<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 June 30, 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 August 3, 1998, there were 47,343,812 shares of the Registrant's Common
Stock outstanding.
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<PAGE> 2
INTERMEDIA COMMUNICATIONS INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE NO.
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Statements of Operations - Three and six months ended
June 30, 1998 and 1997............................................................. 3
Condensed Consolidated Balance Sheets - June 30, 1998 and December 31, 1997............ 4
Condensed Consolidated Statements of Cash Flows - Six months ended June 30,
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................................................ 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................................... 24
ITEM 2. CHANGES IN SECURITIES.................................................................. 24
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>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTERMEDIA COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share information)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Local network services $ 38,193 $ 8,433 $ 71,869 $ 13,642
Enhanced data services 42,668 12,667 79,205 23,988
Interexchange services 82,747 27,703 127,498 53,240
Integration services 26,622 1,329 48,443 3,200
------------ ------------ ------------ ------------
190,230 50,132 327,015 94,070
Expenses:
Network operations 88,015 37,261 159,557 67,263
Facilities administration and maintenance 18,536 5,790 33,568 11,424
Cost of goods sold 17,218 764 30,909 2,034
Selling, general and administrative 56,402 20,452 102,747 39,978
Depreciation and amortization 49,302 9,879 89,166 18,174
Charge off of purchased in-process R&D -- -- 85,000 --
Business restructuring, integration and other
charges 52,551 -- 52,551 --
------------ ------------ ------------ ------------
282,024 74,146 553,498 138,873
------------ ------------ ------------ ------------
Loss from operations (91,794) (24,014) (226,483) (44,803)
Other income (expense):
Interest expense (47,858) (11,117) (97,159) (22,206)
Other income 6,040 5,482 16,770 9,956
------------ ------------ ------------ ------------
Net loss (133,612) (29,649) (306,872) (57,053)
Preferred stock dividends and accretions (18,876) (9,848) (37,471) (13,223)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (152,488) $ (39,497) $ (344,343) $ (70,276)
============ ============ ============ ============
Basic and diluted net loss per common share $ (3.52) $ (1.19) $ (8.75) $ (2.15)
============ ============ ============ ============
Weighted average number of shares outstanding 43,300,889 33,056,966 39,373,704 32,694,576
============ ============ ============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share information)
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- ----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 569,203 $ 756,923
Restricted investments 8,339 6,853
Accounts receivable, less allowance for
doubtful accounts of $18,391 in 1998 and $4,251 in 1997 132,818 58,579
Prepaid expenses and other current assets 19,877 6,122
----------- -----------
Total current assets 730,237 828,477
Telecommunications equipment 1,246,879 545,380
Less accumulated depreciation (140,207) (81,534)
----------- -----------
Telecommunications equipment, net 1,106,672 463,846
Intangible assets, net 1,039,414 138,028
Investment in Shared Technologies Fairchild Inc. -- 403,571
Other assets 53,892 41,048
----------- -----------
Total assets $ 2,930,215 $ 1,874,970
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable $ 86,668 $ 53,630
Other accrued expenses 107,751 20,130
Current portion of long-term debt and capital lease obligations 9,355 7,471
----------- -----------
Total current liabilities 203,774 81,231
Long-term debt and capital lease obligations 2,252,473 1,244,872
Series B redeemable exchangeable preferred stock and accrued dividends, $1.00
par value; 600,000 shares authorized in 1997; 357,371 and 334,420 shares
issued and outstanding in 1998 and 1997, respectively 346,654 323,146
Series D junior convertible preferred stock and accrued dividends, $1.00 par
value; 69,000 shares authorized, issued and outstanding in 1998 and 1997 170,135 169,722
Series E junior convertible preferred stock, $1.00 par value; 87,500 shares
authorized; 80,000 shares issued and outstanding in 1998 and 1997 197,003 196,008
Stockholders' equity (deficiency):
Preferred stock, $1.00 par value; 460,000 and 1,211,000 shares
authorized in 1997 and 1998, respectively, no shares issued -- --
Series C preferred stock, $1.00 par value; 40,000 shares authorized, no
shares issued -- --
Common stock, $.005 par value; 150,000,000 shares authorized;
44,392,120 and 34,890,600 shares issued and outstanding
in 1998 and 1997, respectively 222 175
Additional paid-in capital 487,785 244,114
Accumulated deficit (720,349) (376,006)
Deferred compensation (7,482) (8,292)
----------- -----------
Total stockholders' equity (deficiency) (239,824) (140,009)
----------- -----------
Total liabilities, redeemable preferred stock and stockholders' equity
(deficiency) $ 2,930,215 $ 1,874,970
=========== ===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Operating activities
Net loss $(306,872) $ (57,053)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 91,178 18,943
Amortization of deferred compensation 810 722
Non cash items included in business restructuring,
integration and other charges 11,883 --
Accretion of interest on notes payable and capital leases 40,902 11,833
Imputed interest related to the business acquisitions 6,164 --
Charge off of purchased in-process R&D 85,000 --
Provision for doubtful accounts 6,884 2,947
Changes in operating assets and liabilities:
Accounts receivable (27,908) (10,510)
Prepaid expenses and other current assets (4,058) (1,057)
Other assets (1,293) (1,000)
Accounts payable (4,612) (2,095)
Accrued expenses 38,504 4,041
--------- ---------
Net cash used in operating activities (63,418) (33,229)
Investing activities
Purchases of restricted investments (677) --
Maturities of restricted investments -- 9,989
Purchase of businesses, net of cash acquired (463,817) (165)
Maturities of short-term investments -- 397
Purchases of telecommunications equipment (198,798) (107,022)
--------- ---------
Net cash used in investing activities (663,292) (96,801)
Financing activities
Proceeds from sale of preferred stock, net of
issuance costs -- 288,164
Proceeds from issuance of long-term debt, net of issuance costs 537,303 --
Exercise of stock warrants and options 5,798 247
Principal payments on long-term debt and capital lease obligations (4,111) (64)
--------- ---------
Net cash provided by financing activities 538,990 288,347
Increase (decrease) in cash and cash equivalents (187,720) 158,317
Cash and cash equivalents at beginning of period 756,923 189,546
--------- ---------
Cash and cash equivalents at end of period $ 569,203 $ 347,863
========= =========
Supplemental disclosures of cash flow information
Interest paid $ 15,173 $ 11,181
Common stock issued as dividends on preferred stock 12,493 --
Common stock issued in purchase of business 225,925 --
Assets purchased under capital lease obligations 422,051 --
Preferred stock issued as dividends on preferred stock 22,954 12,938
Accretion of preferred stock 1,466 210
</TABLE>
See accompanying notes.
