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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 10-Q
-----------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1997
Commission File Number: 0-20135
INTERMEDIA COMMUNICATIONS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-2913586
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3625 Queen Palm Drive
Tampa, Florida 33619
(Address of principal executive offices)
Telephone Number (813) 829-0011
----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
--- ---
As of August 7, 1997, there were 16,674,258 shares of the Registrant's Common
Stock outstanding.
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Page 1 of 27 pages
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INTERMEDIA COMMUNICATIONS INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Statements of Operations - Three and
six month periods ended June 30, 1997 and 1996.............................. 3
Condensed Consolidated Balance Sheets - June 30, 1997 and
December 31, 1996 .......................................................... 4
Condensed Consolidated Statements of Cash Flows - Six month
periods ended June 30, 1997 and 1996........................................ 5
Notes to Condensed Consolidated Financial Statements.......................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................... 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................. 23
ITEM 2. CHANGES IN SECURITIES......................................................... 23
ITEM 3. DEFAULT UPON SENIOR SECURITIES................................................ 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................... 24
ITEM 5. OTHER INFORMATION............................................................. 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................. 25
SIGNATURES .............................................................................. 27
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
INTERMEDIA COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Local network services $ 8,433 $ 3,160 $ 13,642 $ 6,381
Enhanced data services 12,667 5,191 23,988 8,747
Interexchange services 27,703 7,248 53,240 12,558
Integration services 1,329 1,251 3,200 2,667
------------ ------------ ------------ ------------
50,132 16,850 94,070 30,353
Expenses:
Network operations 37,261 9,302 67,263 16,551
Facilities administration and maintenance 5,790 1,152 11,424 1,903
Cost of goods sold 764 1,327 2,034 2,585
Selling, general and administrative 20,452 7,790 39,978 13,710
Depreciation and amortization 9,879 3,533 18,174 6,814
------------ ------------ ------------ ------------
74,146 23,104 138,873 41,563
------------ ------------ ------------ ------------
Loss from operations (24,014) (6,254) (44,803) (11,210)
Other income (expense):
Interest expense (11,117) (8,023) (22,206) (13,405)
Other income 5,482 2,034 9,956 3,478
------------ ------------ ------------ ------------
Net loss (29,649) (12,243) (57,053) (21,137)
Preferred stock dividends and accretions 9,848 -- 13,223 --
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (39,497) $ (12,243) $ (70,276) $ (21,137)
============ ============ ============ ============
Net loss per common share $ (2.39) $ (0.92) $ (4.30) $ (1.79)
============ ============ ============ ============
Weighted average number of shares outstanding 16,528,483 13,248,099 16,347,288 11,807,882
============ ============ ============ ============
</TABLE>
See accompanying notes.
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INTERMEDIA COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 347,863 $ 189,546
Short-term investments 5,644 6,041
Restricted investments 16,686 26,675
Accounts receivable, less allowance for
doubtful accounts of $2,574 in 1997 and $1,346 in 1996 26,835 19,272
Prepaid expenses and other current assets 6,224 5,230
--------- ---------
Total current assets 403,252 246,764
Restricted investments 10,483 10,481
Telecommunications equipment 347,588 241,481
Less accumulated depreciation (53,667) (37,574)
--------- ---------
Telecommunications equipment, net 293,921 203,907
Intangible assets, net 46,488 48,397
Other assets 4,391 3,391
--------- ---------
Total assets $ 758,535 $ 512,940
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,799 $ 29,895
Other accrued expenses 14,348 10,307
Current portion of long term debt and capital lease obligation 159,693 532
--------- ---------
Total current liabilities 201,840 40,734
Long-term debt and capital lease obligations 210,385 357,975
--------- ---------
Total liabilities 412,225 398,709
Series B redeemable exchangeable preferred stock and accrued dividends, $1.00
par value; 600,000 shares authorized in 1997; 312,938 shares outstanding in 1997 301,387 --
Stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares authorized in both 1997
and 1996; 16,589,134 and 16,285,340 shares issued and
outstanding in 1997 and 1996, respectively 166 163
Additional paid-in capital 210,219 212,811
Accumulated deficit (161,418) (91,141)
Deferred compensation (4,044) (7,602)
--------- ---------
Total stockholders' equity 44,923 114,231
--------- ---------
Total liabilities, redeemable preferred stock and stockholders' equity $ 758,535 $ 512,940
========= =========
</TABLE>
See accompanying notes.
