection with a Merger with or into a wholly owned
Subsidiary of the Company, the Company, or any entity or Person formed by
or surviving any such consolidation or merger, or to which such sale,
assignment, transfer, lease, conveyance or other disposition has been made,
at the time of such transaction after giving pro forma effect thereto as if
such transaction had occurred at the beginning of the applicable fiscal
quarter (including any Indebtedness incurred or anticipated to be incurred
in connection with or in respect of such transaction or series of
transactions), either (A) could incur at least $ 1.00 of additional
Indebtedness pursuant to the Consolidated Cash Flow Leverage Ratio test
described under "--Incurrence of Indebtedness and Issuance of Disqualified
Stock" or (B) would have (x) Total Market Capitalization of at least $1.0
billion and (y) total Indebtedness in an amount no greater than 30% of its
Total Market Capitalization; and
(v) such transaction would not result in the loss, material impairment or
adverse modification or amendment of any authorization or license of the
Company or its Subsidiaries that would have a material adverse effect on
the business or operations of the Company and its Subsidiaries taken as a
whole.
Transactions with Affiliates
The Indenture provides that the Company and its Subsidiaries may not sell,
lease, transfer or otherwise dispose of any of their respective properties or
assets to, or purchase any property or assets from, or enter into any
contract, agreement, understanding, loan, advance or guarantee with, or for
the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless:
(i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Subsidiary than those that would have been
obtained in a comparable transaction by the Company or such Subsidiary with
an unrelated Person;
(ii) such Affiliate Transaction is approved by a majority of the
disinterested directors on the Board of Directors of the Company; and
(iii) the Company delivers to the Trustee, with respect to any Affiliate
Transaction involving aggregate payments in excess of $1.0 million, a
resolution of a committee of independent directors of the Company set forth
in an Officers' Certificate certifying that such Affiliate Transaction
complies with clauses (i) and (ii) above;
provided that
(a) transactions pursuant to any employment, stock option or stock
purchase agreement entered into by the Company or any of its
Subsidiaries, or any grant of stock, in the ordinary course of business
that are approved by the Board of Directors of the Company,
(b) transactions between or among the Company and its Subsidiaries,
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(c) transactions permitted by the provisions of the Indenture
described above under the covenant "--Restricted Payments," and
(d) loans and advances to employees and officers of the Company or
any of its Subsidiaries in the ordinary course of business in an
aggregate principal amount not to exceed $1.0 million at any one time
outstanding,
shall not be deemed Affiliate Transactions.
Use of Proceeds
The Indenture provides that the Company may use the gross proceeds from the
sale of the Senior Discount Notes only for the following purposes:
(i) to pay the fees and expenses of the issuance of the Senior Discount
Notes including any discount or commission to Bear, Stearns & Co. Inc. and
Salomon Brothers Inc, the initial purchasers of the Senior Discount Notes
(the "Initial Purchasers");
(ii) to be deposited into an account that complies with the provisions
for the Defeasance of the Company's 13 1/2% Notes under the indenture for
the 13 1/2% Notes; provided, that such funds, in whole or in part, may be
used to Retire 13 1/2% Notes so long as all of the 13 1/2% Notes were so
Retired, and
(iii) with respect to any funds remaining after application under clauses
(i) and (ii) above, to fund up to 80% of the cost of the acquisition or
construction of Telecommunications Related Assets, or to the repayment of
the Existing Senior Notes.
Pending application of the proceeds in accordance with clause (iii) above,
the Company will deposit such proceeds into a segregated account in the
Company's name. The Company will deliver to the Trustee an Officer's
Certificate with each annual compliance certificate certifying that the
amounts in such account were applied in accordance with this covenant.
Business Activities
The Indenture provides that the Company and its Subsidiaries may not,
directly or indirectly, engage in any business other than the
Telecommunications Business.
Limitations on Sale and Leaseback Transactions
The Indenture provides that the Company and its Subsidiaries may not,
directly or indirectly, enter into, assume, Guarantee or otherwise become
liable with respect to any Sale and Leaseback Transaction, provided that the
Company or any Subsidiary of the Company may enter into any such transaction
if (i) the Company or such Subsidiary would be permitted under the covenants
described above under "--Incurrence of Indebtedness and Issuance of
Disqualified Stock" and "--Liens" to incur secured Indebtedness in an amount
equal to the Attributable Debt with respect to such transaction, (ii) the
consideration received by the Company or such Subsidiary from such transaction
is at least equal to the Fair Market Value of the property being transferred,
and (iii) the Net Proceeds received by the Company or such Subsidiary from
such transaction are applied in accordance with the covenant described above
under the caption "--Asset Sales."
Reports
The Indenture provides that the Company will file with the Trustee within 15
days after it files them with the Commission copies of the annual and
quarterly reports and the information, documents, and other reports that the
Company is required to file with the Commission pursuant to Section 13(a) or
15(d) of the Exchange Act ("SEC Reports"). In the event the Company is not
required or shall cease to be required to file SEC Reports, pursuant to the
Exchange Act, the Company will nevertheless continue to file such reports with
the Commission (unless the Commission will not accept such a filing) and the
Trustee. Whether or not required by the Exchange Act to file SEC Reports with
the Commission, so long as any Senior Discount Notes are outstanding, the
Company will furnish copies of the SEC Reports to the holders of Senior
Discount Notes at the time the Company is required to file the same with the
Trustee and make such information available to investors who
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request it in writing. In addition, the Company has agreed that, for so long
as any Senior Discount Notes remain outstanding, it will furnish to the
holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
Payments for Consent
The Indenture provides that neither the Company nor any of its Affiliates
shall, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any holder of any Senior
Discount Notes for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Indenture or the Senior Discount Notes
unless such consideration is offered to be paid or agreed to be paid to all
holders of the Senior Discount Notes that consent, waive or agree to amend in
the time frame set forth in the solicitation documents relating to such
consent, waiver or agreement.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default:
(i) default for 30 days in the payment when due of interest or Liquidated
Damages, if any, on the Senior Discount Notes;
(ii) default in payment when due of principal (including Accreted Value)
or premium, if any, on the Senior Discount Notes at maturity, upon
redemption or otherwise;
(iii) failure by the Company to perform or comply with the provisions of
the covenants described above under "--Offer to Purchase Upon Change of
Control," "--Asset Sales," "--Restricted Payments," "--Incurrence of
Indebtedness and Issuance of Disqualified Stock" or "--Merger,
Consolidation or Sale of Assets;"
(iv) failure by the Company for 30 days after notice from the Trustee or
the holders of at least 25% in principal amount of the Senior Discount
Notes then outstanding to comply with its other agreements in the Indenture
or the Senior Discount Notes;
(v) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries
(or the payment of which is guaranteed by the Company or any of its
Subsidiaries), whether such Indebtedness or Guarantee now exists, or is
created after the Issue Date, which default (x) is caused by a failure to
pay when due principal, premium, if any, or interest on such Indebtedness
within the grace period provided in such Indebtedness (a "Payment
Default"), and the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness of the Company or any
Significant Subsidiary under which there has been a Payment Default or the
maturity of which has been accelerated as provided in clause (y),
aggregates $5.0 million or more or (y) results in the acceleration (which
acceleration has not been rescinded) of such Indebtedness prior to its
express maturity and the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more; provided, however, that this
clause (y) shall not relate to an acceleration, if any, of the Existing
Senior Notes or the 13 1/2% Notes, which acceleration arises out of the
issuance of the Senior Discount Notes if such Indebtedness is repaid in
full within 5 business days of such acceleration;
(vi) failure by the Company or any of its Significant Subsidiaries to pay
final judgments (other than any judgment as to which a reputable insurance
company has accepted full liability in writing) aggregating in excess of
$5.0 million which judgments are not paid, discharged or stayed within 45
days after their entry; and
(vii) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing under the Indenture, the
Trustee or the holders of at least 25% in principal amount of the then
outstanding Senior Discount Notes may declare all the Senior Discount
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Notes to be due and payable immediately. Upon such declaration, the principal
of (or, if prior to July 15, 2002, the Accreted Value of), premium, if any,
and accrued and unpaid interest and Liquidated Damages, if any, on the Senior
Discount Notes shall be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to the Company or any of its Significant
Subsidiaries, the foregoing amount shall ipso facto become due and payable
without further action or notice. No premium is payable upon acceleration of
the Senior Discount Notes except that in the case of an Event of Default that
is the result of an action or inaction by the Company or any of its
Subsidiaries intended to avoid restrictions on or premiums related to
redemptions of the Senior Discount Notes contained in the Indenture or the
Senior Discount Notes. The amount declared due and payable will include the
premium that would have been applicable on a voluntary prepayment of the
Senior Discount Notes or, if voluntary prepayment is not then permitted, the
premium set forth in the Indenture. Holders of the Senior Discount Notes may
not enforce the Indenture or the Senior Discount Notes except as provided in
the Indenture. Subject to certain limitations, holders of a majority in
principal amount at maturity of the then outstanding Senior Discount Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from holders of the Senior Discount Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payments of principal or interest) if it determines that withholding
notice is in such holders' interest.
