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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED
DECEMBER 31, 1997
COMMISSION FILE NUMBER:
0-20135
INTERMEDIA COMMUNICATIONS INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 59-291-3586
(State or other jurisdiction of (Employer Identification Number)
incorporation or organization)
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3625 QUEEN PALM DRIVE
TAMPA, FLORIDA 33619
(Address of principal executive offices)
Registrant's telephone number, including area code: (813) 829-0011
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE. RIGHTS TO PURCHASE UNITS OF SERIES C
PREFERRED STOCK.
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment in this Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates(1) of the
registrant on March 5, 1998: $589,628,059.
As of March 5, 1998, there were 17,737,738 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT PART OF 10-K INTO WHICH INCORPORATED
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Proxy Statement relating to registrant's Part III
Annual Meeting of Stockholders to be held on
May 20, 1998
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(1)As used herein, "voting stock held by non-affiliates" means shares of Common
Stock held by persons other than executive officers, directors and persons
holding in excess of 5% of the registrant's Common Stock. The determination of
market value of the Common Stock is based on the last reported sale price as
reported by the Nasdaq Stock Market on the date indicated. The determination of
the "affiliate" status for purposes of this report on Form 10-K shall not be
deemed a determination as to whether an individual is an "affiliate" of the
registrant for any other purposes.
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INTERMEDIA COMMUNICATIONS INC.
INDEX
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PAGE
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PART I
Item 1 Business.................................................... 2
Item 2 Properties.................................................. 24
Item 3 Legal Proceedings........................................... 25
Item 4 Submission of Matters to a Vote of Security Holders......... 25
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 25
Item 6 Selected Financial and Other Operating Data................. 27
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
Item 8 Financial Statements and Supplementary Data................. 37
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 37
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 38
Item 11 Executive Compensation...................................... 38
Item 12 Security Ownership of Certain Beneficial Owners and
Management................................................ 38
Item 13 Certain Relationships and Related Transactions.............. 38
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 38
Glossary.................................................... 41
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References in this report to the "Company" or "Intermedia" mean Intermedia
Communications Inc. together with its subsidiaries, except where the context
otherwise requires. Certain terms used herein are defined in the Glossary which
begins on page 41. This report contains certain "forward-looking statements"
concerning Intermedia's operations, economic performance and financial
condition, which are subject to inherent uncertainties and risks. Actual results
could differ materially from those anticipated in this report. When used in this
report, the words "estimate," "project," "anticipate," "expect," "intend,"
"believe" and similar expressions are intended to identify forward-looking
statements.
ITEM 1. BUSINESS
SUMMARY
Intermedia is a rapidly growing integrated communications provider ("ICP")
delivering local, long distance, enhanced data and Internet-related services to
business and government customers. Intermedia is the largest domestic
independent company among those companies generally referred to as competitive
local exchange carriers ("CLECs") (based upon annualized telecommunications
services revenues and assuming the closing of the announced transaction between
AT&T, Inc. ("AT&T") and Teleport Communications Group, Inc.) and is also the
largest provider of shared tenant telecommunications services in the United
States. As a tier-one Internet services provider ("ISP") and the fourth largest
(based on number of nodes) frame relay provider in the United States, Intermedia
is also a leading provider of enhanced data services to business and government
customers. Intermedia provides services to its customers throughout the United
States and in selected international markets through a combination of owned and
leased network facilities. As an ICP with over 10 years experience focusing on
business and government customers, Intermedia believes it is positioned to take
advantage of technical, regulatory and market dynamics which currently promote
demand for a fully integrated set of communications services.
Intermedia's mission is to become the premier provider of communications
services to business and government customers. Intermedia believes that its
target customers have distinct communications services requirements, including a
need for a reliable network infrastructure, high quality, solutions-oriented and
responsive customer service and continuous focus on service enhancements and new
product development. Intermedia believes it has multiple advantages over its
competitors in serving its targeted customer base as a result of the Company's:
(i) specialized sales and service approach employing engineering and sales
professionals who design and implement integrated, cost-effective
telecommunications solutions; (ii) expertise in developing and operating a
highly reliable, advanced digital fiber optic network offering substantial
transmission capacity for the provision of a full suite of "all distance"
communications services; (iii) emphasis on providing solutions-oriented and
responsive customer service; (iv) network platform capable of servicing
customers throughout the United States and in select international markets; (v)
network development plan designed to assure an efficient evolution from a
voice-oriented, circuit switched network to a packet/cell switched network
supporting Internet and other protocols ("Packet/Cell Switched Network"); (vi)
ongoing development and integration of new telecommunications technologies into
its services, especially those technologies that allow the increasing
integration of voice and data applications onto a single Packet/Cell Switched
Network; and (vii) ability to deliver local, long-distance, enhanced data and
Internet services over a network controlled from end-to-end by Intermedia.
Intermedia's annualized fourth quarter 1997 revenue (giving pro forma
effect to the acquisition of Shared Technologies Fairchild Inc. ("Shared") and
the pending acquisitions of the affiliated entities known as Long Distance
Savers (collectively, "LDS") and the affiliated entities known as National Tel
(collectively, "National")) was $663.6 million. Intermedia's reported revenues
have grown from $14.3 million in 1994 to $247.9 million in 1997, representing a
compound annual growth rate of 158.8% (including the effect of acquisitions).
After giving effect to the pending acquisitions of LDS and National, Intermedia
will serve over 92,000 business customers nationwide and will have a force of
617 quota carrying sales personnel operating in 80 cities serviced by 102
Company sales offices.
Through a combination of acquisitions, leased infrastructure, expansion of
existing network and asset purchases, Intermedia continues to increase its
customer base and network density and is continuously
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pursuing attractive opportunities to complement and support its existing network
infrastructure and its service offerings and expand into new geographic markets.
Pro forma for the pending acquisitions, Intermedia's network infrastructure
includes over 200,000 access lines in service, 18 voice switches, 136 data
switches, 20,209 frame relay nodes, 386 network to network interfaces ("NNIs"),
including NNIs with BellSouth Telecommunications Inc. ("BellSouth"), US West
Communications ("US West"), Sprint Corporation ("Sprint"), GTE Corporation
("GTE"), Bell Atlantic Nynex Corp. ("Bell Atlantic") and Southern New England
Telecommunications Corp ("SNET"), and approximately 35,000 miles of nationwide
long distance fiber facilities. This infrastructure is capable of delivering
local, long distance, enhanced data (including frame relay and asynchronous
transfer mode ("ATM")), and Internet services (including Web site management and
high speed Internet connectivity) and enabled Intermedia to address $34 billion
of a $222 billion national market opportunity by the end of 1997. The Company
believes that at the end of 1998, its addressable market will be over $90
billion, including the impact of the Shared acquisition and the pending
acquisitions of LDS and National. Management believes that continuing expansion
will enable Intermedia to (i) increase the size of its addressable market to
reach a significant number of new potential customers, (ii) achieve economies of
scale in network operations and sales and marketing and (iii) more effectively
service customers that have a presence in multiple metropolitan areas.
Enhanced data services, such as those provided over Intermedia's ATM and
frame relay transport network, include specialized communications services for
customers needing to transport various forms of digital data among multiple
locations. Another important category of Intermedia's enhanced data services are
its Internet services -- both access to the Internet and various Web hosting and
Web site management services. These Internet services are regularly delivered
over Intermedia's ATM and frame relay network. According to industry sources,
the frame relay services market is projected to grow from $1.3 billion in 1996
to $2.7 billion in 1999 and Internet Web site management services are estimated
to grow from $450 million in 1997 to $7 billion in 2002. There can be no
assurance that such market growth will be realized or that the assumptions
underlying such projections are reliable. While Intermedia has concentrated its
enhanced data sales in the eastern half of the United States, Intermedia is
currently the fourth largest national provider of frame relay networking
services (based on number of nodes) after AT&T, MCI Communications Corporation
("MCI") combined with WorldCom, Inc. ("WorldCom") and Sprint Corporation
("Sprint"). To satisfy its customers' desire for end-to-end enhanced data
services (both networking and Internet services) from a single provider,
Intermedia has deployed its network and made interconnection arrangements with
other frame relay service providers to offer national and international service.
Intermedia has rapidly expanded, and intends to continue to expand, its
direct sales and support team consisting of engineering and sales professionals.
The sales and support team has complete product knowledge and technical,
integration and program or project management skills. This team approach
promotes a close working relationship between Intermedia and the customers'
telecommunications, information services and user constituencies. Intermedia
believes such relationships enable it to sell more of its services and maintain
longer relationships with its customers. During 1997, Intermedia increased the
number of its sales offices by 26 to 47 and substantially increased its
engineering support personnel and sales representatives. Intermedia believes
that the continued deployment of its skilled end user engineering support and
sales team will allow Intermedia to establish service in new markets and gain a
stronger competitive position in existing markets. By focusing first on
establishing customer relationships in both new and existing markets, Intermedia
believes it can efficiently deploy capital in response to actual customer
demand.
As Intermedia continues the deployment of local/long distance voice
switches to serve its rapidly growing customer base, it will realize economies
of scale on its intercity network. To further improve economies of scale,
Intermedia combines long distance voice traffic between switches with intercity
enhanced data and Internet traffic. In addition, Intermedia plans to introduce a
new class of voice products which utilize data protocols to deliver voice
traffic over Intermedia's Packet/Cell Switched Network. These services will
provide a competitive service offering to customers seeking a lower cost
alternative to voice services currently provided over traditional circuit
switched telecommunications networks. Intermedia believes that Packet/Cell
Switched Networks, such as its own, will displace a significant portion of the
national telecommunications market that is currently served over traditional
circuit switched networks. Intermedia believes this new service offering, when
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implemented, will accelerate its penetration of the traditional voice services
market and provide improved returns on its network investment.
Over the past few years, a portion of Intermedia's growth has been
accomplished through acquisitions and other strategic ventures or selling
relationships. Intermedia continues to examine various acquisition and other
strategic relationship proposals to accelerate its rate of growth. In addition
to the usual financial considerations, Intermedia assesses each acquisition
opportunity to determine if it: (i) brings an established customer base to whom
Intermedia can cross-sell its other services, (ii) improves Intermedia's network
density in region or provides needed network connectivity out of region, (iii)
provides accelerated time to market in a pre-defined target market, (iv) brings
products and services that are complementary to Intermedia's existing portfolio
and (v) brings skilled staff, particularly in sales and sales support. While
management does not believe that acquisitions are necessary to achieve
Intermedia's strategic goals or to satisfy its business plan, strategic
alliances with or acquisitions of appropriate companies may accelerate
achievement of certain goals by creating financial and operating synergies, and
providing for a more rapid expansion of Intermedia's network and services.
Intermedia is currently evaluating various acquisition and strategic
relationship opportunities. No assurance can be given that any potential
acquisition or strategic relationship, including those described below, will be
consummated.
Intermedia was incorporated in the State of Delaware on November 9, 1987,
as the successor to a Florida corporation that was founded in 1986. Intermedia's
principal offices are located at 3625 Queen Palm Drive, Tampa, Florida 33619,
and its telephone number is (813) 829-0011.
RECENT DEVELOPMENTS
Since June 1997, Intermedia has consummated three acquisitions and entered
definitive agreements for two additional acquisitions as follows:
In June 1997, Intermedia purchased from Telco Communications Group, Inc.
("Telco"), for $38 million, five long distance voice switches and ancillary
network equipment located in Atlanta, Chicago, Dallas, Los Angeles and New York,
all of which have been incorporated into Intermedia's network, as well as
certain network transport services for a three-year period.
In July 1997, Intermedia consummated the acquisition of DIGEX, Incorporated
("DIGEX") for approximately $160 million. DIGEX, headquartered in suburban
Washington, D.C., is a national ISP, which provides a comprehensive range of
industrial strength Internet solutions, including high speed dedicated business
Internet connectivity, Web site management and private network solutions,
primarily to business and government customers.
In March 1998, Intermedia consummated the acquisition of Shared. The total
deemed purchase price for Shared was approximately $660.4 million, excluding
certain transaction expenses and fees relating to certain agreements. Shared is
the nation's largest provider of shared telecommunications services and systems.
Through its technical infrastructure and 800 employees, Shared acts as a single
point of contact for business telecommunications services at more than 465 Class
A office buildings throughout the United States and Canada. This acquisition is
expected to enhance Intermedia's national presence in the telecommunications
market, enabling it to provide a bundled offering of local, long distance, data,
Internet and systems integration services to Shared's existing 15,000 business
customers.
In December 1997, Intermedia entered into a definitive agreement for the
acquisition of LDS for a purchase price of approximately $151.0 million, of
which approximately $130.0 million is payable in Intermedia Common Stock and
approximately $21.0 million is payable in cash, subject to certain adjustments.
LDS is an established regional interexchange carrier, providing long distance
services and Internet access to more than 45,000 business subscribers and
employing over 100 sales and customer service professionals in Louisiana, Texas,
Oklahoma, Mississippi and Florida. The acquisition of LDS will provide a
significant time-to-market advantage in a region important to Intermedia's
expansion plan, while also contributing an experienced regional management team
and established sales platform. Because LDS's service portfolio and footprint
complement those of Intermedia, the Company believes that the pending
acquisition of LDS also
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presents significant synergy realization opportunities. By joining forces with
an established operating company with a staff of experienced sales, management
and technical personnel, Intermedia expects to consolidate its position in these
southern markets.
In February 1998, Intermedia entered into a definitive merger agreement
with National. The total purchase price for National is approximately $151
million, subject to certain adjustments, of which 70% is payable in Intermedia
Common Stock and 30% is payable in cash. National is an emerging switch-based
CLEC and an established interexchange carrier providing local exchange and long
distance voice services to more than 11,000 business customers concentrated in
Florida's major metropolitan markets. National had revenues of $65.2 million,
net income of $5.9 million and EBITDA of $6.8 million, unaudited, for the year
ended December 31, 1997. Intermedia believes that the acquisition of National
will help build critical mass in the State of Florida, one of the top five
telecommunications usage states in the country, and provide an experienced team
of sales professionals.
In January 1998, Intermedia signed a Letter of Intent with the Williams
Telecommunications Group ("Williams") to enter into a long term purchase
agreement for transmission capacity on Williams' nationwide fiber optic network.
The 20 year indefeasible right of use ("IRU") to be provided under the proposed
agreement is expected to allow Intermedia to reduce its unit cost for intercity
transport by up to 50%. The proposed purchase agreement is subject to
negotiation of definitive documentation which is expected to be completed in
early 1998.
In January 1998, Intermedia entered into an agreement with US West pursuant
to which US West will utilize Intermedia as its preferred provider for the
provisioning of frame relay networking and Internet services for all interLATA
connections, both inside and outside US West's 14 state region. The Company
believes this agreement will bring additional traffic onto Intermedia's network
and creates cross-selling opportunities in US West's territory, where Intermedia
currently has no selling activity. Intermedia has undertaken discussions with
other regional Bell operating companies ("RBOCs") and incumbent local exchange
carriers ("ILECs") with the intent of establishing agreements similar to the US
West agreement, although there is no assurance that such additional agreements
will result.
Intermedia is currently evaluating and often engages in discussions
regarding various acquisition opportunities. These acquisitions could be funded
by cash on hand and/or Intermedia's securities. Except as described in this
Annual Report on Form 10-K, Intermedia is not a party to any agreement for any
material acquisition nor can there be any assurance that any such acquisition,
including the acquisitions described herein, will be consummated.
During 1997, Intermedia consummated six Rule 144A offerings of its
preferred stock and senior notes. These offerings, in aggregate, raised gross
proceeds to Intermedia of approximately $1.7 billion. The proceeds from these
offerings have been used, and are reserved for use, for the expansion of
Intermedia's network, to fund a portion of the acquisitions described above and
for other corporate purposes. See "Liquidity and Capital Resources."
SERVICES PROVIDED AND MARKETS SERVED
Intermedia's services generally fall into three categories: (i) local
network services, which include local exchange services, special and switched
access services and local private line services, (ii) enhanced data services,
which include frame relay based data transport, ATM and Internet and Intranet
services and (iii) interexchange (long distance) services. The Company's
integration services are not included in any of these three categories.
Integration services revenue has traditionally represented five percent or less
of total revenue. The impact of the Shared acquisition will increase this
substantially, with revenue from Shared's systems business, which includes the
sale and installation of customer premises telephone equipment such as PBXs and
key systems.
The Company's local network services consist of local private line
services, which the Company has been offering since 1987, and local exchange
service, which the Company began offering in 1996. The Company provides
customers local private line services either by building network facilities or
leasing extended network
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facilities to the customer's premises. Generally, the addition of local exchange
services allows Intermedia to increase its revenue generating product mix
without having to acquire additional transport facilities and allows a more
integrated service to be offered to the customer. The initial circuit used to
reach the customer establishes a platform that can be utilized to offer
additional services. Due to the significant bandwidth inherent in fiber optic
cable, a single connection can support a large number of service types and a
large number of customers.
The Company has built its base of local network service customers by
offering highly reliable, high quality services that compete primarily with the
ILECs. In 1997, local network services accounted for approximately 17% (or
approximately $42 million) of the Company's total revenues. Intermedia believes
that the revenue from these services will grow through the introduction of local
exchange services in additional markets, expansion of its network within
existing markets and increased penetration of existing customers through
provision of new incremental services.
Enhanced data services consist of interexchange data networks utilizing
frame relay and ATM technologies and application services, such as Internet
access and Web Site hosting and management, which utilize the frame relay
network. Enhanced data services enable customers to economically and securely
transmit large volumes of data typically sent in bursts from one site to
another. Previously, customers had to utilize low speed dedicated private lines
or dial up circuits for interconnecting remote LANs and other customer
locations. These methods had numerous disadvantages including: (i) low
transmission speeds; (ii) a requirement for the utilization of complementary
protocols and line speeds which significantly increased the cost of implementing
networks; (iii) limited security, placing customers' entire networks at risk of
tampering from outside sources and (iv) high costs due to the necessity to pay
for a full time dedicated line despite infrequent use. Enhanced data services
are utilized for LAN interconnection, remote site, point of sale and branch
office communications solutions.
The typical Intermedia customer for enhanced data services has multiple
business locations and requires communication for one or more data applications
among these locations. The customer may also have a number of locations served
by Intermedia's fiber optic networks; however, provision of enhanced data
services is not dependent on the provision of local network services at any
specific location. All of the customers' locations, whether domestic or
international, are monitored by the Company and can be served through
Intermedia's own operations or through the use of interconnected networks. As a
consequence of a significantly increased volume of traffic and number of
Internet customers connected to Intermedia's network, many of these customers
connect to other users or Internet hosts without ever leaving Intermedia's
network. Over 300 ISPs utilize Intermedia's network for access to their
customers and other Internet sites.
In 1997, the Company's enhanced data services accounted for approximately
35% (or approximately $87 million) of Intermedia's total revenue. The market for
enhanced data services, according to industry sources, is expected to grow from
$1.3 billion in 1996 to $2.7 billion in 1999. There can be no assurance,
however, that such market growth will be realized or that the assumptions
underlying such projections are reliable.
Intermedia has offered long distance services since December 1994. Long
distance services include inbound (800 or 888) service, outbound service and
calling card telephone service. The Company currently provides interLATA long
distance services in all 50 states, interstate long distance services nationwide
and international termination worldwide. In 1997, Intermedia's long distance
services accounted for approximately 46% (or approximately $113 million) of the
Company's total revenue.
Intermedia's integration services are applicable to all three categories of
service described above and are made available to end user and carrier
customers. A team of sales professionals and engineers develop specialized
solutions for a customer's specific telecommunications needs. Some of these
integration services include the sale, configuration and installation of third
party equipment to handle certain telecommunications and monitoring functions
and the development of private networks. The Company's recent acquisition of
Shared brings a substantial new revenue stream to its integration services
category. Shared engineers, installs, operates and maintains PBXs and key
systems for thousands of customers nationwide. This service offering, which the
Company plans to expand, will be included in the integration services category.
Management
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believes that such services increase the level of linkage between the Company's
and the customer's operations thereby increasing the customer's reliance on
Intermedia.
Certain of Intermedia's services are described by means of examples in
Annex A hereto.
Intermedia believes that the introduction of its services at competitive
market rates has stimulated demand from small to medium-sized customers, thereby
broadening the market for Intermedia's services. Each of Intermedia's
individually packaged services is competitively priced, and when integrated into
a comprehensive telecommunications package, typically provides significant
savings to such customers over a combination of ILEC and interexchange carrier
("IXC") service offerings.
The Company, through the pursuit of strategic alliances, plans to expand
its ability to originate and terminate voice and data traffic in certain Latin
American markets beyond its current ability to terminate frame relay traffic in
Panama, Columbia, Puerto Rico, Chile and Costa Rica. Intermedia believes these
markets are important to its business due to the significant community of
interest between many of these countries and certain key cities in Intermedia's
service territory. This community of interest stems from large Spanish speaking
populations in these cities and from the large number of businesses that have
operations in both Latin America and in the Company's southeastern markets.
The following table sets forth the Company's estimates, based upon an
analysis of industry sources, including industry projections and FCC data, of
the market size nationally of certain of the services described above. Only a
limited amount of direct information is currently available and therefore a
significant portion of the information set forth below is based upon estimates
and assumptions made by the Company. Intermedia believes that its estimates are
based upon reliable information and that its assumptions are reasonable. There
can be no assurance, however, that the estimates will not vary from the actual
market data and that these variances will not be substantial.
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UNITED STATES COMPETITIVE
TELECOMMUNICATIONS MARKET
OPPORTUNITY
1997 COMPANY ESTIMATES
(DOLLARS IN MILLIONS)
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Local Exchange Services(1)......................... $ 87,000
Access Services.................................... 36,000
Enhanced Data Services............................. 3,000
Interexchange Services............................. 96,000
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Total Market Size.................................. $222,000
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(1) The Company is currently permitted to offer these services in 37 states and
the District of Columbia and is currently seeking certification in the
remaining 13 states.
The market sizes set forth in the above table are not intended to provide
an indication of the Company's total addressable market or the revenue potential
for the Company's services. Intermedia has obtained all certifications necessary
to permit the Company to provide local exchange service in 37 states and the
District of Columbia and is currently seeking certification in the remaining 13
states where the Company operates or plans to operate. In addition, the
Company's ability to offer services in its territory is limited by the size and
coverage of its network and competitive factors. The Company derives its
addressable market estimates by multiplying the total national market size
estimated above by the percentage of the population (as derived from U.S. Census
Bureau information) residing in the Company's market areas. This estimate
assumes that per capita telecommunications services usage is the same in various
regions of the United States. The Company estimates that its 1997 addressable
market, computed under this methodology, was approximately $34 billion.
Intermedia believes its 1998 addressable market to be over $90 billion, based on
the same calculation, including the impact of the Shared acquisition, and the
pending acquisitions of LDS and National.
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SALES, MARKETING AND SERVICE DELIVERY
Intermedia's marketing efforts focus on business and government entities.
Intermedia's current customers include large industrial and retail firms,
financial services companies, state government agencies and departments and
large academic and scientific organizations. Intermedia also serves a broad
range of small to medium sized businesses and numerous IXCs.
Intermedia possesses a unique targeted marketing approach. As Intermedia
enters a market, the sales force has clearly defined geographic boundaries based
on the margins attainable from delivering the Company's services. Intermedia's
sales force is compensated with higher incentives when they sell within these
higher margin zones.
Intermedia's marketing is organized around its three major service
categories: local exchange, enhanced data and long distance. Integration
services are offered in support of all three categories. The Company's marketing
and sales strategy is to build long-term business relationships with customers
by providing a full range of service offerings, leveraging one or two of
Intermedia's three major service categories into a broad relationship, in which
Intermedia becomes the single source provider of all the customer's
telecommunications services.
Intermedia's sales efforts utilize a multiple channel approach including
direct sales to end users and indirect sales through various channel partners
and targeted telemarketing. Intermedia's direct end-user sales force is composed
of three major groups: (i) Account Executives and Account Managers whose focus
is on small to medium-sized companies whose initial service offering is
generally local and long distance voice, (ii) Major Account Managers whose focus
is on medium sized companies with both voice and enhanced data service needs and
(iii) National Account Managers whose focus is on the largest, multi-location
companies whose interests usually begin with Intermedia's enhanced data
services.
In addition to the three end user sales groups, Intermedia has created
other specialized sales forces that focus on: (i) public sector markets,
particularly state governments and their agencies, (ii) interexchange carriers
and other carriers, (iii) value-added resellers and other wholesalers and (iv)
Internet connectivity.
All of Intermedia's sales groups are backed by highly experienced technical
personnel, including sales engineers and project managers, who are deployed
throughout Intermedia's service territory. Intermedia's service delivery staff
is organized around the delivery of total solutions to each customer. This
includes the proper coordination of service components provided by supporting
vendors, the preparation of the customers' site, if needed, and the
installation, testing and delivery to the customer of the service solution.
Thereafter, Intermedia monitors and maintains the quality and integrity of the
service through its customer service and technical support staff, available 24
hours per day, 365 days per year. Services are monitored at locations in Tampa,
Florida, Albany, New York and suburban Washington, DC.
NETWORK
In years past, simply owning fiber optic network transport created a
franchise. As network transport has become a commodity, Intermedia has focused
on those aspects of the service that remain as differentiators, retaining the
highest franchise value. Key among today's franchise points are connections to
customers and building entries. These connections provide Intermedia with the
platform to sell a variety of services to existing and additional potential
customers within a building. The 465 Class A office buildings currently served
by Shared exemplify the Company's franchise point strategy. These buildings
represent opportunities for Intermedia to cross sell its entire services
portfolio to both current Shared customers and to the other business tenants in
these buildings. Intermedia believes that its deployment of switching technology
and advanced network electronics enables the Company to better configure its
network to provide cost-effective and customized solutions to its customers.
Intermedia has the ability to lease network capacity from other carriers at
competitive rates. This has led Intermedia to lease network capacity in various
city markets prior to, or as an economical alternative to, building such
capacity. In addition, Intermedia intends to use resold services and unbundled
ILEC network elements to provide rapid market entry and develop its customer
base in advance of capital deployment. With
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network transport becoming a commodity, Intermedia believes that control of the
transport is a critical success factor, but that ownership of these facilities
is not mandatory. Utilizing leased facilities enables Intermedia to (i) meet
customers' needs more rapidly, (ii) improve the utilization of Intermedia's
existing network, (iii) add revenue producing customers before building out its
network, thereby reducing the risks associated with speculative network
construction and (iv) subsequently focus its capital expenditures in geographic
areas where network construction or acquisition will provide a competitive
advantage and clear economic benefit. Intermedia focuses its capital deployment
on the segments of its infrastructure that Intermedia believes will provide it
with the highest revenue and cash flow potential and the greatest long-term
competitive advantage. This prudent capital deployment strategy has provided
Intermedia with a high level of revenue per dollar of gross plant, property and
equipment, achieving revenue of $.63 per dollar of gross plant, property and
equipment for the year ended December 31, 1997.
In those markets where Intermedia chooses to deploy broadband fiber, the
Company's strategy is to deploy these network facilities to reach two sets of
targets: (i) the ILEC central offices ("COs") to which the majority of that
market's business access lines connect and (ii) the office buildings, office
parks or other such high concentrations of business access lines and potential
business customers. By using this approach, the Company is able to expend the
least capital to reach the greatest number of customers and prospects.
Facilities constructed in this manner may also be combined with facilities
leased from another provider.
The Company has fiber optic networks in service in Orlando, Tampa, Miami,
St. Petersburg, Jacksonville, and West Palm Beach, Florida, Cincinnati, Ohio,
Raleigh-Durham, North Carolina, Huntsville, Alabama, and St. Louis, Missouri.
Intermedia continues to expand these networks as needed to reach customers and
targeted ILEC central offices. Intermedia's ten city-based networks are
comprised of fiber optic cables, integrated switching facilities, advanced
electronics, data switching equipment (e.g. frame relay and ATM), transmission
equipment and associated wiring and equipment. As a result of its acquisition of
EMI Communications Corp. ("EMI") in 1996, Intermedia also utilizes certain
wireless technologies as a part of its provision of services. Intermedia owns a
long-haul microwave transmission system comprising approximately 5,000 route
miles in the Northeast, which is principally used for transporting digital
interexchange trunking and analog video signals.
The Company has undertaken a significant network expansion to satisfy the
demands of its market driven growth in interexchange data and voice offerings.
The Company has deployed resources, primarily switching equipment, to develop an
extensive network to provide these services. Excess capacity on this primarily
leased network can be used to provide incremental telecommunications services
such as interexchange long distance services.
Intermedia has deployed a backbone network that is being upgraded to allow
all network applications, voice and data, to be carried over a single
infrastructure utilizing ATM transport and switching. Intermedia believes that
extending ATM transport and switching to the edges of its network will provide
for both economic advantage and innovative service offerings. A single access
circuit carrying voice and data traffic in packets or cells from the customer
location to the Intermedia network can replace several less efficient circuits.
Once a packet or cell reaches the Intermedia network it can be efficiently
switched and transported through the ATM network, and stripped off this
efficient system only when needed to interface with the public telephone
network, or another carrier's less efficient data network.
A local telephone call, carried end to end over Intermedia's Packet/Cell
Switched Network as described above, costs substantially less to deliver than a
local call carried over a traditional telephone switch. Further, an ATM switch
can handle approximately ten times as many calls as a voice switch and costs
approximately one tenth as much as a voice switch, yielding a cost reduction of
up to 99% for the switching components of local telephone calls, compared to the
traditional switching method. Intermedia believes that the deployment of such a
Packet/Cell Switched Network will allow it to achieve a cost of service
advantage over the ILEC, whose substantial size advantage over Intermedia is
offset in part by its inability to replace its entire network fabric with one
such as Intermedia's integrated platform described above. The Company intends to
have deployed ATM switching nodes in 35 cities across the United States by the
end of 1998.
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The combination of the Company's city-based networks and its intercity
capacity comprise the seamless network platform which enables it to offer its
broad array of telecommunications services to its customers. Intermedia believes
that an important aspect of satisfying its customers is its ability to provide
and support services from end to end. This requires network interconnection with
other carriers and operational support systems and tools to "manage" the
customer's total service. Intermedia has entered into interconnection co-carrier
agreements with all relevant carriers in its service territory. Intermedia has
also interconnected its frame relay network to various ILECs, thereby
substantially expanding the reach of its enhanced data services. Intermedia now
provides originating and terminating transport services in all 50 states and
maintains points of presence for interexchange and enhanced data services in
most major cities in the United States. Intermedia has deployed, and continues
to integrate, network monitoring and control tools to insure high levels of
service quality and reliability. Among these, Intermedia's ViewSPAN service
allows the Company and its frame relay network service customers to have full
end to end visibility of network performance, even across interconnections with
other carrier's networks.
The Company founded the UniSPAN(C) consortium in 1994 with three other
carriers to enable Intermedia to provide end-to-end frame relay services
throughout the United States and Canada. While Intermedia continues to
participate as a member of UniSPAN(C), Intermedia has since acquired the other
major member of that consortium and, through its internal expansion and
acquisitions, now operates its own nationwide frame relay network. Because of
the high volume of telecommunications traffic between Intermedia's target
markets and certain Latin American markets, Intermedia has also entered into
international frame relay operating agreements with ImpSat of Columbia S.A.,
TresCom International, Telecom Holdings Panama and Americatel Corporation for
the provision of frame relay services to and from Columbia, Puerto Rico, Panama,
Chile & Costa Rica. Intermedia plans to pursue similar arrangements to enter
other Latin American markets. In addition, Intermedia has pioneered the
interconnection of its frame relay network with those of the ILECs, allowing
pervasive, cost-efficient termination for its customers. Over 380 such NNIs have
been implemented, including those with BellSouth, US West, Sprint, GTE, Bell
Atlantic and SNET. Intermedia has such NNIs in 85% of the nation's Local Access
and Transport Areas ("LATAs").
The Company's telecommunications equipment vendors actively participate in
planning and developing electronic equipment for use in Intermedia's network.
The Company does not believe it is dependent on any single vendor for equipment.
Because the Company uses existing telecommunications technology rather than
developing it, Intermedia's research and development expenditures are not
material.
INFORMATION SYSTEMS
Intermedia believes the information systems that support its business
comprise a key aspect of its customer support services. Intermedia's business
processes, including accepting a service order, implementing the service,
providing ongoing technical and customer support and the invoicing and
collecting payment for the service are a highly repetitive, data-oriented set of
tasks. By creating a flexible, unified database and establishing a middleware
layer of standards-based software, Intermedia expects to allow all customer
support functions (order entry, billing, service implementation, network
management, etc.) efficient access to data. Management believes that external
applications, such as those that are used by acquired firms and systems that
will be used by the ILECs for service orders and billing, will have the ability
to interface with and interact with this information systems structure and that
this integrated system will enhance Intermedia's ability to deliver and support
an integrated package of services. Intermedia believes this architecture will
offer cost performance, flexibility and scalability that will support its rapid
growth, provide for high staff productivity, and support its strategy of
offering fully integrated services to its customers.
COMPETITION
Intermedia faces intense competition in each of its three service
categories: local services, enhanced services and long distance services.
Intermedia believes that various legislative initiatives, including the
Telecommunications Act of 1996 (the "1996 Act"), have removed many of the
remaining legislative barriers to local exchange competition.
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Nevertheless, the extent to which the parameters of local competition will be
determined by the FCC or by individual states remains unclear. Moreover, in
light of the passage of the 1996 Act, regulators are also likely to provide
ILECs with increased pricing flexibility as competition increases. If ILECs are
permitted to lower their rates substantially or engage in excessive volume or
term discount pricing practices for their customers, the net income or cash flow
of ICPs and CLECs, including Intermedia, could be materially adversely affected.
In addition, while Intermedia currently competes with AT&T, MCI and others in
the interexchange services market, recent federal legislation permits the RBOCs
to provide interexchange services once certain criteria are met. Once the RBOCs
begin to provide such services, they will be in a position to offer single
source service similar to that being offered by Intermedia. Recently, a Federal
District Court in Texas found unconstitutional certain provisions of the 1996
Act restricting the RBOCs from offering long distance service in their operating
regions until they could demonstrate that their networks have been made
available to competitive providers of local exchange services in those regions.
If that decision, which has been stayed pending appeal, is permitted to stand,
it could result in RBOCs providing interexchange service in their operating
regions sooner than previously expected. In addition, AT&T and MCI have entered,
and other interexchange carriers have announced their intent to enter, the local
exchange services market, which is facilitated by the 1996 Act's resale and
unbundled network element provisions. Intermedia cannot predict the number of
competitors that will emerge as a result of existing or new federal and state
regulatory or legislative actions. Competition from the RBOCs with respect to
interexchange services or from AT&T, MCI or others with respect to local
exchange services could have a material adverse effect on Intermedia's business.