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INTERMEDIA COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (57,053) $ (21,137)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities
Depreciation and amortization, including loan costs 18,943 6,811
Amortization of deferred compensation 722 96
Accretion of discount on notes 11,833 2,826
Provision for doubtful accounts 2,947 623
Changes in operating assets and liabilities:
Accounts receivable (10,510) (7,608)
Prepaid expenses and other current assets (2,057) (421)
Accounts payable (2,095) 2,690
Other accrued expenses 4,041 1,619
--------- ---------
Net cash (used in) provided by operating activities (33,229) (14,501)
INVESTING ACTIVITIES
Purchase of short-term investments -- (4,750)
Purchase of business, net of cash acquired (165) --
Maturities of short-term investments 397 --
Maturities of restricted investments 9,989 9,200
Purchase of telecommunications equipment (107,022) (41,047)
--------- ---------
Net cash used in investing activities (96,801) (36,597)
FINANCING ACTIVITIES
Proceeds from sale of Series A preferred stock, net of
issuance costs 288,164 --
Proceeds from issuance of senior discount notes -- 171,226
Proceeds from sale of common stock -- 111,769
Exercise of stock warrants and options 247 --
Principal payments on long-term debt and capital lease obligation (64) (604)
--------- ---------
Net cash provided by (used in) financing activities 288,347 282,391
Increase (decrease) in cash and cash equivalents 158,317 231,293
Cash and cash equivalents at beginning of period 189,546 50,997
--------- ---------
Cash and cash equivalents at end of period $ 347,863 $ 282,290
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 11,181 $ 11,123
========= =========
</TABLE>
See accompanying notes
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INTERMEDIA COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary to present fairly the information set
forth therein have been included. Except as disclosed herein, there has
been no material change in the information disclosed in the notes to
the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. Therefore, it
is suggested that the accompanying condensed consolidated financial
statements be read in conjunction with the consolidated financial
statements and footnotes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
Operating results for the three and six month period ended June 30,
1997 are not necessarily an indication of the results that may be
expected for the year ending December 31, 1997.
Reclassification
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Pending Accounting Changes
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No, 128, "Earnings Per
Share" ("FASB 128"), which establishes standards for computing and
presenting earnings per share. FASB 128 replaces the presentation of
primary and fully diluted earnings per share with basic and diluted
earnings per share, respectively. Basic earnings per share are computed
by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share are computed similarly to fully diluted earnings per
share. The standard is effective for financial statements for periods
ending after December 15, 1997, with earlier application not permitted.
For the three and six month periods ended June 30, 1997 and June 30,
1996, earnings per share, under FASB 128, would not have been impacted.
6
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Note 2 Preferred Stock
On March 7, 1997, the Company sold 30,000 shares (aggregate liquidation
preference $300 million) of its Series A Redeemable Exchangeable
Preferred Stock, due 2009, (the "Series A Preferred Stock") in a
private placement transaction. Net proceeds to the Company amounted to
approximately $288 million. On June 6, 1997, the company issued 300,000
shares (aggregate liquidation preference $300 million) of its 13 1/2%
Series B Redeemable Exchangeable Preferred Stock due 2009 (the
"Preferred Stock"), which were registered under the Securities Act of
1933, as amended, in exchange for all outstanding shares of the Series
A Preferred Stock pursuant to a registered exchange offer. Dividends on
the Preferred Stock accumulate at a rate of 13 1/2% of the aggregate
liquidation preference thereof and are payable quarterly, in arrears.
Dividends are payable in cash or, at the Company's option, by the
issuance of additional shares of Preferred Stock having an aggregate
liquidation preference equal to the amount of such dividends. The
Preferred Stock is subject to mandatory redemption at its liquidation
preference of $1,000 per share, plus accumulated and unpaid dividends
on March 31, 2009. The Preferred Stock will be redeemable at the option
of the Company at any time after March 31, 2002 at rates commencing
with 106.75%, declining to 100% on March 31, 2007.
The Company may, at its, option, exchange some or all shares of the
Preferred Stock for the Company's 13 1/2% Senior Subordinated
Debentures, due 2009 (the "Exchange Debentures"). The Exchange
Debentures mature on March 31, 2009. Interest on the Exchange
Debentures is payable semi-annually, and may be paid in the form of
additional Exchange Debentures at the Company's option. Exchange
Debentures will be redeemable by the Company at any time after March
31, 2002 at rates commencing with 106.75%, declining to 100% on March
31, 2007.
The Company is accreting the Preferred Stock to its liquidation
preference through the due date of the Preferred Stock. The accretion
for the three and six month periods ended June 30, 1997 was $285
thousand.
The Company elected to issue approximately 13,000 additional shares of
Preferred Stock, in lieu of cash, with an aggregate liquidation
preference of $12.9 million in June 1997, in payment of the first
quarterly dividend (accumulated from March 7, 1997 through June 30,
1997).
Note 3 Acquisitions
During June 1996, the Company acquired the Telecommunications Division
of EMI Communications corporation (EMI) in exchange for 937,500 shares
of the Company's common stock, valued at approximately $16.9 million.
The acquisition was accounted for by the purchase method of accounting,
with the purchase price allocated to the fair values of assets
acquired, principally telecommunications equipment. EMI's
telecommunications division, headquartered in Syracuse, New York, is a
provider of frame relay based network services and interexchange
private line services primarily in
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the northeastern United States. EMI operates owned and leased microwave
and fiber optic digital network capacity in New York, Massachusetts,
Vermont, Rhode Island, Connecticut, New Jersey, Pennsylvania, Maryland
and the District of Columbia and maintains POPs in most major cities in
these states.
During December 1996, the Company acquired, in two separate
transactions, certain assets and the related businesses of Universal
Telcom, Inc. (UTT) and NetSolve, Incorporated (NetSolve). The purchase
price for UTT included 31,380 shares of the Company's common stock,
valued at approximately $.9 million, and the assumption of
approximately $2 million of UTT's liabilities. NetSolve was purchased
for cash of $12.8 million. The acquisitions are accounted for by the
purchase method of accounting, with the purchase price allocated to the
fair value of assets acquired, principally goodwill. The goodwill,
including an additional $.2 million for legal expenses, for these
acquisitions has been adjusted during the first quarter of 1997 due to
the finalization of the purchase price allocation.
