<PAGE> 1
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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 March 31, 1998
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 May 1, 1998, there were 22,043,089 shares of the Registrant's Common Stock
outstanding.
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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-months ended March 31, 1998 and 1997 ........... 3
Condensed Consolidated Balance Sheets - March
31, 1998 and December 31, 1997 ....................... 4
Condensed Consolidated Statements of Cash
Flows - Three-months ended March 31, 1998 and 1997 ... 5
Notes to Condensed Consolidated Financial Statements...... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS......................................... 18
ITEM 2. CHANGES IN SECURITIES..................................... 18
ITEM 3. DEFAULT UPON SENIOR SECURITIES............................ 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 18
ITEM 5. OTHER INFORMATION......................................... 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................... 18
SIGNATURES .......................................................... 20
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Revenues:
Local network services $ 33,677 $ 5,210
Enhanced data services 36,537 11,320
Interexchange services 44,751 25,537
Integration services 21,821 1,871
------------ ------------
136,786 43,938
Expenses:
Network operations 71,543 30,002
Facilities administration and maintenance 15,033 5,635
Cost of goods sold 13,690 1,270
Selling, general and administrative 46,347 19,526
Depreciation and amortization 39,864 8,294
Charge off of purchased in-process R&D 85,000 --
------------ ------------
271,477 64,727
------------ ------------
Loss from operations (134,691) (20,789)
Other income (expense):
Interest expense (49,301) (11,089)
Other income 10,729 4,474
------------ ------------
Net loss (173,263) (27,404)
Preferred stock dividends and accretions (18,594) (3,375)
------------ ------------
Net loss attributable to common stockholders $ (191,857) $ (30,779)
============ ============
Basic and diluted loss per common share:
Net loss per common share $ (10.87) $ (1.89)
============ ============
Weighted average number of shares outstanding 17,653,134 16,296,744
============ ============
</TABLE>
See accompanying notes.
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<PAGE> 4
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 335,260 $ 756,923
Restricted investments 7,534 6,853
Accounts receivable, less allowance for
doubtful accounts of $6,044 in 1998 and $4,251 in 1997 114,200 58,579
Prepaid expenses and other current assets 18,281 6,122
----------- -----------
Total current assets 475,275 828,477
Telecommunications equipment 1,120,706 545,380
Less accumulated depreciation (107,918) (81,534)
----------- -----------
Telecommunications equipment, net 1,012,788 463,846
Intangible assets, net 894,552 138,028
Investment in Shared Technologies Fairchild Inc. -- 403,571
Other assets 43,140 41,048
----------- -----------
Total assets $ 2,425,755 $ 1,874,970
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 87,337 $ 53,630
Accrued taxes 16,526 2,448
Accrued interest 19,007 4,639
Other accrued expenses 32,885 5,792
Advance billings 12,004 7,251
Current portion of long-term debt 775 601
Current portion of capital lease obligations 7,667 6,870
----------- -----------
Total current liabilities 176,201 81,231
Long-term debt 1,292,813 1,224,455
Capital lease obligations 440,297 20,417
Series B redeemable exchangeable preferred stock and accrued dividends, $1.00
par value; 600,000 shares authorized in 1997; 345,710 and 334,420 shares
issued and outstanding in 1998 and 1997, respectively 334,742 323,146
Series D junior convertible preferred stock and accrued dividends, $1.00 par
value; 69,000 shares authorized, issued and outstanding in 1998 and 1997 169,936 169,722
Series E junior convertible preferred stock, $1.00 par value; 87,500 shares
authorized; 80,000 shares issued and outstanding in 1998 and 1997 196,759 196,008
Stockholders' equity (deficiency):
Preferred stock, $1.00 par value; 460,000 and 1,211,000
shares authorized in 1996 and 1997, respectively, no shares issued -- --
Series C preferred stock, $1.00 par value; 40,000 shares authorized, no
shares issued -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
20,546,482 and 17,445,300 shares issued and outstanding
in 1998 and 1997, respectively 205 175
Additional paid-in capital 390,565 244,114
Accumulated deficit (567,863) (376,006)
Deferred compensation (7,900) (8,292)
----------- -----------
Total stockholders' equity (deficiency) (184,993) (140,009)
----------- -----------
Total liabilities, redeemable preferred stock and stockholders' equity
(deficiency) $ 2,425,755 $ 1,874,970
=========== ===========
</TABLE>
See accompanying notes.
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INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE-MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($173,263) ($ 27,404)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities
Depreciation and amortization, including loan costs 40,812 8,679
Amortization of deferred compensation 392 472
Accretion of interest on notes payable 18,502 5,916
Imputed interest related to the Shared acquisition 5,130 --
Charge off of purchased in-process R&D 85,000 --
Accretion of interest on capital lease obligations 3,924 --
Provision for doubtful accounts 2,731 1,269
Changes in operating assets and liabilities:
Accounts receivable (14,745) (3,877)
Prepaid expenses and other current assets (2,391) 195
Other assets (772) (1,024)
Accounts payable 3,461 (12,638)
Other accrued expenses 24,362 19,228
--------- ---------
Net cash used in operating activities (6,857) (9,184)
INVESTING ACTIVITIES
Maturities of restricted investments (681) (430)
Purchase of businesses, net of cash acquired (387,822) (223)
Maturities of short-term investments -- 199
Purchases of telecommunications equipment (76,917) (33,110)
--------- ---------
Net cash used in investing activities (465,420) (33,564)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net of
issuance costs -- 288,875
Proceeds from issuance of long-term debt, net of issuance costs 48,493 --
Exercise of stock warrants and options 3,913 130
Principal payments on long-term debt and capital lease obligations (1,792) 56
--------- ---------
Net cash provided by financing activities 50,614 289,061
Increase (decrease) in cash and cash equivalents (421,663) 246,313
Cash and cash equivalents at beginning of period 756,923 189,546
--------- ---------
Cash and cash equivalents at end of period $ 335,260 $ 435,859
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 2,664 $ 135
Common stock issued as dividends on preferred stock 5,973 --
Common stock issued in purchase of business 137,176 --
Assets purchased under capital lease obligations 417,933 --
Preferred stock issued as dividends on preferred stock 11,290 --
Accretion of preferred stock 776 --
</TABLE>
See accompanying notes.