Competition in each of the service categories provided by Intermedia, as
well as for systems integration which is common to all market segments, is
discussed below.
Local Services. In each of its geographic markets, Intermedia faces
significant competition for the local services it offers from RBOCs and other
ILECs, which currently dominate their local telecommunications markets. These
companies all have long-standing relationships with their customers and have
financial, personnel and technical resources substantially greater than those of
Intermedia.
Intermedia also faces competition in most markets in which it operates from
one or more CLECs or ICPs operating fiber optic networks. Other local service
providers have operations or are initiating operations within one or more of
Intermedia's service areas. Intermedia expects MCI (on its own and through its
proposed acquisition by WorldCom), AT&T (through its pending acquisition of
Teleport) and certain cable television providers, many of which are
substantially larger and have substantially greater financial resources than
Intermedia, to enter some or all of the markets that Intermedia presently
serves. At least two of these competitors, MCI/WorldCom and Teleport, have
entered or announced plans to enter a number of Intermedia's service areas.
Intermedia also understands that other entities have indicated their desire to
enter the local exchange services market within specific metropolitan areas
served or targeted by Intermedia. Other potential competitors of Intermedia
include cable television systems, utility companies, long distance carriers,
wireless systems and private networks built by individual business customers.
Intermedia cannot predict the number of competitors that will emerge as a result
of existing or any new federal and state regulatory or legislative actions.
Competition in all of Intermedia's geographic market areas is based on
quality, reliability, customer service and responsiveness, service features and
price. Intermedia has kept its prices at levels competitive with those of the
ILECs while providing, in the opinion of Intermedia, a higher level of service
and responsiveness to its customers.
Although the ILECs are generally subject to greater pricing and regulatory
constraints than other local network service providers, ILECs are achieving
increasing pricing flexibility for their local services as a result of recent
legislative and regulatory developments. The ILECs have continued to lower
rates, resulting in downward pressure on certain dedicated and switched access
transport rates. This price erosion has decreased operating margins for these
services. However, Intermedia believes this effect will be more than offset by
the increased revenues available as a result of access to customers provided
through interconnection co-carrier agreements and the opening of local exchange
service to competition. In addition, Intermedia believes that lower rates for
dedicated access will benefit other services offered by Intermedia.
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Enhanced Data Services. Intermedia faces competition in its enhanced data
services business from IXCs, very small aperture terminal ("VSAT") providers,
ILECs and others. Many of Intermedia's existing and potential competitors have
financial and other resources significantly greater than those of Intermedia.
Intermedia competes with the larger IXCs on the basis of service
responsiveness, rapid response to technology and service trends and a regional
focus borne of early market successes. All of the major IXCs, including AT&T,
MCI and Sprint offer frame relay services and several of the major IXCs have
announced plans to provide Internet services. Intermedia believes it competes
favorably with these providers in its markets, based on the features and
functions of its services, the high density of its networks, relatively greater
experience and in-house expertise. Continued aggressive pricing is expected to
support continued rapid growth, but will place increasing pressure on operating
margins.
Intermedia also competes with VSAT services on the basis of price and data
capacity. Intermedia believes that the relatively low bandwidth of each VSAT
terminal and the cost of purchasing and installing VSAT equipment limits the
ability of VSAT to compete with the frame relay services provided by Intermedia.
Many of the ILECs now offer services similar to Intermedia's enhanced data
services, but offer them only on an intraLATA and out-of-region interLATA basis.
While the ILECs generally cannot interconnect their frame relay networks with
each other, Intermedia has interconnected its frame relay network with those of
various ILECs. As a result, Intermedia can use certain ILEC services to keep its
own costs down when distributing into areas that cannot be more economically
serviced on its own network. Intermedia expects the ILECs to aggressively expand
their enhanced data services as regulatory developments permit them to deploy
in-region interLATA long distance networks. When the ILECs are permitted to
provide such services, they will be in a position to offer single source service
similar to that being offered by Intermedia. As part of its various
interconnection agreements, Intermedia has negotiated favorable rates for
unbundled ILEC frame relay service elements. Intermedia expects such
negotiations to decrease its costs, positively impacting margins for this
service.
Interexchange Services. Intermedia currently competes with AT&T, MCI and
others in the interexchange services market. Many of Intermedia's competitors
have longstanding relationships with their customers and have financial,
personnel and technical resources substantially greater than those of
Intermedia. In providing interexchange services, Intermedia focuses on quality
service and economy to distinguish itself in a very competitive marketplace and
has built a loyal customer base by emphasizing its customer service. The
additional new services that are offered as Intermedia implements its local
exchange services should further support this position by allowing Intermedia to
market a wide array of fully integrated telecommunications services. While these
services are subject to highly competitive pricing pressures, Intermedia's cost
to provide these services is decreasing as it deploys more local/long distance
voice switches and interexchange network facilities.
Systems Integration. Intermedia faces competition in its systems
integration business from equipment manufacturers, the RBOCs and other ILECs,
long distance carriers and systems integrators, many of which have financial,
and other resources significantly greater than those of Intermedia. Because
Intermedia is not highly dependent on system integration revenues and because
Intermedia typically provides system integration services to customers who
purchase other services of Intermedia, Intermedia's systems integration
competitors should not pose a significant threat to Intermedia's overall
business.
GOVERNMENT REGULATION
Overview. Intermedia's services are subject to varying degrees of federal,
state and local regulation. The FCC exercises jurisdiction over all facilities
of, and services offered by, telecommunications common carriers to the extent
those facilities are used to provide, originate or terminate interstate or
international communications. The state regulatory commissions retain
jurisdiction over most of the same facilities and services to the extent they
are used to originate or terminate intrastate communications. In addition, the
validity and interpretation of many of the regulations issued by these
regulatory bodies may be subject to judicial review, the result of which
Intermedia is unable to predict. Intermedia is currently not subject to price
cap or rate of
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return regulation at the state or federal level nor is it currently required to
obtain FCC authorization for the installation, acquisition or operation of its
domestic network facilities.
Federal Regulation. Intermedia must comply with the requirements of common
carriage under the Communications Act of 1934 (the "Communications Act"), as
amended. Comprehensive amendments to the Communications Act were made by the
1996 Act, which was signed into law on February 8, 1996. The 1996 Act effected
plenary changes in regulation at both the federal and state levels that affect
virtually every segment of the telecommunications industry. The stated purpose
of the 1996 Act is to promote competition in all areas of telecommunications and
to reduce unnecessary regulation to the greatest extent possible. While it will
take years for the industry to feel the full impact of the 1996 Act, it is
already clear that the legislation provides Intermedia with both new
opportunities and new challenges.
The 1996 Act gives the FCC the authority to forebear from regulating
companies if it finds that such regulation does not serve the public interest,
and directs the FCC to review its regulations for continued relevance on a
regular basis. As a result of this directive, a number of the regulations that
historically applied to Intermedia have been eliminated and others may continue
to be eliminated in the future. While it is therefore expected that a number of
regulations currently applicable to Intermedia will be eliminated in time, the
most significant of those which still apply to Intermedia are discussed below.
The FCC has established different levels of regulation for dominant and
non-dominant carriers. Of domestic common carrier service providers, only GTE,
the RBOCs and other ILECs are classified as dominant carriers, and all other
providers of domestic common carrier services, including Intermedia, are
classified as non-dominant carriers. The 1996 Act provides the FCC with the
authority to forebear from imposing any regulations it deems unnecessary,
including requiring non-dominant carriers to file tariffs. On November 1, 1996,
in its first major exercise of regulatory forbearance authority granted by the
1996 Act, the FCC issued an order detariffing domestic interexchange services.
The order required mandatory detariffing and gave carriers such as Intermedia
nine months to withdraw federal tariffs and move to contractual relationships
with its customers. This order subsequently was stayed by a federal appeals
court and it is unclear at this time whether the detariffing order will be
implemented. Until further action is taken by the FCC or the courts, Intermedia
will continue to maintain tariffs for these services.
In an order released on October 18, 1995, the FCC found that the transport
of frame relay service should be classified as a "basic" service. Previously, it
was common practice in the industry for many carriers to consider frame relay an
"enhanced" service. This decision was significant because the FCC requires that
basic services be tariffed, but permits enhanced services to be offered on an
off-tariff basis. As a result of the FCC's decision, all carriers that provide
frame relay transport were required to include the service in their federal
tariffs by May 6, 1996. Intermedia has included its frame relay service in its
federal tariff. The "basic" and "enhanced" terminology used by the FCC is a
regulatory term of art denoting the classification of services for tariffing
purposes. This regulatory use of the term should not be confused with
Intermedia's description of a class of services-frame relay, ATM and Internet
services-as "enhanced" elsewhere in this document.
On May 16, 1997, the FCC released an order that fundamentally restructured
the "access charges" that ILECs charge to interexchange carriers and end user
customers. Intermedia believes that the FCC's new access charge rules do not
adversely affect Intermedia's business plan, and that they in fact present
significant new opportunities for new entrants, including Intermedia. Aspects of
the access charge order may be changed in the future. Numerous parties have
either filed appeals with federal courts or asked the FCC to reconsider portions
of its new rules.
The 1996 Act greatly expands the FCC's interconnection requirements on the
ILECs. The 1996 Act requires the ILECs to: (i) provide physical collocation,
which allows companies such as Intermedia and other interconnectors to install
and maintain their own network termination equipment in ILEC central offices,
and virtual collocation only if requested or if physical collocation is
demonstrated to be technically infeasible; (ii) unbundle components of their
local service networks so that other providers of local service can compete for
a wider range of local services customers; (iii) establish "wholesale" rates for
their services to promote resale by CLECs and other competitors; (iv) establish
number portability, which will allow a customer to retain its existing phone
number if it switches from the ILEC to a competitive local service provider;
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(v) establish dialing parity, which ensures that customers will not detect a
quality difference in dialing telephone numbers or accessing operators or
emergency services; and (vi) provide nondiscriminatory access to telephone
poles, ducts, conduits and rights-of-way. In addition, the 1996 Act requires
ILECs to compensate competitive carriers for traffic originated by the ILECs and
terminated on the competitive carriers' networks. A dispute has arisen over this
provision of the 1996 Act, with most ILECs arguing that they are not obligated
to pay CLECs -- including Intermedia -- for local calls made to ISPs. This
dispute has resulted in two ILECs withholding approximately $10.2 million in
payments to Intermedia. Recently, Intermedia and other ILECs have asked state
regulatory commissions to resolve this dispute. To date, 13 of 14 state
commissions that have ruled on the issue have found that ILECs must pay
compensation to competitive carriers for local calls to ISPs located on
competitive carriers' networks. A contrary ruling by an administrative law judge
in Oklahoma is currently being appealed. A number of other state commissions
currently have proceedings pending to consider this matter.
The FCC is charged with establishing national guidelines to implement the
1996 Act. The FCC issued its Interconnection Order on August 8, 1996. On July
18, 1997, the U.S. Court of Appeals for the Eighth Circuit issued a decision
vacating the FCC's pricing and "most favored nation" rules, as well as certain
other portions of the FCC's interconnection rules. On October 14, 1997, the
Eighth Circuit issued an order clarifying its previous decision. In this order,
the Court held that ILECs have an obligation under the 1996 Act to offer other
carriers access to the ILECs network elements on an unbundled basis, but the
ILECs do not have an obligation to recombine those elements for use by other
carriers. Most recently, on January 22, 1998, the Eighth Circuit reiterated that
the FCC is bound by the pricing policies of the state regulatory commissions
regarding interconnection, unbundled access, resale, and transport and
termination of local telecommunications traffic and rebuffed what it perceived
as an attempt by the FCC to condition the RBOCs' provision of in-region long
distance service on compliance with federal pricing policies regarding these
items. The FCC's and other parties' petitions to the Supreme Court requesting
review of these decisions have been granted. Even though the Eighth Circuit's
decision currently restricts the role of the FCC with respect to pricing and
other issues (pending review by the Supreme Court) these issues remain subject
to scrutiny and oversight by state regulatory commissions which may exercise
their discretion to adopt policies similar to or different from those proposed
by the FCC.
As part of its pro-competitive policies, the 1996 Act frees the RBOCs from
the judicial orders that prohibited their provision of interLATA services.
Specifically, the Act permits RBOCs to provide long distance services outside
their local service regions immediately, and will permit them to provide
in-region interLATA service upon demonstrating to the FCC and state regulatory
agencies that they have adhered to the FCC's interconnection regulations. Some
RBOCs have filed applications with various state public utility commissions and
the FCC seeking approval to offer in-region interLATA service. Some states have
denied these applications while others have approved them. However, to date,
even where the RBOCs' applications have received state approval the FCC has
denied each of the RBOCs' applications brought before it.
On December 31, 1997, however, a Federal District Court in Texas found
unconstitutional the provisions of the 1996 Act restricting the RBOCs from
offering long distance service in their operating regions until they could
demonstrate that their networks have been made available to competitive
providers of local exchange services in those regions. At the request of the FCC
and some long distance companies, the court has stayed its decision pending
appeal. If the District Court's decision is permitted to stand, it could result
in the RBOCs providing interexchange service in their operating regions sooner
than previously expected.
As a result of these provisions of the 1996 Act, Intermedia has taken the
steps necessary to be a provider of local exchange services and has positioned
itself as a full service, integrated telecommunications services provider.
Intermedia has obtained local certification in 37 states and the District of
Columbia and is currently seeking certification in the remaining 13 states. In
addition, Intermedia has successfully negotiated interconnection agreements with
eight ILECs.
The 1996 Act's interconnection requirements also apply to interexchange
carriers and all other providers of telecommunications services, although the
terms and conditions for interconnection provided by these carriers are not
regulated as strictly as interconnection provided by the ILECs. This may provide
Intermedia
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with the ability to reduce its own access costs by interconnecting directly with
non-ILECs, but may also cause Intermedia to incur additional administrative and
regulatory expenses in replying to interconnection requests.
While the 1996 Act reduces regulation to which non-dominant local exchange
carriers are subject, it also reduces the level of regulation that applies to
the ILECs and increases their ability to respond quickly to competition from
Intermedia and others. For example, in accordance with the 1996 Act, the FCC has
proposed to subject the ILECs to "streamlined" tariff regulation for
interexchange services, which would greatly accelerate the time in which tariffs
that change service rates take effect and eliminate the requirement that ILECs
obtain FCC authorization before constructing new domestic facilities. These
actions will allow ILECs to change service rates more quickly in response to
competition. The FCC initiated a proceeding on December 24, 1996 that addresses
these issues. Similarly, the FCC has initiated a proceeding to review its price
cap rules that may permit significant new pricing flexibility to ILECs. To the
extent that such increased pricing flexibility is provided, Intermedia's ability
to compete with ILECs for certain services may be adversely affected.
In addition, the 1996 Act directs the FCC, in cooperation with state
regulators, to establish a Universal Service Fund that will provide subsidies to
carriers that provide service to under-served individuals and in high cost
areas. A portion of carriers' contributions to the Universal Service Fund also
will be used to provide facilities for schools, libraries and certain rural
health care providers. The FCC released its order in June 1997. This order will
require Intermedia to contribute to the Universal Service Fund, but may also
allow Intermedia to receive payments from the Fund if it is deemed eligible.
Intermedia also may provide service to under-served customers in lieu of making
Universal Service Fund payments. Intermedia's 1998 contribution resulting from
these regulations is estimated to be $750,000 to $1.5 million. For the first and
second calendar quarters of 1998, the Federal Communications Commission
established payment rates for all IXCs, including the Company, that amount to 3
to 4% of eligible intrastate, interstate, and international long distance
service revenues. The FCC allows all IXCs, including the Company, to recover the
international and interstate portions of these payments by passing the charges
through to their customers.
State Regulation. To the extent that Intermedia provides intrastate
service, it is subject to the jurisdiction of the relevant state public service
commissions. Intermedia currently provides some intrastate services in all 50
states and is subject to regulation by the public service commissions of those
states. Intermedia is currently certificated (or certification is not required)
in all 50 states and the District of Columbia to provide interexchange services.
Intermedia is certified as a CLEC in 37 states and the District of Columbia and
is currently seeking CLEC certification in the remaining 13 states. Intermedia
is constantly evaluating the competitive environment and may seek to further
expand its intrastate certifications into additional jurisdictions.
The 1996 Act preempts state statutes and regulations that restrict the
provision of competitive local services. As a result of this sweeping
legislation, Intermedia will be free to provide the full range of intrastate
local and long distance services in all states in which it currently operates,
and any states into which it may expand. While this action greatly increases
Intermedia's addressable customer base, it also increases the amount of
competition to which Intermedia may be subject.
Although the 1996 Act's prohibition of state barriers to competitive entry
took effect on February 8, 1996, various legal and policy matters must be
resolved before the 1996 Act's policies are fully implemented. Intermedia
continues to support efforts at the state government level to encourage
competition in their markets under the federal law and to permit ICPs and CLECs
to operate on the same basis and with the same rights as the ILECs. In addition,
Intermedia has been successful in its pursuit of local certificates from state
commissions and negotiated interconnection agreements with the ILECs which
permit Intermedia to meet its business objectives despite the uncertain
regulatory environment.
In most states, Intermedia is required to file tariffs setting forth the
terms, conditions and prices for services classified as intrastate (local,
interexchange and enhanced). Most states require Intermedia to list the services
provided and the specific rate for each service. Under different forms of
regulatory flexibility, Intermedia may be allowed to set price ranges for
specific services, and in some cases, prices may be set on an individual
customer basis. Intermedia is not subject to price cap or rate of return
regulation in any state in which it is currently certificated to provide local
exchange service. Some states also require Intermedia to seek
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the approval of the local public service commission for the issuance of debt or
equity securities or other transactions which would result in a lien on
Intermedia's property used to provide intrastate service within those states.
As Intermedia expands its operations into other states, it may become
subject to the jurisdiction of their respective public service commissions for
certain services offered by Intermedia. Intermedia does not believe that its
relationship with Latin American or other international service providers
currently subjects it to (or will subject it to) regulation outside the United
States.
Local Government Authorizations. Intermedia may be required to obtain from
municipal authorities street opening and construction permits to install and
expand its fiber optic networks in certain cities. In some cities, local
partners or subcontractors may already possess the requisite authorizations to
construct or expand Intermedia's network.
In some of the areas where Intermedia provides service, it may be subject
to municipal franchise requirements and may be required to pay license or
franchise fees based on a percentage of gross revenue or other formula. There
are no assurances that certain municipalities that do not currently impose fees
will not seek to impose fees in the future, nor is there any assurance that,
following the expiration of existing franchises, fees will remain at their
current levels. In many markets, other companies providing local
telecommunications services, particularly the ILECs, currently are excused from
paying license or franchise fees or pay fees that are materially lower than
those required to be paid by Intermedia. The 1996 Act requires municipalities to
charge nondiscriminatory fees to all telecommunications providers, but it is
uncertain how quickly this requirement will be implemented by particular
municipalities in which Intermedia operates or plans to operate or whether it
will be implemented without a legal challenge initiated by Intermedia or another
ICP or CLEC. If any of Intermedia's existing network agreements were terminated
prior to their expiration date and Intermedia was forced to remove its fiber
optic cables from the streets or abandon its network in place, even with
compensation, such termination could have a material adverse effect on
Intermedia.
Intermedia also must obtain licenses to attach facilities to utility poles
to build and expand facilities. Because utilities that are owned by cooperatives
or municipalities are not subject to federal pole attachment regulation, there
is no assurance that Intermedia will be able to obtain pole attachment from
these utilities at reasonable rates, terms and conditions.
AGREEMENTS
Interconnection Co-carrier Agreements. The Company has entered
interconnection co-carrier agreements with BellSouth, SBC Communications Inc.,
GTE, Sprint, Bell Atlantic, Cincinnati Bell, Inc., SNET and Ameritech
Corporation. Each of these agreements, among other things, provides for mutual
and reciprocal compensation, local interconnection, resale of local exchange
services, access to unbundled network elements, service provider number
portability and access to operator service, directory service and 911 service,
as provided for in the 1996 Act. The agreements further provide that additional
terms and conditions will be set by negotiation between the parties relating to
issues which arise that were not originally contemplated by the agreements.
These agreements were executed during 1996, 1997 and 1998 and have terms ranging
from two to three years.
Network Agreements. The Company has built its digital fiber optic networks
pursuant to various rights-of-way, conduit and dark fiber leases, utility pole
attachment agreements and purchase arrangements (collectively, the "Network
Agreements"). Substantially all of the Network Agreements (other than utility
pole attachment agreements, which typically can be terminated on 90 days notice)
are for a long-term and include renewal options.
Although none of the Network Agreements are exclusive, the Company believes
that conduit space, fiber availability and other physical constraints make it
unlikely that the lessors under the various Network Agreements could easily make
similar arrangements available to others. The Company believes that its
relationships with its lessors are satisfactory. Certain of the Network
Agreements require Intermedia to make revenue sharing payments or, in some
cases, to provide a fixed price alternative or dark fiber to the lessor without
an additional charge. In addition, the Company has various other performance
obligations under its Network Agreements, the breach of which could result in
the termination of such agreements. Further,
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actions by governmental regulatory bodies could, in certain instances, also
result in the termination of certain Network Agreements. The cancellation of any
of the material Network Agreements could materially adversely affect the
Company's business in the affected metropolitan area. See "Risk Factors -- Risk
of Cancellation or Non-Renewal of Network Agreements, Licenses and Permits."
Interexchange Agreements. Intermedia, from time to time, enters into
purchase agreements with interexchange carriers for the transport and/or
termination of long distance calls outside of its territory. These contracts are
typically two years in duration and customarily include minimum purchase
amounts. The pending agreement with Williams, described earlier, will be the
Company's largest IXC agreement to date and will provide a 20 year IRU for high
bandwidth on William's nationwide fiber optic network. The Company believes that
the Williams agreement will allow it to reduce its unit cost for interexchange
transport capacity by up to 50% of current levels.
EMPLOYEES
As of December 31, 1997, Intermedia employed a total of 2,036 full-time
employees. The Company anticipates that the number of employees will increase
significantly throughout 1998. The Company believes that its future success will
depend in large part on its continued ability to attract and retain highly
skilled and qualified personnel. The Company also regularly uses the services of
contract technicians for the installation and maintenance of its network. As of
December 31, 1997, none of Intermedia's employees were represented by a
collective bargaining agreement. Intermedia believes that its relations with its
employees are good.
RISK FACTORS
Limited Operations of Certain Services; History of Net
Losses. Intermedia's business commenced in 1987. Substantially all of
Intermedia's revenues are derived from local exchange services, enhanced data
services, long distance services, integration services and certain local network
services. Many of these services have only recently been initiated or their
availability only recently expanded in new market areas. Intermedia is expecting
to substantially increase the size of its operations in the near future.
Prospective investors, therefore, have limited historical financial information
about Intermedia upon which to base an evaluation of Intermedia's performance.
Given Intermedia's limited operating history, there is no assurance that it will
be able to compete successfully in the telecommunications business.
The development of Intermedia's business and the expansion of its network
require significant capital, operational and administrative expenditures, a
substantial portion of which may be incurred before the realization of revenues.
These capital expenditures will result in negative cash flow until an adequate
customer base is established. Although its revenues have increased in each of
the last three years, Intermedia has incurred significant increases in expenses
associated with the installation of local/long distance voice switches and
expansion of its fiber optic networks, services and customer base. Intermedia
reported net losses attributable to Common Stockholders of approximately $20.7
million, $57.2 million and $284.9 million for the years ended December 31, 1995,
1996 and 1997, respectively. Intermedia expects net losses to continue for the
next several years. In addition, Intermedia had negative EBITDA in 1996 and
1997. There can be no assurance that Intermedia will achieve or sustain
profitability and/or positive EBITDA in the future.
Substantial Indebtedness; Insufficiency of Earnings to Cover Fixed
Charges. Intermedia is highly leveraged. At December 31, 1997, after giving pro
forma effect to the acquisition of Shared and the pending acquisitions of LDS
and National, Intermedia would have had outstanding approximately $1.5 billion
in aggregate principal amount of indebtedness and other liabilities on a
consolidated basis (including trade payables) and approximately $688.9 million
of obligations with respect to three outstanding series of preferred stock. The
degree to which Intermedia is leveraged could have important consequences to
holders of the Common Stock, including the following: (i) a substantial portion
of Intermedia's cash flow from operations will be dedicated to payment of the
principal and interest on its indebtedness and dividends on and the redemption
of outstanding preferred stock thereby reducing funds available for other
purposes; (ii) Intermedia's significant degree of leverage could increase its
vulnerability to changes in general economic conditions or increases in
prevailing interest rates; (iii) Intermedia's ability to obtain additional
financing for
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working capital, capital expenditures, acquisitions, general corporate purposes
or other purposes could be impaired; and (iv) Intermedia may be more leveraged
than certain of its competitors, which may be a competitive disadvantage.
Intermedia's historical earnings have been insufficient to cover combined
fixed charges and dividends on preferred stock by $2.3 million, $3.3 million,
$19.8 million, $60.0 million and $245.7 million for each of the years ended
December 31, 1993, 1994, 1995, 1996 and 1997, respectively. Combined fixed
charges and dividends include interest and dividends whether paid or accrued. On
a pro forma basis, after giving effect to the acquisition of Shared, the pending
acquisitions of LDS and National and each of the Company's 1997 debt and equity
offerings as if they had been consummated at the beginning of the year,
Intermedia's earnings were insufficient to cover combined fixed charges and
dividends on preferred stock by $432.7 million for the year ended December 31,
1997. Intermedia anticipates that earnings will be insufficient to cover fixed
charges for the next several years. In order for Intermedia to meet its debt
service obligations and its dividend and redemption obligations with respect to
its outstanding preferred stock, Intermedia will need to substantially improve
its operating results. There can be no assurance that Intermedia's operating
results will be of sufficient magnitude to enable Intermedia to meet such debt
service, dividend and redemption obligations. In the absence of such operating
results, Intermedia could face substantial liquidity problems and may be
required to raise additional financing through the issuance of debt or equity
securities; however, there can be no assurance that Intermedia would be
successful in raising such financing, or the terms or timing thereof.
Significant Capital Requirements and Need for Additional
Financing. Expansion of Intermedia's existing networks and services and the
development of new networks and services require significant capital
expenditures. Intermedia expects to fund its capital requirements through
existing resources, joint ventures, debt or equity financing, credit
availability and internally generated funds. Intermedia expects that continued
expansion of its business will require raising equity and/or debt by the end of
fiscal 1999. Depending on market conditions, Intermedia may determine to raise
additional capital before such time. There can be no assurance, however, that
Intermedia will be successful in raising sufficient debt or equity on terms that
it will consider acceptable. Moreover, the terms of Intermedia's outstanding
indebtedness and preferred stock impose certain restrictions upon Intermedia's
ability to incur additional indebtedness or issue additional preferred stock. In
addition, Intermedia's future capital requirements will depend upon a number of
factors, including marketing expenses, staffing levels and customer growth, as
well as other factors that are not within Intermedia's control, such as
competitive conditions, government regulation and capital costs. Failure to
generate sufficient funds may require Intermedia to delay or abandon some of its
future expansion or expenditures, which would have a material adverse effect on
its growth and its ability to compete in the telecommunications industry.
Lack of Dividend History. Intermedia has never declared or paid any cash
dividends on its Common Stock and does not expect to declare any such dividends
in the foreseeable future. Payment of any future dividends will depend upon
earnings and capital requirements of Intermedia, Intermedia's debt facilities
and other factors the Board of Directors considers appropriate. Intermedia
intends to retain earnings, if any, to finance the development and expansion of
its business, and therefore does not anticipate paying any dividends in the
foreseeable future. In addition, the terms of the outstanding indebtedness and
preferred stock restrict the payment of dividends on Common Stock. Intermedia
may also establish a bank credit facility which may be secured by a substantial
portion of the assets of Intermedia and would contain additional dividend
restrictions.
Risks Associated with Acquisitions. Intermedia has recently consummated
its acquisition of Shared and has entered into definitive agreements to acquire
LDS and National. Such acquisitions could divert the resources and management
time of Intermedia and would require integration with Intermedia's existing
networks and services. There can be no assurance that the pending acquisitions
of LDS and National will be consummated or that any other acquisitions will
occur or that any such acquisitions, including the acquisition of Shared and the
pending acquisitions of LDS and National, if made, would be on terms favorable
to Intermedia or would be successfully integrated into Intermedia's operations.
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Consistent with its strategy, Intermedia is currently evaluating and often
engages in discussions regarding various acquisition opportunities. These
acquisitions could be funded by cash on hand and/or Intermedia's securities. It
is possible that one or more of such possible future acquisitions, if completed,
could adversely affect Intermedia's funds from operations or cash available for
distribution, in the short term, in the long term or both, or increase
Intermedia's debt, or such an acquisition could be followed by a decline in the
market value of Intermedia's securities.
Failure to Obtain Third Party Consents in connection with an Acquisition or
Merger. Intermedia has consummated a number of acquisitions over the past two
years, including the acquisition of Shared, and expects to consummate additional
acquisitions during the current fiscal year. In connection therewith, Intermedia
may not have obtained or, as in the case of the acquisition of Shared, may have
elected not to seek, and in connection with future acquisitions may elect not to
seek, all required consents from third parties with respect to acquired
contracts. If an acquired contract required the consent of a third party and
such consent was not obtained, the third party could assert a breach of the
contract. Intermedia believes that the failure to obtain any such third party
consents should not result in any material adverse consequences to Intermedia,
although there can be no assurance that such a consequence will not result.
Year 2000 Risk. Intermedia has implemented a Year 2000 program to ensure
that its computer systems and applications will function properly beyond 1999.
Intermedia believes that it has allocated adequate resources for this purpose
and expects its Year 2000 date conversion program to be successfully completed
on a timely basis. There can, however, be no assurance that this will be the
case. The Company does not expect to incur significant expenditures to address
this issue. The ability of third parties with whom Intermedia transacts business
to adequately address their Year 2000 issues is outside of the Company's
control. There can be no assurance that the failure of the Company or such third
parties to adequately address their respective Year 2000 issues will not have a
material adverse effect on the Intermedia's business, financial condition, cash
flows and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Impact of Year 2000."
Regulatory Approval relating to 1997 Offerings. Certain states in which
Intermedia is certificated provide for prior approval or notification of the
issuance of securities by Intermedia. Because of time constraints, Intermedia
did not obtain approval from all such states prior to the consummation of the
offerings of its securities during 1997. The requirements for these filings may
have been pre-empted by the National Securities Market Improvement Act of 1996,
although there is no case law on this point. Intermedia has filed all of the
necessary notifications and applications for approval in these states. After
consultation with counsel, Intermedia believes the remaining regulatory
approvals will be granted and that obtaining such approvals subsequent to the
offerings should not result in any material adverse consequences to Intermedia,
although there can be no assurance that such a consequence will not result.
Maintenance of Peering Relationships. The Internet is comprised of many
ISPs who operate their own networks and interconnect with other ISPs at various
peering points. The establishment and maintenance of peering relationships with
other ISPs is necessary to exchange traffic with other ISPs without having to
pay settlement charges. Although Intermedia meets the industry's current
standards for peering, there is no assurance that other national ISPs will
maintain peering relationships with Intermedia. In addition, there may develop
increasing requirements associated with maintaining peering relationships with
the major national ISPs with which Intermedia may have to comply. There can be
no assurance that Intermedia will be able to expand or adapt its network
infrastructure to meet the industry's evolving standards on a timely basis, at a
commercially reasonable cost, or at all.
Potential Liability of On-Line Service Providers. The law in the United
States relating to the liability of on-line service providers and ISPs for
information carried on, disseminated through or hosted on their systems is
currently unsettled. Several private lawsuits seeking to impose such liability
are currently pending. In one case brought against an ISP, Religious Technology
Center v. Netcom On-Line Communication Services, Inc., the United States
District Court for the Northern District of California ruled in a preliminary
phase that, under certain circumstances, ISPs could be held liable for copyright
infringement. The 1996 Act prohibits and imposes criminal penalties for using an
interactive computer service to transmit certain types of information
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and content, such as indecent or obscene communications. On June 26, 1997, the
Supreme Court affirmed the decision of a panel of three federal judges which
granted a preliminary injunction barring enforcement of this portion of the 1996
Act to the extent enforcement is based upon allegations other than obscenity or
child pornography as an impermissible restriction on the First Amendment's right
of free speech. In addition, numerous states have adopted or are currently
considering similar types of legislation. The imposition upon ISPs or Web
hosting sites of potential liability for materials carried on or disseminated
through their systems could require Intermedia to implement measures to reduce
its exposure to such liability, which could require the expenditure of
substantial resources or the discontinuation of certain product or service
offerings. Intermedia believes that it is currently unsettled whether the 1996
Act prohibits and imposes liability for any services provided by Intermedia
should the content or information transmitted be subject to the statute. The
increased attention focused upon liability issues as a result of these lawsuits,
legislation and legislative proposals could affect the growth of Internet use.
Any such liability or asserted liability could have a material adverse effect on
Intermedia's business, financial condition and results of operations.
Dependence upon Network Infrastructure; Risk of System Failure; Security
Risks. Intermedia's success in marketing its services to business and
government users requires that Intermedia provide superior reliability, capacity
and security via its network infrastructure. Intermedia's networks are subject
to physical damage, power loss, capacity limitations, software defects, breaches
of security (by computer virus, break-ins or otherwise) and other factors,
certain of which have caused, and will continue to cause, interruptions in
service or reduced capacity for Intermedia's customers. Similarly, Intermedia's
ISP business relies on the availability of its network infrastructure for the
provision of Internet connectivity. Interruptions in service, capacity
limitations or security breaches could have a material adverse effect on
Intermedia's business, financial condition and results of operations.
Expansion Risk. Intermedia is experiencing a period of rapid expansion
which management expects will increase in the near future. This growth has
increased the operating complexity of Intermedia as well as the level of
responsibility for both existing and new management personnel. Intermedia's
ability to manage its expansion effectively will require it to continue to
implement and improve its operational and financial systems and to expand, train
and manage its employee base. Intermedia's inability to effectively manage its
expansion could have a material adverse effect on its business.
A portion of Intermedia's expansion may occur through acquisitions as an
alternative to direct investments in the assets required to implement the
expansion. No assurance can be given that suitable acquisitions can be
identified, financed and completed on acceptable terms, or that Intermedia's
future acquisitions, if any, will be successful or will not impair Intermedia's
ability to service its outstanding obligations.