5
<PAGE> 6
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
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 and six month periods ended June 30,
1998 are not necessarily an indication of the results that may be
expected for the year ending December 31, 1998.
Stock Split
All share and per share information presented herein and in the
Company's Condensed Consolidated Financial Statements has been
retroactively restated to reflect a two-for-one stock split of the
Company's common stock on June 15, 1998, paid in the form of a stock
dividend, to holders of record on June 1, 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. Imputed interest of $5.1 million was recorded based on the cash
consideration paid after January 1, 1998, and the cost for Shared was
reduced accordingly. Aggregate consideration for the acquisition was
approximately $578.2 million in cash, plus the retirement of $175.6
million in Shared's long-term debt, and acquisition related expenses of
$16.7 million. 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 ($85.0 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 the Long Distance Savers
group of companies (collectively, "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. The
operating results of LDS are included in the Company's consolidated
financial statements commencing on April 1, 1998. Aggregate
consideration for the
6
<PAGE> 7
acquisition was approximately $15.7 million in cash, plus 5,359,748
shares of the Company's Common Stock, par value $.005 per share (the
"Common Stock"), valued at approximately $137.2 million, the retirement
of $15.0 million in LDS's long-term debt, and acquisition related
expenses of $2.2 million. 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 assumed,
principally goodwill. The allocation of the purchase price is tentative
pending management's completion of the valuation of the purchased
assets and liabilities.
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. The operating
results of National are included in the Company's consolidated
financial statements commencing on April 1, 1998. Aggregate
consideration for the acquisition was approximately $59.4 million in
cash, plus 2,909,796 shares of the Company's Common Stock, valued at
approximately $88.7 million, the retirement of $2.8 million in
National's long-term debt, and $2.2 million in acquisition related
costs. 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. 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 ,
Incorporated ("DIGEX"), Shared, LDS, and National had occurred at the
beginning of the respective periods. 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>
Six Months Ended June 30,
(In thousands, except per share data) 1998 1997
-------------- --------------
<S> <C> <C>
Revenue $ 374,924 $297,150
Net loss (297,880) (67,442)
Net loss attributable to common stockholders (335,351) (82,964)
Basic and diluted net loss per common share (8.52) (2.03)
</TABLE>
Note 3 Business Restructuring and Integration Program
During the second quarter of 1998, management committed to and
commenced implementation of the restructuring program (the "Program")
which was designed to streamline and refocus the Company's operations
and facilitate the transformation of the Company's five separate
operating companies into one Integrated Communications Provider
("ICP"). The significant activities included in the Program include (i)
consolidation, rationalization and integration of network facilities,
collocations, network management and network facility procurement; (ii)
consolidation and integration of the sales forces of the Company and
its recent acquisitions, including the integration of the Company's
products and services and the elimination of redundant headcount and
related costs; (iii) centralization of accounting and financial
functions, including the elimination of redundant headcount and related
costs (iv) development and integration of information systems including
the integration of multiple billing systems and the introduction and
deployment of automated sales force and workflow management tools
including the elimination of headcount and related costs; (v)
consolidation of office space and the elimination of unnecessary legal
entities; and (vi) exiting non-strategic businesses including the
elimination of headcount and related costs.
The following table sets forth the significant components and
activity in the restructuring program reserve at June 30, 1998:
7
<PAGE> 8
<TABLE>
<CAPTION>
Businesses
Exited and Integration
Contract and Other
Termination Restructuring
(In thousands) Costs Costs Total
----------------- --------------- ------
<S> <C> <C> <C>
Provisions recorded $26,801 $10,073 $36,874
Payments and other
adjustments 9,424 1,846 11,270
------- ------- -------
Balance in accrual at
June 30, 1998 $17,377 $ 8,227 $25,604
======= ======= =======
</TABLE>
Charges recorded during the second quarter related to businesses
exited include approximately $2.7 million of telecommunications
equipment that will have no residual value upon exit of a business.
Such charges also include approximately $9.2 million of accounts
receivable that originated under certain contracts and became
uncollectible as a direct result of exiting a business.
As provided for in the Program, the Company also expensed other
business restructuring and integration costs that were incurred in the
second quarter. These costs represent incremental, redundant, or
convergence costs that resulted directly from implementation of the
Program, but are required to be expensed as incurred. The following
table sets forth the components of the other business restructuring
and integration costs that were expensed as incurred during the
second quarter of 1998:
<TABLE>
<CAPTION>
ACTIVITY DESCRIPTION (IN THOUSANDS) AMOUNT
-------------------------------------------------- -------
<S> <C>
Businesses exited $ 1,262
Integration and other restructuring expenses 14,415
-------
$15,677
=======
</TABLE>
Note 4 Long-Term Debt
In January 1998, the over-allotment option with respect to the
December 1997 issuance of the Company's 8.5% Senior Notes due 2008 (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 $48.4 million.
On May 27, 1998, the Company sold $450 million principal amount of
8.6% Senior Notes due 2008 (the "8.6% Senior Notes") in a private
placement transaction. Subsequent thereto, the over-allotment option
with respect to the 8.6% Senior Notes was exercised and the Company
sold an additional $50 million principal amount. Net proceeds to the
Company, including the over allotment, amounted to approximately $488.9
million. Cash interest on the 8.6% Senior Notes is payable
semi-annually in arrears on June 1 and December 1 of each year,
commencing December 1, 1998. The 8.6% Senior Notes are redeemable at
the option of the Company at any time prior to June 1, 2003, in whole
or in part, at the Make-Whole Price (the greater of the sum of the
principal amount plus the present value of the principal, premium, and
interest with respect to such Notes as of June 1, 2003, and the
redemption price of such Notes on June 1, 2003), plus accrued and
unpaid interest and Liquidated Damages (as defined in the indenture
setting forth the terms of such notes), if any, thereon to the
redemption date. On or after June 1, 2003, the Notes are subject to
redemption by the Company, at rates commencing at 104.3%, declining to
100% on June 1, 2006. In addition, at the option of the Company, up to
25% of the aggregate principal amount of the Notes originally issued
may be redeemed at any time prior to June 1, 2001 at a redemption price
of 108.6% of the principal amount thereof plus accrued and unpaid
interest and Liquidation Damages, if any, thereon to the date of
redemption, with the net proceeds of one or more Qualified Equity
Offerings (as defined in the indenture setting forth the terms of such
notes); provided, however that at least 75% in aggregate principal
remains outstanding following any such redemption and, provided
further, that such redemption occurs within 90 days of the date of the
closing of such offering.