The following unaudited pro forma results of operations presents the
consolidated results of operations as if the acquisition of UTT,
NetSolve and EMI had occurred on January 1, 1996, and does not purport
to be indicative of the results that actually would have occurred if
the companies had been acquired as of that date or of results which may
occur in the future.
<TABLE>
<CAPTION>
Six Months Ended
(In thousands) June 30, 1996
-----------------
<S> <C>
Revenue $ 56,235
Net loss (22,368)
Net loss attributable to common stockholders (22,368)
Net loss per share (1.89)
</TABLE>
Note 4 Subsequent Events
On July 11, 1997, Intermedia's wholly owned subsidiary, Daylight
Acquisition Corp., completed a merger with DIGEX, Incorporated, a
leading nationwide business Internet services provider. The aggregate
consideration for the acquisition was approximately $155 million and
was funded with the Company's existing cash reserves.
On July 10, 1997, the Company sold 6,000,000 Depositary Shares (the
"Depositary Shares") (aggregate liquidation preference $150,000,000)
each representing a one- hundredth interest in a share of the Company's
7% Series D Junior Convertible Preferred Stock, (the "Series D
Preferred Stock"), in a private placement transaction. Subsequent
thereto, the over-allotment option with respect to the Depositary
Shares was exercised and the Company sold an additional 900,000
Depositary Shares (aggregate liquidation preference of $22,500,000).
Net proceeds to the Company amounted to approximately $167 million.
Dividends on the Series D Preferred Stock will accumulate at a rate of
7% of the aggregate liquidation preference thereof and are payable
quarterly, in arrears. Dividends are payable in cash or, at the
Company's option, by the issuance of
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shares of Common Stock of the Company. The Series D Preferred Stock
will be redeemable at the option of the Company at any time on or after
July 19, 2000 at rates commencing with 104%, declining to 100% on July
19, 2004.
The Depositary Shares will be convertible at any time after October 7,
1997, at the option of the holder into Common Stock of the Company at a
conversion price of $38.90 per share of Common Stock, subject to
certain adjustments.
Concurrently with the sale of the Depositary Shares, the Company sold
$606 million principal amount at maturity of 11 1/4% Senior Discount
Notes due 2007 (the "Senior Discount Notes") in a private placement
transaction. Subsequent thereto, the over- allotment option with
respect to the Senior Discount Notes was exercised and the Company sold
an additional $43 million principal amount at maturity of Senior
Discount Notes. The issue price of the Senior Discount Notes was
$577.48 per $1,000 principal amount at maturity of the Senior Discount
Notes. Net proceeds to the Company amounted to approximately $365
million. Cash interest will not accrue on the Senior Discount Notes
prior to July 15, 2002. Commencing January 15, 2003, cash interest on
the Senior Discount Notes will be payable semi-annually in arrears on
July 15 and January 15 at a rate of 11 1/4% per annum. The Senior
Discount Notes will be redeemable, at the Company's option at any time
on or after July 15, 2002, and are pari passu with all other senior
indebtedness.
The proceeds of the concurrent private offerings of the Depositary
Shares and Senior Discount Notes will be used to retire or defease (the
"Retirement") Intermedia's outstanding 13 1/2% Senior Notes due 2005
(the "13 1/2% Notes"), to fund continued implementation of the
Company's business plan and for general corporate purposes. The
Retirement will result in an extraordinary loss of approximately $42
million in the third quarter of 1997, related to the write-off of
unamortized deferred finance costs and pre-payment penalties.
Until such time as the Retirement becomes effective, the issuance by
the Company of the 11 1/4% Senior Discount Notes will constitute an
event which could be declared an Event of Default under the Indenture
governing the 13 1/2% Notes 30 days after the receipt of notice from
the trustee 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 Indenture governing the Company's 12 1/2%
Senior Discount Notes due 2006 (the "12 1/2% Notes") and under the
Certificate of Designation setting forth the rights of the Preferred
Stock. If the 13 1/2% Notes were accelerated, a portion of the funds
deposited with the trustee 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 Preferred Stock or any other securities of the Company.
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The Company has classified the 13 1/2% Notes as a current liability as
of June 30, 1997 in the accompanying Balance Sheet due to the Company's
intent that the Retirement be completed before the end of the current
year.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto included herewith,
and with the Company's Management's Discussion and Analysis of Financial
Condition and Results of Operations and audited consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1996 filed with the Securities and Exchange
Commission.
OVERVIEW
Intermedia Communications Inc. (Intermedia or the Company), formerly
Intermedia Communications of Florida, Inc. through May 29, 1996, is a rapidly
growing provider of integrated telecommunications solutions for business,
government, and the telecommunications industry. Headquartered in Tampa,
Florida, Intermedia is the third largest (based on annualized telecommunications
revenues) among providers referred to as Competitive Local Exchange Carriers
(CLECs). Intermedia offers 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, resellers, and wireless
communications companies serving customers from 36 sales offices located
throughout the eastern United States. Intermedia also provides enhanced data/ATM
and Internet services in approximately 2,500 cities nationwide, offering
customers seamless end-to-end connectivity virtually anywhere in the world.
Since its inception in 1987, the Company has experienced substantial
growth. Building from its original base in Florida, Intermedia is now a provider
of integrated telecommunications services to customers that have a presence in
the eastern United States. The Company currently has ten digital, fiber optic
networks 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 Incumbent Local Exchange Carriers (ILECs)
and Interexchange Carriers (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 IXC's. 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 IXC's. In 1988, Intermedia was the first telecommunications provider
in Florida to begin providing special access and private line services to
business customers. In 1991, Intermedia began offering
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integration services in response to customer's 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 revenue 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 IXC's may
enter the market by becoming resellers of the Company's local services. If the
IXC's 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 two quarters 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 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.