Risks of Implementation; Need to Obtain Permits and Rights of
Way. Intermedia is continuing to expand its existing networks. Intermedia has
identified other expansion opportunities and is currently extending the reach of
its networks to pursue such opportunities. There can be no assurance that
Intermedia will be able to expand its existing networks on a timely basis. The
expansion of Intermedia's existing networks and its construction or acquisition
of new networks will be dependent, among other things, on its ability to acquire
rights-of-way and any required permits on satisfactory terms and conditions and
on its ability to finance such expansion, acquisition and construction. In
addition, Intermedia may require pole attachment agreements with utilities and
ILECs to operate existing and future networks, and there can be no assurance
that such agreements will be obtained or obtainable on reasonable terms. These
factors and others could adversely affect the expansion of Intermedia's customer
base on its existing networks and commencement of operations on new networks. If
Intermedia is not able to expand, acquire or construct its networks in
accordance with its plans, the growth of its business would be materially
adversely affected.
Competition. In each of its markets, Intermedia faces significant
competition for the local network services, including local exchange services,
it offers from ILECs, which currently dominate their local telecommunications
markets. ILECs have long-standing relationships with their customers, which
relationships may create competitive barriers. Furthermore, ILECs may have the
potential to subsidize competitive service from monopoly service revenues. In
addition, a continuing trend toward business combinations and
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alliances in the telecommunications industry may create significant new
competitors for Intermedia. Intermedia also faces competition in most markets in
which it operates from one or more ICPs and ILECs operating fiber optic
networks. In addition, Intermedia faces competition in its integration services
business from equipment manufacturers, the RBOCs and other ILECs, long distance
carriers and systems integrators, and in its enhanced data services business
(including Internet) from local telephone companies, long distance carriers,
VSAT providers, other ISPs and others. In particular, the market for Internet
services is extremely competitive and there are limited barriers to entry. Many
of Intermedia's existing and potential competitors have financial, personnel and
other resources significantly greater than those of Intermedia.
Intermedia believes that various legislative initiatives, including the
1996 Act, have removed most of the remaining legislative barriers to local
exchange competition. Nevertheless, in light of the passage of the 1996 Act,
regulators are also likely to provide ILECs with increased pricing flexibility
as competition increases. If ILECs are permitted to lower their rates
substantially or engage in excessive volume or term discount pricing practices
for their customers, the net income or cash flow of ICPs and CLECs, including
Intermedia, could be materially adversely affected. In addition, while
Intermedia currently competes with AT&T, MCI and others in the interexchange
services market, recent federal legislation permits the RBOCs to provide
interexchange services once certain criteria are met. Once the RBOCs begin to
provide such services, they will be in a position to offer single source service
similar to that being offered by Intermedia. Recently, a Federal District Court
in Texas found unconstitutional certain provisions of the 1996 Act restricting
the RBOCs from offering long distance service in their operating regions until
they could demonstrate that their networks have been made available to
competitive providers of local exchange services in those regions. This decision
has been stayed pending appeal. If that decision is permitted to stand, it could
result in RBOCs providing interexchange service in their operating regions
sooner than previously expected. In addition, AT&T and MCI have entered, and
other interexchange carriers have announced their intent to enter, the local
exchange services market, which is facilitated by the 1996 Act's resale and
unbundled network element provisions. Intermedia cannot predict the number of
competitors that will emerge as a result of existing or new federal and state
regulatory or legislative actions. Competition from the RBOCs with respect to
interexchange services or from AT&T, MCI or others with respect to local
exchange services could have a material adverse effect on Intermedia's business.
Regulation. Intermedia is subject to varying degrees of federal, state and
local regulation. Intermedia is not currently subject to price cap or rate of
return regulation at the state or federal level, nor is it currently required to
obtain Federal Communication Commission ("FCC") authorization for the
installation, acquisition or operation of its interstate network facilities.
Further, the FCC issued an order holding that non-dominant carriers, such as
Intermedia, are required to withdraw interstate tariffs for domestic long
distance service. That order has been stayed by a federal appeals court and it
is not clear at this time whether the detariffing order will be implemented.
Until further action is taken by the court, Intermedia will continue to maintain
tariffs for these services. In June 1997, the FCC issued another order stating
that non-dominant carriers, such as Intermedia, could withdraw their tariffs for
interstate access services. While Intermedia has no immediate plans to withdraw
its tariff, this FCC order allows Intermedia to do so. The FCC does require
Intermedia to file tariffs on an ongoing basis for international traffic.
On May 16, 1997, the FCC released an order that fundamentally restructured
the "access charges" that ILECs charge to interexchange carriers and end user
customers. Intermedia believes that the FCC's new access charge rules do not
adversely affect Intermedia's business plan, and that they in fact present
significant new opportunities for new entrants, including Intermedia. Aspects of
the access charge order may be changed in the future. Numerous parties have
either filed appeals with federal courts or asked the FCC to reconsider portions
of its new rules.
Intermedia is generally subject to certification or registration and tariff
or price list filing requirements for intrastate services by state regulators.
The 1996 Act and the issuance by the FCC of rules governing local competition,
particularly those requiring the interconnection of all networks and the
exchange of traffic among the ILEC and CLECs, as well as pro-competitive
policies already developed by state regulatory commissions, have caused
fundamental changes in the structure of the markets for local exchange services.
On July 18, 1997, the U.S. Court of Appeals for the Eighth Circuit issued a
decision vacating the FCC's pricing and "most favored nation" rules, as well as
certain other of the FCC's interconnection rules. On October 14, 1997, the
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Eighth Circuit issued an order clarifying its previous decision. In this order,
the Court held that ILECs have an obligation under the 1996 Act to offer other
carriers access to the ILECs' network elements on an unbundled basis, but the
ILECs do not have an obligation to recombine those elements for use by other
carriers. The FCC's and other parties' petitions to the Supreme Court requesting
review of these decisions have been granted. Most recently, on January 22, 1998,
the Eighth Circuit reiterated that the FCC is bound by the pricing policies of
the state regulatory commissions regarding interconnection, unbundled access,
resale and transport and termination of local telecommunications traffic and
rebuffed what it perceived as an attempt by the FCC to condition the RBOCs'
provision of in-region long distance service on compliance with federal pricing
policies regarding these items. Even though these decisions restrict the role of
the FCC in pricing and other issues, these issues remain subject to scrutiny and
oversight by state regulatory commissions.
Although passage of the 1996 Act should result in increased opportunities
for companies that are competing with the ILECs, no assurance can be given that
changes in current or future regulations adopted by the FCC or state regulators
or other legislative or judicial initiatives relating to the telecommunications
industry would not have a material adverse effect on Intermedia.
Potential Diminishing Rate of Growth. During the period from 1994 through
1997, Intermedia's revenues grew at a compound annual growth rate of 158.8%
(including the effect of acquisitions). While Intermedia expects to continue to
grow, as its size increases it is likely that its rate of growth will diminish.
Risk of New Service Acceptance by Customers. Intermedia has recently
introduced a number of services, primarily local exchange services, that
Intermedia believes are important to its long-term growth. The success of these
services will be dependent upon, among other things, the willingness of
customers to accept Intermedia as the provider of such services. No assurance
can be given that such acceptance will occur; the lack of such acceptance could
have a material adverse effect on Intermedia.
Rapid Technological Changes. The telecommunications industry is subject to
rapid and significant changes in technology. While Intermedia believes that, for
the foreseeable future, these changes will neither materially affect the
continued use of its fiber optic networks nor materially hinder its ability to
acquire necessary technologies, the effect on the business of Intermedia of
technological changes such as changes relating to emerging wireline and wireless
transmission technologies, including software protocols, cannot be predicted.
Dependence on Key Personnel. Intermedia's business is managed by a small
number of key management and operating personnel, the loss of certain of whom
could have a material adverse impact on Intermedia's business. Intermedia
believes that its future success will depend in large part on its continued
ability to attract and retain highly skilled and qualified personnel. None of
Intermedia's key executives is a party to a long-term employment agreement with
Intermedia.
Risk of Cancellation or Non-Renewal of Network Agreements, Licenses and
Permits. Intermedia has lease and/or purchase agreements for rights-of-way,
utility pole attachments, conduit and dark fiber for its fiber optic networks.
Although Intermedia does not believe that any of these agreements will be
cancelled in the near future, cancellation or non-renewal of certain of such
agreements could materially adversely affect Intermedia's business in the
affected metropolitan area. In addition, Intermedia has certain licenses and
permits from local government authorities. The 1996 Act requires that local
government authorities treat telecommunications carriers in a competitively
neutral, non-discriminatory manner, and that most utilities, including most
ILECs and electric companies, afford alternative carriers access to their poles,
conduits and rights-of-way at reasonable rates on non-discriminatory terms and
conditions. There can be no assurance that Intermedia will be able to maintain
its existing franchises, permits and rights or to obtain and maintain the other
franchises, permits and rights needed to implement its strategy on acceptable
terms.
Business Combinations; Change of Control. Intermedia has from time to time
held, and continues to hold, preliminary discussions with (i) potential
strategic investors who have expressed an interest in making an investment in or
acquiring Intermedia and (ii) potential joint venture partners looking toward
the formation of strategic alliances that would expand the reach of Intermedia's
networks or services without necessarily requiring an additional investment in
Intermedia. In addition to providing additional growth capital,
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management believes that an alliance with an appropriate strategic investor
would provide operating synergy to, and enhance the competitive positions of,
both Intermedia and the investor within the rapidly consolidating
telecommunications industry. There can be no assurance that agreements for any
of the foregoing will be reached. An investment, business combination or
strategic alliance could constitute a change of control. A change of control
would require Intermedia to repay its outstanding indebtedness and one series of
its outstanding preferred stock. A change of control also requires Intermedia to
offer to redeem its other outstanding series of preferred stock. If a change of
control does occur, there is no assurance that Intermedia would have sufficient
funds, or could obtain any additional debt or equity financing necessary, to
make such repayments and redemptions.
Anti-Takeover Provisions. Intermedia's Certificate of Incorporation and
Bylaws, the provisions of the Delaware General Corporation Law (the "DGCL") and
the Company's outstanding indebtedness and preferred stock may make it difficult
in some respects to effect a change in control of Intermedia and replace
incumbent management. In addition, Intermedia's Board of Directors has adopted a
Stockholder's Rights Plan, pursuant to which rights to acquire a series of
preferred stock, exercisable upon the occurrence of certain events, were
distributed to its stockholders. The existence of these provisions may have a
negative impact on the price of the Common Stock, may discourage third party
bidders from making a bid for Intermedia or may reduce any premiums paid to
stockholders for their Common Stock. In addition, the Board has the authority to
fix the rights and preferences of, and to issue shares of, Intermedia's
preferred stock, which may have the effect of delaying or preventing a change in
control of Intermedia without action by its stockholders.
Shares Eligible for Future Sale. Future sales of shares by existing
stockholders under Rule 144 of the Securities Act or pursuant to currently
effective registration statements, or through the exercise of outstanding
registration rights or the issuance of shares of Common Stock upon the exercise
of options or warrants or conversion of convertible securities, including two
outstanding series of convertible preferred stock, could materially adversely
affect the market price of shares of Common Stock and could materially impair
Intermedia's future ability to raise capital through an offering of equity
securities. Substantially all of Intermedia's outstanding shares, other than
those held by affiliates, are covered by effective registration statements or
are transferable without restriction under the Securities Act. Additionally, the
purchase price for the acquisitions of LDS and National will be funded at least
in part through the issuance of Common Stock. No predictions can be made as to
the effect, if any, that market sales of such shares or the availability of such
shares for future sale will have on the market price of shares of Common Stock
prevailing from time to time.
Class Action by DIGEX Stockholders. On June 5, 1997, Intermedia announced
that it had agreed to acquire 100% of the outstanding equity of DIGEX (the
"DIGEX Acquisition"). The acquisition was consummated through a tender offer for
all of the outstanding shares of DIGEX, which closed on July 9, 1997, followed
by a cash merger effective on July 11, 1997 (the "DIGEX Merger").
On June 20, 1997, two purported class action complaints were filed in the
Court of Chancery of the State of Delaware in and for New Castle County
respectively by TAAM Associates, Inc. and David and Chaile Steinberg (the
"Complaints"), purported stockholders of DIGEX, on behalf of all non-affiliated
common stockholders of DIGEX, against Intermedia, DIGEX and the Directors of
DIGEX (the "DIGEX Directors"). The Complaints allege that the DIGEX Directors
violated their fiduciary duties to the public stockholders of DIGEX by agreeing
to vote in favor of the DIGEX Merger and that Intermedia knowingly aided and
abetted such violation by offering to retain DIGEX management in their present
positions and consenting to stock option grants to certain executive officers of
DIGEX. The Complaints sought preliminary and permanent injunctions enjoining the
DIGEX Merger, but no applications were made for such injunctions prior to the
consummation of the DIGEX Merger on July 11, 1997. In addition, the Complaints
seek cash damages from the 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 their very early stages and no assurance can be given as
to their ultimate outcome. Intermedia, after consultation with its counsel,
believes that there are meritorious factual and legal defenses to the claims in
the Complaints. Intermedia intends to defend vigorously the claims in the
Complaints.
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Forward Looking Statements. The statements contained in this report that
are not historical facts are "forward-looking statements" (as such term is
defined in the Private Securities Litigation Reform Act of 1995), which can be
identified by the use of forward-looking terminology such as "estimates,"
"projects," "anticipates," "expects," "intends," "believes" or the negative
thereof or other variations thereon or comparable terminology or by discussions
of strategy that involve risks and uncertainties. Management wishes to caution
the reader that these forward-looking statements, such as Intermedia's plans to
expand its existing networks or to build and acquire networks in new areas, the
market opportunity presented by larger metropolitan areas, its anticipation of
installation of switches or the provision of local exchange services and
revenues from designated markets during 1998 and statements regarding
development of Intermedia's businesses, the estimate of market sizes and
addressable markets for Intermedia's services and products, Intermedia's
anticipated capital expenditures, regulatory reform and other statements
contained in this report regarding matters that are not historical facts, are
only estimates or predictions. No assurance can be given that future results
will be achieved. Actual events or results may differ materially as a result of
risks facing Intermedia or actual events differing from the assumptions
underlying such statements. Such risks and assumptions include, but are not
limited to, Intermedia's ability to successfully market its services to current
and new customers, generate customer demand for its services in the particular
markets where it plans to market services, access markets, identify, finance and
complete suitable acquisitions, design and construct fiber optic networks,
install cable and facilities, including switching electronics, and obtain
rights-of-way, building access rights and any required governmental
authorizations, franchises and permits, all in a timely manner, at reasonable
costs and on satisfactory terms and conditions, as well as regulatory,
legislative and judicial developments that could cause actual results to vary
materially from the future results indicated, expressed or implied, in such
forward-looking statements.
Moreover, Intermedia presents certain data contained herein on an
annualized basis, based on quarterly or monthly data, because Intermedia
believes that such annualized data is a standard method to present certain data
in the telecommunications industry. However, actual annual results could differ
materially from annualized data because annualized data does not account for
factors such as seasonality, growth or decline. Consequently, readers should not
place undue reliance on the annualized data.
ITEM 2. PROPERTIES
Intermedia leases its principal administrative, marketing, warehouse and
service development facilities in Tampa, Florida and leases other space for
storage of its electronics equipment and for administrative, sales and
engineering functions in other cities where the Company operates networks and/or
performs sales functions. Intermedia believes that its properties are adequate
and suitable for their intended purposes.
As of December 31, 1997, the Company's total telecommunications and
equipment in service consisted of fiber optic telecommunications equipment
(56%), fiber optic cable (11%), furniture and fixtures (10%), leasehold
improvements (2%) and construction in progress (21%). Such properties do not
lend themselves to description by character and location of principal units.
Fiber optic cable plant used in providing service is primarily on or under
public roads, highways or streets, with the remainder being on or under private
property. Substantially all of the Company's telecommunications equipment is
housed in multiple leased facilities in various locations throughout the
metropolitan areas served by Intermedia.
Equipment additions over the past five years include gross additions to
telecommunications equipment having an estimated service life of one year or
more. Additions, including capital leases and excluding equipment acquired and
capital leases assumed in business acquisitions, since January 1, 1993 were as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- --------
<S> <C>
1993........................................................ $ 10,767
1994........................................................ 18,289
1995........................................................ 34,873
1996........................................................ 131,466
1997........................................................ 275,771
</TABLE>
24
<PAGE> 26
ITEM 3. LEGAL PROCEEDINGS
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 Complaints allege
that the DIGEX Directors violated their fiduciary duties to the public
stockholders of DIGEX by agreeing to vote in favor of the DIGEX Merger, and that
Intermedia knowingly aided and abetted such violation by offering to retain
DIGEX management in their present positions and consenting to stock option
grants to certain executive officers of DIGEX. The Complaints sought preliminary
and permanent injunction enjoining the DIGEX Merger but no applications were
made for such injunctions prior to consummation of the DIGEX Merger on July 11,
1997. In addition, the Complaints seek cash damages from the DIGEX Directors. In
August 1997, a motion to dismiss the Complaints was filed on behalf of
Intermedia, DIGEX and the DIGEX Directors. The case has been dormant since that
date.
These cases are in their very early stages and no assurance can be given as
to their ultimate outcome. Intermedia, after consultation with its counsel,
believes that there are meritorious factual and legal defenses to the claims in
the Complaints. Intermedia intends to defend vigorously the claims in the
Complaints.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market under the
symbol "ICIX". As of February 13, 1998, based upon 80 holders of record of the
Common Stock and an estimate of the number of individual participants
represented by security position listings, there are approximately 4,550
beneficial holders of the Common Stock. The approximate high and low bid prices
for the Common Stock tabulated below are as reported by The Nasdaq Stock Market
and represent inter-dealer quotations which do not include retail mark-ups,
mark-downs or commissions. Such prices do not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
BID PRICE
-----------
QUARTER HIGH LOW
------- ---- ---
<S> <C> <C>
1996
First..................................................... 19 3/4 13
Second.................................................... 38 1/2 17 3/4
Third..................................................... 34 3/4 22
Fourth.................................................... 35 21
1997
First..................................................... 26 1/4 12
Second.................................................... 33 15 1/2
Third..................................................... 48 30
Fourth.................................................... 61 41 1/4
</TABLE>
25
<PAGE> 27
Holders of shares of Common Stock are entitled to dividends, when and if
declared by the Board of Directors, out of funds legally available therefor.
Intermedia has never declared or paid cash dividends on its Common Stock.
Intermedia intends to retain its earnings, if any, to finance the development
and expansion of its business, and therefore does not anticipate paying any
dividends on its Common Stock in the foreseeable future. In addition, the terms
of the Company's outstanding indebtedness and preferred stock restrict the
payment of dividends until certain conditions are met. When such restrictions no
longer exist, the decision whether to pay dividends will be made by the Board of
Directors in light of conditions then existing, including the Company's results
of operations, financial condition and capital requirements, business conditions
and other factors. The payment of dividends on the Common Stock is also subject
to the preference applicable to the outstanding shares of the Company's
preferred stock and to the preference that may be applicable to any shares of
the Company's preferred stock issued in the future.
On October 30, 1997, the Company sold 7,000,000 depositary shares (the
"Series E Depositary Shares") (aggregate liquidation preference $175,000,000)
each representing a one-hundredth interest in a share of the Company's 7% Series
E Junior Convertible Preferred Stock (the "Series E Preferred Stock"), in a
private placement transaction. Subsequent thereto, the over-allotment option
with respect to the Series E Depositary Shares was exercised and the Company
sold an additional 1,000,000 Series E Depositary Shares (aggregate liquidation
preference of $25,000,0000). Net proceeds to the Company amounted to
approximately $193.8 million. Dividends on the Series E Preferred Stock will
accumulate at a rate of 7% of the aggregate liquidation preference thereof and
are payable quarterly, in arrears. Dividends are payable in cash or, at the
Company's option, by the issuance of shares of Common Stock of the Company. The
Series E Preferred Stock will be redeemable at the option of the Company at any
time on or after October 18, 2000 at rates commencing with 104%, declining to
100% on October 18, 2004. The Series E Preferred Stock is convertible, at the
option of the holder, into Common Stock of the Company at a conversion price of
$60.47 per share of Common Stock, subject to certain adjustments.
The Series E Depositary Shares were issued and sold to the initial
purchasers pursuant to an exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended (the "Act"). Each of the initial
purchasers of the Series E Depositary Shares represented to the Company, among
other things, that (i) it is a qualified institutional buyer ("QIB"), (ii) it is
not acquiring the Series E Depositary Shares with a view to any distribution
thereof that would violate the Act or the securities laws of any state of the
United States or any other applicable jurisdiction, (iii) it will be re-offering
and reselling the Series E Depositary Shares only to QIBs in reliance on the
exemption from the registration requirements of the Act provided by Rule 144A,
pursuant to offers and sales that occur outside the United States within the
meaning of Regulation S and to accredited investors in a private placement
exempt from the registration requirements of the Act, and (iv) no form of
general solicitation or general advertising has been or will be used by it or
any of its representatives in connection with the offer and sale of any of the
Series E Depositary Shares.
On January 13, 1998, Current Sciences Group, Inc., formerly known as
Electronic Press Services Inc., exercised a warrant granted by DIGEX prior to
the DIGEX Acquisition which, upon consummation of the DIGEX Acquisition, was
converted into the right to purchase 83,870 shares of Common Stock of Intermedia
at an exercise price of $21.65 per share. After giving effect to the cashless
exercise provision, 53,172 shares of Common Stock were issued to Current
Sciences Group. The shares of Common Stock were issued pursuant to the exemption
from registration provided by Section 3 (a) (9) of the Act.
On November 21, 1997, Ralph J. Sutcliffe, a partner of Kronish, Lieb,
Weiner & Hellman LLP, was granted a warrant to purchase 100,000 shares of Common
Stock at an exercise price of $41.50 per share. The warrant was granted pursuant
to the exemption from registration provided by Section 4(2) of the Act.
26
<PAGE> 28
ITEM 6. SELECTED FINANCIAL AND OTHER OPERATING DATA
The selected financial data and balance sheet data presented below as of
and for the five years in the period ended December 31, 1997 have been derived
from the consolidated financial statements of the Company, which financial
statements have been audited by Ernst & Young LLP, independent certified public
accountants.
The operating results of EMI are included in the Company's consolidated
operating results commencing July 1, 1996. The operating results of Universal
Telecom Inc. ("UTT") and NetSolve Incorporated ("NetSolve") are included in the
Company's consolidated operating results commencing December 1, 1996. The
operating results of DIGEX are included in the Company's consolidated operating
results commencing July 1, 1997. The operating results do not reflect the
recently consummated acquisition of Shared. The financial statements for Shared
may be found beginning on page F-26 of this report. The following financial
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and the
Consolidated Financial Statements of the Company and the Notes thereto, included
elsewhere in this report.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenue............................ $ 8,292 $ 14,272 $ 38,631 $ 103,397 $ 247,899
Expenses
Network expenses, facilities
administration and
maintenance, and cost of goods
sold.......................... 2,843 5,396 22,989 81,105 199,139
Selling, general and
administrative................ 3,893 6,412 14,993 36,610 98,598
Depreciation and amortization... 3,020 5,132 10,196 19,836 53,613
Charge for in-process R&D(1).... -- -- -- -- 60,000
-------- -------- -------- --------- ---------
9,756 16,940 48,178 137,551 411,350
-------- -------- -------- --------- ---------
Loss from operations............... (1,464) (2,668) (9,547) (34,154) (163,451)
Other income (expense)
Interest expense................ (844) (1,218) (13,767) (35,213) (60,662)
Interest and other income....... 234 819 4,060 12,168 26,824
Income tax benefit.............. -- -- 97 -- --
-------- -------- -------- --------- ---------
Loss before extraordinary
item.......................... (2,074) (3,067) (19,157) (57,199) (197,289)
Extraordinary loss on early
extinguishment of debt(2)..... -- -- (1,592) -- (43,834)
-------- -------- -------- --------- ---------
Net loss........................... (2,074) (3,067) (20,749) (57,199) (241,123)
Preferred stock dividends and
accretions...................... -- -- -- -- (43,742)
-------- -------- -------- --------- ---------
Net loss attributable to Common
Stockholders.................. $ (2,074) $ (3,067) $(20,749) $ (57,199) $(284,865)
======== ======== ======== ========= =========
Basic and diluted loss per common
share:
Loss before extraordinary item,
including preferred stock
dividends and accretions...... $ (0.29) $ (0.34) $ (1.91) $ (4.08) $ (14.46)
Extraordinary item (2).......... -- -- (.16) -- (2.63)
-------- -------- -------- --------- ---------
Net loss per common share....... $ (0.29) $ (0.34) $ (2.07) $ (4.08) $ (17.09)
======== ======== ======== ========= =========
Weighted average number of shares
outstanding..................... 7,077 8,956 10,036 14,018 16,670
======== ======== ======== ========= =========
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Other Data:
Earnings (loss) before interest,
income taxes, depreciation,
amortization and charge for
in-process R&D ("EBITDA")(3).... $ 1,556 $ 2,464 $ 649 $ (14,318) $ (49,838)
Capital expenditures............... $ 10,486 $ 13,731 $ 29,962 $ 131,214 $ 260,105
Transport Services:(4)
Buildings connected(5)............. 234 293 380 487 3,005
Route miles........................ 335 378 504 655 757
Fiber miles........................ 10,239 11,227 17,128 24,122 34,956
Number of city-based networks in
service......................... 5 6 9 9 10
Enhanced Data Services:(4)
Nodes(6)........................... 100 900 2,300 9,777 20,209
Cities(7).......................... 37 336 600 2,266 4,104
Switches........................... 4 12 31 89 136
Local and Long Distance Services:(4)
Voice switches in operation........ -- 1 1 5 16
Long distance billable minutes..... -- -- 32,912,501 69,118,148 139,437,921
Access line equivalents............ -- -- -- 7,106 81,349
Employees(4)......................... 58 146 287 874 2,036
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents(8)...... $27,954 $10,208 $ 50,997 $ 189,546 $ 756,923
Working capital(9)................ 25,712 9,588 70,353 206,029 747,246
Total assets...................... 61,219 74,086 216,018 512,940 1,874,970
Long-term obligations and
preferred stock (including
current maturities)............ 11,614 16,527 165,545 358,508 1,941,219
Total stockholders' equity
(deficiency)................... 45,987 52,033 40,254 114,230 (140,009)
</TABLE>
- ---------------
1. A one time charge to earnings was recorded as a result of the purchase of
in process research and development in connection with the acquisition of
DIGEX.
2. The Company incurred extraordinary charges in 1995 and 1997 related to
early extinguishment of debt.
3. EBITDA consists of earnings before interest, income taxes, depreciation,
amortization and charge for in-process R&D. In addition, 1995 and 1997
EBITDA excludes an extraordinary charge of $1,592 and $43,834,
respectively, related to the early extinguishment of debt. EBITDA is
provided in the Selected Financial and Other Operating Data Section since
it is a measure commonly used in the telecommunications industry to measure
operating performance, asset value and financial leverage. It is presented
to enhance the reader's understanding of the Company's operating results
and is not intended to present cash flow for the periods presented. See the
Consolidated Statements of Cash Flows included in the Company's
Consolidated Financial Statements and the Notes thereto included elsewhere
in this report.
4. Amounts reflected in the table are based upon information contained in the
Company's operating records.
5. Beginning in January 1997, Intermedia changed its definition of "Buildings
connected" to include buildings connected to Intermedia's network via
facilities leased by Intermedia in addition to those
28
<PAGE> 30
connected to Intermedia's network via facilities constructed by or
otherwise owned by Intermedia. Intermedia believes the new definition is
consistent with industry practice.
6. Amount represents an individual point of origination and termination of
data served by the Company's enhanced network.
7. Represents the number of discrete postal cities to which enhanced data
services are provided by the Company.
8. Cash and cash equivalents excludes investments of $20,954, $26,675 and
$6,853 in 1995, 1996 and 1997, respectively, restricted under the terms of
various notes and other agreements.
9. Working capital includes the restricted investments referred to in Note 8
above whose restrictions either lapse within one year or will be used to
pay current liabilities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the audited Consolidated Financial Statements and the Notes thereto appearing
elsewhere in this report.
OVERVIEW
Intermedia has experienced continuous revenue growth since its inception in
1986. Since 1992, the Company has experienced an accelerating rate of revenue
growth. Building from its original base in Florida, Intermedia now provides
integrated telecommunications services nationally with a focus on customers who
have a substantial presence in the eastern United States. Through a combination
of internally generated growth and targeted acquisitions the Company has
expanded its service territory and dramatically increased its customer base.
Intermedia's customers include a broad range of business and government end
users and, to a lesser extent, ISPs and other carriers. The Company delivers
local network services, including local exchange service, primarily through
Company owned local and long distance switches and over a Company owned or
leased digital transport network. Often, leasing facilities enables the Company
to more rapidly initiate service to customers, reduces the risk of network
construction or acquisition and potentially improves cash flow due to the
reduction or deferment of capital expenditures. The Company also utilizes the
resale of ILEC local exchange services as a means of rapidly entering new
markets and establishing customer relationships. These resale customers may
later be migrated onto the Company's switches and network. The Company offers
enhanced data services to its customers on an extensive intercity network that
connects its customers, either through its own network or through other
carriers, to locations throughout the country and internationally. Through its
386 NNIs and 136 data switches, Intermedia has established the most densely
deployed frame relay switching network in the nation. The Company's nationwide
interexchange network, which it is upgrading to provide ATM capability, carries
both its data network traffic and its voice network traffic.
At its inception, Intermedia provided special access and private line
services to IXCs. In 1988, Intermedia was the first telecommunications provider
in Florida to begin providing special access and private line services to
business customers. In 1991, Intermedia began offering specialized integration
services such as construction of campus LANs, and in 1992, Intermedia introduced
its first enhanced data services based on frame relay technology, providing
flexible capacity and highly reliable end-to-end data service. The Company began
offering interexchange long distance service in December 1994, Internet services
in 1995, local exchange services in 1996 and integrated voice/data services via
Single-T(sm) in 1997. The pace with which the Company has introduced new service
offerings has enabled it to achieve substantial growth, expand its base of
customers and diversify its sources of revenue. The Company believes that
business and government customers will continue to account for a substantial
share of its revenue, because of Intermedia's ability to offer such customers
integrated, cost-effective telecommunications solutions. The Company believes
that during the first few years of local exchange competition, some IXCs may
enter the local exchange market by becoming resellers of the Company's local
services. If the IXCs pursue a resale strategy, the amount of revenue the
Company realizes from carriers may increase during this period, although the
Company does not depend on these IXC resale revenues to satisfy its business
plan.
29
<PAGE> 31
From 1992 through 1995, the Company achieved positive EBITDA and increased
its revenue base substantially. 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 1998. The development of the Company's
business and the expansion of its network and systems infrastructure have
resulted in substantial capital expenditures and net losses during this period
of its operations. Network operating costs, administration and maintenance of
facilities, depreciation of network capital expenditures and sales, general and
administrative costs will continue to represent a large portion of the Company's
expenses for the next several years. In addition, the Company is experiencing
rapid growth in marketing and selling expenses consistent with the addition of
new customers and an increased level of selling and marketing activity. All of
the marketing and selling expenses associated with the acquisition of new
customers are expensed as they are incurred even though these customers are
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.
PLAN OF OPERATION
In 1998, the Company believes that its growth will be balanced among its
local exchange, long distance and enhanced data services. Based on the Company's
analysis of FCC data and its knowledge of the industry, the Company estimates
that the market for local exchange, long distance and data services was
approximately $34 billion in 1997 in the Company's service territory. As a
result of the Company's planned expansion in 1998, including the consummation of
the pending acquisitions of 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, Intermedia 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.
30
<PAGE> 32
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain
information derived from the Consolidated Statements of Operations of the
Company and the Unaudited Pro Forma Condensed Consolidated Financial Statements
expressed in percentages of revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
----- ----- ------
<S> <C> <C> <C>
Revenues:
Local network services.................................... 27.9% 13.1% 16.9%
Enhanced data services.................................... 18.0 30.6 34.9
Interexchange services.................................... 48.9 51.4 45.6
Integration services...................................... 5.2 4.9 2.6
100.0 100.0 100.0
Expenses:
Network expenses.......................................... 52.1 66.8 66.3
Facilities administration and maintenance................. 5.3 7.4 12.8
Cost of goods sold........................................ 2.1 4.2 1.2
Selling, general and administrative....................... 38.8 35.4 39.8
Depreciation and amortization............................. 26.4 19.2 21.6
Charge for in-process R&D................................. -- -- 24.2
----- ----- ------
Loss from operations........................................ (24.7) (33.0) (65.9)
Other income (expense):
Interest expense.......................................... (35.6) (34.1) (24.5)
Interest and other income................................. 10.5 11.8 10.8
Income tax benefit........................................ 0.2 -- --
----- ----- ------
Loss before extraordinary item.............................. (49.6) (55.3) (79.6)
Extraordinary loss on early extinguishment of debt.......... (4.1) -- (17.7)
----- ----- ------
Net Loss.................................................... (53.7) (55.3) (97.3)
Preferred stock dividends and accretions.................... -- -- (17.6)
----- ----- ------
Net loss attributable to Common Stockholders................ (53.7)% (55.3)% (114.9)%
</TABLE>
YEAR ENDED 1997 VS. YEAR ENDED 1996
The Company's revenue grew from $103.4 million to $247.9 million or 140%
from 1996 to 1997. Revenue in 1996 and 1997 for each of the product lines were
as follows:
<TABLE>
<CAPTION>
1996 1997 INCREASE
------ ------ --------
<S> <C> <C> <C>
Local network services...................................... $ 13.5 $ 42.0 $ 28.5
Enhanced data services...................................... 31.7 86.6 54.9
Interexchange services...................................... 53.1 113.2 60.1
Integration equipment, sales and services................... 5.1 6.1 1.0
------ ------ ------
$103.4 $247.9 $144.5
------ ------ ------
</TABLE>
The increase in revenue was derived principally from the acquisitions of
EMI, NetSolve and UTT in 1996, the acquisition of DIGEX in 1997, 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 increase in the level of local network services primarily related to
the continued rollout of local exchange services into additional markets. The
number of access line equivalents, increased from 7,106 at December 31,
31
<PAGE> 33
1996 to 81,349 at December 31, 1997. The Company has received CLEC certification
in 37 states and the District of Columbia as of December 31, 1997. The increase
in the level of enhanced data services primarily resulted from the expansion of
the Company's enhanced data network by 47 switches and 10,709 new frame relay
nodes since January 1, 1997. In addition, the number of frame relay cities
increased by 1,904 during the same time period. A portion of the revenue
increase was attributable to the inclusion of EMI for 12 months in 1997 versus 6
months in 1996, the inclusion of NetSolve for 12 months in 1997 versus 1 month
in 1996 and the inclusion of DIGEX from July 1, 1997. From December 31, 1996 to
December 31, 1997, the number of fiber miles in the Company's network increased
from 24,122 to 34,956 and route miles increased from 655 to 757. The increase in
the level of interexchange services primarily resulted from strong growth in
long distance switched revenue and steady growth in interLATA transport. A
portion of the increase was attributable to the inclusion of EMI for 12 months
in 1997 versus 6 months in 1996 and the inclusion of UTT for 12 months in 1997
versus 1 month in 1996. The increase in the level of integration services
primarily resulted from the Company's increased focus on providing a total
service package for the customer.