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<PAGE> 9
Note 5 Capital Lease Obligations
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 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 $418.0 million, is being depreciated over the 20-year
estimated useful life of the primary underlying network asset, the
fiber.
Future minimum payments (in thousands) under the Williams capital
lease at June 30, 1998, are as follows:
<TABLE>
<S> <C>
Six Months ended December 31, 1998 $ 11,765
Twelve Months ended:
1999 32,354
2000 39,707
2001 45,590
2002 51,472
2003 52,943
Thereafter 754,434
-----------
988,265
Less amount representing interest (567,581)
-----------
Present value of future minimum lease payments $ 420,684
===========
</TABLE>
Certain executory costs, principally maintenance, associated with the
Williams agreement are being expensed as incurred.
Note 6 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 June 30, 1998.
Note 7 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):
9
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------ ----------- ----------- ------------
1998 1997 1998 1997
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (133,612) $ (29,649) $ (306,872) $ (57,053)
Preferred stock dividends and accretions (18,876) (9,848) (37,471) (13,223)
------------ ------------ ------------ ------------
Numerator for basic loss per share - loss
attributable to common stockholders (152,488) (39,497) (344,343) (70,276)
Effect of dilutive securities -- -- -- --
------------ ------------ ------------ ------------
Numerator for diluted loss per share - income (152,488) (39,497) (344,343) $ (70,276)
attributable to common stockholders after
assumed conversions
Denominator:
Denominator for basic loss per share -
weighted-average shares 43,300,889 33,056,966 39,373,704 32,694,576
Effect of dilutive securities -- -- -- --
----------- ------------ ------------ ------------
Denominator for diluted loss per share-
adjusted weighted-average shares 43,300,889 33,056,966 39,373,704 32,694,576
=========== ============ ============ ============
Basic loss per common share $ (3.52) $ (1.19) $ (8.75) $ (2.15)
=========== ============ ============ ============
Diluted loss per common share $ (3.52) $ (1.19) $ (8.75) $ (2.15)
=========== ============ ============ ============
</TABLE>
Unexercised options to purchase 5,597,258 and 4,405,470 shares of
common stock for the three and six months ended June 30, 1998 and 1997,
respectively, and outstanding convertible preferred stock, convertible
into 15,483,745 shares of common stock for the three and six months
ended June 30, 1998, were not included in the computations of diluted
loss per share because assumed conversion would be antidilutive.
Note 8 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 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.
10
<PAGE> 11
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 $10.1 million for these
services. During the first half of 1998, the Company recognized an
additional $13.4 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 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 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 9 Subsequent Events
During July and August 1998, the Company exchanged (a) approximately
2.029 million shares of its common stock for approximately 1.487
million Depository Shares (each representing 1/100th interest in its 7%
Series D Junior Convertible Preferred Stock) and (b) approximately
665,000 shares of its common stock for approximately 710,000 Depository
Shares (each representing a 1/100th interest in its 7% Series E Junior
Convertible Preferred Stock), pursuant to exchange agreements with
certain holders of such Depository Shares.
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 accelerated 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 inter-city network that
connects its customers, either through its own network or through other
carriers, to locations throughout the country and internationally. Through its
553 network to network interfaces ("NNIs") and 153 data switches, Intermedia has
established one of the most densely deployed frame relay switching network in
the nation. The Company's nationwide interexchange network, which it is
upgrading to provide asynchronous transfer mode ("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 interexchange carriers ("IXCs"). In 1988, Intermedia was the first
telecommunications provider in Florida to begin providing special access and
private
11
<PAGE> 12
line services to business customers. In 1991, Intermedia began offering
specialized integration services such as construction of campus local area
networks ("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 (loss) before
interest expense, interest and other income, income taxes, depreciation,
amortization, charge for in-process R&D and business integration, restructuring
and other costs associated with the Program (as defined). EBITDA is presented
since it is a measure commonly used in the telecommunications industry to
measure operating performance, asset value, and financial leverage. It is
presented to enhance the reader's understanding of the Company's operating
results and is not intended to present cash flows for the periods presented. 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 1996 and 1997. The Company expects EBITDA to be positive for the
full year of 1998. However, 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 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.
In January 1998, the over-allotment option with respect to the Company's
8.5% Senior Notes due 2008 (December 23, 1997 issuance) 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 $48.4 million.
On January 29, 1998, the Company announced a definitive multi-year agreement
to become U S West Communications' ("US West") preferred interLATA data services
provider. Under the terms 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 $770.5 million, including $62.3 million of
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 $15.7
million in cash, plus 5,359,748 shares of the Company's Common Stock, valued at
approximately $137.2 million, the retirement of $15 million in LDS's long-term
debt, and acquisition related expenses of $2.2 million. 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. The operating results of LDS are
included in the Company's consolidated financial statements commencing on April
1, 1998.
12
<PAGE> 13
In March 1998, the Company and 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.
On April 29, 1998, the Company announced that it had committed resources to
plan and implement the integration of acquired businesses to maximize the
synergies that will be realized and to reduce future costs. During the second
quarter of 1998, the Company developed and began implementation of the
restructuring program (the "Program") which was designed to streamline and
refocus the Company's operations and transform Intermedia's five separate
operating companies into one Integrated Communications Provider ("ICP"). The
significant activities included in the Program include (i) consolidation,
rationalization and integration of network facilities, collocations, network
management and network facility procurement; (ii) consolidation and integration
of the sales forces of the Company and its recent acquisitions, including the
integration of the Company's products and services and the elimination of
redundant headcount and related costs; (iii) centralization of accounting and
financial functions, including the elimination of redundant headcount and
related costs (iv) development and integration of information systems including
the integration of multiple billing systems and the introduction and deployment
of automated sales force and workflow management tools including the
elimination of headcount and related costs; (v) consolidation of office space
and the elimination of unnecessary legal entities; and (vi) exiting
non-strategic businesses including the elimination of headcount and related
costs.
The Company recorded a restructuring charge during the second quarter of
approximately $36.9 million, and expensed other business restructuring and
integration costs associated with the Program that were incurred in the second
quarter of approximately $15.7 million. Management anticipates that all
activities included in the Program will be completed by the end of 1999, and the
Company anticipates incurring additional related business integration and
restructuring costs through the end of that period, which will be excluded from
the calculation of EBITDA.