On July 11, 1997, Intermedia's wholly owned subsidiary, Daylight
Acquisition Corp., completed a merger (the "Merger") with DIGEX, Incorporated
("DIGEX"), a leading nationwide business Internet services provider. The
aggregate consideration for the acquisition was approximately $155 million and
was funded with the Company's existing cash reserves in July 1997.
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
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year period. The aggregate purchase price of the Telco Acquisition
was approximately $38 million, which was substantially included in the Company's
planned 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.
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. 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 business 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 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.
The following table presents, for the periods indicated, certain
information derived from the Company's Condensed Consolidated Statements of
Operations, expressed in percentages of revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 1996 1997 1996
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Local network services 16.8 % 18.8 % 14.5 % 21.0 %
Enhanced data services 25.3 30.8 25.5 28.8
Interexchange services 55.3 43.0 56.6 41.4
Integration services 2.6 7.4 3.4 8.8
----- ----- ----- -----
100.0 100.0 100.0 100.0
Expenses:
Network operations 74.3 55.2 71.5 54.5
Facilities administration and 11.5 6.8 12.1 6.3
maintenance
Cost of goods sold 1.5 7.9 2.2 8.5
Selling, general and administrative 40.8 46.2 42.5 45.2
Depreciation and amortization 19.7 21.0 19.3 22.4
----- ----- ----- -----
Loss from operations (47.8) (37.1) (47.6) (36.9)
Other income (expense):
Interest expense (22.2) (47.6) (23.6) (44.2)
Other income 10.9 12.1 10.6 11.5
----- ----- ----- -----
Net loss (59.1) (72.6) (60.6) (69.6)
Preferred stock dividends and accretions 19.6 -- 14.1 --
===== ===== ===== =====
Net loss attributable to common stockholders (78.7)% (72.6)% (74.7)% (69.6)%
===== ===== ===== =====
</TABLE>
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The following table sets forth other statistical data derived from the Company's
operating records:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Transport services:
Buildings connected 1,680 414
Route miles 692 571
Fiber optic miles 33,197 21,232
Network cities
in operation 10 9
Enhanced data services:
Data switches installed 111 45
Frame relay cities 2,720 944
Nodes in service 15,096 3,521
NNI connections 321 110
Local and Long Distance Services:
Voice switches in operation 12 3
Long distance billable minutes 101,538,231 49,025,233
Access line equivalents 30,733 -
Employees 1,143 453
</TABLE>
Quarter Ended June 30, 1997 Compared to Quarter Ended June 30, 1996:
Revenue
Total revenue increased 198% to $50.1 million for the second quarter of
1997 compared to $16.9 million for the same period in 1996. This increase
primarily resulted from the acquisition of EMI, the introduction of new services
and the increased focus of the Company's sales force on offering a full suite of
telecommunications services to an expanding market. Of the increase,
approximately $14.7 million was attributable to the inclusion of EMI's operating
results for the second quarter of 1997.
Local network services revenue increased 167% to $8.4 million for the
second quarter of 1997 compared to $3.2 million for the same period in 1996.
This increase primarily resulted from the continued rollout of local exchange
services into additional markets. The Company has
14
<PAGE> 15
received CLEC certification in 26 states plus the District of Columbia as of the
end of the second quarter of 1997.
Enhanced data services revenue increased 144% to $12.7 million for the
second quarter of 1997 compared to $5.2 million for the same period in 1996.
This increase primarily resulted from the expansion of the Company's enhanced
data network by 66 switches and 11,575 new frame relay nodes since July 1, 1996.
In addition, the number of frame relay cities has increased by 1,776 during the
same time period. Of the revenue increase, approximately $4.2 million was
attributable to the inclusion of EMI's operating results for the second quarter
of 1997.
Interexchange services revenue increased 282% to $27.7 million for the
second quarter of 1997 compared to $7.2 million for the same period in 1996.
This increase primarily resulted from strong growth in long distance switched
revenue and steady growth in interLATA transport. Of the increase, approximately
$10.4 million was attributable to the inclusion of EMI's operating results for
the second quarter of 1997.
Integration services revenue increased 6% to $1.3 million for the
second quarter of 1997 compared to $1.3 million for the same period in 1996.
This increase primarily resulted from the Company's increased focus on providing
a total service package for the customer.
Operating Expenses
Total operating expenses increased 221% to $74.1 million for the second
quarter of 1997 compared to $23.1 million for the same period in 1996. The
increase primarily resulted 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 $11.8 million was attributable to the inclusion of EMI's operating
results for the second quarter of 1997.
Network operations expenses increased 301% to $37.3 million for the
second quarter of 1997 compared to $9.3 million for the same period in 1996.
This increase primarily resulted from the increases in leased network capacity
that is associated with the growth of local network service, enhanced data
service and interexchange service revenues. Of the increase, approximately $8.5
million was attributable to the inclusion of EMI's operating results for the
second quarter of 1997.