Operating expenses in total increased 199% to $411.4 million in 1997
compared to $137.6 million for the same period in 1996. The increase primarily
resulted from the costs associated with the significant expansion of the
Company's owned and leased network and the continued expansion in personnel to
sustain and support the Company's growth. Of the increase, $60 million resulted
from the charge for in-process research and development and the inclusion of
EMI, NetSolve, UTT and DIGEX's operating results. EMI's operating results were
included for 12 months in 1997 versus 6 months in 1996. NetSolve and UTT's
operating results were included for 12 months in 1997 versus 1 month in 1996.
DIGEX's operating results were included from July 1, 1997.
Network expenses increased 138% to $164.5 million in 1997 compared to $69.1
million for the same period in 1996. This increase primarily resulted from the
increases in leased network capacity that is associated with the growth of local
network service, enhanced data service and interexchange service revenues. A
portion of the increase was attributable to the inclusion of EMI for 12 months
in 1997 versus 6 months in 1996, the inclusion of NetSolve and UTT for 12 months
in 1997 versus 1 month in 1996 and the inclusion of DIGEX from July 1, 1997.
Facilities administration and maintenance, and cost of goods sold increased
188% to $34.6 million in 1997 compared to $12.0 million for the same period in
1996. A portion of the increase was attributable to the inclusion of EMI for 12
months in 1997 versus 6 months in 1996, the inclusion of NetSolve and UTT for 12
months in 1997 versus 1 month in 1996 and the inclusion of DIGEX from July 1,
1997. In addition, the increase resulted from the expansion of the Company's
owned and leased network capacity, increases in maintenance expense due to the
network expansion and increased payroll expense related to hiring additional
engineering and operations staff to support and service the expanding network.
Selling, general and administrative expenses increased 169% to $98.6
million in 1997 compared to $36.6 million for the same period in 1996. This
increase primarily resulted from the Company's continued growth and represented
a major increase in the sales, marketing, management information and customer
service personnel, one time expenditures for employee recruitment, relocation
and training and increased commissions relating to the rise in revenue for these
periods. A portion of the increase was attributable to the inclusion of EMI for
12 months in 1997 versus 6 months in 1996, the inclusion of NetSolve and UTT for
12 months in 1997 versus 1 month in 1996 and the inclusion of DIGEX from July 1,
1997.
Depreciation and amortization expense increased 170% to $53.6 million in
1997 compared to $19.8 million for the same period in 1996. This increase
primarily resulted from additions to telecommunications equipment placed in
service during 1996 and 1997, relating to ongoing network expansion, as well as
the DIGEX acquisition which contributed $113.4 million of goodwill in 1997. A
portion of the increase was attributable to the inclusion of EMI for 12 months
in 1997 versus 6 months in 1996, the inclusion of NetSolve and UTT for 12 months
in 1997 versus 1 month in 1996, and the inclusion of DIGEX from July 1, 1997.
Charge for in-process Research & Development of $60 million represents the
amount of purchased in-process research and development associated with the
purchase of DIGEX. This cost was recorded as a one-time charge to earnings in
the third quarter of 1997.
32
<PAGE> 34
Interest expense increased 72% to $60.7 million in 1997 compared to $35.2
million for the same period in 1996. This increase primarily resulted from
interest expense on the approximately $1.6 billion of senior notes issued by the
Company in 1996 and 1997. The increase in interest expense was partially offset
by the retirement of an earlier issuance of senior notes in the third quarter of
1997. Included in 1997 interest expense is $45.5 million of debt discount
amortization and $1.9 million of deferred loan cost amortization, both of which
are non-cash items. Interest expense capitalized in connection with the
Company's construction of telecommunications equipment amounted to approximately
$5 million in 1997.
Interest and other income increased 120% to $26.8 million in 1997 compared
to $12.2 million for the same period in 1996. This increase was primarily the
result of interest earned on the cash available from the proceeds of the
issuances of securities in 1996 and 1997.
Extraordinary Loss of $43.8 million in 1997 consisted of pre-payment
penalties relating to the early retirement of certain outstanding indebtedness
of the Company from the proceeds of a new issuance of senior notes and the
write-off of the unamortized deferred financing costs associated with the
retired indebtedness.
Preferred stock dividends and accretions of $43.7 million resulted from the
issuance in 1997 of three series of preferred stock. Preferred stock dividends
in the amount of $42.5 million were comprised of the issuance of an additional
3,442 shares of one series of the outstanding preferred stock valued at $34.4
million, in payment of the dividends due on such series of preferred stock, the
issuance of 86,854 shares of Common Stock valued at $3.2 million in payment of
dividends on a second series of preferred stock and an accrual of $4.9 million
representing the dividends payable on two series of the preferred stock in
January 1998. Accretions to liquidation preference for the three issues totaled
$1.2 million in 1997.
EBITDA decreased 248% to $(49.8) million in 1997 compared to $(14.3)
million for the same period in 1996. This decline was the result of the
acceleration in the deployment of Intermedia's capital expansion plan, which
significantly increased growth oriented expenses, prior to realizing revenue
associated with these expenditures.
YEAR ENDED 1996 VS. YEAR ENDED 1995
The Company's revenue grew from $38.6 million to $103.4 million or 168%
from 1995 to 1996. Revenue in 1995 and 1996 for each of the product lines were
as follows:
<TABLE>
<CAPTION>
1995 1996 INCREASE
----- ------ --------
<S> <C> <C> <C>
Local network services...................................... $10.8 $ 13.5 $ 2.7
Enhanced data services...................................... 6.9 31.7 24.8
Interexchange services...................................... 18.9 53.1 34.2
Systems integration......................................... 2.0 5.1 3.1
----- ------ -----
$38.6 $103.4 $64.8
===== ====== =====
</TABLE>
The increase in revenue was derived principally from growth in the
Company's local network services, enhanced data services and interexchange
services. EMI contributed $27.8 million to the growth during the last six months
of 1996, of which $20.5 million related to interexchange services and $7.3
million related to enhanced data services. The Company acquired the
telecommunications division of EMI in June 1996. The Company's annualized
monthly recurring revenue increased to $12.3 million at December 31, 1996 from
$3.3 million at December 31, 1995, an increase of 273%. Monthly recurring
revenue represents the monthly service charges billable to telecommunications
service customers as of the last day of the period indicated and excludes
nonrecurring revenue for certain one-time charges, such as installation fees or
equipment sales. The increase in the level of enhanced data services was
evidenced by the increase in nodes which grew approximately 313% from
approximately 2,300 at December 31, 1995 to approximately 9,500 at December 31,
1996. The geographic coverage of the Company's network also grew in 1996
primarily through the acquisitions of EMI, UTT and NetSolve and the expansion of
the Company's intercity network. Monthly recurring revenue in the backlog
(booked sales that have yet to be installed) at December 31, 1996 was
approximately
33
<PAGE> 35
$4.8 million annualized, a 14.3% increase from the prior year. From December 31,
1995 to December 31, 1996, the number of fiber miles in the Company's network
increased from 17,128 to 24,122; route miles increased from 504 to 655; and the
number of customers served by Intermedia increased from 9,530 to 14,133.
Operating expenses in total increased by 186% from $48.2 million for 1995
to $137.6 million in 1996, a $89.4 million increase. Of the increase,
approximately $25.9 million, $1.9 million and $.5 million were attributable to
the inclusion of EMI, NetSolve and UTT operating expenses, respectively. The
operating results of EMI have been included in the consolidated results since
July 1, 1996. NetSolve and UTT operating results have been included in the
consolidated results since December 1, 1996. The balance of the increase was
consistent with the significant expansion of the Company's owned and leased
network and equipment sales to customers.
Network expense, facilities administration and maintenance, and cost of
goods sold increased $58.1 million or 253% to $81.1 million in 1996 from $23.0
million in 1995. Of the increase, approximately $20.9 million, $.9 million and
$.4 million were attributable to the inclusion of EMI, NetSolve and UTT
operating results, respectively. In addition, increases in leased network
capacity associated with the growth of local network service, enhanced data
service and interexchange service revenue, increases in maintenance expense due
to network expansion, payroll expense increases due to hiring additional
engineering and operations staff along with increased cost of goods sold related
to equipment sold to customers contributed to the change.
Selling, general and administrative expense increased to $36.6 million in
1996 from $15.0 million in 1995, an increase of $21.6 million or 144%. The
increase in expense is primarily related to increased sales commissions as a
result of increases in sales bookings, in addition to increased sales, customer
service, marketing and management information systems and payroll expense along
with related costs, including one-time recruitment, relocation and training
expense. Of the increase, approximately $2.7 million was attributable to the
inclusion of EMI operating results. Selling, general and administrative expense
in 1996 include $.9 million of amortization of deferred compensation expense
related to the Company's 1996 Long-Term Incentive Plan. Unamortized deferred
compensation to be amortized into expense over approximately the next 5 years
amounts to $7.6 million.
Depreciation and amortization expense increased to $19.8 million in 1996
from $10.2 million in 1995, an increase of $9.6 million or 95%. These increases
are directly related to the $149.6 million and $34.9 million of
telecommunications equipment additions (including capital leases and business
acquisitions) in 1996 and 1995, respectively, relating to ongoing network
expansion.
Interest expense increased to $35.2 million in 1996 from $13.8 million in
1995, an increase of $21.4 million or 156%. This increase is the result of
interest expense on the $330 million of senior notes issued by the Company in
May 1996 and the effect of a full year of interest expense on the June 1995
issuance of $160 million of senior notes. Included in the $35.2 million of
interest expense for 1996 was $14.3 million of interest on one series of
outstanding senior discount notes which was accreted into principal without a
cash outlay.
Interest and other income increased to $12.2 million in 1996 from $4.1
million in 1995, an increase of $8.1 million or 200%, resulting from interest
income earned on the proceeds of the issuances of securities during 1995 and
1996.
Extraordinary loss of $1.6 million in 1995 reflects $1.2 million in
prepayment penalties related to certain indebtedness which was repaid from the
proceeds of the June 1995 issuance of senior notes and the write-off of the
unamortized deferred financing costs associated with the indebtedness repaid.
EBITDA for 1996 decreased $15.0 million in 1996 from $.6 million in 1995 to
$(14.3) million in 1996. As a percentage of revenue, 1996 and 1995 EBITDA were
approximately (13.8%) and 1.7%, respectively. This decline was the result of the
acceleration in the deployment of Intermedia's capital expansion plan which
significantly increased growth oriented expense prior to realizing revenue
associated with these expenditures.
34
<PAGE> 36
LIQUIDITY AND CAPITAL RESOURCES
Intermedia's operations have required substantial capital investment for
the purchase of telecommunications equipment and the design, construction and
development of Intermedia's networks. Capital expenditures for Intermedia were
$30.0 million, $131.2 million and $260.1 million in 1995, 1996 and 1997,
respectively, excluding capital leases and telecommunications equipment acquired
in connection with business acquisitions. Intermedia expects that it will
continue to have substantial capital requirements in connection with the (i)
expansion and improvement of Intermedia's existing networks, (ii) design,
construction and development of new networks, (iii) connection of additional
buildings and customers to Intermedia's networks, (iv) purchase of switches
necessary for local exchange services and expansion of interexchange services
and (v) continued development of Intermedia's enhanced data services.
Intermedia has funded a substantial portion of these expenditures through
the public sale of debt and equity securities and privately placed debt. From
inception through December 31, 1996, Intermedia 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 Intermedia 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, resulting in an increase of available cash from $189.5 million
at the beginning of 1997 to $756.9 million at December 31, 1997. All of these
issued series of preferred stock include provisions that may cause the
securities to be redeemed upon a change of control of the Company. As a result
of these redemption provisions, the Company is required to classify the
preferred stock outside of stockholder's equity on the Company's balance sheet
at December 31, 1997. 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 Intermedia'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
Intermedia's network in anticipation of connecting revenue generating customers.
Intermedia 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 Intermedia's networks. Until sufficient cash flow after investing
activities is generated, Intermedia will be required to utilize its current and
future capital resources to meet its cash flow requirements, including the
issuance of additional debt and/or equity securities.
In response to the new pro-competitive telecommunications environment (See
"Business -- Government Regulation"), Intermedia 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. Intermedia 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 December 31, 1997, Intermedia was certified as a CLEC in 37
states and the District of Columbia, allowing Intermedia to provide local
exchange services in those markets, and is currently seeking CLEC certification
in the remaining 13 states. In addition, Intermedia expects to expend capital
for the further development of Intermedia's enhanced data service and
interchange service offerings.
A portion of Intermedia's expansion has occurred, and may continue to
occur, by means of acquisitions. In July 1997, Intermedia acquired DIGEX, a
leading nationwide business ISP. The aggregate cash consideration for the
acquisition was approximately $160 million and was funded with Intermedia's then
existing cash reserves. In March 1998, Intermedia acquired Shared. The total
deemed purchase price for Shared is estimated to be approximately $660.4
million, excluding certain transaction expenses and fees relating to certain
agreements. This amount includes repayment of $123.5 million of Shared's
outstanding bank debt (including accrued interest and outstanding fees) in
connection with the consummation of the acquisition.
In December 1997, Intermedia entered into a definitive agreement for the
acquisition of LDS for a purchase price of approximately $151 million, of which
approximately $130 million is payable in Intermedia
35
<PAGE> 37
Common Stock and approximately $21 million is payable in cash, subject to
certain adjustments. In February 1998, Intermedia entered into a definitive
merger agreement with National. The total purchase price for National is
approximately $151 million, subject to certain adjustments, of which 70% is
payable in Intermedia Common Stock and 30% is payable in cash.
Intermedia expects that it will be EBITDA positive for 1998 and that its
1998 capital requirements (estimated as approximately $400 million which does
not include the non-cash Williams network capacity purchase) will be funded from
available cash, cash generated from its 1998 operations and the bank credit
facility discussed below. 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,
Intermedia may determine to raise additional capital before such time. There can
be no assurance, however, that Intermedia will be successful in raising
sufficient debt or equity on terms that it will consider acceptable. Moreover,
the terms of Intermedia's outstanding indebtedness and preferred stock impose
certain restrictions upon Intermedia's ability to incur additional indebtedness
or issue additional preferred stock. Intermedia 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 Intermedia will be established.
Intermedia 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 Intermedia, (ii) potential joint venture partners looking toward
formation of strategic alliances that would expand the reach of Intermedia's
network or services without necessarily requiring an additional investment in or
by Intermedia and (iii) companies that represent potential acquisition
opportunities for Intermedia. There can be no assurance that any agreement with
any potential strategic investor, joint venture partner or acquisition target
will be reached nor does management believe that any thereof is necessary to
successfully implement its strategic plans.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Based on a recent assessment, the Company determined that it will be
required to modify or replace portions of its software and hardware so that its
systems will function properly with respect to dates in the year 2000 and
thereafter. The Company presently believes that with modifications to existing
software and conversions to new software and hardware, the Year 2000 issue will
not pose significant operational problems for its systems. However, if such
modifications and conversions are not made, or are not completed in timely
fashion, the Year 2000 problems could have a material impact on the operations
of the Company.
The Company is in the process of contacting all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues. The Company's total Year 2000 project cost and
estimates to complete include the estimated costs and time associated with the
impact of third party Year 2000 issues based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and would not have a
material adverse effect on the Company's systems.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the software and hardware for Year 2000 compliance. The
Company's objective is to complete the Year 2000 project not later than December
31, 1998, which is prior to any anticipated impact on its operating systems. The
1998 cost of the Year 2000 project for the core Intermedia business is estimated
to be $1.3 million in external personnel costs, and is being funded through
operating cash flows. This cost may be reduced if software and hardware are
replaced with compliant systems as a result of other capital projects currently
scheduled. The remaining expenses would not be expected to have a material
effect on the results of
36
<PAGE> 38
operations. Through year-end 1997, the Company has incurred approximately
$380,000 in expenses related to the assessment of, and preliminary efforts on,
its Year 2000 project and the development of plans for systems modifications and
testing.
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.
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.
INCOME TAXES
The Company recorded no current net income tax expense in 1997. At December
31, 1997, a full valuation allowance was provided on net deferred tax assets of
$117.7 million based upon the Company's history of losses over the past several
years and the uncertainty surrounding the Company's ability to recognize such
assets. The valuation allowance relates primarily to net operating losses and
high yield debt obligations.
NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 128, "Earnings per Share" ("Statement 128").
Statement 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. The Company adopted the
provisions of Statement 128 effective December 31, 1997. All earnings per share
accounts for all periods presented, have been restated to conform to the
Statement 128 requirements.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 131, "Disclosures about Segments of an Enterprise
and Related Information" ("Statement 131"), which establishes standards for
segment reporting and disclosure of additional information on products and
services, geographic areas and major customers. The Company is assessing
implementation of the disclosure requirements of this standard which is
effective for periods beginning after December 15, 1997. The adoption of
Statement 131 may result in additional financial statement disclosures.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 130, "Reporting Comprehensive Income" ("Statement
130"). Statement 130 establishes standards for the reporting and display of
comprehensive income and its components in financial statements. Comprehensive
income, as defined, is the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. The provisions of Statement 130 are effective for periods beginning
after December 15, 1997.
IMPACT OF INFLATION
Inflation has not had a significant impact on Intermedia's operations over
the past three years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in Item 14 are included in this report
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
37
<PAGE> 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference from
the information captioned "Proposal One: Election of Directors" and "Executive
Officers" to be included in the Company's proxy statement to be filed in
connection with the annual meeting of stockholders, to be held on May 20, 1998
(the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference from
the information captioned "Executive Compensation," "Compensation Committee
Interlocks and Insider Participation" and "Comparative Stock Performance" to be
included in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference from
the information captioned "Beneficial Ownership" to be included in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following consolidated financial statements of the Company and the
Notes thereto, the related reports thereon of the independent certified public
accountants, and financial statement schedules, are filed under Item 8 of this
Report:
<TABLE>
<S> <C>
FINANCIAL STATEMENTS -- INTERMEDIA
Report of Independent Certified Public Accountants.......... F-1
Consolidated Balance Sheets at December 31, 1996 and 1997... F-2
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996, and 1997......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
FINANCIAL STATEMENT SCHEDULES -- INTERMEDIA
Schedule II -- Valuation and Qualifying Accounts............ F-25
FINANCIAL STATEMENTS -- SHARED
Report of Independent Auditors.............................. F-26
Consolidated Balance Sheets at December 31, 1996 and 1997... F-29
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996, and 1997......................... F-31
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1995, 1996 and 1997...... F-32
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-33
Notes to Consolidated Financial Statements.................. F-34
</TABLE>
The financial information of Shared is provided pursuant to Rule 3-09 of
Regulation S-X and, under that Rule, is required only for 1997. Information with
respect to Shared Technologies Cellular (Cellular), referred to in Note 19 to
the Shared financial statements is not provided herein since it is not required
with respect to the registrant, but accessible in Cellular's Form 10-K for the
year ended December 31, 1996, filed with the Securities and Exchange Commission.
38
<PAGE> 40
All other financial statement schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission (the
"Commission") are not required under the instructions to Item 8 or are
inapplicable and therefore have been omitted.
REPORTS ON FORM 8-K
The following Current Reports on Form 8-K were filed during in the fourth
quarter of 1997:
Intermedia filed a Current Report on Form 8-K, dated October 24, 1997,
reporting under Item 5, the commencement of two concurrent private placements.
The unaudited financial statements of DIGEX for the six months ended June 30,
1997 and the unaudited pro forma condensed consolidated financial statements of
Intermedia and DIGEX for the year ended December 31, 1996 and the six months
ended June 30, 1997 were filed as exhibits to this report.
Intermedia filed a Current Report on Form 8-K, dated October 30, 1997,
reporting under Item 5 and Item 9, the completion of the concurrent private
placements of senior notes and preferred stock.
Intermedia filed a Current Report on Form 8-K, dated November 21, 1997,
reporting under Item 5, the execution of the definitive merger agreement to
acquire Shared. Intermedia filed Amendment No. 1 to the Current Report on Form
8-K, dated November 21, 1997, to report under Item 2, the execution of the
definitive merger agreement to acquire Shared. The financial statements of
Shared for the period ended December 31, 1996 and unaudited pro forma condensed
consolidated financial statements were filed as Amendment No. 2 to the Current
Report on Form 8-K, dated November 21, 1997. The unaudited pro forma condensed
consolidated financial statements were amended by Amendment No. 3 to the Current
Report on Form 8-K, dated November 21, 1997.
Intermedia filed a Current Report on Form 8-K, dated December 18, 1997,
reporting under Item 5, the execution of a definitive agreement to acquire LDS.
EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ -------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of June 4, 1997,
among Intermedia, Daylight Acquisition Corp. and DIGEX,
Incorporated. Exhibit 99(c)(1) to Intermedia's Schedule
14D-1 filed with the Commission on June 11, 1997 is
incorporated herein by reference.
2.2 Agreement and Plan of Merger, dated as of November 20, 1997,
by and among Intermedia, Moonlight Acquisition Corp. and
Shared Technologies Fairchild Inc. Exhibit 99(c)(1) to In-
termedia's Schedule 14D-1 and Schedule 13D filed with the
Commission on November 26, 1997 is incorporated herein by
reference.
2.3 Acquisition Agreement, dated as of December 17, 1997, among
Intermedia and the holders of interest in the Long Distance
Savers companies. Exhibit 2.3 to Amendment No. 1 to
Intermedia's Registration Statement on Form S-3 filed with
the Commission on January 14, 1998 (No. 333-42999) is
incorporated herein by reference.
2.4 Agreement and Plan of Merger, dated as of February 11, 1998,
among Intermedia, Sumter One Acquisition, Inc., Sumter Two
Acquisition, Inc., National Telecommunications of Florida,
Inc., NTC, Inc. and the stockholders of National. Exhibit
2.4 to Intermedia's Registration Statement on Form S-3 filed
with the Commission on February 13, 1998 (No. 333-46369) is
incorporated herein by reference.
3.1 Restated Certificate of Incorporation of Intermedia,
together with all amendments thereto. Exhibit 3.1 to
Intermedia's Quarterly Report on Form 10-Q for the Quarter
ended September 30, 1997 is incorporated herein by
reference.
3.2 By-laws of Intermedia, together with all amendments thereto.
Exhibit 3.2 to Intermedia's Registration Statement on Form
S-1, filed with the Commission on November 8, 1993 (No.
33-69053) (the "Form S-1") is incorporated herein by
reference.
4.1 Indenture, dated as of June 2, 1995, between Intermedia and
SunBank National Association, as trustee. Exhibit 4.1 to
Intermedia's Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on June 20, 1995 (No.
33-93622) is incorporated herein by reference.
</TABLE>
39
<PAGE> 41
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ -------
<S> <C>
4.1(a) Amended and Restated Indenture, dated as of April 26, 1996,
between Intermedia and SunTrust Bank, Central Florida,
National Association, as trustee. Exhibit 4.1 to
Intermedia's Current Report on Form 8-K filed with the
Commission on April 29, 1996 is incorporated herein by
reference.
4.2 Indenture, dated as of May 14, 1996, between Intermedia and
SunTrust Bank, Central Florida, National Association, as
trustee. Exhibit 4.1 to Amendment No. 1 to Intermedia's
Registration Statement on Form S-3 filed with the Commission
on April 18, 1996 (No. 33-34738) is incorporated herein by
reference.
4.3 Indenture, dated as of July 9, 1997, between Intermedia and
SunTrust Bank, Central Florida, National Association, as
trustee. Exhibit 4.1 to Intermedia's Current Report on Form
8-K filed with the Commission on July 17, 1997 is
incorporated herein by reference.
4.4 Indenture, dated as of October 30, 1997, between Intermedia
and SunTrust Bank, Central Florida, National Association, as
trustee. Exhibit 4.1 to Intermedia's Current Report on Form
8-K filed with the Commission on November 6, 1997 is
incorporated herein by reference.
4.5 Indenture, dated as of December 23, 1997, between Intermedia
and SunTrust Bank, Central Florida, National Association, as
trustee. Exhibit 4.5 to Intermedia's Registration Statement
on Form S-3 (Commission File No. 333-44875) filed with the
Commission on April 18, 1996 is incorporated herein by
reference.
4.6 Rights Agreement dated as of March 7, 1996, between
Intermedia and Continental Stock Transfer and Trust Company.
Exhibit 4.1 to Intermedia's Current Report on Form 8-K filed
with the Commission on March 12, 1996 is incorporated herein
by reference.
4.6(a) Amendment to Rights Agreement, dated as of February 20, 1997
between Intermedia and Continental Stock Transfer & Trust
Company. Exhibit 4.4(a) to Intermedia's Annual Report on
Form 10-K for the year ended December 31, 1996 is
incorporated herein by reference.
4.6(b) Amendment to Rights Agreement, dated as of January 27, 1998
between Intermedia and Continental Stock Transfer & Trust
Company.
10.1 1992 Stock Option Plan. Exhibit 10.1 to the Form S-1 is
incorporated herein by reference.
10.1(a) Amendment to 1992 Stock Option Plan dated May 20, 1993.
Exhibit 10.1(b) to the Form S-1 is incorporated herein by
reference.
10.1(b) Amendment to 1992 Stock Option Plan dated as of December 16,
1997.
10.2 Long Term Incentive Plan. Exhibit 10.1(c) to Intermedia's
Annual Report on Form 10-K for the year ended December 31,
1995 (the "1995 Form 10-K") is incorporated herein by
reference.
10.2(a) Amendment to Long Term Incentive Plan dated as of December
16, 1997.
10.3 Intermedia Communications Inc. 1997 Equity Participation
Plan for the Benefit of Employees of DIGEX, Incorporated.
10.4 Intermedia Communications Inc. 1997 Stock Option Plan for
the Benefit of Employees of DIGEX, Incorporated.
10.5 David C. Ruberg Employment Agreement, dated May 1, 1993,
between David C. Ruberg and Intermedia. Exhibit 10.2 to
Intermedia's 1995 Form 10-K is incorporated herein by
reference.
10.6 Letter Agreement dated August 27, 1996 between Robert M.
Manning and Intermedia.
10.7 Letter Agreement dated September 23, 1996 between Robert A.
Rouse and Intermedia.
10.8 Sublease, dated August 28, 1995, between Intermedia and
Pharmacy Management Services, Inc. for its principal
executive offices located at 3625 Queen Palm Drive, Tampa,
Florida. Exhibit 10.3 to Intermedia's 1995 Form 10-K is
incorporated herein by reference.
10.9 401(k) Plan. Exhibit 10.20 to Intermedia's Form S-1 is
incorporated herein by reference.
12 Statement Re: Computation of Ratios.
21 Subsidiaries of Intermedia.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Arthur Andersen LLP
23.4 Consent of Rothstein, Kass & Company, P.C.
27 Financial Data Schedule
</TABLE>
40
<PAGE> 42
GLOSSARY
ACCESS CHARGES -- The charges paid by an interexchange carrier to a LEC for
the origination or termination of the IXC's customer's long distance calls.
ACCESS LINE -- A circuit that connects a telephone user (customer) to the
public switched network. The access line usually connects to a telephone at the
customer's end.
ATM (ASYNCHRONOUS TRANSFER MODE) -- A modern information transfer standard
that allows packetized voice and data to share a transmission circuit. ATM
provides much greater efficiency than typical channelized transmission media.
BANDWIDTH -- The range of analog frequencies or the bit rate of digital
signals that can be supported by a circuit or device. The bandwidth of a
particular circuit is generally determined by the medium itself (wire, fiber
optic cable, etc.) and the device that transmits the signal to the transmission
medium (laser, audio amplifier, etc.)
CENTRAL OFFICE -- The switching center and/or central circuit termination
facility of a local telephone company.
CENTREX -- A central office based business telephone service that roughly
provides the user with the same services as a PBX, without the capital
investment of the PBX. Centrex services include station to station dialing (2
through 5 digits), customized long distance call handling, and user-input
authorization codes.
CIRCUIT SWITCHED NETWORK -- A telecommunications network that establishes
connections by linking together physical telecommunications circuits, either as
pairs of wires or dedicated channels on high capacity transport facilities such
as fiber optic systems. These connections are maintained for the duration of the
call through one or more telephone switches, as opposed to packet or cell
switched connections, which are virtual, often utilizing many physical paths or
routes to connect the communicating parties. Traditional voice telephone
networks are circuit switched networks.
CLASS A OFFICE BUILDING -- A Class A office building is typically a
multitenant, amenity-rich office building that houses customers of and prospects
for the Company's services. The Company believes that these buildings house
business tenants which typically require advanced, high value telecommunications
services. A typical Class A office building served by Intermedia contains
approximately 1,000 business telephones.
CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER) -- A category of telephone
service provider (carrier) that offers services similar to the former monopoly
local telephone company, as recently allowed by changes in telecommunications
law and regulation. A CLEC may also provide other types of telecommunications
services (long distance, etc.)
CLEC CERTIFICATION -- Granted by a state public service commission or
public utility commission, this certification provides a telecommunications
services provider with the legal standing to offer local exchange telephone
services in direct competition with the ILEC and other CLECs. Such
certifications are granted on a state by state basis.
COLLOCATION -- A location serving as the interface point for a CLEC's
network interconnection to the ILEC or another CLEC. Collocation can be 1)
physical, in which the CLEC "builds" a fiber optic network extension into the
ILEC's or CLEC's central office, or 2) virtual, in which the ILEC or CLEC leases
a facility, similar to that which it might build, to affect a presence in the
ILEC's or CLEC's central office.
COMMUNICATIONS ACT OF 1934 -- The first major federal legislation that
established rules for broadcast and non-broadcast communications, including both
wireless and wire line telephone service.
CONNECTED BUILDING -- A building that is connected to a carrier's network
via a non-switched circuit that is managed and monitored by that carrier.
CPE (CUSTOMER PREMISES EQUIPMENT) -- The devises and systems that
interfaces customer's voice or data telecommunications application to a
provider's network. CPE includes such devices and systems as PBXs and key
systems, routers and ISDN terminal adapters.
41
<PAGE> 43
DEDICATED ACCESS -- A circuit, not shared among multiple customers, that
connects a customer to a carrier's network.
EBITDA -- Earnings Before Interest, Tax, Depreciation, and Amortization --
a financial measure of cash flow.
ENHANCED DATA SERVICES -- Data networking services provided on a
sophisticated, software managed transport and switching network, such as a frame
relay or ATM data network.
ETHERNET -- a popular standard for local area networks. The Ethernet
connects servers and clients within a building or within other proximate areas.
Ethernets typically pass data at 10 million bits per second (Mbs) or 100 Mbs.
DARK FIBER -- Fiber which does not have connected to it the electronics
required to transmit data on such fiber.
FCC (FEDERAL COMMUNICATIONS COMMISSION) -- The US Government organization
charged with the oversight of all public communications media.
FRAME RELAY -- A wide area information transport technology that organizes
data into units called frames, with variable bit length, designed to move
information that is "bursty" in nature.
ICP (INTEGRATED COMMUNICATIONS PROVIDER) -- A telecommunications carrier
that provides packaged or integrated services from among a broad range of
categories, including local exchange service, long distance service, enhanced
data service, cable TV service, and other communications services.
ILEC (INCUMBENT LOCAL EXCHANGE CARRIER) -- The local exchange carrier that
was the monopoly carrier, prior to the opening of local exchange services to
competition.
INTEGRATION SERVICES -- The provision of specialized skills and equipment
to met specific customer needs.
INTERCONNECTION (CO-CARRIER) AGREEMENT -- A contract between an ILEC and a
CLEC for the interconnection of the two's networks, for the purpose of mutual
passing of traffic between the networks, allowing customers of one of the
networks to call users served by the other network. These agreements set out the
financial and operational aspects of such interconnection.
INTEREXCHANGE SERVICES -- Telecommunications services that are provided
between two exchange areas, generally meaning between two cities. These services
can be either voice or data.
ISDN (INTEGRATED SERVICES DIGITAL NETWORK) -- a modern telephone technology
that combines voice and data switching in an efficient manner.
ISP (INTERNET SERVICE PROVIDER) -- a recently created category of
telecommunications service provider who provides access to the Internet,
normally for dial access customers, by sharing communications lines and
equipment.
IXC (INTEREXCHANGE CARRIER) -- A provider of telecommunications services
that extend between exchanges, or cities. Also called long distance carrier.
KBPS -- kilobits per second, or thousands of bits per second, a unit of
measure of data transmission.
KEY SYSTEM -- a device that allows several telephones to share access to
multiple telephone lines and to dial each other with abbreviated dialing schemes
(1 to 4 digits). Modern key sets often include features such as speed dial, call
forward, and others.
LAN (LOCAL AREA NETWORK) -- a connection of computing devices within a
building or other small area, which may extend up to a few thousand feet. The
LAN allows the data and applications connected to one computer to be available
to others on the LAN. Local Area Networks operate with various standards, the
most popular of which is Ethernet.
LATA (LOCAL ACCESS AND TRANSPORT AREA) -- A geographic area inside of which
a LEC can offer switched telecommunications services, even long distance (known
as local toll). There are 161 LATAs in the
42
<PAGE> 44
continental US. The LATA boundaries were established at the Divestiture of the
regional Bell operating companies.
LEC (LOCAL EXCHANGE CARRIER) -- Any telephone service provider offering
local exchange services.
LOCAL EXCHANGE -- An area inside of which telephone calls are generally
completed without any toll, or long distance charges. Local exchange areas are
defined by the state regulator of telephone services.
LOCAL EXCHANGE SERVICES -- Telephone services that are provided within a
local exchange. These usually refer to local calling services (dial tone
services.) Business local exchange services include Centrex, access lines and
trunks, and ISDN.
MBPS -- Megabits per second, or millions of bits per second, a unit of
measure for the transmission of data.
NUMBER PORTABILITY -- A temporary technique that allows local exchange
service customers of an ILEC to keep their existing telephone number, while
moving their service to a CLEC. Their interim technique uses a central office
feature called remote call forwarding. The permanent solution to number
portability is to implemented over the next few years.