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 $59.4 million in cash, plus 2,909,796 shares of the Company's
Common Stock, valued at approximately $88.7 million, the retirement of $2.8
million in National's long-term debt, and $2.2 million in acquisition related
costs. The cash portion of the acquisition was funded with the Company's
existing cash reserves in April 1998. The operating results of National are
included in the Company's consolidated financial statements commencing on April
1, 1998.
On May 19, 1998, the Company entered into a two-part agreement with
Ameritech Communications International ("Ameritech") for the mutual provisioning
of national data services. First, the Company and Ameritech have established a
teaming arrangement which will enable the Company to offer jointly-provided
services to customers on a nationwide basis. Second, the Company will be
Ameritech's vendor of choice for certain out of region interLATA frame relay and
ATM services.
On May 27, 1998, the Company sold $450.0 million principal amount of its
8.6% Senior Notes due 2008 in a private placement transaction. Subsequently, the
over-allotment option with respect to the 8.6% Senior Notes was exercised and
the Company sold an additional $50 million principal amount. Net proceeds to the
Company, including the over allotment, amounted to approximately $488.9 million.
Cash interest on the 8.6% Senior Notes is payable semi-annually in arrears on
June 1 and December 1 of each year, commencing December 1, 1998. The 8.6% Senior
Notes are redeemable at the option of the Company at any time prior to June 1,
2003, in whole or in part, at the Make-Whole Price (the greater of the sum of
the principal amount plus the present value of the principal, premium, and
interest with respect to such Notes as of June 1, 2003, and the redemption price
of such Notes on June 1, 2003), plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the redemption date. On or after June 1, 2003, the
Notes are subject to redemption by the Company, at rates commencing at 104.3%,
declining to 100% on June 1, 2006. In addition, at the option of the Company, up
to 25% of the aggregate principal amount of the Notes originally issued may be
redeemed at any time prior to June 1, 2001 at a redemption price of 108.6% of
the principal amount thereof plus accrued and unpaid interest and Liquidation
Damages, if any, thereon to the date of redemption, with the net proceeds of one
or more Qualified Equity Offerings; provided, however that at least 75% in
aggregate principal remains outstanding following any such redemption and,
provided further, that such redemption occurs within 90 days of the date of the
closing of such offering.
13
<PAGE> 14
On August 4, 1998, the Company commenced a private placement of $200 million
liquidation preference of Depository Shares (each having a 1/100th interest in
its Series F Junior Convertible Preferred Stock, liquidation preference $2,500
per share), pursuant to Rule 144A promulgated under the Securities Act of 1933,
as amended. The net proceeds from the offering of the Depository Shares will be
used to finance the continued expansion of the Company's telecommunications
networks and for general corporate purposes. However, there can be no assurance
that the placement of securities will be successful.
PLAN OF OPERATION
In 1998, the Company believes that its growth will be balanced among its
enhanced data, local exchange, and interexchange services. Based on the
Company's analysis of FCC data and its knowledge of the industry, the Company
estimates that the market for enhanced data, local exchange, and interexchange
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 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Local network services 20.1% 16.8% 22.0% 14.5%
Enhanced data services 22.4 25.3 24.2 25.5
Interexchange services 43.5 55.3 39.0 56.6
Integration services 14.0 2.6 14.8 3.4
----- ----- ----- -----
100.0 100.0 100.0 100.0
Expenses:
Network operations 46.3 74.3 48.8 71.5
Facilities administration and maintenance 9.7 11.5 10.3 12.1
Cost of goods sold 9.1 1.5 9.5 2.2
Selling, general and administrative 29.6 40.8 31.4 42.5
Depreciation and amortization 25.9 19.7 27.3 19.3
Charge off of purchased in-process R&D -- -- 26.0 --
Business restructuring and integration 27.6 -- 16.1 --
----- ----- ----- -----
Loss from operations (48.2) (47.8) (69.4) (47.6)
Other income (expense):
Interest expense (25.2) (22.2) (29.7) (23.6)
Other income 3.2 10.9 5.1 10.6
----- ----- ----- -----
Net loss (70.2) (59.1) (94.0) (60.6)
Preferred stock dividends and accretions (9.9) (19.6) (11.5) (14.1)
----- ----- ----- -----
Net loss attributable to common stockholders (80.1)% (78.7)% (105.5)% (74.7)%
===== ===== ===== =====
</TABLE>
14
<PAGE> 15
The following table sets forth other statistical data derived from the Company's
operating records:
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
-------------- -------------
<S> <C> <C>
Local and Long Distance Services: (1)
Buildings connected (2) 4,309 1,680
Voice switches in operation 21 12
Long distance billable minutes (6) 551,145,010 101,538,231
Access line equivalents 280,144 30,733
Access line equivalents per local switch (3) 6,180 1,143
Enhanced data services: (1)
Data switches installed 153 111
Frame relay cities (4) 4,320 2,720
Nodes in service (5) 27,123 15,096
NNI connections 553 321
Employees 3,597 1,143
</TABLE>
(1) Amounts reflected in the table are based upon information contained in the
Company's operating records.
(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.
(6) Amount represents billable minutes for the three months ended June 30, 1998.
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997:
Revenue
Total revenue increased 279.5% to $190.2 million for the second quarter
of 1998 compared to $50.1 million for the same period in 1997. This increase was
principally the result of the acquisitions of DIGEX, Shared, LDS, and National.
The Company has also continued its efforts to introduce new services and
increase the focus of the Company's sales force on offering a full suite of
telecommunications services to an expanding market. The Company expects revenue
growth to continue, with increased emphasis on sales of key services such as
enhanced data and local service and the integration of the recent acquisitions
and further development of cross-selling programs.
Local network services revenue increased 352.9% to $38.2 million for
the second quarter of 1998 compared to $8.4 million for the same period in 1997.
This increase was principally due to the acquisition of Shared during the first
quarter of 1998, the acquisition of National during the second quarter of 1998,
and the continued rollout of local exchange services into additional markets.
The number of access line equivalents has increased by 249,411 from July 1, 1997
through the end of the second quarter of 1998. The Company was certified as a
CLEC in 37 states and the District of Columbia as of the end of the second
quarter of 1998.
Enhanced data services revenue increased 236.8% to $42.7 million for
the second quarter of 1998 compared to $12.7 million for the same period in
1997. This increase was principally due to the acquisition of DIGEX in the
second half of 1997, the acquisition of LDS during the first quarter of 1998,
and the expansion of the Company's enhanced data network by 42 switches, 232 NNI
connections, and 12,027 new frame relay nodes from July 1, 1997 through the end
of the second quarter of 1998. In addition, the number of frame relay cities
increased by 1,600 during the same time period.