Facilities administration and maintenance expenses increased 403% to
$5.8 million for the second quarter of 1997 compared to $1.2 million for the
same period in 1996. Of the increase, approximately $1.2 million was
attributable to the inclusion of EMI's operating results for the second quarter
of 1997. In addition, the increase resulted from the expansion of the Company's
owned and leased network capacity, increases in maintenance expense due to the
network expansion and increased payroll expenses related to hiring additional
engineering and operations staff to support and service the expanding network.
15
<PAGE> 16
Selling, general and administrative expenses increased 163% to $20.5
million for the second quarter of 1997 compared to $7.8 million for the same
period in 1996. This increase primarily resulted from the Company's continued
growth and represented 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 $.9
million was attributable to the inclusion of EMI's operating results for the
second quarter of 1997.
Depreciation and amortization expenses increased 180% to $9.9 million
for the second quarter of 1997 compared to $3.5 million for the same period in
1996. This increase primarily resulted from additions to telecommunications
equipment placed in service during 1996 and the first six months of 1997,
relating to ongoing network expansion.
Interest Expense
Interest expense increased 39% to $11.1 million for the second quarter
of 1997 compared to $8 million for the same period in 1996. This increase
primarily resulted from interest expense on the May 1996 issuance of $330
million principal amount of the Company's 12 1/2% Senior Discount Notes (the "12
1/2% Notes").
Other Income
Other income increased 170% to $5.5 million for the second quarter of
1997 compared to $2 million for the same period in 1996. This increase was
primarily the result of interest earned on the cash available from the excess
proceeds relating to the May 1996 issuance of the 12 1/2% Notes, the May 1996
issuance of 4,674,503 common shares, par value $.01 per share, 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 (the "Series A Preferred Stock").
Net Loss
Net loss increased 142% to $29.7 million for the second quarter of 1997
compared to $12.2 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
Preferred stock dividends and accretions of $9.8 million resulted from
the March 1997 issuance of 30,000 shares (aggregate liquidation preference $300
million) of the Company's Series A Preferred Stock.
EBITDA
EBITDA decreased 420% to $(14.1) million for the second quarter of 1997
compared to $(2.7) 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
16
<PAGE> 17
expenses, such as increases in sales, customer service and market development
costs, prior to realizing revenues associated with these expenditures.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996:
Revenue
Total revenue increased 210% to $94.1 million for the six months ended
June 30, 1997 compared to $30.4 million for the same period in 1996. This
increase primarily resulted from the acquisitions of EMI, the introduction of
new services and the increased focus of the Company's sales force on offering a
full suite of telecommunications services to an expanding market. Of the
increase, approximately $28.7 million was attributable to the inclusion of EMI's
operating results for the six months ended June 30, 1997.
Local network services revenue increased 114% to $13.6 million for the
six months ended June 30, 1997 compared to $6.4 million for the same period in
1996. This increase primarily resulted from the continued rollout of local
exchange services into additional markets. The Company has received CLEC
certification in 26 states plus the District of Columbia as of the end of the
second quarter of 1997.
Enhanced data services revenue increased 174% to $24 million for the
six months ended June 31, 1997 compared to $8.7 million for the same period in
1996. This increase primarily resulted from the expansion of the Company's
enhanced data network by 66 switches and 11,575 new frame relay nodes since July
1, 1996. In addition, the number of frame relay cities has increased by 1,776
during the same time period. Of the revenue increase, approximately $8.2 million
was attributable to the inclusion of EMI's operating results for the six months
ended June 30, 1997.
Interexchange services revenue increased 324% to $53.2 million for the
six months ended June 30, 1997 compared to $12.6 million for the same period in
1996. This increase primarily resulted from strong growth in long distance
switched revenue and steady growth in interLATA transport. Of the increase,
approximately $20.5 million was attributable to the inclusion of EMI's operating
results for the six months ended June 30, 1997.
Integration services revenue increased 20% to $3.2 million for the six
months ended June 30, 1997 compared to $2.7 million for the same period in 1996.
This increase primarily resulted from the Company's increased focus on providing
a total service package for the customer.
Operating Expenses
Total operating expenses increased 234% to $138.9 million for the six
months ended June 30, 1997 compared to $41.6 million for the same period in
1996. The increase primarily resulted 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
17
<PAGE> 18
growth. Of the increase, approximately $22 million was attributable to the
inclusion of EMI's operating results for the six months ended June 30, 1997.
Network operations expenses increased 306% to $67.3 million for the six
months ended June 30, 1997 compared to $16.6 million for the same period in
1996. This increase primarily resulted from the increases in leased network
capacity that is associated with the growth of local network service, enhanced
data service and interexchange service revenues. Of the increase, approximately
$15.6 million was attributable to the inclusion of EMI's operating results for
the six months ended June 30, 1997.
Facilities administration and maintenance expenses increased 500% to
$11.4 million for the six months ended June 30, 1997 compared to $1.9 million
for the same period in 1996. Of the increase, approximately $2.2 million was
attributable to the inclusion of EMI's operating results for the six months
ended June 30, 1997. In addition, the increase resulted from the expansion of
the Company's owned and leased network capacity, increases in maintenance
expense due to the network expansion and increased payroll expenses related to
hiring additional engineering and operations staff to support and service the
expanding network.
Selling, general and administrative expenses increased 192% to $40
million for the six months ended June 30, 1997 compared to $13.7 million for the
same period in 1996. This increase primarily resulted from the Company's
continued growth and represented 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 $1.7 million was attributable to the inclusion of EMI's operating
results for the six months ended June 30, 1997.