PACKET/CELL SWITCHED NETWORK -- A telecommunications network on which
messages are transmitted as digitized bits, assembled in groups called packets
or cells. These packets and cells contain industry-standard defined numbers of
data bits, along with addressing information and data integrity bits. These
networks, originally used only for the transmission of digital data, are being
implemented by carriers such as Intermedia to transport digitized voice, along
with other data. The switching (or routing) of the packets or cells of data
replace the "circuit-switching" of traditional voice telephone calls. Packet and
cell switching is considered to be a more cost efficient method of delivering
voice and data traffic.
PBX (PRIVATE BRANCH EXCHANGE) -- A telephone switching system designed to
operate at the premises of the user. The PBX functions much like a telephone
company central office. A PBX connects stations (telephones) to each other and
to lines and trunks that connect the PBX to the public network and/or private
telephone networks. A PBX usually provides telephone service to a single
company, but, as with the case of shared tenant services, a PBX can be operated
within a building to provide service to multiple customers.
PEERING -- The commercial practice under which nationwide ISPs exchange
each other's traffic without the payment of settlement charges.
PEERING POINTS -- A location at which ISPs exchange each others' traffic.
POINT OF PRESENCE -- A location where a carrier, usually an IXC, has
located transmission and terminating equipment to connect its network to the
networks of other carriers, or to customers.
PUBLIC SWITCHED NETWORK -- The collection of ILEC and IXC telephone
networks (switches and transmission routes) that allow telephones and other such
devices to dial a standardized number, and reach any other device connected to
the public network. This is contrasted to private networks, access to which is
limited to certain users, typically offices of a business or governmental
agency.
RBOC (REGIONAL BELL OPERATING COMPANY) -- One of the LECs created by the
Divestiture of the local exchange business by AT&T. These include BellSouth,
Bell Atlantic, Ameritech, US West, SBC, and PacTel.
SHARED TENANT SERVICES -- The provision of telecommunications services to
multiple tenants within a building or building complex, by allowing these users
to have shared access to telephone lines and other telephone services, for the
purpose of reducing the user's need to own and operate its own
telecommunications equipment and to reduce cost.
SMDS (SWITCHED MEGABIT DATA SERVICE) -- A data communication service that
allows high speed data transport links to be established, disconnected and
re-established under control of the user. SMDS services compete with private
circuits and with various other data networking technologies such as frame
relay.
43
<PAGE> 45
SPECIAL ACCESS SERVICES -- Private, non-switched connections between an IXC
and a customer, for the purpose of connecting the customer's long distance calls
to the IXC's network, without having to pay the LEC's access charges.
T1 -- digital transmission link with a capacity of 1.544 Mbps (1,544,000
bits per second). T1 uses two pairs of normal twisted wires, the same as you
would find in your house. T1 normally can handle 24 voice conversations, with
each one digitized at 64 Kbps. But with more advanced digital voice encoding
techniques, such as those being utilized by Intermedia, it can handle more voice
channels.
T3 -- 28 T1 lines or 44.736 million bits per second (commonly referred to
as 45 megabits per second). Capable of handling 672 voice conversations using
traditional telephone standards.
TIER-ONE NATIONAL ISP -- An Internet services provider whose network
connects at the nation's six major peering points, directly to other such
Internet providers. There are approximately 10 such ISPs in the U.S.
VSAT (VERY SMALL APERTURE TERMINAL) -- A satellite communication system
that comprises small diameter (approximately 1 meter in diameter) antennae and
electronics to establish a communications terminal, use mostly for data. VSAT
networks compete with other, landline based networks such as private lines and
frame relay.
WEB SITE -- A server connected to the Internet from which Internet users
can obtain information.
WORLD WIDE WEB OR WEB -- A collection of computer systems supporting a
communications protocol that permits multi-media presentation of information
over the Internet.
44
<PAGE> 46
ANNEX A
EXAMPLES OF SERVICES OFFERED
Local Exchange Services. Telephone services that connect a customer's
telephone or PBX to the public switched network. These local services also
provide the customer with access to long distance services, operator and
directory assistance services, 911 service and enhanced local features, which
are described by example below.
<TABLE>
<CAPTION>
SERVICE OR FEATURE DESCRIPTION TYPICAL APPLICATION
- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
Single-T Connects a customer PBX/Key A medium sized business
System to Intermedia's network combines its 10 key system
to provide dedicated access to lines, used for local and long
local, long distance, data and distance calling, with a 768
the Internet over a single T-1 Kbps Internet access connec-
facility. tion, all on a Single-T
facility. Additional capacity
remains available for
expansion.
Single-T PBX Trunk Connects a customer PBX to the A medium sized business, with
public switched network and its own PBX system, uses
allows the customer to combine Single-T to provide 20 two way
Local Exchange Carrier ("LEC") trunks supporting outbound and
local traffic and long distance direct inbound dialing (local
traffic on a single T-1 and long distance) toll free
facility. in-bound calling ("800" ser-
vice) and a 256 Kbps Internet
access connection.
Local Lines and Trunks Connects a business customer's A small sales office utilizes 5
telephone or fax to the public business lines, each with a
switched network for making or unique telephone number,
receiving local and long connected to five telephones in
distance calls. These are the office. Customer gets a
either Intermedia owned single bill for local and long
facilities or ILEC facilities distance services. Local resale
leased by Intermedia and of ILEC facilities is always
"resold" to the customer. combined with Intermedia long
distance services.
ISDN PRI (Primary Rate A high-speed digital switching An ISP with multiple customers
Interface) technology standard that allows for dial-up or dedicated
integrated voice, data and internet access.
video communications on a
single facility.
Virtual Foreign Exchange (VFX) Provides an Intermedia customer An Intermedia business customer
Service a local phone number in a city uses VFX to expand their own
(foreign exchange) that is market coverage area virtually
normally a long distance call rather than physically. A
away. The customer pays a flat potential customer in the new
monthly rate for a virtual T-1 market area may reach the
facility between the cities business in the distant city at
instead of long distance local rates by dialing a local
charges. number.
</TABLE>
Frame Relay Services. Switching and transport of digitized data (or voice)
over a seamless network, designed to provide highly reliable, flexible service
and support of many data transmission protocols. Intermedia's enhanced data
services are provided over its network of frame relay and ATM data switches,
located throughout its service territory. An example of these services is listed
below:
A-1
<PAGE> 47
<TABLE>
<CAPTION>
SERVICE OR FEATURE DESCRIPTION TYPICAL APPLICATIONS
- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
Frame Relay Network Connection of data A firm has several data
communications devices at networks (one for point of
numerous locations over sale, one for finance and
Intermedia's enhanced data accounting, one for LAN to LAN
network. connection) that all consist of
a large "host" site and
numerous remote sites,
currently connected by a large
number of dedicated private
lines. It is converted to
Intermedia's frame relay
network, with a single
connection to each location,
and the multiple networks
operate over this single frame
relay connection.
A small, multi-location firm
has LANs at each location, but
has not been able to provide
company-wide e-mail and file
access, without using dial up
connections. The establish-
ment of a frame relay network
allows an affordable means to
interconnect all offices, for
full time access to
company-wide e-mail and shared
files.
</TABLE>
Internet and Intranet Services. Intermedia offers access to the Internet
as a tier-one national ISP and provides additional services that utilize the
Internet via its frame relay network. Examples of these services are listed
below:
<TABLE>
<CAPTION>
SERVICE OR FEATURE DESCRIPTION TYPICAL APPLICATION
- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
Dedicated Internet Access Connection to the Internet via An existing Intermedia frame
Intermedia's frame relay relay customer utilizes an
network, dedicated existing physical connection to
connectivity, or other local access other computers on the
access options (such as Internet using a "Web browser"
Ethernet or SMDS) from 56Kbps or a corporation needing
to T-3. Internet access purchases a
dedicated Internet connection.
Security Solutions Intermedia offers secure A Corporation requires a fully
Internet access solutions secured, fully managed Internet
including equipment and connection, consisting of a
management services. physical firewall as well as
customized software access
controls in order to secure the
transmission of its busi-
ness-sensitive data between its
multiple locations or to and
from trading partners and
vendors.
Hosted Internet Service Intermedia offers a World Wide A business wishes to have a
Web presence for a customer by World Wide Web presence, but
establishing and maintaining lacks the expertise, computing
the customer's Web site or platform and technical
application on Intermedia's resources to design, imple-
platform. ment, and maintain their Web
presence.
</TABLE>
A-2
<PAGE> 48
<TABLE>
<CAPTION>
SERVICE OR FEATURE DESCRIPTION TYPICAL APPLICATION
- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
Intranet Service Private equivalent of the Intermedia provides a large
Internet. corporation with a "private"
equivalent of the Internet,
allowing secure, closed user
access to the corporation's
private Web Sites, file
transfer capabilities, etc.
</TABLE>
Interexchange Services. The origination and termination of telephone calls
between users in different cities or exchanges. Intermedia provides these
services on a usage basis, utilizing its local/long distance switches, its
intercity network and services provided by other carriers. Examples are listed
below:
<TABLE>
<CAPTION>
SERVICE OR FEATURE DESCRIPTION TYPICAL APPLICATION
- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
Outbound Long Distance Completion of long distance An Intermedia customer of local
calls originated by Intermedia exchange services makes a "1+"
customers. call, domestic or
international, which is
processed and delivered to its
destination by the Intermedia
network as part of an
integrated local/long dis-
tance service package.
Inbound Long Distance "800" or "888" number service. An Intermedia customer receives
"toll free" calls, handled over
Intermedia provided dedicated
lines, or over Intermedia
provisioned local exchange
service lines.
Calling Card Nationwide long distance An Intermedia customer dials a
calling without cash. nationwide 800 number and
completes a long distance call
using the Intermedia calling
card; billing is aggregated
with the customer's other
services.
</TABLE>
Private Line Services. Dedicated channels connecting discreet end points.
These non-switched services can be provided between two locations within the
same city or between locations in different cities (interexchange private
lines). Examples are listed below:
<TABLE>
<CAPTION>
SERVICE OR FEATURE DESCRIPTION TYPICAL APPLICATION
- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
Special Access An intracity private line that An IXC customer of Intermedia
connects a customer to an orders a special access circuit
interexchange carrier ("IXC") to one of its customers in an
for the purpose of delivering Intermedia city.
long distance calls to the IXC.
Interexchange Private Line An inter-city private line, for An Intermedia customer needs a
voice or data, of a fixed 1.544 Mbps connection between
bandwidth, connecting two two computers in Miami and
locations of the same customer. Boston. The full 1.544 Mbps is
used constantly.
IXC End Office Transport Connecting an IXC to the End An IXC customer of Intermedia
Office of an ILEC or CLEC. needs circuits to the end
office of a LEC, to allow the
IXC's customers to obtain "1+"
long distance dialing from that
IXC.
</TABLE>
A-3
<PAGE> 49
Integration Services. Provision and custom configuration of network
devices, normally located at the customer's location, which may include any
special engineering, installation or service function provided by Intermedia.
Examples are listed below:
<TABLE>
<CAPTION>
SERVICE OR FEATURE DESCRIPTION TYPICAL APPLICATION
- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
CPE Integration Handle all aspects of Intermedia designs a
interconnecting CPE to the router-based data network for a
transport network. Tasks customer and procures,
include: provisioning, configures, installs and
configuration, installation, maintains both the hardware and
and monitoring of specialized software for the customer. The
telecommunications equipment. customer receives a single
service invoice.
Campus LAN Construction of a private fiber Intermedia designs, constructs
network. and optionally monitors a
private fiber "loop" built on a
campus of buildings.
Design Service Provision of engineering Intermedia provides hardware
services in support of a and software engineering
customer application. services to support a
customer's Internet Web site.
</TABLE>
A-4
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERMEDIA COMMUNICATIONS INC.
(Registrant)
By: /s/ DAVID C. RUBERG
------------------------------------
David C. Ruberg
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Principal Executive Officer:
/s/ DAVID C. RUBERG Chairman of the Board, President March 24, 1998
- ------------------------------------------------ and Chief Executive Officer
David C. Ruberg
Principal Financial and Accounting Officers:
/s/ ROBERT M. MANNING Senior Vice President and March 24, 1998
- ------------------------------------------------ Chief Financial Officer
Robert M. Manning
/s/ JEANNE M. WALTERS Controller and March 24, 1998
- ------------------------------------------------ Chief Accounting Officer
Jeanne M. Walters
Other Directors:
/s/ JOHN C. BAKER March 24, 1998
- ------------------------------------------------
John C. Baker
/s/ GEORGE F. KNAPP March 24, 1998
- ------------------------------------------------
George F. Knapp
/s/ PHILIP A. CAMPBELL March 24, 1998
- ------------------------------------------------
Philip A. Campbell
</TABLE>
<PAGE> 51
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
INTERMEDIA COMMUNICATIONS INC.
We have audited the accompanying consolidated balance sheets of Intermedia
Communications Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for each of the three years in the period ended
December 31, 1997. Our audits also include the financial statement schedule
listed in the index at Item 14. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Intermedia Communications Inc. and Subsidiaries at December 31, 1996 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Tampa, Florida
February 17, 1998, except for Note 15, as to which the date is
March 10, 1998
F-1
<PAGE> 52
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1997
-------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $189,546 $ 756,923
Short-term investments.................................... 6,041 --
Restricted investments.................................... 26,675 6,853
Accounts receivable, less allowance for doubtful accounts
of $1,346 in 1996 and $4,251 in 1997................... 19,272 58,579
Prepaid expenses and other current assets................. 5,230 6,122
-------- ----------
Total current assets........................................ 246,764 828,477
Restricted investments...................................... 10,481 --
Telecommunications equipment, net........................... 203,907 463,846
Intangible assets, net...................................... 34,634 138,028
Investment in Shared Technologies Fairchild Inc............. -- 403,571
Other assets................................................ 17,154 41,048
-------- ----------
Total assets................................................ $512,940 $1,874,970
======== ==========
</TABLE>
See accompanying notes.
F-2
<PAGE> 53
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1997
-------- ----------
<S> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable.......................................... $ 29,896 $ 53,630
Accrued taxes............................................. 1,660 2,448
Accrued interest.......................................... 1,800 4,639
Other accrued expenses.................................... 3,710 5,792
Advance billings.......................................... 3,137 7,251
Current portion of long-term debt......................... 55 601
Current portion of capital lease obligations.............. 477 6,870
-------- ----------
Total current liabilities................................... 40,735 81,231
Long term debt.............................................. 353,449 1,224,455
Capital lease obligations................................... 4,526 20,417
Series B redeemable exchangeable preferred stock and accrued
dividends, $1.00 par value; 600,000 shares authorized;
334,420 shares issued and outstanding in 1997............. -- 323,146
Series D junior convertible preferred stock and accrued
dividends, $1.00 par value; 69,000 shares authorized,
issued and outstanding in 1997............................ -- 169,722
Series E junior convertible preferred stock, $1.00 par
value; 87,500 shares authorized; 80,000 shares issued and
outstanding in 1997....................................... -- 196,008
Commitments and contingencies (Note 13)
Stockholders' equity (deficiency):
Preferred stock, $1.00 par value; 460,000 and 1,211,000
shares authorized in 1996 and 1997, no shares issued... -- --
Series C preferred stock, $1.00 par value; 40,000 shares
authorized, no shares issued........................... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 16,285,340 and 17,445,300 shares issued and
outstanding in 1996 and 1997, respectively............. 163 175
Additional paid-in capital................................ 212,810 244,114
Accumulated deficit....................................... (91,141) (376,006)
Deferred compensation..................................... (7,602) (8,292)
-------- ----------
Total stockholders' equity (deficiency)..................... 114,230 (140,009)
-------- ----------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficiency)......................... $512,940 $1,874,970
======== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 54
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Local network services................................ $ 10,773 $ 13,524 $ 41,967
Enhanced data services................................ 6,951 31,674 86,636
Interexchange services................................ 18,895 53,136 113,152
Integration equipment sales and services.............. 2,012 5,063 6,144
---------- ---------- ----------
38,631 103,397 247,899
Expenses:
Network expenses...................................... 20,151 69,109 164,461
Facilities administration and maintenance............. 2,046 7,603 31,663
Cost of goods sold.................................... 793 4,393 3,015
Selling, general, and administrative.................. 14,992 36,610 98,598
Depreciation and amortization......................... 10,196 19,836 53,613
Charge off of purchased in-process R&D................ -- -- 60,000
---------- ---------- ----------
48,178 137,551 411,350
---------- ---------- ----------
Loss from operations.................................... (9,547) (34,154) (163,451)
Other income (expense):
Interest expense...................................... (13,767) (35,213) (60,662)
Interest and other income............................. 4,060 12,168 26,824
---------- ---------- ----------
Loss before income tax benefit and extraordinary item... (19,254) (57,199) (197,289)
Income tax benefit...................................... 97 -- --
---------- ---------- ----------
Loss before extraordinary item.......................... (19,157) (57,199) (197,289)
Extraordinary loss on early retirement of debt.......... (1,592) -- (43,834)
---------- ---------- ----------
Net loss................................................ (20,749) (57,199) (241,123)
Preferred stock dividends and accretions................ -- -- (43,742)
---------- ---------- ----------
Net loss attributable to common stockholders............ $ (20,749) $ (57,199) $ (284,865)
========== ========== ==========
Basic and diluted loss per common share:
Loss before extraordinary item, including preferred
stock dividends and accretions..................... $ (1.91) $ (4.08) $ (14.46)
Extraordinary item.................................... (0.16) -- (2.63)
---------- ---------- ----------
Net loss per common share............................. $ (2.07) $ (4.08) $ (17.09)
========== ========== ==========
Weighted average number of shares outstanding........... 10,035,774 14,017,597 16,670,090
========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 55
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN ACCUMULATED DEFERRED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION EQUITY
---------- ------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995..................... 9,659,188 $ 96 $ 65,131 $ (13,193) $ -- $ 52,034
Issuance of shares of common stock for
business combination...................... 683,583 7 7,854 -- -- 7,861
Return and cancellation of escrowed shares
issued for 1994 business combination...... (22,357) (1) (279) -- -- (280)
Exercise of stock options and warrants at
prices ranging from $4.20 to $12.20 per
share..................................... 39,357 1 336 -- -- 337
Issuance of detachable stock purchase
warrants, net of issuance costs........... -- -- 1,051 -- -- 1,051
Net loss..................................... -- -- -- (20,749) -- (20,749)
---------- ---- -------- --------- ------- ---------
Balance at December 31, 1995................... 10,359,771 103 74,093 (33,942) -- 40,254
Sale of common stock......................... 4,674,503 47 111,671 -- -- 111,718
Issuance of shares of common stock for
business combinations..................... 968,880 10 17,767 -- -- 17,777
Exercise of stock options and warrants at
prices ranging from $4.20 to $27.06 per
share..................................... 82,186 1 706 -- -- 707
Issuance of stock options under long-term
compensation plan......................... -- -- 3,575 -- (3,575) --
Issuance of common stock under long-term
compensation plan......................... 200,000 2 4,998 -- (5,000) --
Amortization of deferred compensation........ -- -- -- -- 973 973
Net loss..................................... -- -- -- (57,199) -- (57,199)
---------- ---- -------- --------- ------- ---------
Balance at December 31, 1996................... 16,285,340 163 212,810 (91,141) (7,602) 114,230
Exercise of stock options and warrants at
prices ranging from $0.52 to $41.72 per
share..................................... 908,096 9 4,961 -- -- 4,970
Issuance of 9,675 stock options under
long-term compensation plan............... -- -- 179 -- (179) --
Issuance of common stock under long-term
compensation plan......................... 165,000 2 4,948 -- (4,950) --
Net changes to stock options................. -- -- (2,836) -- 2,836 --
Amortization of deferred compensation........ -- -- -- -- 1,603 1,603
Issuance of 1,177,837 stock options in
connection with the DIGEX acquisition..... -- -- 19,380 -- -- 19,380
Issuance of stock warrant in conjunction with
Shared Technologies Fairchild Inc.
acquisition............................... -- -- 1,455 -- -- 1,455
Issuance of common stock for dividends on
Series D Preferred Stock.................. 86,864 1 3,217 (3,218) -- --
Preferred stock dividends and accretions..... -- -- -- (40,524) -- (40,524)
Net loss..................................... -- -- -- (241,123) -- (241,123)
---------- ---- -------- --------- ------- ---------
Balance at December 31, 1997................... 17,445,300 $175 $244,114 $(376,006) $(8,292) $(140,009)
========== ==== ======== ========= ======= =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 56
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................ $(20,749) $(57,199) $ (241,123)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 10,608 21,088 55,531
Amortization of deferred compensation................. -- 973 1,603
Accretion of interest on notes payable................ -- 14,304 44,629
Extraordinary loss.................................... 1,592 -- 43,834
Deferred tax benefit.................................. (97) -- --
Charge off of purchased in-process R&D................ -- -- 60,000
Provision for doubtful accounts....................... 856 2,285 6,858
Changes in operating assets and liabilities:
Accounts receivable................................ (3,443) (13,150) (40,858)
Prepaid expenses and other current assets.......... (205) (1,703) (554)
Other assets....................................... 160 (178) (1,948)
Accounts payable................................... (592) 22,326 15,079
Other accrued expenses and taxes................... 1,484 2,108 (2,143)
Advance billings................................... 691 1,390 19
-------- -------- ----------
Net cash used in operating activities................... (9,695) (7,756) (59,073)
INVESTING ACTIVITIES
Purchases of telecommunications equipment............... (29,962) (131,214) (260,105)
Investment in Shared Technologies Fairchild Inc......... -- -- (402,116)
Purchase of business, net of cash acquired.............. (1,952) (12,401) (149,840)
Maturities of restricted investments.................... 9,179 19,917 30,303
Purchases / maturities of short-term investments........ -- (6,041) 6,041
Purchase of restricted investments...................... (60,952) (5,250) --
Proceeds from sale of telecommunications equipment...... -- 624 --
-------- -------- ----------
Net cash used in investing activities................... (83,687) (134,365) (775,717)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt, net of
issuance costs........................................ 153,767 170,862 957,661
Proceeds from sale of preferred stock, net of issuance
costs................................................. -- -- 648,352
Payments on long-term debt.............................. (14,804) (1,321) (200,966)
Payments on capital leases.............................. (5,128) (1,296) (7,850)
Exercise of stock warrants and options.................. 337 707 4,970
Proceeds from sale of common stock, net of issuance
costs................................................. -- 111,718 --
-------- -------- ----------
Net cash provided by financing activities............... 134,171 280,670 1,402,167
-------- -------- ----------
Increase in cash and cash equivalents................... 40,789 138,549 567,377
Cash and cash equivalents at beginning of year.......... 10,208 50,997 189,546
-------- -------- ----------
Cash and cash equivalents at end of year................ $ 50,997 $189,546 $ 756,923
======== ======== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid........................................... $ 12,318 $ 23,437 $ 12,917
Schedule of noncash investing and financing activities:
Assets purchased under capital lease.................. 4,911 252 15,666
Warrants and options issued in purchase of business... -- -- 19,380
Common stock issued as dividends on preferred stock... -- -- 3,218
Accretion of preferred stock.......................... -- -- 1,217
</TABLE>
See accompanying notes.
F-6
<PAGE> 57
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Intermedia Communications Inc. and Subsidiaries (Intermedia or the Company)
is an integrated communications services provider offering a full suite of
local, long-distance and enhanced data services to business and government end
user customers, long distance carriers, Internet service providers, resellers
and wireless communications companies. Services include data and video
telecommunications services, frame relay, Internet access services, local
exchange services and long-distance services. The Company offers its full
product package of telecommunications services to customers in 35 metropolitan
statistical areas throughout the country with a focus on the eastern half of the
United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All significant
intercompany transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments consist of certificates of deposit with maturities
of more than three months when purchased and are stated at cost.
RESTRICTED INVESTMENTS
Restricted investments consist of certificates of deposit which are
restricted to collateralize certain letters of credit required by the different
municipalities to ensure the Company's performance related to network expansion.
TELECOMMUNICATIONS EQUIPMENT
Telecommunications equipment is stated at cost. Depreciation expense is
calculated using the straight-line method over the estimated useful lives of the
assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Telecommunications equipment................................ 2-7 years
Fiber optic cable........................................... 20 years
Furniture and fixtures...................................... 5-7 years
</TABLE>
Leasehold improvements are amortized using the straight-line method over
the shorter of the term of the lease or the estimated useful life of the
improvements.
F-7
<PAGE> 58
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
INTANGIBLE ASSETS
Intangible assets are stated at cost and include purchased customer lists,
developed technology and goodwill. Customer lists and developed technology are
amortized using the straight-line method over their estimated useful lives of
eight and ten years, respectively. Goodwill is amortized using the straight-line
method over periods of eight to forty years with a weighted average of nine
years at December 31, 1997.
OTHER ASSETS
Other assets consist primarily of deferred debt issuance costs. Debt
issuance costs are amortized using the effective interest method over the term
of the debt agreements. The related amortization is included as a component of
interest expense in the accompanying consolidated statements of operations.
Amortization of debt issuance costs, included in interest expense, amounted to
$412, $1,252 and $1,918 in 1995, 1996 and 1997, respectively.
REVENUE RECOGNITION
The Company recognizes revenue in the period the service is provided or the
goods are shipped for equipment product sales. Unbilled revenues included in
accounts receivable represent revenues earned for telecommunications services
which will be billed in the succeeding month and totaled $2,404 and $10,981 as
of December 31, 1996 and 1997, respectively. The Company invoices customers one
month in advance for recurring services resulting in advance billings at
December 31, 1996 and 1997 of $3,137 and $7,251, respectively.
INCOME TAXES
The Company has applied the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, which requires an asset and
liability approach in accounting for income taxes for all years presented.
Deferred income taxes are provided for in the consolidated financial statements
and principally relate to net operating losses and basis differences for
customer lists and telecommunications equipment.
LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128), which
establishes standards for computing and presenting earnings per share. SFAS 128
replaces the presentation of primary and fully diluted earnings per share with
basic and diluted earnings per share, respectively. Basic earnings per share are
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share are computed similar to fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to Statement 128 requirements.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk, as defined by Statement of Financial Accounting Standards No. 105,
Disclosure of Information About Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentrations of Credit Risk, are primarily
cash and cash equivalents and accounts receivable.
F-8
<PAGE> 59
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
The Company places its cash and temporary cash investments with
high-quality institutions. As of December 31, 1997, cash equivalents totaling
approximately $730,000 were held by two financial institutions. Such amounts
were collateralized by government-backed securities.
Accounts receivable are due from residential and commercial
telecommunications customers. Credit is extended based on evaluation of the
customer's financial condition and generally collateral is not required.
Anticipated credit losses are provided for in the consolidated financial
statements and have been within management's expectations.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with APB
No. 25, Accounting for Stock Issued to Employees, and, in cases where exercise
prices equal or exceed fair market value, recognizes no compensation expense for
the stock option grants. In cases where exercise prices are less than fair
value, compensation is recognized over the period of performance or the vesting
period.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting and Disclosure of
Stock-Based Compensation, (SFAS 123) which encourages, but does not require,
companies to recognize stock awards based on their fair value at the date of
grant. Unaudited pro forma financial information, assuming that the Company had
adopted the measurement standards of Statement 123, is included in Note 9.
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. Management is currently assessing the impact of this Standard.
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 and comprehensive income
per share be disclosed with equal prominence as net income and earnings per
share. Comprehensive income is defined as changes in stockholders' equity
exclusive of transactions with owners such as capital contributions and
dividends. SFAS 130 is effective for fiscal years beginning after December 15,
1997. Management is currently assessing the impact of this Standard.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified in order to conform with
the 1997 presentation.
2. BUSINESS ACQUISITIONS
During February 1995, the Company acquired FiberNet USA, Inc. (FiberNet) in
exchange for 683,583 shares of the Company's common stock, valued at
approximately $7,900, the assumption of approximately $5,000 in liabilities and
a note payable of $1,200 which was paid on July 17, 1995. The acquisition was
accounted for by the purchase method of accounting with the purchase price
allocated based on fair value of assets acquired and liabilities assumed. The
excess of the purchase price over the fair values of the net assets
F-9
<PAGE> 60
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
amounted to $11,000 and is being amortized over 20 years. The operating results
of FiberNet are included in the Company's consolidated financial statements
since March 1, 1995, since the operating results from the date of acquisition
were deemed to be immaterial.
During June 1996, the Company acquired the Telecommunications Division of
EMI Communications Corporation (EMI) in exchange for 937,500 shares of the
Company's common stock, valued at approximately $16,900. The acquisition was
accounted for by the purchase method of accounting, with the purchase price
allocated to the fair values of assets acquired, principally telecommunications
equipment. The operating results of EMI are included in the Company's
consolidated financial statements from the date of acquisition.
During December 1996, the Company acquired, in two separate transactions,
certain assets and the related businesses of Universal Telcom, Inc. (UTT) and
Netsolve, Inc. (Netsolve). The purchase price for UTT included 31,380 shares of
the Company's common stock, valued at $900, and the assumption of approximately
$2,000 of UTT's liabilities. NetSolve was purchased for cash of $12,800. The
acquisitions were accounted for by the purchase method of accounting, with the
purchase price allocated to the fair value of assets acquired, principally
goodwill. The goodwill, including approximately an additional $200 for legal
expenses, for these acquisitions was adjusted during the first quarter of 1997
due to the finalization of the purchase price allocation.
During July 1997, the Company acquired DIGEX, Incorporated (DIGEX), a
leading nationwide business Internet services provider. Aggregate cash
consideration for the acquisition was approximately $160,000. In addition, the
Company issued options and warrants for 1,177,837 shares of common stock valued
at $19,380 to replace outstanding DIGEX options. 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. In conjunction with
this allocation, the Company obtained an independent valuation related to fixed
assets. Based on this valuation, the amount allocated to in-process research and
development ($60,000) 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 following unaudited pro forma results of operations for the years ended
December 31 assume the acquisitions discussed above had occurred at the
beginning of the year prior to their acquisition, and do not purport to be
indicative of the results that actually would have occurred if the acquisitions
had been made as of those dates or of results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 (AUDITED)
----------------------------------
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Revenues............................................... $104,687 $ 167,644 $ 267,545
Loss before extraordinary item......................... (18,354) (112,924) (300,003)
Net loss attributable to common shareholders........... (19,946) (170,324) (415,687)
Net loss per common share.............................. (1.79) (11.73) (24.94)
</TABLE>
On November 20, 1997, the Company, through Moonlight Acquisition Corp., a
wholly-owned subsidiary of the Company, entered into a definitive merger
agreement with Shared Technologies Fairchild Inc. ("Shared"), a shared tenant
telecommunications services provider. The total purchase price for Shared is
estimated to be approximately $722,700 including $62,300 of certain transaction
expenses and fees relating to certain agreements. The Company initially
purchased 1,100,000 shares, or 6% of Shared for $16,300 on November 20, 1997.
The initial investment was recorded using the cost method.
F-10
<PAGE> 61
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
On December 30, 1997, an additional 4,000,000 shares were purchased for
$60,000, increasing the Company's ownership percentage to 28%. Accordingly,
accounting for the investment was changed to the equity method. At December 31,
1997, the Company's investment in Shared also includes $62,800 for convertible
preferred stock of Shared; $175,000 for Senior Subordinated Discount Notes of
Shared; a warrant valued at $1,455 redeemable for 100,000 shares of common stock
issued as compensation for consulting services related to the acquisition and
advances of $88,000 used by Shared to retire previously outstanding Special
Preferred Stock and pay certain fees related to termination of a previous merger
agreement.
Summarized financial information of Shared was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
Financial Position:
Current assets.............................................. $ 43,117
Property and equipment (net)................................ 65,402
Intangible assets........................................... 248,790
Other assets................................................ 8,887
--------
Total assets................................................ $366,196
========
Current liabilities......................................... $222,765
Long-term obligations....................................... 143,207
Redeemable preferred stock and warrants..................... 26,130
Shareholders' equity........................................ (25,906)
--------
Total liabilities and shareholders' equity.................. $366,196
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Results of Operations:
Revenue..................................................... $181,827
Cost of revenue and other expenses.......................... 281,337
--------
Net income (loss)........................................... $(99,510)
========
</TABLE>
On December 17, 1997, the Company entered into a definitive agreement to
acquire the stock of the Long Distance Savers group of companies (collectively,
LDS) for a purchase price of approximately $151,000, of which $130,000 is
payable in Intermedia common stock and $21,000 is payable in cash, in each case,
subject to certain adjustments (LDS Acquisition). Closing of the LDS Acquisition
is expected to occur before the end of the second quarter of 1998, subject to
certain regulatory approvals.
On February 11, 1998, the Company entered into a definitive agreement and
plan of merger for the acquisition of National Telecommunications of Florida,
Inc. and its affiliate, NTC, Inc. (collectively, National), for a purchase price
of approximately $151,000, subject to certain adjustments, of which
approximately $106,000 is payable in the Company's common stock and $45,000 is
payable in cash (National Acquisition). Closing of the National Acquisition is
expected to occur in the second quarter of 1998 and is subject to regulatory
approvals.
F-11
<PAGE> 62
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
3. TELECOMMUNICATIONS EQUIPMENT
Telecommunications equipment consisted of:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1997
-------- --------
<S> <C> <C>
Telecommunications equipment................................ $128,996 $307,923
Fiber optic cable........................................... 38,099 59,643
Furniture and fixtures...................................... 18,493 52,292
Leasehold improvements...................................... 4,500 10,113
Construction in progress.................................... 51,393 115,409
-------- --------
241,481 545,380
Less accumulated depreciation............................... (37,574) (81,534)
-------- --------
$203,907 $463,846
======== ========
</TABLE>
Depreciation expense totaled $7,940, $15,454 and $43,960 in 1995, 1996 and
1997, respectively.
Interest expense capitalized in connection with the Company's construction
of telecommunications equipment amounted to $677, $2,780 and $5,012 in 1995,
1996 and 1997, respectively.
Telecommunications equipment and construction in progress included $6,867
and $27,287 of equipment recorded under capitalized lease arrangements at
December 31, 1996 and 1997, respectively. Accumulated amortization of assets
recorded under capital leases amounts to $1,450 and $4,277 at December 31, 1996
and 1997, respectively.
In connection with network expansion, the Company had firm commitments for
capital expenditures of approximately $7,187 at December 31, 1997.
4. INTANGIBLE ASSETS
Intangible assets consisted of:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1997
-------- --------
<S> <C> <C>
Goodwill.................................................... $ 28,684 $133,731
Customer lists.............................................. 10,376 10,376
Developed technology........................................ -- 8,000
-------- --------
39,060 152,107
Less accumulated amortization............................... (4,426) (14,079)
-------- --------
$ 34,634 $138,028
======== ========
</TABLE>
Amortization of goodwill and customer lists amounted to $2,012 in 1995,
$3,123 in 1996 and $9,653 in 1997.