Interexchange services revenue increased 198.7% to $82.7 million for
the second quarter of 1998 compared to $27.7 million for the same period in
1997. This increase resulted principally from the acquisitions of Shared and LDS
during the first quarter of 1998, the acquisition of National during the second
quarter of 1998, strong growth in
15
<PAGE> 16
long distance switched revenue, and steady growth in interLATA transport.
Interexchange revenues were negatively impacted during the second quarter of
1998 by the Company's decision to exit the low margin wholesale international
long distance segment. Long distance billable minutes increased to 551.1 million
for the second quarter of 1998 compared to 101.5 million for the same period in
1997. Interexchange revenues are expected to be negatively impacted by an
estimated $3 million to $5 million during the third quarter of 1998 as this exit
strategy is further implemented.
Integration services revenue increased 1,903.2% to $26.6 million for
the second 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.
Operating Expenses
Total operating expenses increased 280.4% to $282 million for the
second quarter of 1998 compared to $74.1 million for the same period in 1997.
The increase resulted principally from the acquisition of DIGEX in July 1997,
the acquisitions of Shared and LDS during the first quarter of 1998, and the
acquisition of National during the second quarter of 1998. The Company has
recorded approximately $52.6 million for the execution of the business
restructuring and integration program, has increased expenditures for
significant expansion of the Company's owned and leased networks, and has
continued expansion in personnel to sustain and support the Company's growth.
Network operations expenses increased 136.2% to $88 million for the
second quarter of 1998 compared to $37.3 million for the same period in 1997.
The increase resulted principally from the acquisition of DIGEX in July 1997,
the acquisitions of Shared and LDS in the first quarter of 1998, and the
acquisition of National in the second quarter of 1998. The Company has incurred
increased expenses in leased network capacity associated with the growth of
local network service, enhanced data service, and interexchange service
revenues. The Williams agreement positively impacted network operations expenses
during 1998 by eliminating certain backbone network costs that were previously
accounted for as operating leases.
Facilities administration and maintenance expenses increased 220.1% to
$18.5 million for the second quarter of 1998 compared to $5.8 million for the
same period in 1997. The increase was principally due to the acquisition of
DIGEX in July 1997, the acquisitions of Shared and LDS in the first quarter of
1998, and the acquisition of National in the second quarter of 1998. The
increase also resulted from the expansion of the Company's owned and leased
network capacity, increases in maintenance expenses due to network expansion and
increased payroll expenses related to hiring additional engineering and
operations staff to support and service the expanding network, including the
increase in volume relating to the US West and Ameritech agreements.
Cost of Goods Sold increased 2,153.7% to $17.2 million for the second
quarter of 1998 compared to $.8 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 175.8% to $56.4
million for the second quarter of 1998 compared to $20.5 million for the same
period in 1997. The increase was principally due to the acquisition of DIGEX in
July 1997, the acquisitions of Shared and LDS in the first quarter of 1998, and
the acquisition of National in the second quarter of 1998. The Company has
experienced continued personnel growth, represented by 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 by 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 399.1% to $49.3
million for the second quarter of 1998 compared to $9.9 million for the same
period in 1997. This increase was principally due to additions to
telecommunications equipment placed in service since July 1, 1997 relating to
ongoing network expansion, as well as the acquisitions of DIGEX, Shared, LDS,
and National which contributed, based on preliminary estimates, approximately
$113.3 million, $640.6 million, $142.8, and $147.7 million of goodwill,
respectively. Additional depreciation charges resulted from the long-term lease
of capital assets from Williams in March 1998. Depreciation
16
<PAGE> 17
and amortization expense is expected to increase in future periods as the
Company expands the network and depreciates and amortizes goodwill associated
with the businesses acquired.
Business restructuring and integration expense of approximately $52.6
million was recorded by the Company during the second quarter of 1998. The
restructuring charge of $36.9 million is comprised of businesses exited and
contract termination costs of approximately $26.8 million and integration, and
other restructuring costs of approximately $10.1 million. In addition, the
Company expensed approximately $15.7 million, including businesses exited and
integration and other restructuring costs, that were incurred in the second
quarter. Such costs were comprised primarily of network integration,
information systems integration costs, and costs associated with positions
scheduled to be eliminated by the second quarter of 1999. These costs represent
incremental, redundant or convergence costs that result directly from
implementation of the Program, but are required to be expensed as incurred. Such
costs were substantially in line with the amounts expected for the second
quarter by management. Additional incremental, redundant and convergence costs
within this category of Program cost will be expensed as they are incurred each
quarter over the Program implementation period.
Interest Expense
Interest expense increased 330.5% to $47.9 million for the second
quarter of 1998 compared to $11.1 million for the same period in 1997. This
increase primarily resulted from interest expense on approximately $1.8 billion
of senior notes issued by the Company in 1997, January 1998, and May 1998, plus
the non-cash imputed interest charges of $1.0 million related to the acquisition
of National during the second quarter of 1998. In addition, the Company recorded
interest expense of $9.9 million related to the capital lease with Williams.
Also included in 1998 interest expense is $18.5 million of debt discount
amortization and $1.1 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
$1.6 million and $.8 million for the three months ended June 30, 1998 and 1997,
respectively.
Other Income
Other income increased 10.2% to $6 million for the second quarter of
1998 compared to $5.5 million for the same period in 1997. This increase was
primarily the result of interest earned on the cash available from the proceeds
of the issuance of securities in 1997, the exercise of the over-allotment option
with respect to the 8.5% Senior Notes in January 1998, and the issuance of the
8.6% Senior Notes in May 1998.
Net Loss
Net loss increased 350.7% to $133.6 million for the second quarter of
1998 compared to $29.6 million for the same period in 1997. The increase
resulted principally from the acquisition of DIGEX in July 1997, the acquisition
of Shared in the first quarter of 1998, and the acquisition of National in the
second quarter of 1998. In addition, the increased operating expenses resulting
from the expansion of the network, increased selling, general and administrative
costs, the business restructuring and integration expenses, and increased
interest costs contributed to the increase in the net loss.
Preferred Stock Dividends and Accretions
Preferred stock dividends and accretions increased 91.7% to $18.9
million for the second quarter of 1998 compared to $9.8 million for the same
period in 1997. The increase was due to the issuance of the three series of
preferred stock issued in March 1997, July 1997, and October 1997. Preferred
stock dividends were paid in the form of Common Stock and Preferred Stock.
Management does not expect to pay cash dividends in the foreseeable future.