5
<PAGE> 6
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
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. The accompanying
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes
included in the Annual Report on Form 10-K (the "Form 10-K") of
Intermedia Communications Inc.
("Intermedia" or the Company") for the year ended December 31, 1997.
Operating results for the three-month period ended March 31, 1998 are
not necessarily an indication of the results that may be expected for
the year ending December 31, 1998.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS 131), which
supersedes Financial Accounting Standards No. 14. SFAS 131 uses a
management approach to report financial and descriptive information
about a Company's operating segments. Operating segments are
revenue-producing components of the enterprise for which separate
financial information is produced internally for the Company's
management. SFAS 131 is effective for fiscal years beginning after
December 31, 1997, but is not required to be applied to interim
financial statements in the initial year of its application. Management
is currently assessing the impact of this Standard.
Note 2 Business Acquisitions
On March 10 1998, the Company completed its acquisition of Shared
Technologies Fairchild Inc. ("Shared"), a shared tenant communications
services provider. The operating results of Shared are included in the
Company's consolidated financial statements commencing on January 1,
1998, the effective date of the acquisition. Imputed interest of $5.1
million was recorded based on the cash consideration paid after the
effective date of the acquisition in the first quarter of 1998 and the
cost for Shared was reduced accordingly. Aggregate cash consideration
for the acquisition was approximately $769.3 million, including $62.3
million of certain transaction expenses and fees relating to certain
agreements. The acquisition was accounted for by the purchase method of
accounting, with the purchase price allocated to the fair value of
assets acquired and liabilities assumed, principally goodwill. In
conjunction with this allocation, the Company has engaged an
independent valuation related to intangible assets acquired. Based on
the preliminary valuation, the amount allocated to in-process research
and development ($85 million) was recorded as a one-time charge to
operations in the accompanying consolidated statements of operations
because the technology was not fully developed and had no future
alternative use. The allocation of the purchase price to other assets
and liabilities is tentative pending management's completion of the
valuation of the purchased assets and liabilities.
On March 31, 1998, the Company acquired LDS Communications Group
("LDS"), a regional interexchange carrier. The operating results of LDS
for the one day of ownership during the first quarter of 1998 are
considered immaterial and will be included in the Company's
consolidated statement of operations commencing on April 1, 1998. The
balance sheet as of March 31, 1998 has been included in the Company's
consolidated balance sheet as of March 31, 1998. Aggregate
consideration for the acquisition was approximately $16.4 million in
cash, plus 2,679,874 shares of the Company's Common Stock, par value
$.01 per share (the "Common Stock"), valued at approximately $137.2
million and the retirement of $15 million in LDS's long-term debt. The
acquisition was accounted for by the purchase method of accounting,
with the purchase price to be allocated to the fair value of assets
acquired and liabilities
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assumed, principally goodwill. The allocation of the purchase price is
tentative pending management's completion of the valuation of the
purchased assets and liabilities.
The following unaudited pro forma results of operations present the
consolidated results of operations as if the acquisitions of DIGEX,
Shared and LDS had occurred on January 1, 1997 These proforma results
do not purport to be indicative of the results that actually would have
occurred if the acquisition had been made as of that date or of results
which may occur in the future.
<TABLE>
<CAPTION>
Three Months Ended March 31,
(In thousands, except per share data) 1998 1997
-------------- -------------
<S> <C> <C>
Revenue $166,798 $126,035
Net loss (163,872) (34,146)
Net loss attributable to common stockholders (182,466) (38,597)
Basic and diluted net loss per common share (8.97) (2.03)
</TABLE>
On April 30, 1998, the Company completed the acquisition of privately
held National Telecommunications of Florida, Inc. and NTC, Inc.
(collectively, "National"), an emerging switch-based competitive local
exchange carrier and established interexchange carrier. Aggregate
consideration for the acquisition was approximately $63.1 million in
cash, including the repayment of approximately $2.8 million in National
debt and $.8 million in acquisition related costs incurred to date,
plus 1,454,898 shares of Common Stock, valued at approximately $88.7
million.
Note 3 Long-Term Debt and Capital Lease Obligations
In January 1998, the over-allotment option with respect to the 8.5%
Senior Notes was exercised and the Company sold an additional $50
million principal amount of 8.5% Senior Notes. Net proceeds to the
Company amounted to approximately $48.8 million.
As disclosed in the Company's annual report on Form 10-K for the year
ended December 31, 1997, the Company is party to various capital lease
agreements for fiber optic cable, underground conduit equipment and
utility poles which extend through the year 2015.