F-12
<PAGE> 63
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1997
-------- ----------
<S> <C> <C>
13.5% Senior Notes.......................................... $159,115 $ --
12.5% Senior Discount Notes................................. 194,224 219,260
11.25% Senior Discount Notes................................ -- 394,325
8.875% Senior Notes......................................... -- 260,250
8.5% Senior Notes........................................... -- 350,000
Other notes payable......................................... 165 1,221
-------- ----------
353,504 1,225,056
Less current portion........................................ (55) (601)
-------- ----------
$353,449 $1,224,455
======== ==========
</TABLE>
During June 1995, Intermedia issued $160,000 principal amount of 13.5%
Senior Notes due 2005 (13.5% Senior Notes) and warrants to purchase 350,400
shares of the Company's common stock at $10.86 per share. The Company allocated
$1,051 of the proceeds to the warrants, representing the estimated fair value at
the date of issuance. During 1997, the Company used a portion of the proceeds of
the 11.25% Senior Discount Notes, described below, to retire the 13.5% Senior
Notes. This retirement resulted in an extraordinary loss, as shown in the
accompanying 1997 consolidated statement of operations, of approximately
$43,834.
The Company originally used a portion of the proceeds from the 13.5% Senior
Notes to retire certain other long-term indebtedness. In connection with the
repayment of certain indebtedness, the Company incurred a prepayment penalty of
approximately $1,156. This amount, plus the write-off of related unamortized
financing costs have been reported as an extraordinary loss in the accompanying
1995 consolidated statement of operations.
During May 1996, the Company issued $330,000 principal amount of 12.5%
Senior Discount Notes, due May 15, 2006 (the 12.5% Senior Discount Notes). The
original issue discounted price for each $1,000 face value 12.5% Senior Discount
Note was $545. The original issue discount is being amortized over the term of
the 12.5% Senior Discount Notes using the effective interest method. Commencing
on November 15, 2001, interest on the 12.5% Senior Discount Notes will be
payable semiannually in arrears on May 15 and November 15 at a rate of 12.5% per
annum. Amortization of the original issue discount amounted to approximately
$14,304 and $25,036 during 1996 and 1997, respectively and is included in
interest expense. The 12.5% Senior Discount Notes are redeemable at the option
of the Company after May 15, 2001, at a premium declining to par in 2004, plus
accrued and unpaid interest. The 12.5% Senior Discount Notes agreement contains
certain restrictive covenants including limitations on the incurrence of
additional indebtedness, with which the Company is in compliance.
On July 9, 1997, the Company sold $606,000 principal amount at maturity of
11.25% Senior Discount Notes due 2007 (11.25% Senior Discount Notes) in a
private placement transaction. Subsequent thereto, the over-allotment option
with respect to the 11.25% Senior Discount Notes was exercised and the Company
sold an additional $43,000 principal amount at maturity of 11.25% Senior
Discount Notes. The issue price of the 11.25% Senior Discount Notes was $577.48
per $1000 principal amount at maturity of the 11.25% Senior Discount Notes. Net
proceeds to the Company amounted to approximately $363,000. The original issue
discount is being amortized over the term of the 11.25% Senior Discount Notes
using the effective interest
F-13
<PAGE> 64
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
method. Cash interest will not accrue on the 11.25% Senior Discount Notes prior
to July 15, 2002. Commencing January 15, 2003, cash interest on the 11.25%
Senior Discount Notes will be payable semi-annually in arrears on July 15 and
January 15 at a rate of 11.25% per annum. The 11.25% Senior Discount Notes will
be redeemable, at the Company's option at any time on or after July 15, 2002 and
are pari passu with all other senior indebtedness.
On October 30, 1997, the Company sold $250,000 principal amount of 8.875%
Senior Notes due 2007 (8.875% Senior Notes) in a private placement transaction.
Subsequent thereto, the over-allotment option with respect to the 8.875% Notes
was exercised and the Company sold an additional $10,250 principal amount at
maturity of 8.875% Notes. Net proceeds to the Company amounted to approximately
$253,000. Cash interest on the 8.875% Senior Notes will be payable semi-annually
in arrears on May 1 and November 1 at a rate of 8.875% per annum commencing May
1, 1998. The 8.875% Senior Notes will be redeemable, at the Company's option at
any time on or after November 1, 2002 and are pari passu with all other senior
indebtedness.
On December 23, 1997, the Company sold $350,000 principal amount of 8.5%
Senior Notes due 2008 (8.5% Senior Notes) in a private placement transaction.
Subsequent to December 31, 1997, the over-allotment option with respect to the
8.5% Senior Notes was exercised and the Company sold an additional $50,000
principal amount at maturity of 8.5% Senior Notes. Net proceeds to the Company
amounted to approximately $390,000. Cash interest on the 8.5% Senior Notes will
be payable semi-annually in arrears on January 15 and July 15 of each year
commencing July 15, 1998. The 8.5% Senior Notes, which mature on January 15,
2008, will be redeemable at the option of the Company at any time on or after
January 15, 2003 and are pari passu with all other senior indebtedness.
Long-term debt maturities as of December 31, 1997 for the next five years
are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 601
1999........................................................ 619
2000........................................................ --
2001........................................................ --
2002........................................................ --
Thereafter.................................................. 1,223,836
----------
$1,225,056
==========
</TABLE>
The Company is a party to various capital lease agreements for fiber optic
cable, underground conduit equipment and utility poles which extend through the
year 2015.
F-14
<PAGE> 65
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
Future minimum lease payments for assets under the capital leases at
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 9,531
1999........................................................ 8,980
2000........................................................ 6,176
2001........................................................ 1,903
2002........................................................ 1,740
Thereafter.................................................. 10,518
-------
38,848
Less amount representing interest........................... (11,561)
-------
Present value of future minimum lease payments.............. 27,287
Less current portion........................................ (6,870)
-------
$20,417
=======
</TABLE>
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments
at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1997
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents....................... $189,546 $189,546 $756,923 $755,410
Short-term investments.......................... 6,041 6,041 -- --
Restricted investments, current and
non-current.................................. 37,156 36,920 6,853 6,853
Accounts receivable............................. 19,272 19,272 58,579 58,579
Liabilities:
Accounts payable................................ 29,896 29,896 53,630 53,630
Long-term debt:
13.5% Senior Notes........................... 159,115 182,800 -- --
12.5% Senior Discount Notes.................. 194,224 216,975 219,260 259,050
11.25% Senior Discount Notes................. -- -- 394,325 462,413
8.875% Senior Notes.......................... -- -- 260,250 266,756
8.5% Senior Notes............................ -- -- 350,000 350,000
Other notes payable.......................... 165 165 1,221 1,221
Series B redeemable exchangeable preferred
stock........................................... -- -- 323,146 409,665
Series D junior convertible preferred stock....... -- -- 169,722 282,486
Series E junior convertible preferred stock....... -- -- 196,008 225,040
</TABLE>
The following methods and assumptions are used in estimating fair values
for financial instruments:
Cash and cash equivalents: The fair value of cash equivalents is based on
negotiated trades for the securities.
F-15
<PAGE> 66
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
Investments: As of December 31, 1996, these investments were classified as
held-to-maturity, in accordance with SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities. At December 31, 1997, the fair value
of these investments approximates their carrying amounts.
Accounts receivable and accounts payable: The carrying amounts reported in
the consolidated balance sheets for accounts receivable and accounts payable
approximate their fair value.
Long-term and short-term debt: The estimated fair value of the Company's
borrowing is based on negotiated trades for the securities as provided by the
Company's investment banker or by using discounted cash flows at the Company's
incremental borrowing rate.
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):
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Loss before extraordinary item........................ $ (19,157) $ (57,199) $ (197,289)
Extraordinary item.................................... (1,592) -- (43,834)
---------- ---------- ----------
Net loss.............................................. (20,749) (57,199) (241,123)
Preferred stock dividends and accretions.............. -- -- (43,742)
---------- ---------- ----------
Numerator for basic loss per share -- loss
attributable to common stockholders................ (20,749) (57,199) (284,865)
Effect of dilutive securities......................... -- -- --
---------- ---------- ----------
Numerator for diluted loss per share -- income
attributable to common stockholders after assumed
conversions........................................ (20,749) (57,199) (284,865)
Denominator:
Denominator for basic loss per share --
weighted-average shares............................ 10,035,774 14,017,597 16,670,090
Effect of dilutive securities......................... -- -- --
---------- ---------- ----------
Denominator for diluted loss per share -- adjusted
weighted-average shares and assumed conversions.... 10,035,774 14,017,597 16,670,090
========== ========== ==========
Basic loss per common share............................. $ (2.07) $ (4.08) $ (17.09)
========== ========== ==========
Diluted loss per common share........................... $ (2.07) $ (4.08) $ (17.09)
========== ========== ==========
</TABLE>
As discussed in Note 2 to the consolidated financial statements, the
Company has entered into definitive agreements to purchase LDS and National. The
closing of these two acquisitions are expected to occur during 1998. The
definitive agreements call for the Company to issue $130,000 and $106,000 of
common stock as a portion of the purchase price of LDS and National,
respectively, at the closing. The ultimate number of shares to be issued will be
based on the fair market value of the Company's common stock as of the date of
the agreements, subject to certain exceptions related to the market value of the
Company's common stock.
Unexercised options to purchase 1,138,974, 2,176,671 and 3,533,131 shares
of common stock for 1995, 1996, and 1997 respectively, and unexercised
convertible preferred stock outstanding to yield 7,741,872 shares
F-16
<PAGE> 67
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
of common stock for 1997, were not included in the computations of diluted loss
per share because assumed conversion would be antidilutive.
8. REDEEMABLE PREFERRED STOCK
On March 7, 1997, the Company sold 30,000 shares (aggregate liquidation
preference $300,000) of its Series A Redeemable Exchangeable Preferred Stock due
2009 (Series A Preferred Stock) in a private placement transaction. Net proceeds
to the Company amounted to approximately $288,000. On June 6, 1997, the Company
issued 300,000 shares (aggregate liquidation preference $300,000) of its 13.5%
Series B Redeemable Exchangeable Preferred Stock due 2009 (Series B Preferred
Stock) in exchange for all outstanding shares of the Series A Preferred Stock
pursuant to a registered exchange offer. Dividends on the Series B Preferred
Stock accumulate at a rate of 13.5% of the aggregate liquidation preference
thereof and are payable quarterly, in arrears. Dividends are payable in cash or,
at the Company's option, by the issuance of additional shares of Series B
Preferred Stock having an aggregate liquidation preference equal to the amount
of such dividends. The Series B Preferred Stock is subject to mandatory
redemption at its liquidation preference of $1,000 per share, plus accumulated
and unpaid dividends on March 31, 2009. The Series B Preferred Stock will be
redeemable at the option of the Company at any time after March 31, 2002 at
rates commencing with 106.75%, declining to 100% on March 31, 2007.
The Company may, at its option, exchange some or all shares of the Series B
Preferred Stock for the Company's 13.5% Senior Subordinated Debentures, due 2009
(Exchange Debentures). The Exchange Debentures mature on March 31, 2009.
Interest on the Exchange Debentures is payable semi-annually, and may be paid in
the form of additional Exchange Debentures at the Company's option. Exchange
Debentures will be redeemable by the Company at any time after March 31, 2002 at
rates commencing with 106.75%, declining to 100% on March 31, 2007.
The Company is accreting the Series B Preferred Stock to its liquidation
preference through the due date of the Series B Preferred Stock. The accretion
for the year ended December 31, 1997 was approximately $739.
During 1997, the Company issued 3,442 additional shares of Series B
Preferred Stock, in lieu of cash, with an aggregate liquidation preference of
$34,414 as payment of the required quarterly dividends.
On July 9, 1997, the Company sold 6,000,000 Depositary Shares (Series D
Depositary Shares) (aggregate liquidation preference $150,000) each representing
a one-hundredth interest in a share of the Company's 7% Series D Junior
Convertible Preferred Stock, (Series D Preferred Stock), in a private placement
transaction. Subsequent thereto, the over-allotment option with respect to the
Series D Depositary Shares was exercised and the Company sold an additional
900,000 Series D Depositary Shares (aggregate liquidation preference of
$22,500). Net proceeds to the Company amounted to approximately $167,000.
Dividends on the Series D Preferred Stock will accumulate at a rate of 7% of the
aggregate liquidation preference thereof and are payable quarterly, in arrears.
Dividends are payable in cash or, at the Company's option, by the issuance of
shares of common stock of the Company. The Series D Preferred Stock will be
redeemable at the option of the Company at any time on or after July 19, 2000 at
rates commencing with 104%, declining to 100% on July 19, 2004.
The Series D Preferred Stock is convertible, at the option of the holder,
into common stock of the Company at a conversion price of $38.90 per share of
common stock, subject to certain adjustments. Further, in the event of a change
in control, the holder may compel the Company to redeem the preferred stock at a
price equal to 100% of liquidation preference or $2,500 per share.
F-17
<PAGE> 68
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
The Company is accreting the Series D Preferred Stock to its liquidation
preference through the due date of the Series D Preferred Stock. The accretion
for the year ended December 31, 1997 was approximately $335.
During 1997, the Company issued 86,854 shares of common stock valued at the
then current market price, in lieu of cash, as payment of the required
dividends.
On October 30, 1997, the Company sold 7,000,000 Depositary Shares (Series E
Depositary Shares) (aggregate liquidation preference $175,000) each representing
a one-hundredth interest in a share of the Company's 7% Series E Junior
Convertible Preferred Stock (Series E Preferred Stock), in a private placement
transaction. Subsequent thereto, the over-allotment option with respect to the
Series E Depositary Shares was exercised and the Company sold an additional
1,000,000 Series E Depositary Shares (aggregate liquidation preference $25,000).
Net proceeds to the Company amounted to approximately $194,000. Dividends on the
Series E Preferred Stock will accumulate at a rate of 7% of the aggregate
liquidation preference thereof and are payable quarterly, in arrears. Dividends
are payable in cash or, at the Company's option, by the issuance of shares of
common stock of the Company. The Series E Preferred Stock will be redeemable at
the option of the Company at any time on or after October 18, 2000 at rates
commencing with 104%, declining to 100% on October 18, 2004.
The Series E Preferred Stock will be convertible, at the option of the
holder, into common stock of the Company at a conversion price of $60.47 per
share of common stock, subject to certain adjustments. Further, in the event of
a change in control, the holder may compel the Company to redeem the preferred
stock at a price equal to 100% of liquidation preference or $2,500 per share.
The Company is accreting the Series E Preferred Stock to its liquidation
preference through the due date of the Series E Preferred Stock. The accretion
for the year ended December 31, 1997 was approximately $143.
9. STOCKHOLDERS' EQUITY
Stock Options: The Company has a 1992 Stock Option Plan and a 1996
Long-Term Incentive Plan (the Plans) under which options to acquire an aggregate
of 1,346,000 shares and 2,500,000 shares, respectively, of common stock may be
granted to employees, officers, directors and consultants of the Company. The
Plans authorize the Board of Directors (the Board) to issue incentive stock
options (ISOs), as defined in Section 422A(b) of the Internal Revenue Code, and
stock options that do not conform to the requirements of that Code section
(Non-ISOs). The Board has discretionary authority to determine the types of
stock options to be granted, the persons among those eligible to whom options
will be granted, the number of shares to be subject to such options, and the
terms of the stock option agreements. Options may be exercised in the manner and
at such times as fixed by the Board, but may not be exercised after the tenth
anniversary of the grant of such options.
F-18
<PAGE> 69
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table summarizes the transactions for the three years ended
December 31, 1997 relating to the Plans:
<TABLE>
<CAPTION>
NUMBER OF PER SHARE
SHARES OPTION PRICE
--------- ---------------------
<S> <C> <C> <C> <C>
Outstanding, January 1, 1995................................ 748,767 $ 6.06 - $12.25
Granted................................................... 549,057 $ 9.50 - $15.56
Exercised................................................. (37,831) $ 6.38 - $12.25
Canceled.................................................. (121,019) $ 6.38 - $12.25
---------
Outstanding, December 31, 1995.............................. 1,138,974 $ 6.06 - $15.56
Granted................................................... 1,187,183 $19.75 - $34.50
Exercised................................................. (81,996) $ 6.38 - $27.06
Canceled.................................................. (67,490) $ 6.60 - $15.56
---------
Outstanding, December 31, 1996.............................. 2,176,671 $ 6.38 - $15.56
Granted................................................... 2,385,712 $15.38 - $53.25
Exercised................................................. (404,689) $ 0.52 - $27.06
Canceled.................................................. (624,563) $ 0.52 - $25.88
---------
Outstanding, December 31, 1997.............................. 3,533,131
=========
Exercisable, December 31, 1997.............................. 1,049,938
=========
</TABLE>
The Board of Directors has reserved 534,300 shares of common stock for
issuance in connection with the future exercise of outstanding stock warrants,
and 3,853,092 shares of common stock that may be issued to employees, officers,
directors and consultants of the Company pursuant to existing long-term
compensation plans as may be determined by the Board of Directors.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company had accounted for its employee stock options under the fair value
method of that Statement starting in 1995. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1995, 1996 and 1997: risk-free
interest rates of 6.2% in 1995 and 1996, and 6.07% in 1997; a dividend yield of
zero; volatility factors of the expected market price of the Company's common
stock based on historical trends; and a weighted-average expected life of the
options of five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-19
<PAGE> 70
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Pro forma net loss attributable to common stockholders..... $(20,961) $(58,602) $(289,927)
Pro forma loss per common share............................ $ (2.09) $ (4.18) $ (17.39)
</TABLE>
Stock Award Plans: During 1996, the Company entered into restricted share
agreements with certain executive officers that provide stock award incentives.
Pursuant to the agreements, an aggregate of 365,000 restricted shares of common
stock were awarded to the respective officers upon the Company's attainment of
certain stock price milestones ranging from $20 to $40. Shares awarded under
these arrangements vest over a period of five years following the award. During
1996 and 1997, 200,000 and 165,000 shares were awarded with a fair value of
$5,000 and $4,950, respectively. These amounts are being amortized over the
vesting periods.
The Company adopted a 1997 long-term incentive plan under which options to
purchase DIGEX common stock were converted to options to acquire Intermedia
common stock as a result of the business combination. Outstanding options under
this plan at December 31, 1997 were 666,511.
Stock Warrants: At December 31, 1997, warrants to purchase the following
shares of the Company's common stock were outstanding:
<TABLE>
<CAPTION>
SHARES PRICE PER SHARE EXPIRATION DATE
- ------- --------------- -----------------
<C> <C> <S>
350,400 $10.86 June 1, 2000
100,000 $41.50 November 11, 2002
83,900 $21.65 January 1, 2000
</TABLE>
As further discussed in Note 5, the Company issued warrants expiring in
2000 that would allow the holder to acquire 350,400 shares of the Company's
common stock in connection with the issuance of the Senior Notes. The Company
also has a warrant outstanding that has been issued for consulting services that
will allow the holder to purchase 100,000 shares of the Company's common stock.
Warrants to purchase 83,900 shares of common stock were assumed in the
acquisition of DIGEX.
On January 13, 1998, a warrant to purchase approximately 83,900 shares of
the Company's common stock was exercised pursuant to a cashless exercise
provision for 53,172 shares.
Shareholder Rights Plan: On March 7, 1996, the Board of Directors adopted
a Shareholder Rights Plan and declared a dividend of one common stock Purchase
Right (a Right) for each outstanding share of common stock to shareholders of
record on March 18, 1996. Such Rights only become exercisable, or transferable
apart from the common stock, ten business days after a person or group (an
Acquiring Person) acquires beneficial ownership of, or commences a tender or
exchange offer for, 15% or more of the Company's common stock, without the
approval of the Company's Board of Directors.
Each Right then may be exercised to acquire 1/1000th of a share of the
Company's Series C preferred stock at an exercise price of $85. Subsequent to
December 31, 1997, the exercise price was changed to $200 per share. Thereafter,
upon the occurrence of certain events, the Rights entitle holders other than the
Acquiring Person to acquire the existing Company's preferred stock or common
stock of the surviving company having a value of twice the exercise price of the
Rights.
F-20
<PAGE> 71
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
The Rights may be redeemed by the Company at a redemption price of $.01 per
Right at any time until the 10th business day following public announcement that
a 15% position has been acquired or ten business days after commencement of a
tender or exchange offer.
10. INCOME TAXES
At December 31, 1996 and 1997, the Company had temporary differences
between amounts of assets and liabilities for financial reporting purposes and
such amounts measured by tax laws. The Company also has net operating loss (NOL)
carryforwards available to offset future taxable income. Significant components
of the Company's deferred tax assets and liabilities as of December 31 are as
follows:
<TABLE>
<CAPTION>
DEFERRED TAX
ASSET (LIABILITY)
--------------------
TEMPORARY DIFFERENCES/CARRYFORWARDS 1996 1997
- ----------------------------------- -------- --------
<S> <C> <C>
Tax over book depreciation.................................. $ (5,751) $ (1,131)
Intangibles................................................. (2,849) (15,260)
-------- --------
Total deferred tax liabilities............................ (8,600) (16,391)
Net operating loss carryforwards............................ 37,091 100,347
High yield debt obligations................................. -- 14,753
Other....................................................... 1,038 2,570
-------- --------
Total deferred tax assets................................. 38,129 117,670
Less valuation allowance.................................... (29,529) (101,279)
-------- --------
Net deferred tax assets................................... 8,600 16,391
-------- --------
Net Deferred Tax Liabilities................................ $ -- $ --
======== ========
</TABLE>
At December 31, 1997, the Company's net operating loss carryforward for
federal income tax purposes is approximately $267,000, expiring in various
amounts from 2003 to 2012. Limitations apply to the use of the net operating
loss carryforwards.
RATE RECONCILIATION
<TABLE>
<CAPTION>
1995 1996 1997
----------------- ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Tax benefit at U.S. statutory rates.... $(7,054) (34.0)% $(19,448) (34.0)% $(81,989) (34.0)%
State income taxes, net of federal
benefit.............................. (725) (3.5) (2,001) (3.5) (8,439) (3.5)
In-process R&D......................... -- -- -- -- 20,400 8.5
Other.................................. (83) (0.6) (315) (0.6) (1,722) (0.7)
Change in valuation allowance.......... 7,765 37.6 21,764 38.1 71,750 29.7
------- ------- -------- ------- -------- -------
$ (97) (0.5)% $ -- --% $ -- --%
======= ======= ======== ======= ======== =======
</TABLE>
11. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) profit-sharing plan. Employees 21
years or older with three months of service are eligible to participate in the
plan. Participants may elect to contribute, on a tax-deferred basis, up to 15%
of their compensation, not to exceed $10 in 1997. The Company will match
one-half of a participant's contribution, up to a maximum of 6% of the
participant's compensation. The Company's
F-21
<PAGE> 72
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
matching contribution fully vests after three years of service. The Company's
contributions to the plan were approximately $85, $77 and $735 in 1995, 1996 and
1997, respectively.
12. OPERATING LEASES
The Company leases fiber optic cable, terminal facility space, and office
space. The leases generally contain renewal options which range from one year to
fifteen years, with certain rights-of-way and cable conduit space being
renewable indefinitely after the minimum lease term subject to cancellation
notice by either party to the lease. Lease payments in some cases may be
adjusted for related revenues, increases in property taxes, operating costs of
the lessor, and increases in the Consumer Price Index. Operating lease expense
was $1,466, $4,795 and $9,857 for 1995, 1996 and 1997, respectively.
Future minimum lease payments under noncancelable operating leases with
original terms of more than one year as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
FIBER TERMINAL
OPTIC FACILITY OFFICE
CABLE SPACE SPACE TOTAL
------ -------- ------- -------
<S> <C> <C> <C> <C>
1998................................................... $ 680 $ 3,876 $ 7,942 $12,498
1999................................................... 510 3,199 8,495 12,204
2000................................................... 475 2,361 10,018 12,854
2001................................................... 475 1,889 3,334 5,698
2002................................................... 475 1,584 3,396 5,455
Thereafter............................................. 872 2,950 34,850 38,672
------ ------- ------- -------
$3,487 $15,859 $68,035 $87,381
====== ======= ======= =======
</TABLE>
13. 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
F-22
<PAGE> 73
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
claims or lawsuits will have a material effect on the Company's financial
condition, results of operations or cash flows.
The Company maintains interconnection agreements with incumbent local
exchange carriers (ILECs) in Florida, Georgia, and North Carolina. These
contracts govern the reciprocal amounts to be billed by competitive carriers for
terminating local traffic of internet service providers (ISPs) in each state.
During 1997, the Company billed these ILECs approximately $10,193 for 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, thirteen of fourteen state commissions that have
ruled on the issue found that ILECs must pay compensation to competitive
carriers for local calls to ISPs located on competitive carriers' networks. A
contrary ruling by an administrative law judge in Oklahoma is currently being
appealed. A number of other state commissions currently have proceedings pending
to consider this matter. Management is pursuing this matter vigorously and
believes the ILECs will ultimately pay all amounts in full.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------------- ------------------- -------------------- -------------------
1996 1997 1996 1997 1996 1997(A) 1996 1997
-------- -------- -------- -------- -------- --------- -------- --------
IN THOUSANDS EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 13,503 $ 43,938 $ 16,850 $ 50,132 $ 33,980 $ 71,246 $ 39,064 $ 82,583
Network expenses..................... (18,459) (64,727) (23,104) (74,146) (43,434) (160,624) (52,554) (111,853)
-------- -------- -------- -------- -------- --------- -------- --------
Loss from operations................. (4,956) (20,789) (6,254) (24,014) (9,454) (89,378) (13,490) (29,270)
Other income (expense)............... (3,937) (6,615) (5,989) (5,635) (5,051) (10,953) (8,068) (10,635)
-------- -------- -------- -------- -------- --------- -------- --------
Loss before extraordinary item....... (8,893) (27,404) (12,243) (29,649) (14,505) (100,331) (21,558) (39,905)
Extraordinary loss................... -- -- -- -- -- (43,834) -- --
-------- -------- -------- -------- -------- --------- -------- --------
Net loss............................. (8,893) (27,404) (12,243) (29,649) (14,505) (144,165) (21,558) (39,905)
Preferred stock dividends and
accretions......................... -- (3,375) -- (9,848) -- (13,895) -- (16,624)
-------- -------- -------- -------- -------- --------- -------- --------
Net loss attributable to common
stockholders....................... $ (8,893) $(30,779) $(12,243) $(39,497) $(14,505) $(158,060) $(21,558) $(56,529)
======== ======== ======== ======== ======== ========= ======== ========
LOSS PER COMMON SHARE:
Loss before extraordinary item....... $ (0.86) $ (1.89) $ (0.92) $ (2.39) $ (0.90) $ (6.82) $ (1.39) $ (3.25)
Extraordinary item................... -- -- -- -- -- (2.63) -- --
-------- -------- -------- -------- -------- --------- -------- --------
Net loss per common share............ $ (0.86) $ (1.89) $ (0.92) $ (2.39) $ (0.90) $ (9.44) $ (1.39) $ (3.25)
======== ======== ======== ======== ======== ========= ======== ========
</TABLE>
- ---------------
(a) Results of the third quarter reflect the acquisition of DIGEX effective July
1, 1997 and a resulting $60,000 in-process research and development charge.
F-23
<PAGE> 74
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
15. SUBSEQUENT EVENTS
On February 25, 1998, the Company's Board of Directors approved a 2-for-1
stock split of the Company's common stock. The stock split is subject to
shareholder approval of a proposed increase of the Company's authorized common
stock.
On March 10, 1998, the Company completed its acquisition of Shared by
acquiring the remaining outstanding common stock for approximately $195,000
under the purchase method of accounting. Concurrent with the acquisition, the
Company retired approximately $123,500 of Shared's outstanding Credit Facility
Term Loans and Revolving Credit Facilities.
F-24
<PAGE> 75
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
INTERMEDIA COMMUNICATIONS INC.
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER DEDUCTIONS -- END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DESCRIBE PERIOD
- ----------- ------------ ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful
accounts...................... $ 545 $ 856 -- $ 532(2) $ 869
====== ====== ====== ====== ======
For the year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful
accounts...................... $ 869 $2,285 -- $1,808(2) $1,346
====== ====== ====== ====== ======
For the year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful
accounts...................... $1,346 $6,858 $1,464(1) $5,417(2) $4,251
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Amount represents allowance accounts purchased in the DIGEX business
combination.
(2) Uncollectible accounts written off, net of recoveries.
F-25
<PAGE> 76
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
SHARED TECHNOLOGIES FAIRCHILD INC.
We have audited the accompanying consolidated balance sheet of Shared
Technologies Fairchild Inc. and Subsidiaries (the "Company") as of December 31,
1997, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Shared Technologies Fairchild Inc. at December 31, 1997, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
February 13, 1998 except for Note 20,
as to which the date is March 10, 1998
Vienna, Virginia
F-26
<PAGE> 77
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Shared Technologies Fairchild Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Shared
Technologies Fairchild Inc. and subsidiaries (the "Company") as of December 31,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The summarized
financial data for Shared Technologies Cellular Inc., contained in Note 19 are
based on the financial statements of Shared Technologies Cellular Inc., which
were audited by other auditors. Their report has been furnished to us and our
opinion, insofar as it relates to the data in Note 19, is based solely on the
report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Shared Technologies Fairchild Inc. and
subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Washington, D.C.
March 7, 1997
F-27
<PAGE> 78
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Shared Technologies Fairchild Inc. and Subsidiaries:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Shared Technologies Fairchild Inc. and
Subsidiaries for the year ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of their operations and
their cash flows of Shared Technologies Fairchild Inc. and Subsidiaries for the
year ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 19 to the consolidated financial statements, the
Company changed its method of accounting for its investment in one of its
subsidiaries.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
March 1, 1996, except for Note 1,
as to which the date is March 13, 1996
F-28
<PAGE> 79
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,685 $ 2,703
Billed accounts receivable, less allowance for doubtful
accounts of $1,015 and $611 at December 31, 1997 and
1996, respectively..................................... 22,038 23,752
Unbilled accounts receivable.............................. 8,072 8,811
Inventories............................................... 4,842 1,976
Other current assets...................................... 3,480 1,853
-------- --------
Total current assets........................................ 43,117 39,095
Property and equipment at cost:
Telecommunications........................................ 98,645 90,158
Office and data processing................................ 7,054 5,776
-------- --------
105,699 95,934
Accumulated depreciation and amortization................. (40,297) (28,169)
-------- --------
Property and equipment, net............................... 65,402 67,765
Other assets:
Costs in excess of net assets acquired, less accumulated
amortization of $12,790 and $6,189 for 1997 and 1996,
respectively........................................... 248,790 253,329
Deferred financing and debt issuance costs................ 7,332 8,513
Investment in affiliates.................................. 727 457
Other..................................................... 828 407
-------- --------
257,677 262,706
-------- --------
Total....................................................... $366,196 $369,566
======== ========
</TABLE>
See accompanying notes.
F-29
<PAGE> 80
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
-------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt and capital lease
obligations............................................ $124,046 $ 13,576
Note payable to related party (Note 14)................... 48,150 --
Accounts payable.......................................... 22,960 17,356
Accrued expenses.......................................... 18,451 9,558
Advanced billings......................................... 6,978 6,935
Accrued dividends......................................... 2,180 435
-------- --------
Total current liabilities................................... 222,765 47,860
Long-term debt and capital lease obligations................ 143,207 238,261
Redeemable put warrant...................................... 1,130 1,069
-------- --------
Total liabilities........................................... 367,102 287,190
Redeemable convertible preferred stock, $0.01 par value, 250
shares authorized and outstanding......................... 25,000 25,000
Redeemable special preferred stock, $0.01 par value, 200
shares authorized and outstanding in 1996................. -- 14,167
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value:
Series C, authorized 1,500 shares, outstanding 428
shares in 1996........................................ -- 4
Series D, authorized 1,000 shares, outstanding 64 and
441 shares in 1997 and 1996, respectively............. 1 4
Common stock, $0.004 par value; 50,000 shares authorized,
18,130 and 15,682 shares issued and outstanding in 1997
and 1996, respectively................................. 73 63
Capital in excess of par value............................ 117,602 76,054
Accumulated deficit....................................... (143,582) (32,916)
-------- --------
Total shareholders' equity (deficit)........................ (25,906) 43,209
-------- --------
Total liabilities and shareholders' equity (deficit)........ $366,196 $369,566
======== ========
</TABLE>
See accompanying notes.
F-30
<PAGE> 81
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Shared telecommunication services...................... $ 105,248 $ 96,016 $ 35,176
Telecommunication systems.............................. 76,579 61,225 11,910
--------- --------- ---------
Total revenues........................................... 181,827 157,241 47,086
COST OF REVENUES:
Shared telecommunication services...................... 55,147 45,133 19,473
Telecommunication systems.............................. 45,209 37,439 9,399
--------- --------- ---------
Total cost of revenues................................... 100,356 82,572 28,872
--------- --------- ---------
Gross margin............................................. 81,471 74,669 18,214
Selling, general and administrative expenses............. 88,398 55,329 16,188
--------- --------- ---------
Operating income......................................... (6,927) 19,340 2,026
Other income (expense):
Merger related fees (Note 16).......................... (62,250) -- --
Equity in loss of affiliates........................... (211) (3,927) (1,752)
Interest expense....................................... (29,775) (22,903) (882)
Interest income........................................ 33 15 205
Gain on sale of subsidiary stock....................... -- -- 1,375
--------- --------- ---------
(92,203) (26,815) (1,054)
--------- --------- ---------
(Loss) income before income tax provision and
extraordinary item..................................... (99,130) (7,475) 972
Income tax provision..................................... (380) (783) (45)
--------- --------- ---------
(Loss) income before extraordinary item.................. (99,510) (8,258) 927
Extraordinary item, loss on early retirement of debt..... -- (311) --
--------- --------- ---------
Net (loss) income........................................ (99,510) (8,569) 927
Preferred stock dividends................................ (4,628) (2,366) (398)
--------- --------- ---------
Net (loss) income applicable to common stockholders...... $(104,138) $ (10,935) $ 529
========= ========= =========
(Loss) income per common share:
(Loss) income before extraordinary item................ $ (6.75) $ (0.77) $ 0.06
Extraordinary item..................................... -- (0.02) --
--------- --------- ---------
Net (loss) income...................................... $ (6.75) $ (0.79) $ 0.06
========= ========= =========
Weighted average common shares outstanding............... 16,381 13,787 8,482
========= ========= =========
</TABLE>
See accompanying notes.