The holders of a majority in aggregate principal amount at maturity of the
Senior Discount Notes then outstanding, by notice to the Trustee, may on
behalf of the holders of all of the Senior Discount Notes, waive any existing
Default or Event of Default and its consequences under the Indenture, except a
continuing Default or Event of Default in the payment of interest or
Liquidated Damages or premium on, or the principal of, the Senior Discount
Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF PARTNERS, DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Senior Discount Notes or the Indenture or for any claim based on, in respect
of, or by reason of such obligations or their creation. Each holder of Senior
Discount Notes by accepting a Senior Discount Note waives and releases all
such liability. The waiver and release are part of the consideration for
issuance of the Senior Discount Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Senior Discount Notes
("Legal Defeasance"). Such Legal Defeasance means that the Company shall be
deemed to have paid and discharged the entire indebtedness represented by the
outstanding Senior Discount Notes, except for:
(a) the rights of holders of outstanding Senior Discount Notes to receive
from the trust described below payments in respect of the principal of,
premium, if any, and interest on and Liquidated Damages with respect to
such Senior Discount Notes when such payments are due, or on the redemption
date, as the case may be;
(b) the Company's obligations with respect to the Senior Discount Notes
concerning issuing temporary Senior Discount Notes, registration of Senior
Discount Notes, mutilated, destroyed, lost or stolen Senior Discount Notes
and the maintenance of an office or agency for payment and money for
security payments held in trust;
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(c) the rights, powers, trust, duties and immunities of the Trustee, and
the Company's obligations in connection therewith; and
(d) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or
Event of Default with respect to the Senior Discount Notes. In the event
Covenant Defeasance occurs, certain events (not including non payment,
bankruptcy, receivership, rehabilitation and insolvency events) described
under "Events of Default" will no longer constitute an Event of Default with
respect to the Senior Discount Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(i) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the holders of the Senior Discount Notes, cash in U.S.
dollars, non-callable U.S. government obligations, or a combination
thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants selected by
the Company, to pay the principal of, premium, if any, and interest on the
outstanding Senior Discount Notes, on the stated maturity or on the
applicable optional redemption date, as the case may be, of such principal
or installment of principal of, premium, if any, or interest on or
Liquidated Damages with respect to the outstanding Senior Discount Notes;
(ii) in the case of Legal Defeasance, the Company must deliver to the
Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that (A) the Company has received from, or there has
been published by, the Internal Revenue Service a ruling or (B) since the
Issue Date, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the holders of the outstanding Senior Discount
Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not
occurred;
(iii) in the case of Covenant Defeasance, the Company must deliver to the
Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that the holders of the outstanding Senior Discount
Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not
occurred;
(iv) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date
of deposit;
(v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day (or such other applicable date)
following the deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally;
(vii) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the holders of Senior Discount Notes over the other creditors of
the Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and
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(viii) the Company must deliver to the Trustee an Officers' Certificate
and an opinion of counsel, each stating that all conditions precedent
provided for relating to the Legal Defeasance or the Covenant Defeasance
have been complied with.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Senior Discount Notes in accordance with
the Indenture. The Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or
exchange any Senior Discount Note selected for redemption. Also, the Company
is not required to transfer or exchange any Senior Discount Note for a period
of 15 days before a selection of Senior Discount Notes to be redeemed.
The registered holder of a Senior Discount Note will be treated as the owner
of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraph, the Indenture or the
Senior Discount Notes may be amended or supplemented with the consent of the
holders of at least a majority in principal amount at maturity of the Senior
Discount Notes then outstanding (including consents obtained in connection
with a tender offer or exchange offer for Senior Discount Notes), and any
existing default or compliance with any provision of the Indenture or the
Senior Discount Notes may be waived with the consent of the holders of a
majority in principal amount at maturity of the then outstanding Senior
Discount Notes (including consents obtained in connection with a tender offer
or exchange offer for Senior Discount Notes).
Without the consent of each holder affected, however, an amendment or waiver
may not (with respect to any Senior Discount Note held by a non-consenting
holder):
(i) reduce the principal amount at maturity of Senior Discount Notes
whose holders must consent to an amendment, supplement or waiver;
(ii) reduce the principal at maturity of or change the fixed maturity of
any Senior Discount Note or alter the provisions with respect to the
redemption of the Senior Discount Notes (other than provisions relating to
the covenants described under the caption "--Offer to Purchase upon Change
of Control" and "--Offer to Purchase with Excess Asset Sale Proceeds");
(iii) reduce the rate of or change the time for payment of interest on
any Senior Discount Notes;
(iv) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the Senior Discount Notes (except a
rescission of acceleration of the Senior Discount Notes by the holders of
at least a majority in aggregate principal amount at maturity of the Senior
Discount Notes and a waiver of the payment default that resulted from such
acceleration);
(v) make any Senior Discount Note payable in money other than that stated
in the Senior Discount Notes;
(vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of holders of Senior Discount Notes
to receive payments of principal of, premium, if any, or interest on the
Senior Discount Notes;
(vii) waive a redemption payment with respect to any Senior Discount Note
(other than a payment required by one of the covenants described above
under the captions "--Offer to Purchase upon Change of Control" and "Offer
to Purchase with Excess Asset Sale Proceeds"); or
(viii) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of Senior
Discount Notes, the Company and the Trustee may amend or supplement the
Indenture or the Senior Discount Notes:
(a) to cure any ambiguity, defect or inconsistency;
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(b) to provide for uncertificated Senior Discount Notes in addition
to or in place of certificated Senior Discount Notes;
(c) to provide for the assumption of the Company's obligations to
holders of the Senior Discount Notes in the case of a merger or
consolidation;
(d) to make any change that would provide any additional rights or
benefits to the holders of the Senior Discount Notes or that does not
adversely affect the legal rights under the Indenture of any such
holder; or
(e) to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust
Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in other transactions with the Company; however, if the Trustee
acquires any conflicting interest, it must eliminate such conflict within 90
days, apply to the Commission for permission to continue as Trustee or resign.
The holders of a majority in principal amount of the then outstanding Senior
Discount Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur and be continuing, the Trustee will be required, in the
exercise of its powers, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Senior Discount Notes, unless such
holder shall have offered to the Trustee security and indemnity satisfactory
to it against any loss, liability or expense. No holder of any Senior Discount
Note will have any right to institute any proceeding with respect to the
Indenture or for any remedy thereunder, unless (i) such holder gives to the
Trustee written notice of a continuing Event of Default, (ii) holders of at
least 25% in principal amount at maturity of the then outstanding Senior
Discount Notes make a written request to pursue the remedy, (iii) such holders
of the Senior Discount Notes provide to the Trustee satisfactory indemnity and
(iv) the Trustee does not comply within 60 days. Otherwise, no holder of any
Senior Discount Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, except: (i) a holder of
a Senior Discount Note may institute suit for enforcement of payment of the
principal of and premium, if any, or interest on such Senior Discount Note on
or after the respective due dates expressed in such Senior Discount Note
(including upon acceleration thereof) or (ii) the institution of any
proceeding with respect to the Indenture or any remedy thereunder, including
without limitation acceleration, by the holders of a majority in principal
amount at maturity of the outstanding Senior Discount Notes, provided that,
upon institution of any proceeding or exercise of any remedy such holders
provide the Trustee with prompt notice thereof.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company and the Initial Purchasers entered into the Registration Rights
Agreement on July 9, 1997. Pursuant to the Registration Rights Agreement, the
Company agreed to file with the Commission the Registration Statement of which
this Prospectus forms a part (the "Exchange Offer Registration Statement")
with respect to the Senior Discount Notes. Upon the effectiveness of the
Exchange Offer Registration Statement, the Company will offer to the holders
of Transfer Restricted Securities pursuant to the Exchange Offer who are able
to make certain representations the opportunity to exchange their Transfer
Restricted Securities for the Senior Discount Notes. If (i) the Company is not
required to file the Exchange Offer Registration Statement or permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any holder of Transfer Restricted
Securities notifies the Company within the specified time period that (A) it
is prohibited by law or Commission policy from participating in the Exchange
Offer, (B) that it may
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not resell the Senior Discount Notes acquired by it in the Exchange Offer to
the public without delivering a prospectus and the prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales or (C) that it is a broker-dealer and owns Old Notes acquired directly
from the Company or an affiliate of the Company, the Company will file with
the Commission a shelf registration statement to cover resales of the Old
Notes (the "Shelf Registration Statement") by the holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. The Company will use its best efforts to
cause the applicable registration statement to be declared effective on or
prior to (1) in the case of a Shelf Registration Statement filed pursuant to
clause (i) above, 90 days after the date on which the Company becomes
obligated to file such Shelf Registration Statement (and in any event within
240 days after July 9, 1997), and (2) in the case of a Shelf Registration
Statement filed pursuant to clause (ii) above, 90 days after the date on which
the Company receives the notice specified in clause (ii) above. For purposes
of the foregoing, "Transfer Restricted Securities" means each Old Note until
(i) the date on which such Old Note has been exchanged by a Person other than
a broker-dealer for a Senior Discount Note in the Exchange Offer, (ii)
following the exchange by a broker-dealer in the Exchange Offer of an Old Note
for a Senior Discount Note, the date on which such Senior Discount Note is
sold to a purchaser who receives from such broker-dealer on or prior to the
date of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Old Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iv) the date on which such Old Note
is distributed to the public pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Company will file
the Exchange Offer Registration Statement with the Commission on or prior to
60 days after July 9, 1997, (the "Closing Date"), (ii) the Company will use
its best efforts to have the Exchange Offer Registration Statement declared
effective by the Commission at the earliest possible time, but in no event
later than 120 days after the Closing Date, and (iii) unless the Exchange
Offer would not be permitted by applicable law or Commission policy, the
Company will commence the Exchange Offer and use its best efforts to issue on
or prior to 30 business days after the date on which the Exchange Offer
Registration Statement was declared effective by the Commission, Senior
Discount Notes in exchange for all Old Notes tendered prior thereto in the
Exchange Offer.