In March 1998, the Company and Williams Communications, Inc.
("Williams") executed a Capacity Purchase Agreement which provides the
Company with the right to purchase transmission capacity on a
non-cancelable indefeasible right of use basis on the Williams fiber
network for the next 20 years. The agreement covers approximately
14,000 route miles of existing and planned network facilities. The
capitalized asset, consisting of the Company's rights to use network
facilities, including but not limited to, fiber, optronics/electronics,
digital encoders/decoders, telephone lines and microwave facilities, in
the amount of $417 million, is being depreciated over the 20-year
estimated useful life of the primary underlying network asset, the
fiber.
Future minimum payments under the capital leases at March 31, 1998
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) WILLIAMS ALL OTHERS TOTAL
-------- ---------- ------
<S> <C> <C> <C>
Nine Months ended December 31, 1998 $ 17,648 $ 7,777 $ 25,425
Twelve Months ended:
1999 35,295 9,478 44,773
2000 41,178 6,612 47,790
2001 47,060 2,203 49,263
2002 52,943 1,745 54,688
2003 52,943 1,776 54,719
Thereafter 751,126 8,888 760,014
-------- -------- ----------
998,193 38,479 1,036,672
Less amount representing interest (577,509) (11,199) (588,708)
-------- -------- ----------
Present value of future minimum lease payments 420,684 27,280 447,964
Less current portion -- (7,667) (7,667)
======== ======== ==========
$420,684 $ 19,613 $ 440,297
======== ======== ==========
</TABLE>
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<PAGE> 8
Certain executory costs, principally maintenance, associated with the
Williams agreement are being expensed as incurred.
Note 4 Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS 130). SFAS 130 requires that total
comprehensive income be disclosed with equal prominence as net income.
Comprehensive income is defined as changes in stockholders' equity
exclusive of transactions with owners such as capital contributions and
dividends. Adoption of SFAS 130 had no impact on the Company as
comprehensive income for the Company, as defined by SFAS 130, equals
net income for the quarter ended March 31, 1998.
Note 5 Earnings Per Share
The following table sets forth the computation of basic and diluted
loss per common share (Dollars in thousands, except shares and per
share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH, 31
1998 1997
------------ ------------
<S> <C> <C>
Numerator:
Net loss $ (173,263) $ (27,404)
Preferred stock dividends and accretions (18,594) (3,375)
------------ ------------
Numerator for basic loss per share - loss
attributable to common stockholders (191,857) (30,779)
Effect of dilutive securities -- --
------------ ------------
Numerator for diluted loss per share - income
attributable to common stockholders after assumed conversions $ (191,857) $ (30,779)
============ ============
Denominator:
Denominator for basic loss per share --
weighted-average shares 17,653,134 16,296,744
Effect of dilutive securities -- --
------------ ------------
Denominator for diluted loss per share - adjusted
weighted-average shares and assumed conversions 17,653,134 16,296,744
============ ============
Basic loss per common share $ (10.87) $ (1.89)
============ ============
Diluted loss per common share $ (10.87) $ (1.89)
============ ============
</TABLE>
Unexercised options to purchase 2,796,777 and 2,382,112 shares of
common stock for the quarter ended March 31, 1998 and 1997
respectively, and unexercised convertible preferred stock outstanding
to yield 7,741,872 shares of common stock for the first quarter of
1998, were not included in the computations of diluted loss per share
because assumed conversion would be antidilutive.
Note 6 Contingencies
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
between DIGEX and a wholly owned subsidiary of Intermedia (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 a preliminary and permanent injunction
enjoining the Merger but no applications were made for such injunctions
prior to consummation of the Merger on July
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11, 1997. In addition, the Complaints seek cash damages from DIGEX
Directors. In August 1997, a motion to dismiss the Complaints was filed
on behalf of Intermedia, DIGEX and the DIGEX Directors. The action has
been dormant since that time.
These cases are in the 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.
The Company is not a party to any other pending legal proceedings
except for various claims and lawsuits arising in the normal course of
business. The Company does not believe that these normal course of
business claims or lawsuits will have a material effect on the
Company's financial condition, results of operations or cash flows.
The Company maintains interconnection agreements with incumbent local
exchange carriers (ILECs) in Florida, Georgia, and North Carolina.
These contracts govern the reciprocal amounts to be billed by
competitive carriers for terminating local traffic of internet service
providers (ISPs) in each state. During 1997, the Company recognized
revenue from these ILECS of approximately $10.2 million for these
services. During the first quarter of 1998, the Company recognized an
additional $5.4 million in revenue from these services. No payments
were received as the ILECs are disputing the Company's right to bill
for such services.
Management believes the issue related to mutual compensation for
Internet traffic to be an industry wide matter that will ultimately be
resolved on a state-by-state basis. To date, twenty of twenty-one state
commissions that have ruled on the issue found that ILECs must pay
compensation to competitive carriers for local calls to ISPs located on
competitive carriers' networks. A contrary ruling by an administrative
law judge in Oklahoma is currently being appealed. A number of other
state commissions currently have proceedings pending to consider this
matter. Management is pursuing this matter vigorously and believes the
ILECs will ultimately pay all amounts in full.