Depreciation and amortization expenses increased 167% to $18.2 million
for the six months ended June 30, 1997 compared to $6.8 million for the same
period in 1996. This increase primarily resulted from additions to
telecommunications equipment placed in service during 1996 and the first six
months of 1997, relating to ongoing network expansion.
Interest Expense
Interest expense increased 66% to $22.2 million for the six months
ended June 30, 1997 compared to $13.4 million for the same period in 1996. This
increase primarily resulted from interest expense on the May 1996 issuance of
the 12.5% Notes.
Other Income
Other income increased 186% to $10 million for the six months ended
June 30, 1997 compared to $3.5 million for the same period in 1996. This
increase was primarily the result of interest earned on the cash available from
the excess proceeds relating to the May 1996 issuance of the 12.5% Notes, the
May 1996 issuance of 4,674,503 common shares, par value $.01 per share, at
$26.00 per share and the March 1997 issuance of 30,000 shares (aggregate
liquidation preference $300 million) of the Series A Preferred Stock.
18
<PAGE> 19
Net Loss
Net loss increased 170% to $57.1 million for the six months ended June
30, 1997 compared to $21.1 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
Preferred stock dividends and accretions of $13.2 million resulted from
the March 1997 issuance of 30,000 shares (aggregate liquidation preference $300
million) of the Series A Preferred Stock.
EBITDA
EBITDA decreased 506% to $(26.7) million for the six months ended June
30, 1997 compared to $(4.4) 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.
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 $107.1 million and $41 million for the six months ended June 30, 1997 and
1996, respectively. 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, the Company
utilized approximately $155 million of its available cash to complete the
acquisition of DIGEX in July 1997.
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 senior debt.
The substantial capital investment required to build the Company's
network 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 was 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
19
<PAGE> 20
investing activities for the next several years due to the expansion activities
associated with the development of the Company's networks. Until sufficient cash
flow after investing activities is generated from operations, the Company will
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,
the Company has accelerated and expanded its capital deployment plan to allow
for an increased level of demand-driven 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. The Company is certified as a CLEC
in 26 states and the District of Columbia, allowing the Company to provide local
exchange services in those markets. 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 $90
million to fund anticipated capital requirements during the remainder of 1997,
which it expects to fund from its available cash. The Company does not believe
that the acquisition of DIGEX will have a material impact on its capital
expenditure requirements.
On March 7, 1997, the Company sold 30,000 shares (aggregate liquidation
preference $300,000,000) of the Series A Preferred Stock in a private placement
transaction. Net proceeds to the Company amounted to approximately $288 million.
On June 6, 1997, the company issued 300,000 shares (aggregate liquidation
preference $300 million) of its 13 1/2% Series B Redeemable Exchangeable
Preferred Stock due 2009 (the "Preferred Stock"), which were registered under
the Securities Act of 1933, as amended, in exchange for all outstanding shares
of the Series A Preferred Stock pursuant to a registered exchange offer.
Dividends on the Preferred Stock accumulate at a rate of 13 1/2% of the
aggregate liquidation preference thereof and are payable quarterly, in arrears.
Dividends are payable in cash or, at the Company's option, by the issuance of
additional shares of Preferred Stock having an aggregate liquidation preference
equal to the amount of such dividends. The Preferred Stock is subject to
mandatory redemption at its liquidation preference of $1,000 per share, plus
accumulated and unpaid dividends on March 31, 2009. The Preferred Stock will be
redeemable at the option of the Company at any time after March 31, 2002 at
rates commencing with 106.75%, declining to 100% on March 31, 2007.
The Company may, at its, option, exchange some or all shares of the
Preferred Stock for the Company's 13 1/2% Senior Subordinated Debentures, due
2009 (the "Exchange Debentures"). The Exchange Debentures mature on March 31,
2009. Interest on the Exchange Debentures is payable semi-annually, and may be
paid in the form of additional Exchange Debentures at the Company's option.
Exchange Debentures will be redeemable by the Company at any time after March
31, 2002 at rates commencing with 106.75%, declining to 100% on March 31, 2007.
On July 11, 1997, Intermedia's wholly owned subsidiary, Daylight
Acquisition Corp., completed a merger (the "Merger") with DIGEX, Incorporated
("DIGEX"), a leading
20
<PAGE> 21
nationwide business Internet services provider. The aggregate consideration for
the acquisition was approximately $155 million and was funded with the Company's
existing cash reserves in July 1997.
On July 10, 1997, the Company sold 6,000,000 Depositary Shares (the
"Depositary Shares") (aggregate liquidation preference $150,000,000) each
representing a one-hundredth interest in a share of the Company's 7% Series D
Junior Convertible Preferred Stock, (the "Series D Preferred Stock"), in a
private placement transaction. Subsequent thereto, the over-allotment option
with respect to the Depositary Shares was exercised and the Company sold an
additional 900,000 Depositary Shares (aggregate liquidation preference of
$22,500,000). Net proceeds to the Company amounted to approximately $167
million. Dividends on the Series D Preferred Stock will accumulate at a rate of
7% of the aggregate liquidation preference thereof and are payable quarterly, in
arrears. Dividends are payable in cash or, at the Company's option, by the
issuance of shares of Common Stock of the Company. The Series D Preferred Stock
will be redeemable at the option of the Company at any time on or after July 19,
2000 at rates commencing with 104%, declining to 100% on July 19, 2004.