If (a) the Company fails to file any of the registration statements required
by the Registration Rights Agreement on or before the date specified for such
filing, (b) any of such registration statements is not declared effective by
the Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) the Company fails to consummate the Exchange
Offer within 30 business days of the Effectiveness Target Date with respect to
the Exchange Offer Registration Statement, or (d) the Shelf Registration
Statement or the Exchange Offer Registration Statement is declared effective
but thereafter ceases to be effective or usable in connection with resales of
Transfer Restricted Securities during the periods specified in the
Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a "Registration Default"), then the Company will pay
Liquidated Damages to each holder of Transfer Restricted Securities, with
respect to the first 90-day period immediately following the occurrence of
such Registration Default in an amount equal to $.05 per week per $1,000
principal amount of Old Notes constituting Transfer Restricted Securities held
by such holder. The amount of the Liquidated Damages will increase by an
additional $.05 per week per $1,000 principal amount constituting Transfer
Restricted Securities with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of $.50 per week per $1,000 principal amount of Old Notes constituting
Transfer Restricted Securities. All accrued Liquidated Damages will be paid by
the Company on each Damages Payment Date to the Global Security Holder (as
defined herein) by wire transfer of immediately available funds or by federal
funds check and to holders of Certificated Securities (as defined herein) by
mailing checks to their registered addresses. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease.
Notwithstanding the foregoing, the Company will have the option of suspending
the effectiveness of the Shelf Registration Statement, without becoming
obligated to pay Liquidated Damages for periods of up to a total of 60 days in
any calendar year if the Board of Directors of the Company determines that
compliance with the disclosure obligations necessary to maintain the
effectiveness of the Shelf Registration Statement at such time could
reasonably be expected to have an adverse effect on the Company or a pending
corporate transaction.
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Holders of Old Notes are required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Old Notes included
in the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Senior Discount Notes may be
issued in the form of one or more Global Securities (the "Global Securities").
The Global Securities will be deposited on the Exchange Date with, or on
behalf of, The Depository Trust Company (the "Depositary") and registered in
the name of Cede & Co., as nominee of the Depositary (such nominee being
referred to herein as the "Global Security Holder").
Senior Discount Notes that are issued as described below under "--
Certificated Securities" will be issued in the form of registered definitive
certificates (the "Certificated Securities"). Upon the transfer of
Certificated Securities, such Certificated Securities may, unless the Global
Securities have previously been exchanged for Certificated Securities, be
exchanged for an interest in the Global Securities representing the principal
amount of Senior Discount Notes being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants" or the "Depositary's Indirect Participants") that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Securities, the Depositary will
credit the accounts of Participants designated by the Exchange Agent with
portions of the principal amount of the Global Securities and (ii) ownership
of the Senior Discount Notes evidenced by the Global Securities will be shown
on, and the transfer of ownership thereof will be effected only through,
records maintained by the Depositary (with respect to the interests of the
Depositary's Participants), the Depositary's Participants and the Depositary's
Indirect Participants. Prospective purchasers are advised that the laws of
some states require that certain persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer Senior
Discount Notes evidenced by the Global Securities will be limited to such
extent.
So long as the Global Security Holder is the registered owner of any Senior
Discount Notes, the Global Security Holder will be considered the sole holder
under the Indenture of any Senior Discount Notes evidenced by the Global
Securities. Beneficial owners of Senior Discount Notes evidenced by the Global
Securities will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any
aspect of the records of the Depositary or for maintaining, supervising or
reviewing any records of the Depositary relating to the Senior Discount Notes.
Payments in respect of the principal of, premium, if any, interest and
Liquidated Damages, if any, on any Senior Discount Notes registered in the
name of the Global Security Holder on the applicable record date will be
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payable by the Trustee to or at the direction of the Global Security Holder in
its capacity as the registered holder under the Indenture. Under the terms of
the Indenture, the Company and the Trustee may treat the persons in whose
names Senior Discount Notes, including the Global Securities, are registered
as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial
owners of Senior Discount Notes. The Company believes, however, that it is
currently the policy of the Depositary to immediately credit the accounts of
the relevant Participants with such payments, in amounts proportionate to
their respective holdings of beneficial interests in the relevant security as
shown on the records of the Depositary. Payments by the Depositary's
Participants and the Depositary's Indirect Participants to the beneficial
owners of Senior Discount Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in
the Global Securities may, upon request to the Trustee, exchange such
beneficial interest for Senior Discount Notes in the form of Certificated
Securities. Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of, and cause the same to be delivered to,
such person or persons (or the nominee of any thereof). In addition, if (i)
the Company notifies the Trustee in writing that the Depositary is no longer
willing or able to act as a depositary and the Company is unable to locate a
qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Senior
Discount Notes in the form of Certificated Securities under the Indenture,
then, upon surrender by the Global Security Holder of its Global Security,
Senior Discount Notes in such form will be issued to each person that the
Global Security Holder and the Depositary identify as being the beneficial
owner of the related Senior Discount Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Security Holder or the Depositary in identifying the beneficial owners
of Senior Discount Notes and the Company and the Trustee may conclusively rely
on, and will be protected in relying on, instructions from the Global Security
Holder or the Depositary for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Senior Discount Notes
represented by the Global Securities (including principal, premium, if any,
interest and Liquidated Damages, if any) be made by wire transfer of
immediately available funds to the accounts specified by the Global Security
Holder. With respect to Certificated Securities, the Company will make all
payments of principal, premium, if any, interest and Liquidated Damages, if
any, by wire transfer of immediately available funds to the accounts specified
by the holders thereof or, if no such account is specified, by mailing a check
to each such holder's registered address. The Senior Discount Notes
represented by the Global Securities are expected to be eligible to trade in
the Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Senior Discount Notes will therefore be
required by the Depositary to be settled in immediately available funds. The
Company expects that secondary trading in the Certificated Securities will
also be settled in immediately available funds.
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CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"13 1/2% Notes" means the Company's 13 1/2% Senior Notes due 2005.
"Accreted Value" means, as of any date of determination prior to July 15,
2002, the sum of (a) the initial offering price of each Senior Discount Note
and (b) that portion of the excess of the principal amount of each Senior
Discount Note over such initial offering price as shall have been accreted
thereon through such date, such amount to be so accreted on a daily basis at
the rate of 11 1/4% per annum of the initial offering price of the Senior
Discount Notes, compounded semi-annually on each July 15, and January 15, from
the date of issuance of the Senior Discount Notes through the date of
determination computed on the basis of a 360-day year of twelve 30-day months.
The Accreted Value of any Senior Discount Note on or after July 15, 2002 shall
be 100% of the principal amount thereof.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise,
provided, however, that beneficial ownership of 25% or more of the voting
securities of a Person shall be deemed to be control.