Note 7 Subsequent Event
On April 29, 1998, the Company announced that it has committed
resources to plan and implement the integration of acquired businesses
to maximize the synergies that will be realized and to reduce future
costs. In connection with the integration and realignment of the
Company's businesses and operating structure, the Company expects to
record a one-time restructuring charge later this year, the amount and
timing of which is subject to the completion of a detailed
restructuring program.
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<PAGE> 10
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, 1997 filed with the Securities and Exchange Commission.
OVERVIEW
Intermedia has experienced continuous revenue growth since its inception in
1986. Since 1992, the Company has experienced an accelerating rate of revenue
growth. Building from its original base in Florida, Intermedia now provides
integrated telecommunications services nationally with a focus on customers who
have a substantial presence in the eastern United States. Through a combination
of internally generated growth and targeted acquisitions the Company has
expanded its service territory and dramatically increased its customer base.
Intermedia's customers include a broad range of business and government end
users and, to a lesser extent, ISPs and other carriers. The Company delivers
local network services, including local exchange service, primarily through
Company owned local and long distance switches and over a Company owned or
leased digital transport network. Often, 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 utilizes the
resale of ILEC local exchange services as a means of rapidly entering new
markets and establishing customer relationships. These resale customers may
later be migrated onto the Company's switches and network. The Company 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. Through its
433 NNIs and 150 data switches, Intermedia has established the most densely
deployed frame relay switching network in the nation. The Company's nationwide
interexchange network, which it is upgrading to provide ATM capability, carries
both its data network traffic and its voice network traffic.
At its inception, Intermedia provided special access and private line
services to IXCs. 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 specialized integration
services such as construction of campus LANs, and in 1992, Intermedia introduced
its first enhanced data services based on frame relay technology, providing
flexible capacity and highly reliable end-to-end data service. The Company began
offering interexchange long distance service in December 1994, Internet services
in 1995, local exchange services in 1996 and integrated voice/data services via
Single-T(sm) in 1997. The pace with which the Company has introduced new service
offerings has enabled it to achieve substantial growth, expand its base 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, 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, some IXCs may
enter the local exchange market by becoming resellers of the Company's local
services. If the IXCs pursue a resale strategy, the amount of revenue the
Company realizes from carriers may increase during this period, although the
Company does not depend on these IXC resale revenues to satisfy its business
plan.
From 1992 through 1995, the Company achieved positive EBITDA and increased
its revenue base substantially. EBITDA consists of earnings before interest,
income taxes, depreciation, amortization and one-time and certain non-recurring
charges such as the charge for in-process R&D. As a result of significant
investments in the resources necessary to launch local exchange services and
expand enhanced data services, the Company's EBITDA was negative for 1997 and
the first quarter of 1998. The Company expects EBITDA to be positive for 1998.
The development of the Company's business and the expansion of its network and
systems infrastructure have resulted in substantial capital expenditures and net
losses during this period of its operations. Network operating costs,
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 for the next several years.
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
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<PAGE> 11
expected to generate recurring revenue for the Company for several years. The
continued expansion of the Company's networks in preparation for 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 that as its customer base grows, incremental revenues will be
greater than incremental operating expenses.
On January 29, 1998, the Company announced a definitive multi-year agreement
to become U S West Communication's ("US West") preferred interLATA data services
provider. Under the term's of this preferred provider agreement, the Company
will grant US West a license to utilize and market the Company's portfolio of
enhanced data services.
On March 10 1998, the Company completed its acquisition of Shared, a shared
tenant communications services provider. Aggregate cash consideration for the
acquisition was approximately $769.3 million, including $62.3 million of certain
transaction expenses and fees relating to certain agreements with the final
payment made March 10, 1998 and funded with the Company's existing cash reserves
in March 1998. The operating results of Shared are included in the Company's
consolidated financial statements commencing on January 1, 1998.
On March 31, 1998, the Company acquired LDS, a regional interexchange carrier.
Aggregate consideration for the acquisition was approximately $16.4 million in
cash, plus 2,679,874 shares of Common Stock, valued at approximately $137.2
million and the retirement of $15 million in LDS's long-term debt. The cash
portion of the acquisition was funded with the Company's existing cash reserves
in March 1998. . The operating results of LDS for the one day of ownership
during the first quarter of 1998 are considered immaterial and will be included
in the Company's consolidated statement of operations commencing on April 1,
1998. The balance sheet as of March 31, 1998 has been included in the Company's
consolidated balance sheet as of March 31, 1998.
In March 1998, the Company and Williams Communications, Inc. ("Williams")
executed a Capacity Purchase Agreement which provides the Company with the right
to purchase transmission capacity on a non-cancelable indefeasible right of use
basis on the Williams fiber network for the next 20 years. The agreement covers
approximately 14,000 route miles of existing and planned network facilities.
On April 29, 1998, the Company announced that it has committed resources to
plan and implement the integration of acquired businesses to maximize the
synergies that will be realized and to reduce future costs. In connection with
the integration and realignment of the Company's businesses and operating
structure, the Company expects to record a one-time restructuring charge later
this year, the amount and timing of which is subject to the completion of a
detailed restructuring program.
On April 30, 1998, the Company completed the acquisition of privately held
National, an emerging switch-based competitive local exchange carrier and
established interexchange carrier. Aggregate consideration for the acquisition
was approximately $63.1 million in cash, including the repayment of
approximately $2.8 million in National debt and $.8 million in acquisition
related costs incurred to date, plus 1,454,898 shares of Common Stock, valued at
approximately $88.7 million.