EBITDA
EBITDA increased 171.1% to $10.1 million for the second quarter of 1998
compared to $(14.1) million for the same period in 1997. The increase was
principally from the acquisition of DIGEX in July 1997, the acquisitions of
Shared and LDS in the first quarter of 1998, and the acquisition of National in
the second quarter 1998. The Company has continued its efforts to consolidate
traffic through the Williams backbone network as well as through the Company's
existing networks in an efficient manner. In addition, the Company has been
successful in selling more of its local services "on switch" and increasing its
mix of higher margin products. The business restructuring and
17
<PAGE> 18
integration program has yielded benefits by eliminating redundant costs
associated with rationalizing and integrating the recent acquisitions. In
addition, the Company has reduced network operation expenses, facilities
administration and maintenance expenses, and selling, general and administrative
expenses as a percentage of revenue in the second quarter of 1998 as compared to
the same period in 1997.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997:
Revenue
Total revenue increased 247.6% to $327 million for the six months ended
June 30, 1998 compared to $94.1 million for the same period in 1997. The
increase was principally the result of the acquisition of DIGEX in July 1997,
the acquisitions of Shared and LDS in the first quarter of 1998, the acquisition
of National in the second quarter of 1998, 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. The Company expects revenue
growth to continue for the remainder of 1998, with increased emphasis on sales
of key services such as enhanced data and local service and on the integration
of the recent acquisitions and further development of cross-selling programs.
Local network services revenue increased 426.8% to $71.9 million for
the six months ended June 30, 1998 compared to $13.6 million for the same period
in 1997. This increase was principally due to the acquisition of Shared during
the first quarter of 1998, the acquisition of National during the second quarter
of 1998, and the increased number of local customers over the same period in
1997. The number of access line equivalents increased by 249,411 from July 1,
1997 through the end of the second quarter of 1998. Additionally, the Company
successfully continued its rollout of local exchange services into additional
markets. The Company was certified as a CLEC in 37 states and the District of
Columbia as of the end of the second quarter of 1998.
Enhanced data services revenue increased 230.2% to $79.2 million for
the six months ended June 30, 1998 compared to $24.0 million for the same period
in 1997. This increase resulted principally from the acquisition of DIGEX during
the second half of 1997, the acquisition of LDS during the first quarter of
1998, and the expansion of the Company's enhanced data network by 42 switches,
232 NNI connections, and 12,207 new frame relay nodes from July 1, 1997 through
the end of the second quarter of 1998. In addition, the number of frame relay
cities increased by 1,600 during the same time period.
Interexchange services revenue increased 139.5% to $127.5 million for
the six months ended June 30, 1998 compared to $53.2 million for the same period
in 1997. This increase resulted principally from the acquisitions of Shared and
LDS in the first quarter of 1998, and the acquisition of National in the second
quarter of 1998. The Company has experienced strong growth in long distance
switched revenue and steady growth in interLATA transport. Interexchange
revenues were negatively impacted during the second quarter of 1998 by the
Company's decision to exit the low margin wholesale international long distance
segment. Long distance billable minutes increased to 735.4 million for the first
half of 1998 compared to 189.0 million for the same period in 1997.
Interexchange revenues are expected to be negatively impacted by an estimated $3
million to $5 million during the third quarter of 1998 as this exit strategy is
further implemented.
Integration services revenue increased 1,413.8% to $48.4 million for
the six months ended June 30, 1998 compared to $3.2 million for the same period
in 1997. This increase resulted primarily from the acquisition of Shared during
the first quarter 1998 as well as the Company's continued focus on providing a
total service package to its customers.
Operating Expenses
Total operating expenses increased 298.6% to $553.5 million for the six
months ended June 30, 1998 compared to $138.9 million for the same period in
1997. The increase resulted principally from the acquisition of DIGEX in July
1997, the acquisitions of Shared and LDS in the first quarter of 1998, and the
acquisition of National in the second quarter of 1998. The Company has recorded
a one-time charge to earnings of $85.0 million during the first quarter of 1998
for purchased in-process research and development associated with the
acquisition of Shared. Additionally, the Company recorded expenses of
approximately $52.6 million for the execution of the business restructuring and
integration program during the second quarter 1998, increased expenditures for
significant
18
<PAGE> 19
expansion of the Company's owned and leased networks, and has continued
expanding its personnel to sustain and support the Company's growth.
Network operations expenses increased 137.2% to $159.6 million for the
six months ended June 30, 1998 compared to $67.3 million for the same period in
1998. The increase resulted principally from the acquisition of DIGEX in July
1997, the acquisitions of Shared and LDS in the first quarter of 1998, and the
acquisition of National in the second quarter of 1998. The Company has incurred
increased expenses in leased network capacity associated with the growth of
local network service, enhanced data service, and interexchange service
revenues. The Williams agreement positively impacted network operations expenses
during 1998 by eliminating certain backbone network costs that were previously
accounted for as operating leases.
Facilities administration and maintenance expenses increased 193.8% to
$33.6 million for the six months ended June 30, 1998 compared to $11.4 million
for the same period in 1997. The increase was principally the result of the
acquisition of DIGEX in July 1997, the acquisitions of Shared and LDS in the
first quarter of 1998, and the acquisition of National in the second quarter of
1998. The increase also resulted from the expansion of the Company's owned and
leased network capacity, increases in maintenance expense due to network
expansion, and increased payroll expenses related to hiring additional
engineering and operations staff to support and service the expanding network,
including the increase in volume relating to the US West and Ameritech
agreements.
Cost of Goods Sold increased 1,419.6% to $30.9 million for the six
months ended June 30, 1998 compared to $2 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 157% to $102.7
million for the six months ended June 30, 1998 compared to $40.0 million for the
same period in 1997. The increase was principally due to the acquisition of
DIGEX in July 1997, the acquisitions of Shared and LDS in the first quarter of
1998, and the acquisition of National in the second quarter of 1998. The Company
has experienced continued personnel growth, represented by 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 by 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 390.6% to $89.2
million for the six months ended June 30, 1998 compared to $18.2 million for the
same period in 1997. This increase was principally due to additions to
telecommunications equipment placed in service since July 1, 1997, relating to
ongoing network expansion, as well as the acquisitions of DIGEX, Shared, LDS,
and National which contributed, based on preliminary estimates, approximately
$113.3 million, $640.6 million, $142.8, and $147.7 million of goodwill,
respectively. Additional depreciation charges resulted from the long-term lease
of capital assets from Williams in March 1998. Depreciation and amortization
expense is expected to increase in future periods as the Company expands the
network and depreciates and amortizes goodwill associated with the businesses
acquired.