"Attributable Debt" means, with respect to any Sale and Leaseback
Transaction, the present value at the time of determination (discounted at a
rate consistent with accounting guidelines, as determined in good faith by the
Company) of the payments during the remaining term of the lease (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended) or until the earliest date on which the lessee may
terminate such lease without penalty or upon payment of a penalty (in which
case the rental payments shall include such penalty), after excluding all
amounts required to be paid on account of maintenance and repairs, insurance,
taxes, assessments, water, utilities and similar charges.
"Beneficial Owner" means a beneficial owner as defined in Rules 13d-3 and
13d-5 under the Exchange Act (or any successor rules), including the provision
of such Rules that a Person shall be deemed to have beneficial ownership of
all securities that such Person has a right to acquire within 60 days;
provided that a Person will not be deemed a beneficial owner of, or to own
beneficially, any securities if such beneficial ownership (1) arises solely as
a result of a revocable proxy delivered in response to a proxy or consent
solicitation made pursuant to, and in accordance with, the Exchange Act and
(2) is not also then reportable on Schedule 13D or Schedule 13G (or any
successor schedule) under the Exchange Act.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be so required to be capitalized on the balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock and (iii) in the case of a partnership, partnership interests
(whether general or limited) and any
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other interest or participation that confers on a Person the right to receive
a share of the profits and losses of, or distributions of assets of, such
partnership.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of the Company
and its Subsidiaries, taken as a whole, to any Person or group (as such term
is used in Section 13(d)(3) and 14(d)(2) of the Exchange Act), (ii) the
adoption of a plan relating to the liquidation or dissolution of the Company,
(iii) any Person or group (as defined above) is or becomes the Beneficial
Owner, directly or indirectly, of more than 50% of the total Voting Stock or
Total Common Equity of the Company, including by way of merger, consolidation
or otherwise or (iv) the first day on which a majority of the members of the
Board of Directors of the Company are not Continuing Directors.
"Closing Price" on any Trading Day with respect to the per share price of
any shares of Capital Stock means the last reported sale price regular way or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if such shares of Capital Stock are not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the
Nasdaq National Market or, if such shares are not listed or admitted to
trading on any national securities exchange or quoted on Nasdaq National
Market but the issuer is a Foreign Issuer (as defined in Rule 3b-4(b) under
the Exchange Act) and the principal securities exchange on which such shares
are listed or admitted to trading is a Designated Offshore Securities Market
(as defined in Rule 902(a) under the Securities Act), the average of the
reported closing bid and asked prices regular way on such principal exchange,
or, if such shares are not listed or admitted to trading on any national
securities exchange or quoted on Nasdaq National Market and the issuer and
principal securities exchange do not meet such requirements. the average of
the closing bid and asked prices in the over-the-counter market as furnished
by any New York Stock Exchange member firm that is selected from time to time
by the Company for that purpose and is reasonably acceptable to the Trustee.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding
up of such Person, to shares of Capital Stock of any other class of such
Person.
"Consolidated Cash Flow Leverage Ratio" with respect to any Person means the
ratio of the Consolidated Indebtedness of such Person to the Consolidated
EBITDA of such Person for the relevant period; provided, however, that (1) if
the Company or any Subsidiary of the Company has incurred any Indebtedness
(including Acquired Debt) or if the Company has issued any Disqualified Stock
or if any Subsidiary of the Company has issued any Preferred Stock since the
beginning of such period that remains outstanding on the date of such
determination or if the transaction giving rise to the need to calculate the
Consolidated Cash Flow Leverage Ratio is an incurrence of Indebtedness
(including Acquired Debt) or the issuance of Disqualified Stock by the
Company, Consolidated EBITDA and Consolidated Indebtedness for such period
will be calculated after giving effect on a pro forma basis to (A) such
Indebtedness, Disqualified Stock or Preferred Stock, as applicable, as if such
Indebtedness had been incurred or such stock had been issued on the first day
of such period, (B) the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such new
Indebtedness or sale of stock as if such discharge had occurred on the first
day of such period, and (C) the interest income realized by the Company or its
Subsidiaries on the proceeds of such Indebtedness or of such stock sale, to
the extent not yet applied at the date of determination, assuming such
proceeds earned interest at the rate in effect on the date of determination
from the first day of such period through such date of determination, (2) if
since the beginning of such period the Company or any Subsidiary of the
Company has made any sale of assets (including, without limitation, any Asset
Sales or pursuant to any Sale and Leaseback Transaction), Consolidated EBITDA
for such period will be (A) reduced by an amount equal to Consolidated EBITDA
(if positive) directly attributable to the assets which are the subject of
such sale of assets for such period or (B) increased by an amount equal to
Consolidated EBITDA (if negative) directly attributable thereto for such
period and (3) if since the beginning of such period the Company or any
Subsidiary of the Company (by merger
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or otherwise) has made an Investment in any Subsidiary of the Company (or any
Person which becomes a Subsidiary of the Company) or has made an acquisition
of assets, including, without limitation, any acquisition of assets occurring
in connection with a transaction causing a calculation of Consolidated EBITDA
to be made hereunder, which constitutes all or substantially all of an
operating unit of a business, Consolidated EBITDA for such period will be
calculated after giving pro forma effect thereto (including the incurrence of
any Indebtedness (including Acquired Debt)) as if such Investment or
acquisition occurred on the first day of such period. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition of
assets, the pro forma calculations will be determined in good faith by a
responsible financial or accounting Officer of the Company, provided, however,
that such Officer shall assume (i) the historical sales and gross profit
margins associated with such assets for any consecutive 12-month period ended
prior to the date of purchase (provided that the first month of such 12-month
period will be no more than 18 months prior to such date of purchase) and (ii)
other expenses as if such assets had been owned by the Company since the first
day of such period. If any Indebtedness (including, without limitation,
Acquired Debt) bears a floating rate of interest and is being given pro forma
effect, the interest on such Indebtedness will be calculated as if the rate in
effect on the date of determination had been the applicable rate for the
entire period.
"Consolidated EBITDA" as of any date of determination means the Consolidated
Net Income for such period (but without giving effect to adjustments,
accruals, deductions or entries resulting from purchase accounting
extraordinary losses or gains and any gains or losses from any Asset Sales),
plus the following to the extent deducted in calculating such Consolidated Net
Income: (i) provision for taxes based on income or profits of such Person and
its Subsidiaries for such period, (ii) Consolidated Interest Expense, (iii)
depreciation, amortization (including amortization of goodwill and other
intangibles) and other non-cash charges (excluding any such non-cash charge to
the extent that it represents an accrual of or reserve for cash charges in any
future period or amortization of a prepaid cash expense that was paid in a
prior period and excluding non-cash interest and dividend income) of such
Person and its Subsidiaries for such period, in each case, on a consolidated
basis and determined in accordance with GAAP. Notwithstanding the foregoing,
the provision for taxes on the income or profits of, and the depreciation,
amortization, interest expense and other non-cash charges of, a Subsidiary of
the referent Person shall be added to Consolidated Net Income to compute
Consolidated EBITDA only to the extent (and in same proportion) that the Net
Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Subsidiary,
or loaned to the Company by any such Subsidiary, without prior approval (that
has not been obtained), pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Indebtedness" means, with respect to any Person, as of any
date of determination, the aggregate amount of Indebtedness of such Person and
its Subsidiaries as of such date calculated on a consolidated basis in
accordance with GAAP consistently applied.
"Consolidated Interest Expense" means, for any Person, for any period, the
aggregate of the following for such Person for such period determined on a
consolidated basis in accordance with GAAP: (a) the amount of interest in
respect of Indebtedness (including amortization of original issue discount,
amortization of debt issuance costs, and non-cash interest payments on any
Indebtedness, the interest portion of any deferred payment obligation and
after taking into account the effect of elections made under any Interest Rate
Agreement however denominated with respect to such Indebtedness), (b) the
amount of Redeemable Dividends (to the extent not already included in
Indebtedness in determining Consolidated Interest Expense for the relevant
period) and (c) the interest component of rentals in respect of any Capital
Lease Obligation paid, in each case whether accrued or scheduled to be paid or
accrued by such Person during such period to the extent such amounts were
deducted in computing Consolidated Net Income, determined on a consolidated
basis in accordance with GAAP. For purposes of this definition interest on a
Capital Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by such Person to be the rate of interest implicit in
such Capital Lease Obligation in accordance with GAAP consistently applied.
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"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that:
(i) the Net Income of any Person that is not a Subsidiary or that is
accounted for by the equity method of accounting shall be included only to
the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Subsidiary thereof,
(ii) the Net Income of any Subsidiary shall be excluded to the extent
that the declaration or payment of dividends or other distributions by that
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (which has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary or its stockholders,
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded,
(iv) the cumulative effect of a change in accounting principles shall be
excluded, and
(v) the Net Income of any Unrestricted Subsidiary shall be excluded,
whether or not distributed to the Company or one of its Subsidiaries.