PLAN OF OPERATION
In 1998, 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 $34 billion in 1997 in the Company's service territory. As a
result of the Company's planned expansion in 1998, including the consummation of
the acquisitions of Shared, LDS and National, the Company expects to be
positioned to provide these services in markets with a total opportunity of more
than $90 billion by the end of 1998.
In order to develop its business more rapidly and efficiently utilize its
capital resources, the Company plans to use the existing fiber optic
infrastructure of other providers in addition to using its own existing
networks. The Company believes transport provided on fiber optic systems has
become commodity-like, and its capital expenditures are better focused on
intelligent switching and other more strategic network components required to
implement a Packet/Cell Switched Network. 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 its substantial existing network
capacity should enable it to add new customers and provide additional services
that will result in
11
<PAGE> 12
increased revenues with lower incremental costs and, correspondingly, 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.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain information
derived from the Unaudited Condensed Consolidated Statements of Operations of
the Company, expressed in percentages of revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
Local network services 24.6% 11.8%
Enhanced data services 26.7 25.8
Interexchange services 32.7 58.1
Integration services 16.0 4.3
----- -----
100.0 100.0
Expenses:
Network operations 52.3 68.3
Facilities administration and maintenance 11.0 12.8
Cost of goods sold 10.0 2.9
Selling, general and administrative 33.9 44.4
Depreciation and amortization 29.1 18.9
Charge off of purchased in-process R&D 62.1 --
----- -----
Loss from operations (98.4) (47.3)
Other income (expense):
Interest expense (36.0) (25.2)
Other income 7.8 10.2
----- -----
Net loss (126.6) (62.3)
Preferred stock dividends and accretions (13.6) (7.7)
----- -----
Net loss attributable to common stockholders (140.2)% (70.0)%
===== =====
</TABLE>
The following table sets forth other statistical data derived from the
Company's operating records:
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Local and Long Distance Services: (1)
Buildings connected (2) 4,071 1,157
Voice switches in operation 19 6
Long distance billable minutes 184,227,094 87,501,080
Access line equivalents 220,587 17,385
Access line equivalents per local switch (3) 4,928 1,510
Enhanced data services: (1)
Data switches installed 150 100
Frame relay cities (4) 4,146 2,526
Nodes in service (5) 22,789 12,447
NNI connections 433 293
Employees 3,329 1,026
</TABLE>
(1) Amounts reflected in the table are based upon information contained in
the Company's operating records.
12
<PAGE> 13
(2) Includes both on-net direct connections with Intermedia-owned fiber
optic cable and on-net extended connections with leased circuits.
(3) Calculated by dividing the number of on-switch access line equivalents
by the number of switches providing local service. Excludes access
lines contributed by Shared.
(4) Represents the number of discrete postal cities to which enhanced data
services are provided by the Company.
(5) Amount represents an individual point of origination and termination of
data served by the Company's enhanced network.
Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997:
Revenue
Total revenue increased 211% to $136.8 million for the first quarter of
1998 compared to $43.9 million for the same period in 1997. This increase was
principally through the acquisitions of DIGEX and Shared, 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.
Local network services revenue increased 546% to $33.7 million for the
first quarter of 1998 compared to $5.2 million for the same period in 1997. This
increase was principally due to the acquisition of Shared during the first
quarter of 1998 and the continued rollout of local exchange services into
additional markets. The number of access line equivalents has increased by
203,202 since April 1, 1997, of which 111,600 are related to the acquisition of
Shared. The Company has received CLEC certification in 37 states plus the
District of Columbia as of the end of the first quarter of 1998. Local network
services revenue will be positively impacted starting in the second quarter of
1998 by the acquisition of National which closed on April 30, 1998.
Enhanced data services revenue increased 223% to $36.5 million for the
first quarter of 1998 compared to $11.3 million for the same period in 1997.
This increase was principally from the acquisition of DIGEX in July 1997 and the
expansion of the Company's enhanced data network by 50 switches, 140 NNI
connections and 10,342 new frame relay nodes since April 1, 1997. In addition,
the number of frame relay cities has increased by 1,620 during the same time
period. Enhanced data services revenue will be positively impacted starting in
the second quarter of 1998 by the acquisition of LDS which closed on March 31,
1998.
Interexchange services revenue increased 75% to $44.8 million for the
first quarter of 1998 compared to $25.5 million for the same period in 1997.
This increase was principally from the acquisition of Shared during the first
quarter of 1998, strong growth in long distance switched revenue and steady
growth in interLATA transport. Long distance billable minutes have increased to
184.2 million minutes for the first quarter of 1998 compared to 87.5 million
minutes for the same period in 1997. Interexchange revenues will be negatively
impacted by an estimated $2 million per month by the Company's decision to exit
the low margin wholesale international long distance segment starting in the
second quarter of 1998. Interexchange revenues will be positively impacted
starting in the second quarter of 1998 by the acquisitions of LDS and National.
Integration services revenue increased 1,066% to $21.8 million for the
first quarter of 1998 compared to $1.9 million for the same period in 1997. This
increase was principally due to the acquisition of Shared during the first
quarter of 1998.