Charge for in-process Research & Development of $85 million represent
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.
Business restructuring and integration expense of approximately $52.6
million was recorded by the Company during the second quarter of 1998. The
restructuring charge of $36.9 million is comprised of businesses exited and
contract termination costs of approximately $26.8 million and integration and
other restructuring costs of approximately $10.1 million. In addition, the
Company expensed approximately $15.7 million, including businesses exited and
integration and other restructuring costs, that were incurred in the second
quarter. Such costs were comprised primarily of network integration and
information systems integration costs. These costs represent incremental,
redundant or convergence costs that result directly from implementation of the
Program, but are required to be expensed as incurred. Such costs were
substantially in line with the amounts expected for the second quarter by
management. Additional incremental, redundant and convergence costs within this
category of Program cost will be expensed as they are incurred each quarter over
the Program implementation period.
19
<PAGE> 20
Interest Expense
Interest expense increased 337.5% to $97.2 million for the six months
ended June 30, 1998 compared to $22.2 million for the same period in 1997. This
increase primarily resulted from interest expense on approximately $1.8 billion
of senior notes issued by the Company in 1997 and 1998, plus the non-cash
imputed interest charges of $5.1 million related to the acquisition of Shared
and $1 million related to the acquisition of National. In addition, the Company
recorded interest expense of $19.9 million related to the capital lease with
Williams. Included in 1998 interest expense is $37 million of debt discount
amortization and $2.0 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
$3.6 million and $1.6 million for the six months ended June 30, 1998 and 1997,
respectively.
Other Income
Other income increased 68.4% to $16.8 million for the six months ended
June 30, 1998 compared to $10.0 million for the same period in 1997. This
increase was primarily the result of interest earned on the cash available from
the 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, and the
issuance of the 8.6% Senior Notes in May 1998.
Net Loss
Net loss increased 437.9% to $306.9 million for the six months ended
June 30, 1998 compared to $57.1 million for the same period in 1997. The
increase was principally due to the acquisition of DIGEX in July 1997, the
acquisition of Shared in the first quarter of 1998, and the acquisition of
National in the second 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, business restructuring
and integration expenses, and increased interest costs contributed to the
increase in net loss.
Preferred Stock Dividends and Accretions
Preferred stock dividends and accretions increased 183.4% to $37.5
million for the six months ended June 30, 1998 compared to $13.2 million for the
same period in 1997. The increase was due to the issuance of 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. Management
does not expect to pay cash dividends in the foreseeable future.
EBITDA
EBITDA increased 100.9% to $.2 million for the six months ended June
30, 1998 compared to $(26.6) million for the same period in 1997. The increase
was principally from the acquisition of DIGEX in July 1997, the acquisitions of
Shared and LDS in the first quarter of 1998, and the acquisition of National in
the second quarter of 1998. The Company has continued its efforts to consolidate
traffic through the Williams backbone network as well as through the Company's
existing networks in an efficient manner. In addition, the Company has been
successful in selling more of its local services "on switch" and increasing its
mix of higher margin products. The business restructuring and integration
program has yielded benefits from the elimination of redundant costs associated
with rationalizing and integrating the recent acquisitions. In addition, the
Company has reduced network operation expenses, facilities administration and
maintenance expenses, and selling, general and administrative expenses as a
percentage of revenue in the second 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 $198.8 million and $107 million for the six months ended June 30,
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
20
<PAGE> 21
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 $770.5 million of
its available cash to complete the Shared acquisition and approximately $32.9
million of its available cash to complete the LDS acquisition. In addition, the
Company utilized approximately $64.4 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. During
1998, the Company raised approximately $537.3 million in net proceeds from the
sale of senior notes, including the overallotment exercises. All of the
Company's 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 June 30, 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 before 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 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 June 30, 1998, the Company
was certified as a CLEC in 37 states plus the District of Columbia, allowing the
Company to provide local exchange services in those markets, and is currently
seeking CLEC certification in 11 additional states. 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 $770.5 million,
which was paid out in 1998 and 1997, including certain transaction expenses and
fees relating to certain agreements. This amount includes repayment of $175.6
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 $170.1 million, of which approximately $137.2 million was paid in
Common Stock and approximately $32.9 million was paid in cash, including the
repayment of approximately $15.0 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. Aggregate consideration for the acquisition
was approximately $59.4 million in cash, plus 2,909,796 shares of the Company's
Common Stock valued at approximately $88.7 million, the retirement of $2.8
million in National's long-term debt, and $2.2 million in acquisition related
costs.
During July and August 1998, the Company exchanged (a) approximately 2.029
million shares of its common stock for approximately 1.487 million Depository
Shares (each representing 1/100th interest in its 7% Series D Junior Convertible
Preferred Stock) and (b) approximately 665,000 shares of its common stock for
approximately 710,000
21
<PAGE> 22
Depository Shares (each representing a 1/100th interest in its 7% Series E
Junior Convertible Preferred Stock), pursuant to exchange agreements with
certain holders of such Depository Shares.
The Company expects that it will be EBITDA positive for 1998 and that its
capital requirements (estimated at approximately $400.0 million, of which
approximately $198.8 million has been expended during the first six months of
1998, 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
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. On August 4, 1998, the Company commenced a
private placement of $200 million liquidation preference of Depository Shares
(each having a 1/100th interest in its Series F Junior Convertible Preferred
Stock, liquidation preference $2,500 per share), pursuant to Rule 144A
promulgated under the Securities Act of 1933, as amended. The net proceeds from
the offering of the Depository Shares will be used to finance the continued
expansion of the Company's telecommunications networks and for general corporate
purposes. However, there can be no assurance that the placement of securities
will be successful. 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 ending in "00"
as the year 1900 rather than the year 2000. This could result in system failure
or miscalculations causing 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 continuing to contact 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 will not have a material adverse
effect on the Company's systems.
The Company is actively engaged in utilizing 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 $1.2 million in internal personnel costs, both of which are being funded
through operating cash flows. This
22
<PAGE> 23
cost may be reduced if software and hardware are replaced with compliant systems
as a result of other currently scheduled capital projects. The remaining
expenses are not expected to have a material effect on the results of
operations. During the first and second quarters of 1998 the Company has
incurred approximately $.5 million in external staffing costs, $.4 million in
internal staffing costs, and $.2 million in hardware and software costs.