"Contingent Investment" means, with respect to any Person, any guarantee by
such Person of the performance of another Person or any commitment by such
Person to invest in another Person. Any Investment that consists of a
Contingent Investment shall be deemed made at the time that the guarantee of
performance or the commitment to invest is given, and the amount of such
Investment shall be the maximum monetary obligation under such guarantee of
performance or commitment to invest. To the extent that a Contingent
Investment is released or lapses without payment under the guarantee of
performance or the commitment to invest, such Investment shall be deemed not
made to the extent of such release or lapse. With respect to any Contingent
Investment, the payment of the guarantee of performance or the payment under
the commitment to invest shall not be deemed to be an additional Investment.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with the affirmative vote of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Facility" means any credit facility entered into by and among the
Company and one or more commercial banks or financial institutions, providing
for senior term or revolving credit borrowings of a type similar to credit
facilities typically entered into by commercial banks and financial
institutions, including any related notes, Guarantees, collateral documents,
instruments and agreements executed in connection therewith, as such credit
facility and related agreements may be amended, extended, refinanced, renewed,
restated, replaced or refunded from time to time.
"Damages Payment Date" means each July 15 and January 15.
"Defeasance" means the defeasance by the Company of its 13 1/2% Notes
pursuant to Article 8 of the indenture governing such notes.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock to the extent that, and only to
the extent that, by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the date on
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which the Senior Discount Notes mature, provided, however, that any Capital
Stock which would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require the Company to repurchase or
redeem such Capital Stock upon the occurrence of a Change of Control occurring
prior to the final maturity of the Senior Discount Notes shall not constitute
Disqualified Stock if the change in control provisions applicable to such
Capital Stock are no more favorable to the holders of such Capital Stock than
the provisions applicable to the Senior Discount Notes contained in the
covenant described under "Offer to Purchase Upon a Change of Control" and such
Capital Stock specifically provides that the Company will not repurchase or
redeem any such stock pursuant to such provisions prior to the Company's
repurchase of such Senior Discount Notes as are required to be repurchased
pursuant to the covenant described under "Offer to Purchase Upon Change of
Control."
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent
in foreign currency, whose debt is rated "A" (or higher) according to S&P or
Moody's at the time as of which any investment or rollover therein is made.
"Eligible Receivable" means any Receivable not more than 90 days past due
under its scheduled payment terms.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock or that are measured by the value of Capital
Stock (but excluding any debt security that is convertible into or
exchangeable for Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or any
successor act), and the rules and regulations thereunder.
"Existing Indebtedness" means the Existing Senior Notes and all other
Indebtedness of the Company and its Subsidiaries in existence on the Issue
Date.
"Existing Senior Notes" means the Company's 12 1/2% Senior Discount Notes
due 2006.
"Fair Market Value" means with respect to any asset or property, the sale
value that would be obtained in an arm's length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect on the Issue Date.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under Interest Rate Agreements.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or representing the balance
deferred and unpaid
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of the purchase price of any property (including pursuant to capital leases)
or representing any Hedging Obligations, except any such balance that
constitutes an accrued expense or trade payable, if and to the extent any of
the foregoing (other than Hedging Obligations or letters of credit) would
appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, all indebtedness of others secured by a Lien on any
asset of such Person (whether or not such indebtedness is assumed by such
Persons), all obligations to purchase, redeem, retire, defease or otherwise
acquire for value any Disqualified Stock or any warrants, rights or options to
acquire such Disqualified Stock valued, in the case of Disqualified Stock, at
the greatest amount payable in respect thereof on a liquidation (whether
voluntary or involuntary) plus accrued and unpaid dividends, the liquidation
value of any Preferred Stock issued by Subsidiaries of such Person plus
accrued and unpaid dividends, and also includes, to the extent not otherwise
included, the Guarantee of items that would be included within this definition
and any amendment, supplement, modification, deferral, renewal, extension or
refunding of any of the above; notwithstanding the foregoing, in no event will
performance bonds or similar security for performance be deemed Indebtedness
so long as such performance bonds or similar security for performance would
not appear as a liability on a balance sheet of such Person prepared in
accordance with GAAP; and provided further, that the amount of any
Indebtedness in respect of any Guarantee shall be the maximum principal amount
of the Indebtedness so guaranteed.
"Interest Rate Agreements" means (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against
fluctuations in interest rates.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans,
Guarantees, Contingent Investments, advances or capital contributions
(excluding commission, travel and similar advances to officers and employees
made in the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities of any
other Person and all other items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; provided,
however, that any investment to the extent made with Capital Stock of the
Company (other than Disqualified Stock) shall not be deemed an "Investment"
for purposes of the Indenture.
"Issue Date" means July 9, 1997.
"Joint Venture" means a Person in the Telecommunications Business in which
the Company holds less than a majority of the shares of Voting Stock or an
Unrestricted Subsidiary in the Telecommunications Business.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Marketable Securities" means:
(i) Government Securities;
(ii) any certificate of deposit maturing not more than 270 days after the
date of acquisition issued by, or time deposit of, an Eligible Institution;
(iii) commercial paper maturing not more than 270 days after the date of
acquisition issued by a corporation (other than an Affiliate of the
Company) with a rating at the time as of which any investment therein is
made, of "A-1" (or higher) according to S&P or "P-1" (or higher) according
to Moody's;
(iv) any banker's acceptances or money market deposit accounts issued or
offered by an Eligible Institution; and
(v) any fund investing exclusively in investments of the types described
in clauses (i) through (iv) above.
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"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to Sale and Leaseback Transactions) or (b)
the disposition of any securities by such Person or any of its Subsidiaries or
the extinguishment of any Indebtedness of such Person or any of its
Subsidiaries and (ii) any extraordinary gain (but not loss), together with any
related provision for taxes on such extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale, net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation
expenses incurred as a result thereof, taxes paid or payable as a result
thereof (after taking into account any available tax credits or deductions and
any tax sharing arrangements), amounts required to be applied to the repayment
of Indebtedness secured by a Lien on the asset or assets that are the subject
of such Asset Sale and any reserve for adjustment in respect of the sale price
of such asset or assets. Net Proceeds shall exclude any non-cash proceeds
received from any Asset Sale, but shall include such proceeds when and as
converted by the Company or any Subsidiary of the Company to cash.
"Pari Passu Notes" means any notes issued by the Company which, by their
terms and the terms of any indenture governing such notes, have an obligation
to be repurchased by the Company upon the occurrence of an Asset Sale.
"Permitted Investment" means (a) any Investments in the Company or any
Subsidiary of the Company; (b) any Investments in Marketable Securities; (c)
Investments by the Company or any Subsidiary of the Company in a Person, if as
a result of such Investment (i) such Person becomes a Subsidiary of the
Company or (ii) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Subsidiary of the Company; (d) any
Investments in property or assets to be used in (A) any line of business in
which the Company or any of its Subsidiaries was engaged on the Issue Date or
(B) any Telecommunications Business; (e) Investments in any Person in
connection with the acquisition of such Person or substantially all of the
property or assets of such Person by the Company or any Subsidiary of the
Company; provided that within 180 days from the first date of any such
Investment, either (A) such Person becomes a Subsidiary of the Company or any
of its Subsidiaries or (B) the amount of any such Investment is repaid in full
to the Company or any of its Subsidiaries; (f) Investments pursuant to any
agreement or obligation of the Company or a Subsidiary, in effect on the Issue
Date or on the date a Subsidiary becomes a Subsidiary (provided that any such
agreement was not entered into in contemplation of such Subsidiary becoming a
Subsidiary), to make such Investments; (g) Investments in prepaid expenses,
negotiable instruments held for collection and lease, utility and workers'
compensation, performance and other similar deposits; (h) Hedging Obligations
permitted to be incurred by the covenant entitled "Incurrence of Indebtedness
and Issuance of Preferred Stock;" and (i) bonds, notes, debentures or other
securities received as a result of Asset Sales permitted under the covenant
entitled "Asset Sales."