Operating Expenses
Total operating expenses increased 319% to $271.5 million for the first
quarter of 1998 compared to $64.8 million for the same period in 1997. The
increase was principally from the acquisition of DIGEX in July 1997, the
acquisition of Shared in the first quarter of 1998, increased expenditures to
prepare for the expected increase in volume from the US West agreement,
increased network operations expenditures related to increased traffic and
increased expenditures related to the implementation of manual processes and
procedures to augment some of the back-office functions which are at or near
capacity from an automation perspective. In addition, there has been significant
expansion of the Company's owned and leased networks and the continued expansion
in personnel to sustain and support the Company's growth. Operating expenses
will be impacted starting in the second quarter by the acquisition of both LDS
and Shared.
13
<PAGE> 14
Network operations expenses increased 138% to $71.5 million for the
first quarter of 1998 compared to $30.0 million for the same period in 1997. The
increase was principally from the acquisition of DIGEX in July 1997 and the
acquisition of Shared in the first quarter of 1998. In addition, the Company has
incurred increases in leased network capacity that is associated with the growth
of local network service, enhanced data service and interexchange service
revenues. The Williams agreement is expected to positively impact network
operations expenses by eliminating certain backbone network leases that were
accounted for as operating leases.
Facilities administration and maintenance expenses increased 167% to
$15.0 million for the first quarter of 1998 compared to $5.6 million for the
same period in 1997. The increase was principally from the acquisition of DIGEX
in July 1997 and the acquisition of Shared in the first quarter of 1998. 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,
including the expected increase in volume on account of the US West agreement.
Cost of Goods Sold increased 978% to $13.7 million for the first
quarter of 1998 compared to $1.3 million for the same period in 1997. This
increase was principally due to the acquisition of Shared during the first
quarter of 1998.
Selling, general and administrative expenses increased 137% to $46.3
million for the first quarter of 1998 compared to $19.5 million for the same
period in 1997. The increase was principally from the acquisition of DIGEX in
July 1997 and the acquisition of Shared in the first quarter of 1998. In
addition, the increase was due to the Company's continued growth, the increase
in costs to prepare for the US West agreement, and represented an 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.
These expenses were also negatively impacted from the increased expenditures
related to the implementation of manual processes and procedures to augment some
of the back-office functions which are at or near capacity from an automation
perspective.
Depreciation and amortization expenses increased 381% to $39.9 million
for the first quarter of 1998 compared to $8.3 million for the same period in
1997. This increase was principally from additions to telecommunications
equipment placed in service since April 1, 1997, relating to ongoing network
expansion, as well as the DIGEX acquisition, the Shared acquisition and the LDS
acquisition which contributed, based on preliminary estimates, approximately
$113 million, $629 million and $141 million of goodwill, respectively.
Depreciation and amortization expense is expected to increase in future periods
as the Company expands the network, depreciates the capital assets leased from
Williams and amortizes goodwill associated with the businesses acquired.
Charge for in-process Research & Development of $85 million represents
the amount of purchased in-process research and development associated with the
purchase of Shared. This cost was recorded as a one-time charge to earnings in
the first quarter of 1998.
Interest Expense
Interest expense increased 345% to $49.3 million for the first quarter
of 1998 compared to $11.1 million for the same period in 1997. This increase
primarily resulted from interest expense on approximately $1.3 billion of senior
notes issued by the Company in 1997 and in January 1998, the non-cash imputed
interest charge of $5.1 million related to the acquisition of Shared and the
interest related to the capital lease with Williams. Included in 1998 interest
expense is $18.5 million of debt discount amortization and $.9 million of
deferred loan cost amortization, both of which are non-cash items. Interest
expense capitalized in connection with the Company's construction of
telecommunications equipment amounted to approximately $2.0 million and $.8
million for the three months ended March 31, 1998 and 1997, respectively.
Other Income
Other income increased 140% to $10.7 million for the first quarter of
1998 compared to $4.5 million for the same period in 1997. This increase was
primarily the result of interest earned on the cash available from the
14
<PAGE> 15
proceeds of the issuance of securities in 1997 and the exercise of the
over-allotment option with respect to the 8.5% Senior Notes in January 1998.
Net Loss
Net loss increased 532% to $173.3 million for the first quarter of 1998
compared to $27.4 million for the same period in 1997. The increase was
principally from the acquisition of DIGEX in July 1997, and the acquisition of
Shared in the first quarter of 1998. In addition, the increased operating
expenses resulting from the expansion of the network, increased selling, general
and administrative costs, the charge for in-process R&D, and increased interest
costs contributed to the increase.
Preferred Stock Dividends and Accretions
Preferred stock dividends and accretions increased 451% to $18.6
million for the first quarter of 1998 compared to $3.4 million for the same
period in 1997. The increase was due to the issuance of the three series of
preferred stock in March 1997, July 1997 and October 1997. Preferred stock
dividends were paid in the form of Common Stock and Preferred Stock. No cash
dividends are expected by management in the foreseeable future.
EBITDA
EBITDA increased 21.3% to $(9.8) million for the first quarter of 1998
compared to $(12.5) million for the same period in 1997. This increase was the
result of the acquisition of Shared and the decrease in network operation
expenses, facilities administration and maintenance expenses and selling,
general and administrative expenses as a percentage of revenue in the first
quarter of 1998 as compared to the same period in 1997.
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 approximately $77 million and $33 million for the three months ended March
31, 1998 and 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) continued development of the Company's enhanced data services.