The Depositary Shares will be convertible at any time after October 7,
1997, at the option of the holder into Common Stock of the Company at a
conversion price of $38.90 per share of Common Stock, subject to certain
adjustments.
Concurrently with the sale of the Depositary Shares, the Company sold
$606 million principal amount at maturity of 11 1/4% Senior Discount Notes due
2007 (the "Senior Discount Notes") in a private placement transaction.
Subsequent thereto, the over-allotment option with respect to the Senior
Discount notes was exercised and the Company sold an additional $43 million
principal amount at maturity of Senior Discount Notes. The issue price of the
Senior Discount Notes was $577.48 per $1,000 principal amount at maturity of the
Senior Discount Notes. Net proceeds to the Company amounted to approximately
$365 million. Cash interest will not accrue on the Senior Discount Notes prior
to July 15, 2002. Commencing January 15, 2003, cash interest on the Senior
Discount Notes will be payable semi-annually in arrears on July 15 and January
15 at a rate of 11 1/4% per annum. The Senior Discount Notes will be redeemable,
at the Company's option at any time on or after July 15, 2002, and are pari
passu with all other senior indebtedness.
The proceeds of the concurrent private offerings of the Depositary
Shares and Senior Discount Notes will be used to retire or defease (the
"Retirement") Intermedia's outstanding 13 1/2% Senior Notes due 2005 (the "13
1/2% Notes"), to fund continued implementation of the Company's business plan
and for general corporate purposes. The Retirement will result in an
extraordinary loss of approximately $42 million in the third quarter of 1997,
related to the write-off of unamortized deferred finance costs and pre-payment
penalties.
Until such time as the Retirement becomes effective, the issuance by
the Company of the 11 1/4% Senior Discount Notes will constitute an event which
could be declared an Event of Default under the Indenture governing the 13 1/2%
Notes 30 days after the receipt of notice from the trustee 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 Indenture governing the 12
1/2% Notes and
21
<PAGE> 22
under the Certificate of Designation setting forth the rights of the Preferred
Stock. If the 13 1/2% Notes were accelerated, a portion of the funds deposited
with the trustee 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 deployment plan. An Event of Default would not lead to
acceleration of the Preferred Stock or any other securities of the Company.
The Company has classified the 13 1/2% Notes as a current liability as
of June 30, 1997 in the accompanying Balance Sheet due to the Company's intent
that the Retirement be completed before the end of the current year.
The Company expects that its available cash, including proceeds from
the concurrent offerings of the Senior Discount Notes and Depositary Shares and
the exercise of the over-allotment options related to those concurrent
offerings, and credit availability will be sufficient to fund its accelerated
and expanded capital deployment plan. If the Company were to require additional
financing, it would seek to obtain such financing 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 of the terms upon
which such financing might be available. Moreover, the 12 1/2% Notes, the Senior
Discount Notes and the Preferred Stock 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.
Impact of Inflation
Inflation has not had a significant impact on the Company's operations
over the past 3 years.
The information set forth above in "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" includes forward-looking
statements that involve numerous risks and uncertainties. The Company's actual
results could differ materially from those anticipated in such forward-looking
statements as a result of certain factors, including those set forth in the
section entitled "Risk Factors" in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
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, Incorporated ("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 sought preliminary and permanent injunction
enjoining the Merger but no applications were made for such injunctions prior to
consummation of the Merger on July 11, 1997. In addition, the Complaints seek
cash damages from the DIGEX Directors.
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.
ITEM 2. Changes in Securities
On July 10, 1997, the Company sold 6,000,000 Depositary Shares
(aggregate liquidation preference $150,000,000) each representing a
one-hundredth interest in a share of Series D Preferred Stock, in a private
placement transaction. Subsequent thereto, the over-allotment option with
respect to the Depositary Shares was exercised and the Company sold an
additional 900,000 Depositary Shares (aggregate liquidation preference of
$22,500,000). Net proceeds to the Company amounted to approximately $167
million. Dividends on the Series D Preferred Stock will accumulate at a rate of
7% of the aggregate liquidation preference thereof and are payable quarterly, in
arrears. Dividends are payable in cash or, at the Company's option, by the
issuance of shares of Common Stock of the Company. The Series D Preferred Stock
will be redeemable at the option of the Company at any time on or after July 19,
2000 at rates commencing with 104%, declining to 100% on July 19, 2004.
The Depositary Shares will be convertible at any time after October 7,
1997, at the option of the holder into Common Stock of the Company at a
conversion price of $38.90 per share of Common Stock, subject to certain
adjustments.
The Depositary Shares were issued and sold to the initial purchasers
pursuant to an exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended (the "Act"). Each of the initial purchasers
of the Depositary Shares represented to the Company, among other things, that
(i) it is a qualified institutional buyer ("QIB"), (ii) it is not acquiring the
Depositary Shares with a view to any distribution thereof that would violate the
Act or the securities laws of any state of the United States or any other
applicable jurisdiction, (iii) it will be re-offering and reselling the
Depositary Shares only to QIBs in reliance on the exemption from the
registration requirements of the Act provided by Rule 144A and to accredited
investors in a private placement exempt from the registration requirements of
the Act,
23
<PAGE> 24
and (iv) no form of general solicitation or general advertising has been or will
be used by it or any of its representatives in connection with the offer and
sale of any of the Depositary Shares.