"Permitted Liens" means (i) Liens securing Indebtedness (including Capital
Lease Obligations) permitted to be incurred pursuant to clauses (a) and (b) of
the second paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock;" (ii) Liens in favor of the Company; (iii) Liens
on property of a Person existing, at the time such Person is merged into or
consolidated with the Company or any Subsidiary of the Company; provided that
such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (iv) Liens on property existing
at the time of acquisition thereof by the Company or any Subsidiary of the
Company, provided that such Liens were in existence prior to the contemplation
of such acquisition; (v) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other obligations of
a like nature incurred in the ordinary course of business; (vi) Liens
existing, on the Issue Date;
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(vii) Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by appropriate
proceedings timely instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (viii) Liens incurred in the ordinary
course of business of the Company or any Subsidiary of the Company with
respect to obligations that do not exceed $5.0 million at any one time
outstanding and that (a) are not incurred in connection with the borrowing of
money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (b) do not in the aggregate materially
detract from the value of the property or materially impair the use thereof in
the operation of business by the Company or such Subsidiary; (ix) existing
Liens to secure the Company's 13 1/2% Notes pursuant to the indenture
governing such notes or Liens arising from the Defeasance thereof; (x) Liens
on Telecommunications Related Assets existing during the time of the
construction thereof; (xi) Liens on Receivables to secure Indebtedness
permitted to be incurred by the covenant entitled "Incurrence of Indebtedness
and Issuance of Preferred Stock," but only to the extent that the outstanding
amount of the Indebtedness secured by such Liens would not represent more than
80% of Eligible Receivables; and (xii) Liens to secure any Permitted
Refinancing of any Indebtedness secured by Liens referred to in the foregoing
clauses (i), (iii), (v) or (xi); but only to the extent that such Liens do not
extend to any other property or assets and the principal amount of the
Indebtedness secured by such Liens is not increased.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Preferred Stock" as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of
such Person, to shares of Capital Stock of any other class of such Person.
"Public Offering" means an underwritten offering of Common Stock of the
company registered under the Securities Act.
"Receivables" means, with respect to any Person, all of the following
property and interests in property of such person or entity, whether now
existing or existing in the future or hereafter acquired or arising: (i)
accounts; (ii) accounts receivable, including. without limitation, all rights
to payment created by or arising from sales of goods, leases of goods or the
rendition of services no matter how evidenced, whether or not earned by
performance; (iii) all unpaid seller's or lessor's rights including, without
limitation, rescission, replevin, reclamation and stoppage in transit,
relating to any of the foregoing after creation of the foregoing or arising
therefrom; (iv) all rights to any goods or merchandise represented by any of
the foregoing, including, without limitation, returned or repossessed goods;
(v) all reserves and credit balances with respect to any such accounts
receivable or account debtors; (vi) all letters of credit, security, or
Guarantees for any of the foregoing; (vii) all insurance policies or reports
relating to any of the foregoing; (viii) all collection of deposit accounts
relating to any of the foregoing; (ix) all proceeds of any of the foregoing;
and (x) all books and records relating to any of the foregoing.
"Redeemable Dividend" means, for any dividend with regard to Disqualified
Stock and Preferred Stock, the quotient of the dividend divided by the
difference between one and the maximum statutory federal income tax rate
(expressed as a decimal number between 1 and 0) then applicable to the issuer
of such Disqualified Stock or Preferred Stock.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Retire" means, with respect to any Indebtedness, to repay, redeem, refund,
purchase or otherwise to acquire for value, such Indebtedness. The terms
"Retired" and "Retirement" shall have correlative meanings.
"S & P" means, Standard and Poor's Corporation and its successors.
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"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which any property (other than
Capital Stock) is sold by such Person or a Subsidiary of such Person and is
thereafter leased back from the purchaser or transferee thereof by such Person
or one of its Subsidiaries.
"Senior Discount Note Registration Rights Agreement" means the Registration
Rights Agreement between the Company and the Initial Purchasers in respect of
the Senior Discount Notes.
"Senior Indebtedness" means any Indebtedness permitted to be incurred by the
Company under the terms of the Indenture, unless the instrument under which
such Indebtedness is incurred expressly provides that it is subordinated in
right of payment to the Senior Discount Notes. Notwithstanding anything to the
contrary in the foregoing, Senior Indebtedness will not include (i) any
liability for federal, state, local or other taxes owed or owing by the
Company, (ii) any Indebtedness of the Company to any of its Subsidiaries or
other Affiliates, (iii) any trade payables or (iv) any Indebtedness that is
incurred in violation of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Strategic Investor" means, with respect to any sale of the Company's
Capital Stock, any Person which, both as of the Trading Day immediately before
the day of such sale and the Trading Day immediately after the day of such
sale, has, or whose parent has, a Total Market Capitalization of at least $1.0
billion on a consolidated basis. In calculating Total Market Capitalization
for the purpose of this definition, the consolidated Indebtedness of such
Person, solely when calculated as of the Trading Day immediately after the day
of such sale, will be calculated after giving effect to such sale (including
any Indebtedness incurred in connection with such sale). For purposes of this
definition, the term parent means any Person of which the referent Strategic
Investor is a Subsidiary.
"Subsidiary" of any Person means (i) any corporation, association or
business entity of which more than 50% of the total voting power of shares of
Capital Stock entitled (without regard to the occurrence of any contingency)
to vote in the election of directors, managers or trustees thereof is at the
time owned or controlled, directly or indirectly, by such Person or one or
more of the other Subsidiaries of such Person or a combination thereof and
(ii) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (b) the only
general partners of which are such Person or one or more Subsidiaries of such
Person or any combination thereof; provided that any Unrestricted Subsidiary
shall be excluded from this definition of "Subsidiary."
"Telecommunications Business" means, when used in reference to any Person,
that such Person is engaged primarily in the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) creating, developing or
marketing communications related network equipment, software and other devices
for use in a Telecommunications Business or (iii) evaluating, participating or
pursuing any other activity or opportunity that is related to those identified
in (i) or (ii) above; provided that the determination of what constitutes a
Telecommunications Business shall be made in good faith by the Board of
Directors of the Company.
"Telecommunications Related Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used in connection
with a Telecommunications Business.
"Total Common Equity" of any Person means, as of any date of determination
(and as modified for purposes of the definition of "Change of Control"), the
product of (i) the aggregate number of outstanding primary shares of Common
Stock of such Person on such day (which shall not include any options or
warrants on, or securities convertible or exchangeable into, shares of Common
Stock of such Person) and (ii) the average Closing Price of such Common Stock
over the 20 consecutive Trading Days immediately preceding such day. If no
such Closing Price exists with respect to shares of any such class, the value
of such shares for purposes of
98
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clause (ii) of the preceding sentence shall be determined by the Board of
Directors of the Company in good faith and evidenced by a resolution of the
Board of Directors filed with the Trustee.
"Total Market Capitalization " of any Person means, as of any day of
determination (and as modified for purposes of the definition of "Strategic
Investor"), the sum of (1) the consolidated Indebtedness of such Person and
its Subsidiaries (except in the case of the Company, in which case of the
Company and its Subsidiaries) on such day, plus (2) the product of (i) the
aggregate number of outstanding primary shares of Common Stock of such Person
on such day (which shall not include any options or warrants on, or securities
convertible or exchangeable into, shares of Common Stock of such Person) and
(ii) the average Closing Price of such Common Stock over the 20 consecutive
Trading Days immediately preceding such day, plus (3) the liquidation value of
any outstanding share of Preferred Stock of such Person on such day. If no
such Closing Price exists with respect to shares of any such class, the value
of such shares for purposes of clause (2) of the preceding sentence shall be
determined by the Company's Board of Directors in good faith and evidenced by
a resolution of the Board of Directors filed with the Trustee.
"Trading Day," with respect to a securities exchange or automated quotation
system, means a day on which such exchange or system is open for a full day of
trading.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a resolution of
the Board of Directors.
"Vendor Indebtedness" means any Indebtedness of the Company or any
Subsidiary incurred in connection with the acquisition or construction of
Telecommunications Related Assets.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or Persons
performing similar functions) of such Person, whether at all times or only so
long as no senior class of securities has such voting power by reason of any
contingency.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
principal amount of such Indebtedness into (b) the total of the product
obtained by multiplying (x) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof, by (y) the number of
years (calculated to the nearest one-twelfth) that will elapse between such
date and the making of such payment; provided, that with respect to Capital
Lease Obligations, that maturity shall be calculated after giving effect to
all renewal options by the Lessee.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The exchange of Old Notes for Senior Discount Notes will not constitute a
recognition event for federal income tax purposes. Consequently, no gain or
loss will be recognized by holders upon receipt of the Senior Discount Notes.
The Senior Discount Notes will have the same issue date and issue price as the
Old Notes. A holder's initial tax basis in the Senior Discount Notes will be
the same as the holder's basis in the Old Notes exchanged therefor. Holders
will be considered to have held the Senior Discount Notes from the time of
their original acquisition of the Old Notes.