During the first quarter of 1998, the Company utilized approximately $367
million of its available cash to complete the Shared acquisition and
approximately $31.5 million of its available cash to complete the LDS
acquisition. In addition, the Company utilized approximately $63.1 million of
its available cash to complete the acquisition of National in April 1998.
The Company has funded a substantial portion of these expenditures through
the public and private sale of debt and equity securities. From inception
through December 31, 1996, the Company raised approximately $212.6 million in
net proceeds from the sale of Common Stock, including Common Stock issued in
connection with certain acquisitions, and $324.6 million in net proceeds from
the sale of senior notes. During 1997 the Company raised approximately $957.5
million in net proceeds from the sale of senior notes and approximately $648.6
million in net proceeds from the sale of three series of preferred stock. All of
these issued series of preferred stock include provisions that may cause the
securities to be redeemed upon a change of control of the Company. As a result
of these redemption provisions, the Company is required to classify the
preferred stock outside of stockholder's equity on the Company's balance sheet
at March 31, 1998. Additionally, none of the outstanding series of preferred
stock require the Company to pay cash dividends in the foreseeable future.
The substantial capital investment required to build the Company's network
has resulted in negative cash flow 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 the continuous expansion and the
development of the Company's networks. Until sufficient cash flow after
investing activities is generated, the Company will be required to utilize its
15
<PAGE> 16
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 capital spending necessary to more rapidly
exploit the market opportunity in the local exchange market. The Company expects
to commit substantial amounts of funds to upgrade its existing network 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, 1998, the Company
was certified as a CLEC in 37 states and the District of Columbia, allowing the
Company to provide local exchange services in those markets, and is currently
seeking CLEC certification in the remaining 13 states. In addition, the Company
expects to expend capital for the further development of the Company's enhanced
data service and interchange service offerings.
A portion of the Company's expansion has occurred, and may continue to
occur, by means of acquisitions. In July 1997, the Company acquired DIGEX, a
leading nationwide business ISP. The aggregate cash consideration for the
acquisition was approximately $160 million and was funded with the Company's
then existing cash reserves. In March 1998, the Company acquired Shared. The
total aggregate cash consideration for Shared was approximately $769 million,
which was paid out in 1998 and 1997, including certain transaction expenses and
fees relating to certain agreements. This amount includes repayment of $123.5
million of Shared's outstanding bank debt (including accrued interest and
outstanding fees) in connection with the consummation of the acquisition. In
March 1998, the Company completed its acquisition of LDS for a purchase price of
approximately $169 million, of which approximately $137 million was paid in
Common Stock and approximately $31.5 million was paid in cash, including the
repayment of approximately $15 million of LDS debt.
On April 30, 1998, the Company completed the acquisition of privately held
National, an emerging switch-based competitive local exchange carrier and
established interexchange carrier. The aggregate consideration for the
acquisition was approximately $151.8 million, of which approximately $88.7
million was paid by delivering approximately 1.5 million shares of Common Stock
and approximately $63.1 million was paid in cash, including the repayment of
approximately $2.8 million in National debt and $.8 million in acquisition
related costs incurred to date.
The Company expects that it will be EBITDA positive for 1998 and that its
1998 capital requirements (estimated as approximately $400 million which does
not include the non-cash Williams network capacity purchase) will be funded from
available cash, cash generated from its 1998 operations, the bank credit
facility discussed below and/or other offerings of the Company's debt
securities. Continued funding of the Company's accelerated and expanded capital
deployment plan will require the Company to raise additional debt or equity
capital by the end of 1999. Depending on market conditions, the Company may
determine to raise additional capital before such time. There can be no
assurance, however, that the Company will be successful in raising sufficient
debt or equity on terms that it will consider acceptable. Moreover, the terms of
the Company's outstanding indebtedness and preferred stock impose certain
restrictions upon the Company's ability to incur additional indebtedness or
issue additional preferred stock. The Company has entered discussions with
several banks for a bank credit facility, although there can be no assurance
that a bank facility on terms satisfactory to the Company will be established.
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 or
by 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 Year 2000
The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing
16
<PAGE> 17
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on an assessment, the Company determined that it will be required to
modify or replace portions of its software and hardware so that its systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company presently believes that with modifications to existing software and
conversions to new software and hardware, the Year 2000 issue will not pose
significant operational problems for its systems. However, if such modifications
and conversions are not made, or are not completed in timely fashion, the Year
2000 problems could have a material impact on the operations of the Company.
The Company is in the process of contacting all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues. The Company's total Year 2000 project cost and
estimates to complete include the estimated costs and time associated with the
impact of third party Year 2000 issues based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and would not have a
material adverse effect on the Company's systems.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the software and hardware for Year 2000 compliance. The
Company's objective is to complete the Year 2000 project not later than December
31, 1998, which is prior to any anticipated impact on its operating systems. The
1998 cost of the Year 2000 project for the core Intermedia business is estimated
to be $1.3 million in external personnel costs, and is being funded through
operating cash flows. This cost may be reduced if software and hardware are
replaced with compliant systems as a result of other capital projects currently
scheduled. The remaining expenses would not be expected to have a material
effect on the results of operations. Through year-end 1997, the Company has
incurred approximately $380,000 in expenses related to the assessment of, and
preliminary efforts on, its Year 2000 project and the development of plans for
systems modifications and testing. For the first quarter of 1998, the Company
has incurred approximately $250,000 on its ongoing Year 2000 project.