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 second quarter of 1998,
the Company incurred approximately $.2 million in costs related to the review of
systems acquired as part of the acquisitions of DIGEX, Shared, LDS, and
National. Systems modification and testing associated with Year 2000 activities
relating to such acquisitions is estimated to be $2.6 million for the third and
fourth quarter of 1998. Internal personnel costs associated with Year 2000
activities relating to the Company's recent acquisitions were approximately $.1
million for the second quarter. It is projected that internal personnel costs
associated with such Year 2000 activities relating to the acquisitions of Shared
and DIGEX will be $.2 million. An estimate of the internal personnel costs
associated with Year 2000 conversions at LDS and National is expected to be
determined in the third quarter of 1998.
Approximately $.2 million was spent in the second quarter on upgrades to
the Company's hardware and software. A preliminary estimate for hardware and
software upgrades during the third and fourth quarter is $2.8 million, due
primarily to data network upgrades needed with respect to data network
components acquired in a 1996 acquisition. Projected costs associated with
hardware and software upgrades relating to the acquisitions of Shared, DIGEX,
and LDS are $4.8 million, largely in shared tenant equipment and office
infrastructure upgrades. An estimate of the costs associated with hardware and
software upgrades for National is expected to be determined in the third
quarter.
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.
23
<PAGE> 24
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
Note 8 to the Company's Condensed Consolidated Financial Statements included
herein.
ITEM 2. Changes in Securities
On April 30, 1998, the Company acquired National for
approximately $151.8 million including 2,909,796 shares of Common Stock (the
"National Shares"), valued at approximately $88.8 million. The National Shares
were issued by the Company to the former shareholders of National (the "National
Shareholders"). The number of National Shares payable to the National
Shareholders was based upon the merger consideration provisions in the Agreement
and Plan of Merger dated as of February 11, 1998 by and among the Company,
National, the National Shareholders, and certain other parties, as amended, that
set forth (i) the merger consideration, (ii) the adjustments to be made to the
merger consideration, (iii) the portion of the merger consideration to be paid
by the issuance of Common Stock and (iv) that the Common Stock to be delivered
to the National Shareholders shall be deemed to be valued at $61 per share. The
National Shares were transferred to the National 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 National Shares, the
National Shareholders represented to the Company that: (i) they are acquiring
the National 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 National 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 National Shares.
The Company increased the number of authorized shares of common stock
from 50,000,000 to 150,000,000. The Company also completed a two-for-one stock
split on June 15, 1998, paid in the form of a stock dividend.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on May 20, 1998. At the
meeting, the following actions were taken by the stockholders:
The following member was elected to the Company's Board of Directors to
hold office for a term of three years. The voting on the resolution was as
follows:
Nominee For Withhold Authority
------- -------- ------------------
John C. Baker 18,758,113 114,859
The number of shares of Common Stock authorized for issuance under the
Company's Long-Term Incentive Plan was increased from 2,500,000 shares to
4,500,000 shares (5,000,000 shares to 9,000,000 shares post stock split).
The voting on the resolution was as follows:
For Against Abstained Not voted
--- -------- --------- ---------
11,539,710 5,628,391 159,452 1,545,419
24
<PAGE> 25
An amendment to the Company's Restated Certificate of Incorporation,
as amended, to increase the number of authorized shares of common stock from
50,000,000 shares to 150,000,000 was approved. The voting on the resolution was
as follows:
For Against Abstained Not voted
--- -------- --------- ---------
15,807,168 3,033,377 32,427 -
The appointment of Ernst & Young LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1998 was
ratified. The voting on the resolution was as follows:
For Against Abstained Not voted
--- -------- --------- ---------
18,785,345 77,354 10,273 -
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
2.1 Agreement and Plan of Merger, dated as of February
11, 1998, among the Company, Sumter One Acquisition,
Inc., Sumter Two Acquisition, Inc., National
Telecommunications of Florida, Inc. NTC, Inc. and the
stockholders of National. Exhibit 2.4 to the
Company's Registration Statement on Form S-3 filed
with the SEC on February 13, 1998 (No. 333-46369) is
incorporated herein by reference.
3.1 Restated Certificate of Incorporation of the Company,
together with all amendments, thereto. Exhibit 3.1 to
the Company's Registration Statement on Form S-4,
filed with the SEC on June 16, 1998 (No. 333-56939)
(the "S-4") is incorporated herein by reference.
4.1 Indenture, dated as of May 27, 1998, between the
Company and SunTrust Bank, Central Florida, National
Association, as trustee. Exhibit 4.6 to the S-4 is
incorporated herein by reference.
4.2 Registration Rights Agreement, dated as of May 27,
1998, among the Company and the Initial Purchasers.
Exhibit 4.7 to the S-4 is incorporated herein by
reference.
27.1 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 1998:
The Company filed a Current Report on Form 8-K, dated April 6,
1998, reporting under Item 2 the acquisition of LDS. The
Company also reported under Item 7 the acquisition agreement
for LDS and the related press release.
The Company filed a Current Report on Form 8-K, dated April
30, 1998, reporting under Item 5 the issuance of a press
release discussing the first quarter results. The Company also
reported under Item 7 the filing of the press release.
25
<PAGE> 26
The Company filed a Current Report on Form 8-K, dated May 1,
1998, reporting under Item 5 the issuance of a press release
announcing the consummation of the acquisition of National
Telecommunications of Florida.
The Company filed a Current Report on Form 8-K/A, dated May
13, 1998, reporting under Item 2 its acquisition of the LDS.
The Company also filed under Item 7 the filing of Exhibit 2.1
which is the Acquisition Agreement, dated December 17, 1997
among Intermedia and LDS.
The Company filed a Current Report on Form 8-K, dated May 20,
1998, reporting under Item 5 the commencement of a private
offering of $350 million principal amount of senior notes. The
Company also reported under Item 5 the announcement of a
two-part agreement with Ameritech . The Company also reported
under Item 5 the announcement of a split of its common stock
to be effected as a stock dividend payable on June 15, 1998 to
stockholders of record on June 1, 1998. The Company also
reported under Item 7 the filing of the Agreement and Plan of
Merger relating to the acquisitions of the affiliated entities
known as National Tel, which was consummated on April 29,
1998.
The Company filed a Current Report on Form 8-K, dated May 29,
1998, reporting under Item 5 the completion of a private
offering of $350 million principal amount of its 8.6% Senior
Notes, which was subsequently increase to $450 million and
closed on May 27, 1998. 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/A, dated June
11, 1998, reporting under Item 7 the filing of the Unaudited
Pro Forma Condensed Financial Statements as of March 31, 1998.
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 5, 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
Vice President, Controller and
Chief Accounting Officer
27
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