The following is a summary of the anticipated material United States federal
income tax consequences of the purchase, ownership and disposition of the
Senior Discount Notes. This summary is based upon the Internal Revenue Code of
1986, as amended (the "Code"), its legislative history, existing and proposed
regulations thereunder, published rulings and court decisions, all as in
effect and existing on the date of this Prospectus and all of which are
subject to change at any time; any such change may be applied retroactively in
a manner that could adversely affect a holder. This summary applies only to
those persons who hold Senior Discount Notes as capital assets and does not
address the tax consequences to taxpayers who are subject to special rules
(such as financial institutions, tax-exempt organizations, insurance companies
and persons holding Senior Discount Notes as part of a straddle, hedge or
conversion transaction) or aspects of federal income taxation that may be
relevant to a prospective investor based upon such investor's particular tax
situation. Moreover, the effect of any applicable state, local or foreign tax
laws is not discussed. Accordingly, purchasers of Senior Discount Notes should
consult their own tax advisors with respect to the particular consequences to
them of the purchase, ownership and disposition of the Senior Discount Notes
and the applicability of any state, local or foreign tax laws, as well as with
respect to the possible effects of changes in federal and other tax laws.
ORIGINAL ISSUE DISCOUNT
General. For federal income tax purposes, the Senior Discount Notes will
have the same issue date and issue price as the Old Notes. Because the Old
Notes were issued with original issue discount ("OID") for federal income tax
purposes, holders of the Senior Discount Notes will be required to include OID
in income periodically over the term of the Senior Discount Notes before
receipt of the cash to which such income is attributable.
The amount of OID on a Senior Discount Notes will be the excess of the
stated redemption price at maturity of the Senior Discount Note over its issue
price. The issue price of a Senior Discount Note will be the first price at
which a substantial amount of Old Notes was sold to the public for money
(excluding sales to bond houses, brokers or others acting in the capacity of
underwriters, placement agents or wholesalers, etc.). The stated redemption
price at maturity of a Senior Discount Note will be the sum of all payments to
be made on such Senior Discount Note, whether denominated as principal or
interest. Accordingly, each Senior Discount Note will have a substantial
amount of OID.
In general, a holder must include in gross income for federal income tax
purposes the sum of the daily portions of OID with respect to a Senior
Discount Note for each day during the taxable year or portion of a taxable
year on which such holder holds the Senior Discount Note ("Accrued OID"). The
daily portion is determined by allocating to each day of any accrual period a
pro rata portion of the OID allocable to that accrual period. The OID
allocable to a full accrual period is an amount equal to the adjusted issue
price of the Senior Discount Note at the beginning of the accrual period
multiplied by the yield to maturity of the Senior Discount Note. For purposes
of computing OID, the Company will use six-month accrual periods that end on
the days in the calendar year corresponding to the day before the maturity
date of the Senior Discount Notes and the date six months prior to such day,
with the exception of an initial short accrual period. The adjusted issue
price of a Senior Discount Note at the beginning of any accrual period is the
issue price of the Senior Discount Note increased by the Accrued OID for all
prior accrual periods, less any cash payments on the Senior Discount Note made
on or before the first day of that accrual period. Under these rules, holders
will generally be required to include in gross income increasingly greater
amounts of OID in each successive accrual period.
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The Company is required to furnish certain information to the Internal
Revenue Service (the "IRS"), and will furnish annually to record holders of a
Senior Discount Note information with respect to OID accruing during the
calendar year. That information will be based upon the adjusted issue price of
the Senior Discount Note as if the holder purchased the Senior Discount Note
on the issue date at the issue price. Holders who did not acquire Old Notes on
their original issue at their original offering price will be required to
determine for themselves the amount of OID they are required to include in
gross income for federal income tax purposes.
ACQUISITION PREMIUM/DISCOUNT
If the purchase price of a Senior Discount Note is greater than the adjusted
issue price, the amount of Accrued OID included in the purchaser's gross
income will be reduced to take the acquisition premium into account.
If the purchase price of a Senior Discount Note is less than the adjusted
issue price, the difference will be considered "market discount" unless it is
de minimis in amount. Any gain realized on a disposition of the Senior
Discount Note will generally be treated as ordinary interest income to the
extent of the market discount that accrued while the Senior Discount Note was
held by the purchaser, and the purchaser may be required to defer the
deduction of a portion of the interest paid or accrued on debt incurred or
continued to purchase or carry the Senior Discount Note, unless the purchaser
elects to include market discount in income currently as it accrues.
A purchaser of a Senior Discount Note at a premium or discount may elect to
include all interest that accrues on the Senior Discount Note (that is,
original issue discount increased by market discount--including de minimis
market discount--or reduced by acquisition premium) in gross income on a
constant-yield basis. If a purchaser makes this election for a Senior Discount
Note with market discount, the purchaser will be deemed to have made an
election to include market discount in income currently with respect to all
other debt instruments having market discount that the purchaser acquires
during the taxable year of the election or thereafter.
DISPOSITION OF THE SENIOR DISCOUNT NOTES
Generally, any sale, redemption or other taxable disposition of a Senior
Discount Note will result in taxable gain or loss equal to the difference
between the amount of cash and the fair market value of property received in
exchange therefor and the holder's adjusted tax basis in the Senior Discount
Note. A holder's adjusted tax basis for determining gain or loss on such sale
or other disposition will equal the cost of the Senior Discount Note to such
holder, increased by any Accrued OID (and market discount) includible in such
holder's gross income and decreased by the amount of any cash payments
received by such holder (regardless of whether such payments are denominated
as principal or interest). Any gain or loss upon a sale or other disposition
of a Senior Discount Note will generally be capital gain or loss, and will be
long-term capital gain or loss if the Senior Discount Note has been held by
the holder for more than one year. (Under legislation passed by Congress on
July 31, 1997, a lower capital gains tax rate will apply to a non-corporate
holder if the Senior Discount Note has been held for more than 18 months.)
BACKUP WITHHOLDING
A holder may be subject, under certain circumstances, to backup withholding
at a 31 percent rate with respect to payments of interest and OID received on,
and proceeds from the sale (through a broker) of, a Senior Discount Note.
Backup withholding generally applies only if the holder (i) fails to furnish
his or her social security or other taxpayer identification number ("TIN") to
the Company in the required manner, (ii) furnishes an incorrect TIN and the
IRS so notifies the Company, (iii) is notified by the IRS that he or she has
failed to report properly payments of interest or dividends and the IRS has
notified the Company that he or she is subject to withholding, or (iv) fails,
under certain circumstances, to provide a certified statement, signed under
penalty of perjury, that the TIN provided is his or her correct number and
that he or she is not subject to backup withholding. Any amount withheld from
a payment to a holder under the backup withholding rules is allowable as a
credit against such holder's federal income tax liability, provided that the
required information is furnished to the IRS. Certain holders (including,
among others, corporations) are not subject to backup withholding. Holders
should consult their tax advisors as to their qualification for exemption from
backup withholding and the procedure for obtaining such an exemption.
101
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Senior Discount Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of the Senior Discount Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Senior Discount Notes
received in exchange for Old Notes acquired as a result of market-making
activities or other trading activities. The Company has agreed that for a
period expiring on the earlier of (i) the date that all holders of Transfer
Restricted Securities have registered such securities pursuant to the Exchange
Offer and (ii) 365 days after the Exchange Date, it will make this Prospectus,
as amended or supplemented, available to any broker-dealer for use in
connection with any such resale.
The Company will not receive any proceeds from any sale of Senior Discount
Notes by broker-dealers. Senior Discount Notes received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options of the Senior Discount Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any Senior
Discount Notes. Any broker-dealer that resells Senior Discount Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker-dealer that participates in a distribution of Senior Discount Notes may
be deemed to be an "underwriter" within the meaning of the Securities Act and
any profit on any resale of Senior Discount Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that
by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
The Company has not entered into any arrangement or understanding with any
person to distribute the Senior Discount Notes to be received in the Exchange
Offer and to the best of the Company's information and belief, each person
participating in the Exchange Offer is acquiring the Senior Discount Notes in
its ordinary course of business and has no arrangement or understanding with
any person to participate in the distribution of the Senior Discount Notes to
be received in the Exchange Offer.
102
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LEGAL MATTERS
The legality of the securities offered hereby will be 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 6,745 shares of the Common Stock.
EXPERTS
The consolidated financial statements and schedule of the Company appearing
in the Company's Annual Report (Form 10-K) for the year ended December 31,
1996, have been audited by Ernst & Young LLP, independent certified public
accountants, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements and
schedule are incorporated herein by reference in reliance upon such report
given the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of DIGEX appearing in DIGEX's Annual
Report (Form 10-KSB) for the year ended December 31, 1996, have been audited
by Ernst & Young LLP, independent auditors, as set forth 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.
103
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ANNEX A
INTERMEDIA COMMUNICATIONS INC.
LOGO -------------------------------------------------------------------
GLOSSARY
Access Charges--The charges paid by an interexchange carrier to a LEC for
the origination or termination of the IXC's customer's long distance calls.