Costs and timetables for Year 2000 projects associated with corporate
mergers and acquisitions are not included in the above estimates, and will be
funded on a case-by-case basis as they occur. During the first quarter of 1998
the Company has incurred approximately $25,000 related to systems review for two
of the Company's acquisitions. Assessments relating to additional costs to be
incurred for the Year 2000 project as it relates to the Company's acquisitions
is expected to be completed in the second quarter of 1998.
The costs of the project and the date which the Company has established to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, unanticipated mergers
and acquisitions, and similar uncertainties.
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" include 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, 1997.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Except as described below, the Company is not a party to any pending
legal proceedings other than 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, purported
stockholders of DIGEX on behalf of all non-affiliated common stockholders of
DIGEX against Intermedia, DIGEX and the DIGEX Directors. The cases have been
dormant since August 1997 when a motion to dismiss the Complaints was filed on
behalf of Intermedia, DIGEX and the DIGEX Directors. See Item 3 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
ITEM 2. Changes in Securities
On March 31, 1998, the Company acquired LDS for approximately $168.6
million including 2,679,874 shares of Common Stock (the "LDS Shares"), valued at
approximately $137.2 million. The LDS Shares were issued by the Company to the
former shareholders of LDS (the "LDS Shareholders"). The number of LDS Share
payable to the LDS Shareholders was based upon the provisions in the Acquisition
Agreement dated as of December 17, 1997 by and among the Company and the LDS
Shareholders that set forth (i) the purchase price, (ii) the adjustments to be
made to the purchase price, (iii) the portion of the purchase price to be paid
by the issuance of Common Stock and (iv) that the Common Stock to be delivered
to the LDS Shareholders shall be deemed to be valued at $51.1875 per share. The
LDS Shares were transferred to the LDS Shareholders pursuant to an exemption
from registration provided for under Section 4(2) of the Securities Act of 1933,
as amended. Prior to the issuance of the LDS Shares, the LDS Shareholders
represented to the Company that: (i) they are acquiring the LDS Shares for their
own account for investment and without any view to any distribution thereof;
(ii) they understand that they must bear the economic risk of their investment
in the LDS Shares for an indefinite period of time; and (iii) they are aware of
the Company's business affairs and financial condition and have acquired
sufficient information about the Company to reach an informed and knowledgeable
decision to acquire the LDS Shares.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Exhibit
------ -------
<S> <C>
2.1 Agreement and Plan of Merger dated as of February 11,
1998 among Intermedia, Sumter One Acquisition, Inc.,
Sumter Two Acquisition, Inc., National
Telecommunications of Florida, Inc., NTC, Inc. and
the stockholders of National. Exhibit 2.4 to
Intermedia's Form S-3 (No. 333-46369) filed with the
Securities and Exchange Commission (the "Commission")
on February 13, 1998 is incorporated by reference.
3.1 Restated Certificate of Incorporation of the Company,
together with all amendments thereto. Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the
Quarter ended September 30, 1997 is incorporated
herein by reference.
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C>
3.2 By-laws of the Company, together with all amendments
thereto. Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (No. 33-64053) is incorporated
herein by reference.
27 Financial Data Schedule (For SEC Use Only)
</TABLE>
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the first quarter of
1998:
The Company filed a Current Report on Form 8-K, dated January 16, 1998,
reporting under Item 5 the exercise of the over-allotment option
related to its private placement of 8 1/2% Senior Notes on December 23,
1997. The Company also reported under Item 7 the filing of pro forma
financial statements which give effect to certain recent and pending
acquisitions and recently completed financings as an exhibit to this
report.
The Company filed a Current Report on Form 8-K, dated February 11,
1998, reporting under Item 5 the issuance of a press release announcing
the execution of a definitive agreement to purchase National.
The Company filed a Current Report on Form 8-K, dated March 10, 1998,
reporting under Item 2 the merger of Moonlight Acquisition Corp.
("Moonlight"), a wholly owned subsidiary of Intermedia with and into
Shared as the final step in its acquisition of Shared. Intermedia filed
Amendment No. 1 to the Current Report on From 8-K, dated March 10,
1998, to report under Item 2 the merger of Moonlight with and into
Shared as the final step in its acquisition of Shared. The unaudited
pro forma condensed consolidated financial statements were filed as an
exhibit to this report.
19
<PAGE> 20
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: May 4, 1998
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
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 342,794
<SECURITIES> 0
<RECEIVABLES> 114,200
<ALLOWANCES> 6,044
<INVENTORY> 0
<CURRENT-ASSETS> 475,275
<PP&E> 1,120,706
<DEPRECIATION> 107,918
<TOTAL-ASSETS> 2,425,755
<CURRENT-LIABILITIES> 176,201
<BONDS> 1,741,552
701,437
0
<COMMON> 205
<OTHER-SE> (185,198)
<TOTAL-LIABILITY-AND-EQUITY> 2,425,755
<SALES> 21,821
<TOTAL-REVENUES> 136,786
<CGS> 13,690
<TOTAL-COSTS> 100,266
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,731
<INTEREST-EXPENSE> 49,301
<INCOME-PRETAX> (173,263)
<INCOME-TAX> 0
<INCOME-CONTINUING> (173,263)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (191,857)
<EPS-PRIMARY> (10.87)
<EPS-DILUTED> (10.87)
</TABLE>