ITEM 3. Defaults Upon Senior Securities
The proceeds of the concurrent private offerings of the Depositary
Shares and Senior Discount Notes will be used to fund the Retirement, to fund
continued implementation of the Company's business plan and for general
corporate purposes. The Retirement will result in an extraordinary loss of
approximately $42 million in the third quarter of 1997, related to the write-off
of unamortized deferred finance costs and pre-payment penalties.
Until such time as the Retirement becomes effective, the issuance by
the Company of the Senior Discount Notes will constitute an event which could be
declared an Event of Default under the Indenture governing the 13 1/2% Notes 30
days after the receipt of notice from the trustee 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 Indenture governing the 12 1/2% Notes
and under the Certificate of Designation setting forth the rights of the
Preferred Stock. If the 13 1/2% Notes were accelerated, a portion of the funds
deposited with the trustee 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 Preferred Stock or any other securities of the
Company.
The Company has classified the 13 1/2% Notes as a current liability as
of June 30, 1997 in the accompanying Balance Sheet due to the Company's intent
that the Retirement will be completed before the end of the current year.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on May 22,1997. At the
meeting, the following actions were taken by the stockholders:
The following two members were re-elected to the Company's Board of
Directors to hold office for terms expiring in 2000 or when their respective
successors have been duly elected and qualified. The voting on the resolution
was as follows:
<TABLE>
<CAPTION>
Nominee For Against Abstained
- ------- --- ------- ---------
<S> <C> <C>
David C. Ruberg 15,162,700 - 307,900
Philip A. Campbell 15,167,500 - 303,100
</TABLE>
The number of shares of Common Stock authorized for issuance under the
Company's Long-Term Incentive Plan was increased from 1,500,000 shares to
2,500,000 shares. The voting on the resolution was as follows:
<TABLE>
<CAPTION>
For Against Abstained Not voted
--- ------- --------- ---------
<S> <C> <C> <C>
8,645,042 3,679,125 23,042 3,123,391
</TABLE>
24
<PAGE> 25
An amendment to the Company's Restated Certificate of Incorporation,
as amended, to increase the number of authorized shares of preferred stock from
500,000 shares to 2,000,000 was approved. The voting on the resolution was as
follows:
<TABLE>
<CAPTION>
For Against Abstained Not voted
--- ------- --------- ---------
<S> <C> <C> <C>
9,926,378 2,389,584 31,247 3,123,391
</TABLE>
An amendment to the Company's Restated Certificate of Incorporation,
as amended, to increase the number of authorized shares of the Company's 13 1/2%
Series B Redeemable Exchangeable Preferred Stock due 2009 from 60,000 shares to
600,000 shares and to concurrently decrease the liquidation preference of each
authorized share of Preferred Stock from $10,000 per share to $1,000 per share
was approved. The voting on the resolution was as follows:
<TABLE>
<CAPTION>
For Against Abstained Not voted
--- ------- --------- ---------
<S> <C> <C> <C>
11,613,514 667,048 66,647 3,123,391
</TABLE>
The appointment of Ernst & Young LLP as the independent auditors of
the Company for the fiscal year ending December 31, 1997 was ratified. The
voting on the resolution was as follows:
<TABLE>
<CAPTION>
For Against Abstained Not voted
--- ------- --------- ---------
<S> <C> <C> <C>
15,440,093 19,865 10,642 -
</TABLE>
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (For SEC Use Only)
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the second
quarter of 1997 and through July 9, 1997:
The Company filed a Current Report on Form 8-K, dated June 5,
1997, reporting under Item 5 an announcement concerning the
Company's execution of a definitive agreement for the
acquisition of DIGEX, Incorporated.
The Company filed a Current Report on Form 8-K, dated June 24,
1997, reporting under Item 5 the commencement of two
concurrent private offerings of its securities.
The Company filed a Current Report on Form 8-K, dated July 9,
1997, reporting under Item 2 the completion of the acquisition
of DIGEX, Incorporated by Daylight Acquisition, Corp., a
wholly owned subsidiary of Intermedia
25
<PAGE> 26
Communications Inc. The Company also reported under Item 5 the
completion of the concurrent private placements of its
securities.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 11, 1997
INTERMEDIA COMMUNICATIONS INC.
(Registrant)
/s/ Robert M. Manning
-------------------------------
Robert M. Manning
Senior Vice President and
Chief Financial Officer
/s/ Jeanne M. Walters
-------------------------------
Jeanne M. Walters
Controller and Chief Accounting
Officer
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INTERMEDIA COMMUNICATIONS, INC. FOR THE PERIOD ENDED
JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 347,863
<SECURITIES> 32,813
<RECEIVABLES> 26,835
<ALLOWANCES> 2,574
<INVENTORY> 0
<CURRENT-ASSETS> 403,252
<PP&E> 347,588
<DEPRECIATION> 53,667
<TOTAL-ASSETS> 758,535
<CURRENT-LIABILITIES> 201,840
<BONDS> 370,078
301,387
0
<COMMON> 166
<OTHER-SE> 44,757
<TOTAL-LIABILITY-AND-EQUITY> 758,535
<SALES> 3,200
<TOTAL-REVENUES> 94,070
<CGS> 2,034
<TOTAL-COSTS> 138,873
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,206
<INCOME-PRETAX> (57,053)
<INCOME-TAX> 0
<INCOME-CONTINUING> (57,053)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (70,276)
<EPS-PRIMARY> (4.30)
<EPS-DILUTED> (4.30)
</TABLE>