Access Line--A circuit that connects a telephone user (customer) to the
public switched telephone network. The access line usually connects to a
telephone at the customer's end.
Access Node--A Nortel switching device, which extends the presence of the
DMS-500 switch to a remote site, such as an On-Net building. The Access Node
provides interfaces for line connections to the network, and provides
concentration of lines back to the DMS-500 switch.
Access Trunk--A circuit that connects a telephone user's PBX or other
intelligent device to the public switched telephone network. An access trunk
is designed to carry more traffic than an access line, since it is accessible
to a number of users.
ATM (Asynchronous Transfer Mode)--A modern information transfer standard
that allows packetized voice and data to share a transmission circuit. ATM
provides much greater efficiency than typical channelized transmission media.
Bandwidth--The range of analog frequencies or the bit rate of digital
signals that can be supported by a circuit or device. The bandwidth of a
particular circuit is generally determined by the medium itself (wire, fiber
optic cable, etc.) and the device that transmits the signal to the
transmission medium (laser, audio amplifier, etc.)
Bell System--The name given to the large, single entity that comprised what
are today AT&T and the RBOCs, including Bell Laboratories and other
subsidiaries.
CAP (Competitive Access Provider)--A name for a category of local service
provider that appeared in the late 1980's, who competed with local telephone
companies by placing its own fiber optic cables in a city and sold various
private line telecommunications services in direct competition to the local
telephone company.
Central Office--The switching center and/or central circuit termination
facility of a local telephone company.
CENTREX--A central office based business telephone service that roughly
provides the user with the same services as a PBX, without the capital
investment of the PBX. Centrex services include station to station dialing (2
through 5 digits), customized long distance call handling, and user-input
authorization codes.
CLEC (Competitive Local Exchange Carrier)--A category of telephone service
provider (carrier) that offers services similar to the former monopoly local
telephone company, as recently allowed by changes in telecommunications law
and regulation. A CLEC may also provide other types of telecommunications
services (long distance, etc.)
CLEC Certification--Granted by a state public service commission or public
utility commission, this certification provides a telecommunications services
provider with the legal standing to offer local exchange telephone services in
direct competition with the incumbent LEC and other CLECs. Such certifications
are granted on a state by state basis.
Communications Act of 1934--The first major federal legislation that
established rules for broadcast and non-broadcast communications, including
both wireless and wired telephone service.
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A-1
<PAGE>
Connected Building--A building that is connected to a carrier's network via
a non-switched circuit that is managed and monitored by that carrier.
Dedicated Access--A circuit, not shared among multiple customers, that
connects a customer to a carrier's network.
Diverse Routing--A network topology that provides reliability by providing
two distinct physical routes for network transmission (fiber optic or copper
cables) with the ability to quickly "switch" traffic from one route to the
other, should one of the routes be rendered inoperable.
DMS-500--A telephone switch manufactured by Nortel, that provides both local
exchange switching (also known as a "class 5" switch) and a long distance
switching (also known as a "class 4" switch) in a single device.
EBITDA--Earnings Before Interest, Tax, Depreciation, and Amortization - a
financial measure of cash flow.
Enhanced Data Services--Data networking services provided on a
sophisticated, software managed transport and switching network, such as a
frame relay or ATM data network.
Dark Fiber--Fiber which does not have connected to it the electronics
required to transmit data on such fiber.
FCC (Federal Communications Commission)--The US Government organization
charged with the oversight of all public communications media.
Feature Group Circuit--A telecommunications channel that connects a LEC
telephone switch with an IXC telephone switch, for the purpose of passing long
distance calls between the two carriers' networks. Calls placed by dialing
"1+" are routed over these circuits.
Frame Relay--A wide area information transport technology that organizes
data into units called frames, with variable bit length, designed to move
information that is "bursty" in nature.
ICP (Integrated Communications Provider)--A telecommunications carrier that
provides packaged or integrated services from among a broad range of
categories, including local exchange service, long distance service, enhanced
data service, cable TV service, and other communications services.
ILEC (Incumbent Local Exchange Carrier)--The local exchange carrier that was
the monopoly carrier, prior to the opening of local exchange services to
competition.
ILEC Collocation--A location serving as the interface point for a CLEC's
network interconnection to the ILEC. Collocation can be 1) physical, in which
the CLEC "builds" a fiber optic network extension into the ILEC central
office, or 2) virtual, in which the ILEC leases a facility, similar to that
which it might build, to affect a presence in the ILEC central office.
Integration Services--The provision of specialized skills and equipment to
met specific customer needs.
Interconnection (co-carrier) Agreement--A contract between an ILEC and a
CLEC for the interconnection of the two's networks, for the purpose of mutual
passing of traffic between the networks, allowing customers of one of the
networks to call users served by the other network. These agreements set out
the financial and operational aspects of such interconnection.
Interexchange Services--Telecommunications services that are provided
between two exchange areas, generally meaning between two cities. These
services can be either voice or data.
Interim Number Portability--A temporary technique that allows local exchange
service customers of an ILEC to keep their existing telephone number, while
moving their service to a CLEC. Their interim technique uses a central office
feature called remote call forwarding. The permanent solution to number
portability is to implemented over the next few years.
- -------------------------------------------------------------------------------
A-2
<PAGE>
ISDN (Integrated Services Digital Network)--a modern telephone technology
that combines voice and data switching in an efficient manner.
ISP (Internet Service Provider)--a recently created category of
telecommunications service provider who provides access to the Internet,
normally for dial access customers, by sharing communications lines and
equipment.
IXC (Interexchange Carrier)--A provider of telecommunications services that
extend between exchanges, or cities. Also called long distance carrier.
LATA (Local Access and Transport Area)--A geographic area inside of which a
LEC can offer switched telecommunications services, even long distance (known
as local toll). There are 161 LATAs in the continental US. The LATA boundaries
were established at the Divestiture of the regional Bell operating companies.
LEC (Local Exchange Carrier)--Any telephone service provider offering local
exchange services.
Local Exchange--An area inside of which telephone calls are generally
completed without any toll, or long distance charges. Local exchange areas are
defined by the state regulator of telephone services.
Local Exchange Services--Telephone services that are provided within a local
exchange. These usually refer to local calling services (dial tone services.)
Business local exchange services include Centrex, access lines and trunks, and
ISDN.
Peering--The commercial practice under which nationwide ISPs exchange each
other's traffic without the payment of settlement charges.
Peering Points--A location at which ISPs exchange each others' traffic.
POP (Point of Presence)--A location where a carrier, usually an IXC, has
located transmission and terminating equipment to connect its network to the
networks of other carriers, or to customers.
RBOC (Regional Bell Operating Company)--One of the LECs created by the
Divestiture of the local exchange business by AT&T. These include BellSouth,
NYNEX, Bell Atlantic, Ameritech, US West, SBC, and PacTel.
SONET (Synchronous Optical NETwork)--A transmission technology that is used
by carriers in both local and long distance telecommunications networks to
provide efficient, highly reliable communications channels.
Special Access Services--Private, non-switched connections between an IXC
and a customer, for the purpose of connecting the customer's long distance
calls to the IXC's network, without having to pay the LEC's access charges.
VSAT (Very Small Aperture Terminal)--A satellite communication system that
comprises small diameter (approximately 1 meter in diameter) antennae and
electronics to establish a communications terminal, use mostly for data. VSAT
networks compete with other, landline based networks such as private lines and
frame relay.
Web Site--A server connected to the Internet from which Internet users can
obtain information.
World Wide Web or Web--A collection of computer systems supporting a
communications protocol that permits multi-media presentation of information
over the Internet.
- -------------------------------------------------------------------------------
A-3
<PAGE>
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- -------------------------------------------------------------------------------
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 AN OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES
IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN 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 HERE-
UNDER 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
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... ii
Incorporation of Certain Documents by
Reference............................................................... iii
Prospectus Summary....................................................... 1
Risk Factors............................................................. 15
The Exchange Offer....................................................... 23
Use of Proceeds.......................................................... 30
Capitalization........................................................... 30
Selected Financial and Other Operating Data.............................. 31
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 33
Business................................................................. 43
Management............................................................... 66
Description of Outstanding Indebtedness.................................. 69
Description of the Senior Discount Notes................................. 71
Certain Federal Income Tax Considerations................................ 100
Plan of Distribution..................................................... 102
Legal Matters............................................................ 103
Experts.................................................................. 103
Glossary................................................................. A-1
</TABLE>
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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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$649,000,000
LOGO
INTERMEDIA COMMUNICATIONS INC.
11 1/4% SERIES B
SENIOR DISCOUNT NOTES DUE 2007
----------------------------
PROSPECTUS
----------------------------
AUGUST 12, 1997
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