F-31
<PAGE> 82
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SERIES C SERIES D SERIES E SERIES F
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- --------------- --------------- --------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995.......... 907 $ 9 457 $ 5 400 $ 4 700 $ 7 6,628 $27
Preferred stock dividends.........
Dividend accretion of redeemable
put warrant.....................
Exercise of common stock options
and warrants.................... 17
Issuance of common stock.......... 405 2
Conversion of preferred stock..... (400) (4) (700) (7) 1,100 4
Proceeds from sale of common stock
net of expenses of $112......... 300 1
Common stock issued in lieu of
compensation and payment of
accrued expenses................ 56
Net income........................
---- --- ---- --- ---- --- ---- --- ------ ---
Balance, December 31, 1995........ 907 $ 9 457 $ 5 $-- $-- 8,506 $34
Preferred stock dividends.........
Exercise of common stock options
and warrants.................... 675 3
Issuance of common stock.......... 6,000 24
Conversion of preferred stock..... (479) (5) (16) (1) 442 1
Issuance of common stock for
benefit plan.................... 59 1
Net loss..........................
---- --- ---- --- ---- --- ---- --- ------ ---
Balance, December 31, 1996........ 428 $ 4 441 $ 4 $-- $-- 15,682 $63
Preferred stock dividends.........
Exercise of common stock options
and warrants.................... 1,715 7
Issuance of common stock.......... 35
Conversion of preferred stock..... (428) (4) (383) (3) 698 3
Redemption price in excess of the
carrying value of special
preferred stock.................
Acceleration of stock options.....
Merger related fees...............
Net income(loss)..................
---- --- ---- --- ---- --- ---- --- ------ ---
Balance, December 31, 1997........ $-- 58 $ 1 $-- $-- 18,130 $73
==== === ==== === ==== === ==== === ====== ===
<CAPTION>
CAPITAL IN OBLIGATIONS
EXCESS OF TO ISSUE TOTAL
PAR ACCUMULATED COMMON STOCKHOLDERS'
VALUE DEFICIT STOCK EQUITY
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995.......... $ 41,488 $ (22,465) $ 1,806 $ 20,881
Preferred stock dividends......... (398) (398)
Dividend accretion of redeemable
put warrant..................... (45) (45)
Exercise of common stock options
and warrants.................... 70 70
Issuance of common stock.......... 1,804 (1,806)
Conversion of preferred stock..... 7
Proceeds from sale of common stock
net of expenses of $112......... 1,162 1,163
Common stock issued in lieu of
compensation and payment of
accrued expenses................ 246 246
Net income........................ 927 927
-------- --------- -------- --------
Balance, December 31, 1995........ $ 44,777 $ (21,981) $ -- $ 22,844
Preferred stock dividends......... (2,366) (2,366)
Exercise of common stock options
and warrants.................... 3,210 3,213
Issuance of common stock.......... 27,726 27,750
Conversion of preferred stock..... 5
Issuance of common stock for
benefit plan.................... 336 337
Net loss.......................... (8,569) (8,569)
-------- --------- -------- --------
Balance, December 31, 1996........ $ 76,054 $ (32,916) $ -- $ 43,209
Preferred stock dividends......... (4,628) (4,628)
Exercise of common stock options
and warrants.................... 3,363 3,370
Issuance of common stock.......... 281 281
Conversion of preferred stock..... 4
Redemption price in excess of the
carrying value of special
preferred stock................. (6,528) (6,528)
Acceleration of stock options..... 1,900 1,900
Merger related fees............... 36,000 36,000
Net income(loss).................. (99,510) (99,510)
-------- --------- -------- --------
Balance, December 31, 1997........ $117,602 $(143,582) $ -- $(25,906)
======== ========= ======== ========
</TABLE>
See accompanying notes.
F-32
<PAGE> 83
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- --------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(99,510) $ (8,569) $ 927
Adjustments:
Depreciation and amortization.......................... 19,916 15,530 3,967
Accretion on 12 1/4% bonds............................. 15,973 11,526 --
Equity in loss of affiliate............................ 211 3,927 1,752
Termination fees paid by other......................... 62,250 -- --
Other.................................................. 6,667 1,321 (787)
Change in assets and liabilities (Note 18)................ 11,967 662 (981)
-------- --------- -------
Net cash provided by operating activities................... 17,474 24,397 4,878
-------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment....................................... (13,464) (9,702) (3,679)
Acquisitions, net of cash acquired.......................... (2,068) (225,924) (1,382)
Payments to affiliate....................................... (752) (8,407) --
Other....................................................... 271 (2,804) (866)
-------- --------- -------
Net cash used in investing activities....................... (16,013) (246,837) (5,927)
-------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt and capital lease
obligations............................................... (23,576) (12,662) (2,226)
Proceeds from borrowing..................................... 23,019 244,999 2,684
Proceeds from sales of common and preferred stock........... 3,651 3,213 1,233
Preferred stock dividends paid.............................. (2,573) (1,467) (398)
Deferred financing and debt issuance costs.................. -- (9,416) --
Other....................................................... -- -- 60
-------- --------- -------
Net cash provided by financing activities................... 521 224,667 1,353
-------- --------- -------
Net increase in cash........................................ 1,982 2,227 304
Cash, beginning of year..................................... 2,703 476 172
-------- --------- -------
Cash, end of year........................................... $ 4,685 $ 2,703 $ 476
======== ========= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest.................................................... $ 12,732 $ 11,377 $ 856
Income taxes................................................ 380 223 84
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Retirement of special preferred stock with debt............. 21,899 -- --
Issuance of preferred stock in connection with
acquisition............................................... -- 38,269 --
Issuance of common stock to acquire FII..................... -- 27,750 --
</TABLE>
See accompanying notes.
F-33
<PAGE> 84
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BUSINESS AND ORGANIZATION
On March 13, 1996, Shared Technologies Inc., merged with Fairchild
Industries, Inc. ("FII"), and changed its name to Shared Technologies Fairchild
Inc. ("Shared") (see Note 3 for additional information concerning this merger).
Shared, together with its subsidiaries (collectively the "Company")
operates in the telecommunications industry by providing shared
telecommunications services ("STS") and telecommunications systems ("Systems")
which provides telecommunications and office automation services and equipment
to tenants of office buildings.
On November 20, 1997, the Company entered into an Agreement and Plan of
Merger with Intermedia Communications Inc. ("Intermedia") (the "Proposed
Merger"). In February 1998 the Boards of Directors of both the Company and
Intermedia and the shareholders of the Company approved the Proposed Merger. The
transaction is expected to be completed in the first quarter of 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries in which the Company has a controlling
interest. The effects of all significant intercompany transactions have been
eliminated in consolidation. Investments in companies owned between 20% and 50%
by the Company are recorded using the equity method.
CASH EQUIVALENTS/STATEMENTS OF CASH FLOWS
For purposes of these statements, the Company considers all highly liquid
investments with original maturity dates of three months or less as cash
equivalents. The Company maintains its cash in bank deposit accounts, which at
times, may exceed federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not subject to any significant credit
risk on cash.
UNBILLED RECEIVABLES AND ADVANCED BILLINGS
Unbilled receivables arise from those contracts under which billings can
only be rendered upon the achievement of certain contract stages or upon
submission of appropriate billing detail. Advanced billings represent
pre-billings for services not yet rendered. Advanced billings are generally for
services to be rendered within one year.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
primarily using the weighted average method. The inventories consist of
telecommunications equipment to be installed at customer sites.
PROPERTY AND EQUIPMENT
Properties are stated at cost and depreciated over estimated useful lives,
generally on a straight-line basis. All telecommunications equipment is
classified as equipment. No interest costs were capitalized in any of the years
presented. Useful lives for property and equipment are:
<TABLE>
<S> <C>
Telecommunications equipment................................ 8 years
Office and data processing.................................. 3-8 years
</TABLE>
F-34
<PAGE> 85
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Depreciation expense related to property and equipment amounted to $12,128,
$10,133, and $3,534 for 1997, 1996, and 1995, respectively.
REVENUE RECOGNITION
The majority of the Company's revenues are related to the sale and
installation of telecommunications equipment and services and maintenance after
the sale. Service revenues are billed and earned on a monthly basis. For systems
installations, which usually require three to five months, the Company uses the
percentage-of-completion method, measured by costs incurred versus total
estimated cost at completion. The Company bills equipment rentals, local
telephone access service, and maintenance contracts in advance. The deferred
revenue is relieved when the revenue is earned. Systems equipment sales are
recognized at time of shipment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
AMORTIZATION OF COST IN EXCESS OF NET ASSETS ACQUIRED
The excess of cost of purchased businesses over the fair value of their net
assets at acquisition dates is being amortized on a straight-line basis,
primarily over 40 years. The Company recorded amortization of $6,601, $5,397,
and $433 for the years ended 1997, 1996, and 1995, respectively.
DEFERRED FINANCING AND DEBT ISSUANCE COSTS
Costs incurred related to the issuance of debt are deferred and are being
amortized over the life of the related debt. The amortization of deferred
financing and debt issuance costs included in interest expense was $1,172 and
$939 in 1997 and 1996, respectively.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred
income tax assets and liabilities are computed annually for differences between
financial statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future, based on enacted tax laws and rates
applicable to the periods in which the differences are expected to effect
taxable income. Valuation allowances are established, when necessary, to reduce
the deferred income tax assets to the amount expected to be realized.
INCOME (LOSS) PER COMMON SHARE
During 1997, Shared adopted SFAS No. 128, "Earnings Per Share," which
requires the Company to present basic and diluted earnings per share for all
years presented. Basic income (loss) per common share is computed by deducting
preferred stock dividends and premiums paid to redeem preferred stock from net
income. The resulting net income applicable to common stock is divided by the
weighted average number of common shares outstanding. For the year ended
December 31, 1997 the premium paid to redeem the special preferred stock of
$6,528 was included in the calculation of basic earnings per share, as described
above.
F-35
<PAGE> 86
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Diluted income (loss) per common share is computed by dividing net income
applicable to common stock by the weighted average number of common and common
equivalent shares and the effect of preferred stock conversions, if dilutive.
Diluted income (loss) per common share is substantially the same as basic income
(loss) per common share for the years ended December 31, 1997 and 1996.
For the years ended December 31, 1997, and 1996, because of their
anti-dilutive effect, the redeemable convertible preferred stock, redeemable
special preferred stock, redeemable put warrant, and all stock options have been
excluded from the computation of dilutive earnings per share. The following is a
reconciliation of the numerator and denominator of the basic and dilutive
earning per share calculation for the year ended December 31, 1995.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings....................................... $529 8,482 $0.062
Effect of Dilutive Securities
Redeemable put warrant............................. -- 31
Warrants........................................... -- 140
Stock options...................................... -- 134
---- -----
Diluted earnings..................................... $529 8,787 $0.060
==== =====
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company
reviews its long-lived assets, including property and equipment, goodwill and
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. To determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows, without
interest charges, will be less than the carrying amount of the assets.
Impairment is measured at fair value. There was no impairment of long-lived
assets in 1997 and 1996.
3. THE MERGER AGREEMENT AND OTHER ACQUISITIONS
On March 13, 1996, the Company's stockholders approved and the Company
consummated its merger with FII, a subsidiary of RHI Holdings, Inc. ("RHI") for
consideration of $295,191 of securities and assumed debt. Under the merger
agreement, Shared issued to RHI 6,000 shares of common stock, 250 shares of
convertible preferred stock with a $25,000 initial liquidation preference and
200 shares of special preferred stock with a $20,000 initial liquidation
preference (see Note 8). The Company issued 12 1/4% Senior Subordinated Discount
Notes due 2006 with an initial accreted value of $114,999 and received $125,000
(of an available $145,000) in loans from a credit facility with financial
institutions (see Note 5). The funds were used primarily for the retirement of
certain liabilities assumed from FII in connection with the merger, and the
retirement of the Company's existing credit facility. In connection with the
merger, the Company entered into two-year employment agreements with key
employees for annual compensation aggregating $1,250, and adopted the 1996
Equity Incentive Plan. The merger was accounted for using the purchase method of
accounting and resulted in $248,117 of cost in excess of net assets acquired,
which is being amortized over 40 years.
F-36
<PAGE> 87
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following unaudited pro forma financial statement of operations for
1996 give effect to the acquisition as if it had occurred on January 1.
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Revenues.................................................... $184,525
Income before extraordinary items........................... (4,621)
Net income.................................................. (4,932)
Net income available to common stockholders................. (8,520)
(Loss) income per common share:
(Loss) income before extraordinary item................... (0.60)
Extraordinary item........................................ (0.02)
--------
Net (loss) income........................................... $ (0.62)
========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1996, consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
State sales and excise taxes................................ $ 4,105 $1,986
Property taxes.............................................. 662 230
Concession fees............................................. 676 204
Salaries and wages.......................................... 7,560 3,598
Other....................................................... 5,448 3,540
------- ------
$18,451 $9,558
======= ======
</TABLE>
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Credit Facility Term Loans.................................. $100,500 $113,250
Revolving Credit Facility................................... 23,000 10,000
Senior Subordinated Discount Notes.......................... 142,498 126,525
Other long-term debt and capital leases..................... 1,255 2,062
-------- --------
267,253 251,837
Less current portion........................................ 124,046 13,576
-------- --------
$143,207 $238,261
======== ========
</TABLE>
THE CREDIT FACILITY
The Company, through its wholly owned subsidiary, Shared Technologies
Fairchild Communications Corp. ("STFCC"), entered into a Credit Facility with a
consortium of banks (the "Lenders") upon the merger with FII in March 1996. The
Credit Facility consists of (a) a Tranche A Senior Secured Term Loan Facility
providing for term loans to the Company in a principal amount not to exceed
$50,000 (the
F-37
<PAGE> 88
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
"Tranche A Term Facility"); (b) a Tranche B Senior Secured Term Loan Facility
providing for term loans to the Company in a principal amount not to exceed
$70,000 (the "Tranche B Term Facility" and, together with the Tranche A Term
Facility, the "Term Facilities"); and (c) a Senior Secured Revolving Credit
Facility providing for revolving loans to the Company in an aggregate principal
amount at any time not to exceed $25,000 (the "Revolving Facility").
The Tranche A Term Facility requires quarterly payments due over 5 years;
$34,000 and $44,750 was outstanding at December 31, 1997 and 1996, respectively.
The Tranche B Term Facility requires quarterly payments over 7 years; $66,500
and $68,500 was outstanding at December 31, 1997 and 1996, respectively.
The Company will be required to make mandatory prepayments of loans in
amounts, at times and subject to exceptions (a) in respect of 75% (subject to
step-down based upon a leverage ratio test) of consolidated excess cash flow of
the Company and its subsidiaries, (b) in respect of 100% of the net proceeds of
certain dispositions of assets or the stock of subsidiaries or the incurrance of
certain indebtedness by the Company or any of its subsidiaries and (c) in
respect of 100% (subject to step-down based upon a leverage ratio test) of the
net proceeds of the issuance of any equity securities by the Company or any of
its subsidiaries. At the Company's option, loans may be repaid, and revolving
credit commitments may be permanently reduced, in whole or in part, at any time.
The obligations of the Company's wholly owned subsidiary, STFCC, under the
Credit Facility are unconditionally and jointly and severally guaranteed by the
Company and the subsidiary guarantors. In addition, the Credit Facility is
secured by first priority security interests in all the capital stock and the
tangible and intangible assets of the Company and the guarantors, including all
the capital stock of, or other equity interests in, the Company and each direct
or indirect domestic subsidiary of the Company. The wholly owned subsidiary,
STFCC, is restricted from payment of dividends or other distributions to its
parent, Shared, except to the extent necessary to pay preferred dividends and
other identified items.
At the Company's option, the interest rates per annum applicable to the
Credit Facility will be either Adjusted LIBOR plus a margin ranging from 2.75%
to 3.50%, or the Adjusted Base Rate plus a margin ranging from 1.75% to 2.50%.
The Alternate Base Rate is the higher of Credit Suisse's Prime Rate and the
Federal Funds Effective Rate plus 0.5%. At December 31, 1997 and 1996, the
interest rate for the Tranche A Term Facility was 8.54% and 8.38%, and the
interest rate for the Tranche B Term Facility was 9.29% and 9.13%, respectively.
The Revolving Facility interest rates at December 31, 1997 and 1996 ranged from
8.19% to 10.25% and from 8.13% to 10.0%, respectively.
As required under the Credit Agreement, the Company entered into interest
rate swap agreements with two commercial banks. The three contracts, each with a
$10,000 notional amount, expire from May 1999 through May 2001. In order to
protect the Company from interest rate increases, the agreements require the
Company to pay a fixed interest rate in lieu of a variable interest rate. The
Company accounts for the interest rate swaps as hedge agreements and recognizes
interest expense based on the fixed rate.
The Credit Facility contains a number of significant convenants that, among
other things, restricts the ability of the Company to dispose of assets, incur
additional indebtedness, repay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, enter into leases,
investments or acquisitions, engage in mergers or consolidations, make capital
expenditures, or engage in certain transactions with subsidiaries and affiliates
and otherwise restrict corporate activities. In addition, under the Credit
Facility, the Company is required to comply with specified financial ratios and
tests, including a limitation on capital expenditures, a minimum Earnings Before
Interest, Taxes, Depreciation, and Amortization ("EBITDA") test (as defined), a
fixed charge coverage ratio, an interest coverage ratio, a leverage ratio and a
minimum net
F-38
<PAGE> 89
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
worth test. As of December 31, 1997 the Company was in default on certain
covenants which result in the acceleration of payments and therefore the entire
amount has been classified as current.
SENIOR SUBORDINATED DISCOUNT NOTES
As part of the acquisition of FII, the Company also issued $163,637 of
aggregate principal amount (with an initial accreted value of $114,999) of
Senior Subordinated Discount Notes (the "Discount Notes"). The discount notes
bear an annual interest rate of 12.25% with the principal fully due on March 1,
2006. Interest will begin accruing on March 1, 1999, with payments due
semi-annually thereafter. The discount on the Discount Notes is being amortized
to interest expense using the effective interest method over the three year
accretion period, ending March 1, 1999.
The Discount Notes are not redeemable prior to March 1, 2001 except that,
subject to certain limitations, until 1999, the Company may redeem, at its
option, up to an aggregate of 25% of the principal amount of the Discount Notes
at a specified redemption price plus accrued interest until the date of the
redemption. On or after March 2001, the Discount Notes are redeemable at the
option of the Company, in whole or in part, at the specified redemption prices
plus accrued interest to the date of redemption.
Upon a change in control of the Company, as defined, the holders of the
Discount Notes may require the Company to repurchase the Discount Notes at 101%
of the accreted value plus accrued interest to the date of repurchase. As part
of the Agreement and Plan of Merger with Intermedia (Note 1), Intermedia
purchased the Discount Notes. Intermedia plans to retire the Notes subsequent to
the consummation of the Proposed Merger.
The Discount Notes of the Company's wholly owned subsidiary, STFCC, are
subordinated to all existing and future senior indebtedness, as defined, of the
Company. The Discount Notes are unconditionally and jointly and severely
guaranteed on an unsecured senior subordinated basis by the Company and its
subsidiary guarantors.
In addition to similar restrictions to the Credit Agreement, the indenture
under which the Discount Notes were issued limits (i) the issuance of additional
debt and preferred stock by the Company and subsidiaries, (ii) the payment of
dividends on capital stock of the Company and its subsidiaries and the purchase,
redemption or retirement of capital stock or indebtedness, (iii) investments,
and (iv) sales of assets, including capital stock of subsidiaries.
BANK REVOLVER
In May 1994, the Company entered into a $5,000 financing agreement with a
bank collateralized by certain assets of the Company. The agreement provided for
a revolving credit line for a maximum, as defined, of $4,000 to be used for
expansion in the shared telecommunications services business and a $1,000 term
loan. The Company retired this debt in 1996 and recorded an extraordinary
expense of $311.
F-39
<PAGE> 90
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DEBT MATURITY
Scheduled maturities on long-term debt and capital lease obligations are as
follows:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL LEASE
YEAR ENDING DECEMBER 31 DEBT OBLIGATIONS
----------------------- --------- -------------
<S> <C> <C>
1998........................................................ $123,722 $324
1999........................................................ 126 83
2000........................................................ 36 20
2001........................................................ 85 --
2002........................................................ 92 --
Thereafter.................................................. 163,904 --
-------- ----
Subtotal.................................................. 287,965 427
Less -- accretion of 12 1/4% Discount Notes................. (21,139) --
-------- ----
Total debt maturities....................................... $266,826 $427
======== ====
</TABLE>
The Company is not in compliance with various debt covenants as previously
described, and is therefore in default under the terms thereof. This permits the
holders of such indebtedness to accelerate the maturity of such indebtedness
which could cause default under such indebtedness of the Company (See Note 19).
6. REDEEMABLE PUT WARRANT
In connection with the May 1994 bank financing agreement, the Company
issued the bank a redeemable put warrant for a number of common shares of the
Company's outstanding common stock, subject to certain anti-dilution
adjustments. The warrant was redeemable at the Company's option prior to May
1996, and is redeemable at the bank's option at any time after May 1997. As
defined in the agreement, the Company has guaranteed the bank a minimum of $500
in cash upon redemption of the warrant, and therefore, initially valued the
warrant at the present value of the minimum guarantee discounted at 11.25%. To
the extent that the Company's stock price exceeds approximately $6.03 per share,
the bank may elect to receive stock in lieu of $500 cash as the value of the
stock will exceed $500. At December 31, 1997 and 1996, the Company's stock price
was $15.00 and $9.125 per share, respectively. The Company has therefore
accreted through interest expense the additional value due to the bank,
resulting in a liability of $1,130 and $1,069 at December 31, 1997 and 1996,
respectively. The liability will continue to fluctuate until redemption based on
the Company's stock prices.
7. REDEEMABLE PREFERRED STOCK
CONVERTIBLE PREFERRED STOCK
In connection with the Merger, the Company issued non-voting Convertible
Preferred Stock to RHI with an initial liquidation preference of $25,000.
Dividends on the Convertible Preferred Stock are payable quarterly at the rate
of 6% per annum in cash. If for any reason a dividend is not paid in cash when
scheduled, the amount of such dividend shall accrue interest at a rate of 12%
per annum until paid.
The Convertible Preferred Stock has a liquidation preference of $25,000 in
the aggregate plus an additional amount equal to the total amount of dividends
the holder would have received if dividends were paid quarterly in cash at the
rate of 10% per annum for the life of the issue, minus the total amount of cash
dividends actually paid (the "Liquidation Preference"). At December 31, 1997 the
liquidation preference was
F-40
<PAGE> 91
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
$26,680. Each share is convertible at any time at the option of the holder into
such number of Common Shares as is determined by dividing the Liquidation
Preference thereof by the conversion price of $6.375. The conversion price is
subject to adjustment upon occurrence of adjustment events including, but not
limited to, stock dividends, stock subdivisions and reclassifications or
combinations.
The Convertible Preferred Stock is not redeemable at the Company's option
during the first three years after issuance, but thereafter, upon 30 days' prior
written notice, is redeemable at the Company's option at a redemption price of
100% of the Liquidation Preference. In March 2008, the Company is required to
redeem 100% of the outstanding shares of Convertible Preferred Stock at the
Liquidation Preference. During 1997 Intermedia purchased substantially all of
the Convertible Preferred Stock.
SPECIAL PREFERRED STOCK
In connection with the Merger, the Company issued non-voting Special
Preferred Stock to RHI with an initial Liquidation Preference of $20,000 and
recorded at an initial fair value of $13,269. No dividends are payable on the
Special Preferred Stock until 2007 when the outstanding Special Preferred Stock
will receive a dividend at a rate equal to the interest rate on the Discount
Notes and calculated on the then outstanding Liquidation Preference. The Special
Preferred Stock's initial liquidation preference of $20,000 will increase by
$1,000 each year after 1996 to a maximum Liquidation Preference of $30,000 in
2007. The Company is accreting the Special Preferred stock to $30,000 using the
effective interest method and records the accretion as preferred dividends.
Shares are redeemable at the Company's option at any time upon 30 days'
prior written notice, at a redemption price of 100% of the Liquidation
Preference. All outstanding Special Preferred Stock is mandatorily redeemable in
its entirety at 100% of the Liquidation Preference upon a change of control of
the Company and, in any event, in 2008. In addition, in March of each year,
commencing with March 31, 1997, the Company is required to redeem, at a price
equal to 100% of the liquidation preference in effect from time to time, an
amount of Special Preferred Stock equal to 50% of the amount, if any, by which
the consolidated EBITDA, as defined, of the Company and its subsidiaries exceeds
a specified amount for the immediately preceding year ended December 31. On
November 20, 1997, in accordance with the Agreement and Plan of Merger between
the Company and Intermedia (see Note 1), Intermedia agreed to loan the Company
funds necessary to redeem the outstanding special preferred stock. The Company
then redeemed the Special Preferred Stock for $21,899. The redemption resulted
in an accretion of $6,528, which was charged to Accumulated Deficit. The
borrowings from Intermedia of $21,899 is reflected in notes payable to related
parties on the face of the balance sheet.
8. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company has authorized 50,000 shares of common stock at $0.004 par
value per share with equal voting rights.
SERIES C PREFERRED STOCK
These shares were converted in August 1997 into 315 shares of common stock.
Series C Preferred Stock was non-voting and was entitled to a liquidation value
of $4 per share and dividends of $.32 per share per annum, payable quarterly in
arrears.
F-41
<PAGE> 92
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SERIES D PREFERRED STOCK
In December 1993, the Company commenced a private placement to sell to
certain investors units consisting of one share of Series D Preferred Stock and
one warrant to purchase one share of common stock. As of December 31, 1995, the
Company had sold 457 units for net proceeds of $1,740, after deducting expenses
of $430. Series D Preferred Stock is entitled to dividends of 5% per annum,
payable quarterly, and maybe redeemed for $7 per share, plus all accrued
dividends, at the option of the Company. The shares are non-voting and are
convertible into shares of the Company's common stock on a one-for-one basis at
the holder's option. The shares are senior to all shares of the Company's common
stock and junior to Series C Preferred Stock. The common stock purchase warrants
are exercisable at a per share price of $5.75. In connection with the offering,
an investment banking firm received warrants to purchase 16 shares of the
Company's common stock at an exercise price of $5.75 per share. As of December
31, 1997 and 1996, 479 and 428 warrants, respectively, had been exercised.
SERIES E PREFERRED STOCK
The Series E Preferred Stock was converted into 400 shares of common stock
in January 1995. The holders also received warrants, which expire on December
31, 1999, to purchase 175 shares of the Company's common stock, at an exercise
price of $4.25 per share, subject to certain anti-dilutive provisions.
SERIES F PREFERRED STOCK
These shares were converted on August 1, 1995 into 700 shares of common
stock. In 1996, an additional 111 shares of the Company's common stock were
issued in connection with the provisions of conversion of the Series F Preferred
Stock, as defined.
Additionally, the Company issued warrants to the previous owners of a
subsidiary of the Company to purchase 225 shares of the Company's common stock
at an exercise price of $4.25 per share, subject to certain anti-dilution
adjustments.
9. GAIN ON SALE OF SUBSIDIARY COMMON STOCK
In April 1995, Shared Technologies Cellular, Inc., an equity investee of
the Company, completed its SB 2 filing with the Securities and Exchange
Commission and became a public company. Prior to this date, STC was
approximately an 86% owned subsidiary of the Company. STC sold 950 shares of
common stock at $5.25 per share, which generated net proceeds of approximately
$3,274 after underwriters' commissions and offering expenses. The net effect of
the public offering on the consolidated financial statements was a gain of
approximately $1,375.
10. STOCK OPTION PLANS
1987 STOCK OPTION PLAN
Under the 1987 Stock Option Plan (the "1987 Plan"), the Company is
authorized to issue options to purchase an aggregate of 1,200 shares of common
stock of the Company. All options granted are exercisable at the date of grant,
with a term of five to ten years and are exercisable in accordance with vesting
schedules set individually by the Board of Directors. As of December 31, 1997
and 1996, approximately 109 and 131 options are available for grant,
respectively. Options to purchase 298 and 556 shares of common stock were
outstanding at December 31, 1997 and 1996, respectively.
F-42
<PAGE> 93
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BOARD OF DIRECTORS STOCK OPTION PLAN
The Board of Directors Stock Option Plan (the "Directors' Plan"), was
adopted by the Board of Directors in 1994 and accepted by the stockholders of
the Company in 1995. Under the Directors' Plan, an "Independent Director" is a
director of the Company who is neither an employee nor a principal stockholder
of the Company. The Directors' Plan provided for a one-time grant of an option
to purchase 15 shares of common stock to all independent directors who served
during the 1994-95 term.
Each independent director who received the initial one-time option grant in
1994, and who was elected to a new term as a director in 1995 or is reelected in
1996, shall receive upon such reelection a grant of an option for 5 or 10
options, respectively. Reelection after 1996 of any independent director in
service as of September 22, 1994, shall entitle such director to a grant of 15
options.
All options issued under the Directors' Plan are exercisable at the closing
bid price for the date proceeding the date of grant. The options vest over three
years and are exercisable for so long as the optionee continues as an
independent director and for a period of 90 days after the optionee ceases to be
a director of the Company. The maximum term of the option is ten years from the
date of grant. The maximum number of shares of common stock which may be issued
under the Directors' Plan is 250 shares, of which options to purchase 85 and 145
are outstanding as of December 31, 1997 and 1996, respectively.
1996 EQUITY INCENTIVE PLAN
In connection with the acquisition of FII, the Company adopted the 1996
Equity Incentive Plan (the "1996 Plan"), pursuant to which the Company will
offer shares, and share-based compensation, to key employees. The 1996 Plan
provides for the grant to eligible employees of stock options, stock
appreciation rights, restricted stock, performance shares, and performance units
(the "Awards"). The 1996 Plan is administered by the Compensation Committee of
the Company's Board of Directors (the "Compensation Committee").
The 1996 Plan provides that not more than 1,500 shares of common stock will
be granted under the 1996 Plan, subject to certain anti-dilutive adjustments.
The exercise price will be set by the Compensation Committee, but can not be
less than the market value of the stock at date of issuance. Stock appreciation
rights may be granted only in tandem with stock options. Options to purchase
1,069 and 1,478 shares of common stock were outstanding at December 31, 1997 and
1996, respectively.
SUMMARY ACTIVITY
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
OPTIONS RANGE AVERAGE
--------- ------------------ --------
<S> <C> <C> <C> <C> <C>
Balance outstanding
January 1, 1995.................................... 697 $1.72 -- 11.00 $3.78
Granted............................................ 40 4.13 4.13
Expired............................................ (2) 5.00 -- 5.72 5.16
Exercised.......................................... (2) 2.28 -- 2.84 2.58
-----
Balance outstanding
December 31, 1995.................................. 733 $1.72 -- 11.00 3.79
Granted............................................ 1,716 4.13 -- 7.75 4.50
Expired............................................ (32) 4.38 4.38
Exercised.......................................... (238) 1.72 -- 5.50 3.48
-----
</TABLE>
F-43
<PAGE> 94
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
OPTIONS RANGE AVERAGE
--------- ------------------ --------
<S> <C> <C> <C> <C> <C>
Balance outstanding
December 31, 1996.................................. 2,179 $2.00 -- 11.00 4.37
Granted............................................ 164 5.63 -- 6.50 6.32
Expired............................................ (408) 4.38 -- 5.75 4.45
Exercised.......................................... (483) 2.84 -- 10.18 4.15
-----
Balance Outstanding
December 31, 1997.................................. 1,452 $2.00 -- 11.00 $4.66
</TABLE>
At December 31, 1997, there were 560 options immediately exercisable at
prices ranging from $2.00 to $11.00.
The Company adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," effective for the Company's December
31, 1996, financial statements. The Company applied APB No. 25 and related
interpretations in accounting for its plans. Accordingly, compensation cost has
been recognized for its stock plans based on the intrinsic value of the stock
option at date of grant (i.e., the difference between the exercise price and the
fair value of the Company's stock). Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS No.
123, the Company's net (loss) income and (loss) earnings per share would have
been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Net (loss) income available to common shareholders:
As reported............................................... $(104,138) $(10,935)
Pro forma................................................. (103,316) (12,364)
(Loss) earnings per share:
As reported............................................... (6.75) (0.79)
Pro forma................................................. (6.71) (0.90)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The fair value of each option granted was $3.26 per option and was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants in 1997 and 1996:
risk-free interest rates of 5.47% and 6.0%; no dividend yields; expected lives
of 5 to 10 years; and expected volatilities of .521.
11. RETIREMENT AND SAVINGS PLAN
On March 3, 1989, the Company adopted a savings and retirement plan (the
"Plan"), which covers substantially all of the Company's employees. Participants
in the Plan may elect to make contributions up to a maximum of 20% of their
compensation. For each participant, the company will make a matching
contribution at one-half of the participant's contributions, up to 5% of the
participant's compensation. Matching contributions may be made in the form of
the Company's common stock and are vested at the rate of 33% per year. The
Company's expense relating to the matching contributions was approximately $706,
F-44
<PAGE> 95
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
$609, and $199 for 1997, 1996, and 1995, respectively. At December 31, 1997 and
1996, the Plan owned 35 and 148 shares, respectively, of the Company's common
stock.
12. INCOME TAXES
Income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................... $ -- $ -- $ (10)
State and local........................................... (380) (223) (45)
------ ------ ------
(380) (223) (55)
Deferred:
Federal................................................... -- (560) 10
State and local........................................... -- -- --
------ ------ ------
-- (560) 10
------ ------ ------
Total (expense) benefit................................... $ (380) $ (783) $ (45)
====== ====== ======
</TABLE>
The income tax provision for continuing operations differs from that
computed using the statutory Federal income tax rate of 35% in 1997, 1996, and
1995 for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -----
<S> <C> <C> <C>
Computed statutory amount................................... $ 34,695 $ 2,616 $(340)
Effect of net operating losses.............................. -- -- 285
Valuation allowance on net operating loss tax benefits...... (29,270) (3,004) 10
Business combination cost................................... (10,210) -- --
Other....................................................... 4,405 (395) --
-------- -------- -----
$ (380) $ (783) $ (45)
======== ======== =====
</TABLE>
F-45
<PAGE> 96
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table is a summary of the significant components of the
continuing operations portion of the Company's deferred tax assets and
liabilities as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
DEFERRED (PROVISION) BENEFIT 1997 1996
- ---------------------------- -------- --------
<S> <C> <C>
Deferred tax assets:
Equity in loss of subsidiary.............................. $ 1,599 $ 1,588
Accrued expenses not yet tax deductible................... 14,316 5,581
NOL carryforwards......................................... 30,875 9,156
-------- --------
46,790 16,325
Deferred tax liabilities:
Asset basis differences -- fixed assets................... (11,137) (11,008)
Asset basis differences -- intangible assets related to
acquisition (Goodwill and other intangibles)........... (2,439) (1,373)
-------- --------
(13,576) (12,381)
Deferred tax asset, net..................................... 33,214 3,944
Less valuation allowance.................................... (33,214) (3,944)
-------- --------
Net deferred tax asset.................................... $ -- $ --
======== ========
</TABLE>
At December 31, 1997, the Company's Net Operating Loss (NOL) carryforward
for federal income tax purposes is approximately $79,000, expiring between 2001
and 2012. NOL's available for state income tax purposes are less than those for
federal purposes and generally expire earlier. Limitations apply to the use of
NOLs.
13. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has entered into operating leases for the use of office
facilities and equipment, which expire through 2008. Certain of the leases are
subject to escalations for increases in real estate taxes and other operating
expenses. Rent expense amounted to approximately $7,761, $6,093, and $2,200 for
the years ended December 31, 1997, 1996, and 1995, respectively. Aggregate
approximate future minimum lease payments are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1998........................................................ $ 6,204
1999........................................................ 5,621
2000........................................................ 4,675
2001........................................................ 3,946
2002........................................................ 3,080
Thereafter.................................................. 1,878
-------
$25,404
=======
</TABLE>
F-46
<PAGE> 97
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONTINGENCIES
As a result of the acquisition of FII (the "Merger"), the Company became
liable for all liabilities of FII with respect to the operations of the former
businesses of FII, including the FII Telecommunications Business and its
aerospace and industrial fasteners business up to the effective date of the
Merger as well as operations of FII disposed of prior to the Merger, including
its injection molding business. As a matter of law, the Company will not be
released from FII's obligations with respect to such liabilities. As a
pre-condition of the Merger: (a) FII, its parent RHI, and RHI's parent,
Fairchild and certain other subsidiaries of Fairchild underwent a
recapitalization pursuant to which FII divested itself of all assets unrelated
to the FII Telecommunications Business; (b) RHI assumed all liabilities of FII
unrelated to the FII Telecommunications Business (other than the Retained
Liabilities), including but not limited to the following (collectively, the
"Non-communications Liabilities"): (i) contingent liabilities related to a
dispute with the United States Government under Government Contract Accounts
rules concerning potential liability arising out of the use of and accounting
for approximately $50,000 in excess pension funds relating to certain government
contracts in the discontinued aerospace business of FII; (ii) all environmental
liabilities except those related to the FII Telecommunications Business; (iii)
approximately $50,000 (at June 30, 1995) of costs associated with post-
retirement healthcare benefits; and (iv) all other accrued liabilities and any
and all other unasserted liabilities unrelated to the FII Telecommunications
Business; and (c) pursuant to certain indemnification agreements (the
"Indemnification Agreements"), the Company is indemnified (i) by Fairchild and
RHI jointly and severally with respect to all Non-communications Liabilities and
all tax liabilities of FII and Shared resulting from the FII Recapitalization or
otherwise attributable to periods prior to the Merger and (ii) by Fairchild
Holding Corp. (a company formed in connection with the FII Recapitalization)
with respect to the liabilities that are indemnified for being herein
collectively referred to as the "Indemnified Liabilities"). The Company believes
no taxable gain or loss was recognized by FII or any of its affiliates on the
transfer of the FII assets and liabilities pursuant to the FII recapitalization.
In December 1995, a suit was filed against the Company in U.S. District
Court for the Southern District of New York alleging breach of a letter
agreement and seeking an amount in excess of $2,250 for a commission allegedly
owed to a vendor as a result of a vendor initiating negotiations between the
Company and FII and negotiating the Merger. A vendor has alleged that the
Company entered into a fee agreement, whereby the Company agreed to pay to the
vendor 0.75% of the value of the transaction as a fee. FII has denied that FII
at any time engaged the vendor for this transaction. The Company filed an answer
in January 1996, denying that any commission is owed. This litigation is in the
discovery process. Management believes, however, that an adverse outcome, if
any, will not have a material adverse effect on the Company's consolidated
financial statements.
In January 1994, the Company entered into a consulting agreement for
financial and marketing services, which expired on November 1996. Pursuant to
the consulting agreement, the consultant was issued a three year warrant to
purchase 300 shares of the Company's common stock at a purchase price of $5.75
per share and a five year warrant to purchase 250 shares of the Company's common
stock at a purchase price of $7.00 per share. The consultant may not compete
with the Company during the term of this agreement and for two years thereafter.
In December 1995, the Company granted options to employees of the Company,
STC and certain members of the Board of Directors of the Company and STC, to
purchase an aggregate of 350 shares of STC common stock, held by the Company.
The options are exercisable for five years, at $2.50 per share.
The Company's sales and use tax returns in certain jurisdictions are
currently under examination. Management believes these examinations will not
result in a material change from liabilities provided.
F-47
<PAGE> 98
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
In addition to the above matters, the Company is a party to various legal
actions, the outcome of which, in the opinion of management, will not have a
material adverse effect on results of operations, cash flows or financial
position of the Company.
14. RELATED PARTY TRANSACTIONS
At December 31, 1997 Shared had a note payable to Intermedia of $48,150.
See further discussion in Note 8 and 16.
As of December 31, 1993, the company had paid approximately $288 of life
insurance premiums on behalf of an officer of the Company, which was to be
repaid from the proceeds of a $2,500 face value life insurance policy owned by
the president. In January 1994, the beneficiary on the policy was changed to the
Company in order to reduce the premium payments required by the Company. As of
December 31, 1997, the amount due to the Company for premiums paid exceeded the
cash surrender value of the policy by approximately $141. Accordingly, the
officer has agreed to reimburse the Company for this amount. The receivable and
cash surrender value are reflected in other assets in the accompanying
consolidated balance sheets.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosures of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for financial instruments.
CURRENT ASSETS AND LIABILITIES
The carrying amount reported in the balance sheet approximates the fair
value for cash and cash equivalents, accounts receivable, accounts payable,
advanced billings, deferred revenue, accrued liabilities, and capital lease
obligations.
LONG-TERM DEBT
There is no active market for the Company's long-term debt securities, and
consequently, no quoted market prices are available. The Company's long-term
debt securities can be segregated into two distinct categories: variable rate
long-term debt that reprices frequently and fixed rate long-term debt.
Variable Rate Long-term Debt -- The Company's Credit Facility Term Loans,
Credit Revolving Facility and Bank Revolver carry a rate of interest which
varies in relation to LIBOR or prime, a common market interest rate. Because
these loans reprice within one to six months, fluctuations in market interest
rates do not materially impact the fair market value of these obligations.
Therefore, the carrying value of these financial instruments approximate fair
market value.
Fixed Rate Long-Term Debt -- The fair value of the Company's Senior
Subordinated Discount Notes is estimated using a discounted cash flow analysis
based on the Company's borrowing cost for similar credit facilities, at December
31, 1997. As minimal changes in the market level of interest rates occurred
since issuance in March 1996, the Company estimates that carrying value
approximates fair market value, at December 31, 1997.
F-48
<PAGE> 99
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST RATE SWAP AGREEMENTS
The Company holds interest rate swap agreements with two commercial banks
in order to reduce the impact of potential interest rate increases on its
variable rate debt. At December 31, 1997 and 1996, it would have cost
approximately $1,348 and $1,059 to break the Company's interest rate swap
agreements, respectively. The Company is exposed to credit loss in the event of
non-performance by the banks, however, such non-performance is not anticipated.
REDEEMABLE PUT WARRANT
The carrying amount of the redeemable put warrant approximates fair market
value as it is adjusted quarterly to reflect the Company's liability due to the
holder.
REDEEMABLE PREFERRED STOCK
The Company estimates the fair market value of the Redeemable Convertible
Preferred Stock at carrying value based on the conversion feature and underlying
value of common stock at year end. The fair market value of the Redeemable
Special Preferred stock is estimated at carrying cost. Carrying cost reflects a
discount to face value.
This disclosure relates to financial instruments only. The fair value
assumptions were based upon subjective estimates of market conditions and
perceived risks of the financial instruments at a certain point in time.
16. INFREQUENT ITEM
As discussed in Note 1, on November 20, 1997 the Company entered into an
Agreement and Plan of Merger with Intermedia. Conditions to this agreement were
that Intermedia would pay certain liabilities of the Company that resulted from
the termination of certain contracts of the Company. This payment has been
reflected in the accompanying financial statements. In the event that the
Proposed Merger is not completed, the Company will be required to reimburse
Intermedia $26,250 of the total $62,250 paid. The amount requiring reimbursement
has been included in notes payable to related parties on the face of the balance
sheet. The remaining $36,000 has been reflected as an addition to the Company's
capital paid in excess of par as Intermedia will not require reimbursement and
it is therefore viewed as a permanent investment.
17. EMPLOYEE TERMINATIONS
During 1997 the Company entered into severance agreements with several key
employees. Under the agreements, the Company agreed to certain payments to these
employees and to accelerate the vesting period of any stock options held by
these employees. The total expense recognized for the agreements was $4,162,
with $1,900 of this amount related to the acceleration of the vesting period of
stock options.
The Company also entered into a severance agreement which is contingent
upon the Intermedia and Shared merger (See Note 1). The costs associated with
this severance agreement, $5,329, has been deferred and will be recognized upon
consummation of the said merger.
F-49
<PAGE> 100
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
18. BREAKOUT OF CHANGE IN ASSETS AND LIABILITIES, NET OF EFFECT OF
ACQUISITIONS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Accounts receivable......................................... $ 1,446 $ (86) $(2,639)
Other current assets........................................ (4,492) 483 (52)
Other assets................................................ (421) 83 --
Deferred income taxes....................................... -- 560 (10)
Accounts payable............................................ 5,604 (4,277) 2,208
Accrued expenses............................................ 8,893 2,261 (556)
Advance billings............................................ 43 1,203 68
Other liabilities........................................... 894 435 --
------- ------- -------
Total..................................................... $11,967 $ 662 $ (981)
======= ======= =======
</TABLE>
19. INVESTMENT IN AFFILIATE:
During December 1995, STC issued approximately $3,000 in voting preferred
stock to third parties. The voting rights assigned to the preferred stock
reduced the Company's voting interest in STC to approximately 42.7 percent,
resulting in the Company's loss of voting control of STC. As a result of
additional common stock issuance to third parties, partially offset by the
Company's receiving 250 shares of STC Series B voting Convertible Preferred
Stock, the Company's voting interest in STC was reduced to approximately 41.3
percent during 1996. Accordingly, STC has been accounted for on the equity
method for 1996 and 1995.
The summarized balance sheet of STC as of December 31, 1996 and 1995, and
the related summarized statement of operations of STC for the years then ended,
are as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Summarized balance sheet:
Current assets............................................ $ 2,070 $ 5,824
Telecommunications and office equipment, net.............. 2,131 2,158
Other assets.............................................. 10,061 6,396
------- -------
Total assets...................................... $14,262 $14,378
======= =======
Current liabilities....................................... $11,045 $ 7,676
Note payable.............................................. 360 1,600
------- -------
Total liabilities................................. 11,105 9,276
Stockholders' equity...................................... 2,857 5,102
------- -------
Total liabilities and stockholders' equity........ $14,262 $14,378
======= =======
Summarized statement of operations:
Revenues.................................................. $20,914 $13,613
Gross margin.............................................. 7,285 5,026
Operating loss............................................ 6,888 2,989
Net loss.................................................. 8,796 2,848
</TABLE>
F-50
<PAGE> 101
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
20. SUBSEQUENT EVENT
On March 10, 1998 the total amount of the outstanding obligation under the
Credit Facility (Note 5) of $123,905 was paid in full by Intermedia. On this
date Shared was released from any liens granted to the Lenders, the interest
rate swap agreements entered into under the Credit Facility, and has no further
obligation to the Lenders.
F-51
<PAGE> 1
Exhibit 4.6(b)
AMENDMENT NO.2 TO RIGHTS AGREEMENT
Agreement (this "Amendment") dated as of January 27, 1998, between
Intermedia Communications Inc., a Delaware Corporation ("the Company") f/k/a
Intermedia Communications of Florida, Inc., and Continental Stock Transfer &
Trust Company (the "Rights Agent").
Reference is made to the Rights Agreement between the Company and the
Rights Agent, dated as of March 7, 1996 (the "Agreement"). Capitalized terms
used herein and not otherwise defined herein have the respective meanings
ascribed to them in the Agreement.
Paragraph (b) of Section 7 of the Agreement is hereby deleted and replaced
with the following:
(b) The purchase price for each one-thousandth of a share (each such
one one-thousandth of a share being a "Unit") of Preferred Stock upon
exercise of Rights shall be $200.00, subject to adjustment from time to
time as provided in Sections 11 and 13(a) hereof (such purchase price, as
so adjusted, being the "Purchase Price"), and shall be payable in
accordance with paragraph (c) below.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed, all as of the date first above written.
ATTEST: INTERMEDIA COMMUNICATIONS INC.
By: By:
--------------------------- --------------------------
Robert M. Manning David C. Ruberg
Senior Vice President, President and Chief
Chief Financial Officer Executive Officer
ATTEST: CONTINENTAL STOCK TRANSFER AND
TRUST COMPANY
By: By:
--------------------------- --------------------------
Name: Name:
Title: Title:
<PAGE> 1
Exhibit 10.1(b)
AMENDMENTS TO 1992 STOCK OPTION PLAN
REGARDING CHANGES OF CONTROL
ADD THE FOLLOWING NEW SUBPARAGRAPH (E) TO PARAGRAPH 6:
(e) If within 12 months of a Change of Control (as defined below),
an Optionee's employment or other relationship with the Company or a subsidiary
corporation is terminated (i) by the Company or a subsidiary corporation
without cause, or (ii) by the Optionee or the Company or a subsidiary
corporation (A) as a result of being required by the Company or a subsidiary
corporation to relocate to a different metropolitan area at least 60 miles away
from the area in which he worked at the time of the Change of Control or (B) as
a result of the Optionee's title or authority being materially diminished or
base pay or bonus potential being reduced, then all Options then held by such
Optionee shall become immediately exercisable. Upon any such termination of
the Optionee's employment, all Options then held by the Optionee may be
exercised (but not beyond the original option exercise period provided for in
the Option) at any time within three months after such termination. This
subparagraph (e) of Paragraph 6 shall apply to all Options granted under the
Plan, including those Options granted prior to the inclusion of this
subparagraph in the Plan. "Change of Control" shall mean the sale, exchange or
transfer of Common Shares, whether in one transaction or a series of related
transactions occurring within one year, which results in an accumulation of 50%
or more of the outstanding Common Shares (on a fully diluted basis) in one
holder or several affiliated holders (or any such transaction(s) occurring
within six months that result in an accumulation of at least 35% of such
Common Shares (on a fully diluted basis)) or an event involving the sale or
merger of the Company which results in the holders of Common Shares immediately
prior to the occurrence of such sale or merger holding less than a majority of
the outstanding Common Shares immediately thereafter.
SUBSTITUTE THE FOLLOWING NEW SUBPARAGRAPH FOR SUBPARAGRAPH (D) OF PARAGRAPH 6:
(d) An Option may not be exercised pursuant to subparagraph (a),
(b) or (c) of this Paragraph 6 except to the extent that the Optionee was
entitled to exercise the Option at the time of termination of employment or
such other relationship, or death, and in any event may not be exercised after
the expiration of ten (10) years from the date the Option was granted, or five
(5) years from the date the Option was granted if the Optionee was a Principal
Shareholder at that date.
<PAGE> 1
Exhibit 10.2(a)
AMENDMENTS TO LONG-TERM INCENTIVE PLAN
REGARDING CHANGES OF CONTROL
Add the following new definitions to Section II:
"Change of Control" means the sale, exchange or transfer of Common
Stock, whether in one transaction or a series of related transactions
occurring within one year, which results in an accumulation of 50% or
more of the outstanding shares of Common Stock (on a fully diluted
basis) in one holder or several affiliated holders (or any such
transaction(s) occurring within six months that result in an
accumulation of at least 35% of such shares of Common Stock (on a
fully diluted basis)) or an event involving the sale or merger of the
Corporation which results in the holders of shares of Common Stock
immediately prior to the occurrence of such sale or merger holding
less than a majority of the outstanding shares of Common Stock
immediately thereafter.
Add the following new subsections (i) and (j) to the end of Section VIII:
(i) Change of Control-General Provisions. Unless
otherwise specifically provided in any Award or in a Participant's
employment agreement with the Corporation or a Subsidiary or otherwise
provided in Section VIII(j) of this Plan, if within 12 months of a
Change of Control, a Participant's employment or other relationship
with the Corporation or a Subsidiary is terminated (A) by the
Corporation or a Subsidiary without cause, or (B) by the Participant
or the Corporation or a Subsidiary (x) as a result of the
Participant's title or authority being materially diminished or base
pay or bonus potential being reduced or (y) as a result of the
Participant being required by the Corporation or a Subsidiary to
relocate to a different metropolitan area at least 60 miles away from
the area in which he worked at the time of the Change of Control, then
all Awards (other than Awards of restricted shares containing price
targets not attained) then held by such Participant shall become fully
vested and, if applicable, immediately exercisable. Upon any such
termination of a Participant's employment, any stock options then held
by the Participant may be exercised (but not beyond the original
exercise period provided for in the Award) at any time within three
months after such termination. This Section VIII(i) shall apply to
all Awards granted under this Plan, including those Awards granted
prior to the inclusion of this Section VIII(i) in this Plan.
Substitute the following new sentence for the last sentence of Section X:
Without limiting the provisions of Section VIII(i), the Committee may
also make the changes referred to in the immediately preceding
sentence and any other changes, including changes in the classes of
securities available, to the extent it is deemed
1
<PAGE> 2
necessary or desirable to preserve the intended benefits of the Plan
for the Corporation and the Participants in the event of any
other reorganization, recapitalization, merger, consolidation,
spin-off, extraordinary dividend or other distribution or similar
transaction.
2
<PAGE> 1
Exhibit 10.3
INTERMEDIA COMMUNICATIONS INC.
1997 EQUITY PARTICIPATION PLAN
FOR
THE BENEFIT OF EMPLOYEES OF DIGEX, INCORPORATED
In connection with the merger (the "Merger") of Intermedia
Communications Inc (the "Company") with DIGEX, Incorporated ("DIGEX") the
Company assumed the DIGEX, Incorporated 1996 Equity Participation Plan (the
"1996 Plan") and all outstanding options to acquire DIGEX common stock granted
thereunder. No awards will be granted under the plan after the consummation of
the Merger. This 1997 Equity Participation Plan for the Benefit of Employees
of DIGEX, Incorporated (the "Plan") is a restatement (the "Restatement") of the
1996 Plan as assumed by the Company. Because only nonqualified options to
acquire DIGEX common stock were granted under the 1996 Plan, the Restatement
deletes all references to other types of awards which had been permitted under
the 1996 Plan.
The Plan consists of two plans, one for the benefit of
Employees (as such term is defined below) and consultants and one for the
benefit of Independent Directors (as such term is defined below).
The purposes of the 1996 Plan when adopted were as follows:
(1) To provide an additional incentive for directors,
Employees and consultants to further the growth, development and financial
success of DIGEX by personally benefiting through the ownership of DIGEX stock
and/or rights which recognize such growth, development and financial success.
(2) To enable DIGEX to obtain and retain the services of
directors, Employees and consultants considered essential to the long range
success of DIGEX by offering them an opportunity to own stock in DIGEX and/or
rights which will reflect the growth, development and financial success of
DIGEX.
The Company assumed the 1996 Plan in order to encourage the
recipients of awards under such plan to continue to exert their maximum efforts
to the success of the Company and DIGEX.
ARTICLE 1
DEFINITIONS
1.1 General. Wherever the following terms are used in
this Plan they shall have the meaning specified below, unless the context
clearly indicates otherwise.
<PAGE> 2
1.2 Award Limit. "Award Limit" shall mean 28,756. shares
of Common Stock.
1.3 Board. "Board" shall mean the Board of Directors of
the Company.
1.4 Change in Control. "Change in Control" shall mean
any of the following stockholder-approved transactions to which the Company is
a party:
(1) the sale, transfer, exchange or other disposition of
all or substantially all of the assets of the Company, in complete liquidation
or dissolution of the Company; or
(2) any merger or consolidation immediately after which
securities possessing more than fifty percent (50%) of the total voting power
of the outstanding voting securities of the entity that survives the merger or
consolidation are owned by persons different from those who held more than
fifty percent (50%) of the total outstanding voting securities of the Company
immediately prior to such merger or consolidation.
1.5 Code. "Code" shall mean the Internal Revenue Code
of 1986, as amended.
1.6 Committee. "Committee" shall mean the committee
appointed by the Board.
1.7 Common Stock. "Common Stock" shall mean the common
stock of the Company, par value $0.01 per share, and any equity security of the
Company issued or authorized to be issued in the future, but excluding any
preferred stock and any warrants, options or other rights to purchase Common
Stock. Debt securities of the Company convertible into Common Stock shall be
deemed equity securities of the Company.
1.8 Company. "Company" shall mean Intermedia
Communications, Inc.
1.9 DIGEX. "DIGEX" shall mean DIGEX, Incorporated, a
Delaware Corporation.
1.10 DIGEX Board. "DIGEX Board" shall mean the Board of
Directors of DIGEX.
1.11 Director. "Director" shall mean a member of the
DIGEX Board.
1.12 Employee. "Employee" shall mean any officer or other
employee (as defined in accordance with Section 3401(c) of the Code) of DIGEX
prior to the merger of the Company and DIGEX, or of any corporation which was a
subsidiary of DIGEX.
2
<PAGE> 3
1.13 Exchange Act. "Exchange Act" shall mean the
Securities Exchange Act of 1934, as amended.
1.14 Fair Market Value. "Fair Market Value" shall mean
the average of the closing prices of the sales of Common Stock as of such date
on all national securities exchanges on which such securities may at the time
be listed, or, if there had been no sales on any such exchange on such date,
the average of the highest bid and lowest asked prices on all such exchanges at
the close of business of such date, or, if on any date no such shares of Common
Stock were listed, the average of the representative bid and asked prices
quoted in the NASDAQ System as of 4:00 P.M., New York time, or, if on any date
such securities were not quoted in the NASDAQ System, the average of the
highest bid and lowest asked prices on such date in the domestic
over-the-counter market as reported by the National Quotation Bureau
Incorporated, or any similar successor organization, in each such case averaged
over the period of the 20 consecutive business days prior to the date of
determination.
1.15 Independent Director. "Independent Director" shall
mean a member of the DIGEX Board prior to the merger of the Company and DIGEX
and who was not an employee of DIGEX.
1.16 Option. "Option" shall mean a stock option granted
under this Plan. Prior to the Restatement Options granted under the Plan did
not qualify as incentive stock options within the meaning of Section 422 of the
Code.
1.17 Optionee. "Optionee" shall mean an Employee,
consultant or Independent Director granted an Option under this Plan.
1.18 Restatement. "Restatement" shall mean the
restatement of the 1996 Plan to this Plan.
1.19 Rule 16b-3. "Rule 16b-3" shall mean that certain
Rule 16b-3 under the Exchange Act, as such Rule may be amended from time to
time.
1.20 Subsidiary. "Subsidiary" shall mean any corporation
in an unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then owns
stock possessing 50 percent or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
1.21 Termination of Consultancy. "Termination of
Consultancy" shall mean the time when the engagement of an Optionee as a
consultant to the Company or a Subsidiary is terminated for any reason, with or
without cause, including, but not by way of limitation, by resignation,
discharge, death or retirement; but excluding terminations where there is a
simultaneous commencement of employment with the Company or any Subsidiary.
The Committee, in its sole discretion, shall determine the effect of all
matters and questions relating
3
<PAGE> 4
to Termination of Consultancy, including, but not by way of limitation, the
question of whether a Termination of Consultancy resulted from a discharge for
good cause, and all questions of whether a particular leave of absence
constitutes a Termination of Consultancy. Notwithstanding any other provision
of this Plan, the Company or any Subsidiary has an absolute and unrestricted
right to terminate a consultant's service at any time for any reason
whatsoever, with or without cause, except to the extent expressly provided
otherwise in writing.
1.22 Termination of Directorship. "Termination of
Directorship" shall mean the time when an Optionee who is an Independent
Director ceases to be a Director for any reason, including, but not by way of
limitation, a termination by resignation, failure to be elected, removal, death
or retirement. The Board, in its sole discretion, shall determine the effect
of all matters and questions relating to Termination of Directorship with
respect to Independent Directors.
1.23 Termination of Employment. "Termination of
Employment" shall mean the time when the employee-employer relationship
between an Optionee and the Company or any Subsidiary is terminated for any
reason, with or without cause, including, but not by way of limitation, a
termination by resignation, discharge, death, disability or retirement; but
excluding (i) terminations where there is a simultaneous reemployment or
continuing employment of an Optionee by the Company or any Subsidiary, (ii) at
the sole discretion of the Committee, terminations which result in a temporary
severance of the employee-employer relationship, and (iii) at the sole
discretion of the Committee, terminations which are followed by the
simultaneous establishment of a consulting relationship by the Company or a
Subsidiary with the former employee. The Committee, in its sole discretion,
shall determine the effect of all matters and questions relating to Termination
of Employment, including, but not by way of limitation, the question of whether
a Termination of Employment resulted from a discharge for good cause, and all
questions of whether a particular leave of absence constitutes a Termination of
Employment. Notwithstanding any other provision of this Plan, the Company or
any Subsidiary has an absolute and unrestricted right to terminate an
Optionee's employment at any time for any reason whatsoever, with or without
cause, except to the extent expressly provided otherwise in writing.
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<PAGE> 5
ARTICLE 2
SHARES SUBJECT TO PLAN
2.1 Shares Subject to Plan.
(a) Subject to adjustment as provided in Section 7.3, below
the maximum number of shares of the Company's Common Stock which may be issued
and sold under the Plan is 824,610 shares.
(b) Prior to the Restatement, the maximum number of shares
which could be subject to Options under the 1996 Plan to any individual in a
calendar year could not exceed the Award Limit.
ARTICLE 3
GRANTING OF OPTIONS
3.1 Eligibility. After the Restatement, no person shall
be eligible for Option grants.
ARTICLE 4
TERMS OF OPTIONS
4.1 Option Agreement. Each Option is subject to such
terms and conditions as set forth in the applicable Option Agreement; provided,
however, that the Company shall be deemed added or substituted for DIGEX, where
appropriate in the Option Agreement.
4.2 Option Price. The price per share of the shares
subject to each Option shall equal the price set forth in the applicable Option
Agreement as appropriately adjusted pursuant to Section 2.9 of the Agreement
and Plan of Merger, dated June 24, 1997, by and among the Company, Daylight
Acquisition Corp. and DIGEX.
4.3 Option Term. The term of an Option shall be as set
forth in the applicable Option Agreement. The Committee may extend the term of
any outstanding Option in connection with any Termination of Employment or
Termination of Consultancy of the Optionee, or amend any other term or
condition of such Option relating to such a termination.
4.4 Option Vesting
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<PAGE> 6
(1) The period during which the right to exercise an
Option in whole or in part vests in the Optionee shall be as set forth in the
applicable Option Agreement. At any time after grant of an Option, the
Committee may, in its sole discretion and subject to whatever terms and
conditions it selects, accelerate the period during which an Option (except a
Formula Option granted to an Independent Director) vests.
(2) No portion of an Option which is unexercisable at
Termination of Employment, Termination of Directorship or Termination of
Consultancy, as applicable, shall thereafter become exercisable, except as may
be otherwise provided in the Option Agreement or by action of the Committee
following the grant of the Option.
4.5 Rights to Employment. Nothing in this Plan or in any
Option Agreement hereunder shall confer upon any Optionee any right to continue
in the employ of, or as a consultant for, the Company or any Subsidiary, or as
a director of the Company, or shall interfere with or restrict in any way the
rights of the Company and any Subsidiary, which are hereby expressly reserved,
to discharge any Optionee at any time for any reason whatsoever, with or
without cause.
ARTICLE 5
EXERCISE OF OPTIONS
5.1 Partial Exercise. An exercisable Option may be
exercised in whole or in part subject to the terms of the applicable Option
Agreement.
5.2 Manner of Exercise. All or a portion of an
exercisable Option shall be deemed exercised upon delivery of all of the
following to the Secretary of the Company or his office:
(1) A written notice complying with the applicable rules
established by the Committee (or the Board, in the case of options granted to
Independent Directors) stating that the Option, or a portion thereof, is
exercised. The notice shall be signed by the Optionee or other person then
entitled to exercise the Option or such portion;
(2) Such representations and documents as the Committee
(or the Board, in the case of Options granted to Independent Directors), in its
sole discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act of 1933, as amended, and any other
federal or state securities laws or regulations. The Committee or Board may,
in its sole discretion, also take whatever additional actions it deems
appropriate to effect such compliance including, without limitation, placing
legends on share certificates and issuing stop-transfer notices to agents and
registrars;
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<PAGE> 7
(3) In the event that the Option shall be exercised
pursuant to Section 7.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the
Option; and
(4) Full cash payment to the Secretary of the Company for
the shares with respect to which the Option, or portion thereof, is exercised.
However, the Committee (or the Board, in the case of Options granted to
Independent Directors), may in its sole discretion (i) allow a delay in payment
up to thirty (30) days from the date the Option, or portion thereof, is
exercised; (ii) allow payment, in whole or in part, through the delivery of
shares of Common Stock owned by the Optionee, duly endorsed for transfer to the
Company with a Fair Market Value on the date of delivery equal to the aggregate
exercise price of the Option or exercised portion thereof; (iii) allow payment,
in whole or in part, through the surrender of shares of Common Stock then
issuable upon exercise of the Option having a Fair Market Value on the date of
Option exercise equal to the aggregate exercise price of the Option or
exercised portion thereof; (iv) allow payment, in whole or in part, through the
delivery of property of any kind which constitutes good and valuable
consideration; (v) allow payment, in whole or in part, through the delivery of
a full recourse promissory note bearing interest (at no less than such rate as
shall then preclude the imputation of interest under the Code) and payable upon
such terms as may be prescribed by the Committee or the Board, (vi) allow
payment, in whole or in part, through the delivery of a notice that the
Optionee has placed a market sell order with a broker with respect to shares of
Common Stock then issuable upon exercise of the Option, and that the broker has
been directed to pay a sufficient portion of the net proceeds of the sale to
the Company in satisfaction of the Option exercise price; or (vii) allow
payment through any combination of the consideration provided in the foregoing
subparagraphs (ii), (iii), (iv), (v) and (vi). In the case of a promissory
note, the Committee (or the Board, in the case of Options granted to
Independent Directors) may also prescribe the form of such note and the
security to be given for such note. The Option may not be exercised, however,
by delivery of a promissory note or by a loan from the Company when or where
such loan or other extension of credit is prohibited by law.
5.3 Conditions to Issuance of Stock Certificates. The
Company shall not be required to issue or deliver any certificate or
certificates for shares of stock purchased upon the exercise of any Option or
portion thereof prior to fulfillment of all of the following conditions:
(1) The admission of such shares to listing on all stock
exchanges on which such class of stock is then listed;
(2) The completion of any registration or other
qualification of such shares under any state or federal law, or under the
rulings or regulations of the Securities and Exchange Commission or any other
governmental regulatory body which the Committee or Board shall, in its sole
discretion, deem necessary or advisable;
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<PAGE> 8
(3) The obtaining of any approval or other clearance from
any state or federal governmental agency which the Committee (or Board, in the
case of Options granted to Independent Directors) shall, in its sole
discretion, determine to be necessary or advisable;
(4) The lapse of such reasonable period of time following
the exercise of the Option as the Committee (or Board, in the case of Options
granted to Independent Directors) may establish from time to time for reasons
of administrative convenience; and
(5) The receipt by the Company of full payment for such
shares, including payment of any applicable withholding tax.
5.4 Rights as Stockholders. The holders of Options shall
not be, nor have any of the rights or privileges of, stockholders of the
Company in respect of any shares purchasable upon the exercise of any part of
an Option unless and until certificates representing such shares have been
issued by the Company to such holders.
5.5 Ownership and Transfer Restrictions. The shares
purchasable upon the exercise of an Option shall be subject to such
restrictions on the ownership and transferability as are set forth in the
respective Option Agreements and such restrictions may be referred to on the
certificates evidencing such shares. The Committee may direct that the
certificates evidencing shares acquired by exercise of an Option refer to such
requirement to give prompt notice of disposition.
5.6 Limitations on Exercise of Formula Options Granted to
Independent Directors. No Formula Option granted to an Independent Director
may be exercised to any extent by anyone after the first to occur of the
following events:
(1) the expiration of twelve (12) months from the date of
the Optionee's death;
(2) the expiration of twelve (12) months from the date of
the Optionee's Termination of Directorship by reason of his or her permanent
and total disability (within the meaning of Section 22(e)(3) of the Code);
(3) the expiration of thirty (30) days from the date of
the Optionee's Termination of Directorship by reason of removal for cause, as
determined by the Board;
(4) the expiration of three (3) months from the date of
the Optionee's Termination of Directorship for any reason other than removal
for cause or the Optionee's death or his permanent and total disability, unless
the Optionee dies within said three-month period; or
(5) The expiration of ten years from the date the Option
was granted.
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<PAGE> 9
ARTICLE 6
ADMINISTRATION
6.1 Duties and Powers of Committee. It shall be the duty
of the Committee to conduct the general administration of this Plan in
accordance with its provisions. The Committee shall have the power to
interpret this Plan and the agreements pursuant to which Options, are granted
and to adopt such rules for the administration, interpretation, and application
of this Plan as are consistent therewith and to interpret, amend or revoke any
such rules. Notwithstanding the foregoing, the full Board, acting by a
majority of its members in office, shall conduct the general administration of
the Plan with respect to Options granted to Independent Directors. In its sole
discretion, the Board may at any time and from time to time exercise any and
all rights and duties of the Committee under this Plan except with respect to
matters which under Rule 16b-3 or Section 162(m) of the Code, or any
regulations or rules issued thereunder, are required to be determined in the
sole discretion of the Committee.
6.2 Majority Rule; Unanimous Written Consent. The
Committee shall act by a majority of its members in attendance at a meeting at
which a quorum is present or by a memorandum or other written instrument signed
by all members of the Committee.
6.3 Compensation; Professional Assistance; Good Faith
Actions. Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities which members of the Committee incur in connection with the
administration of this Plan shall be borne by the Company. The Committee may,
with the approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers, or other persons. The Committee, the Company and the
Company's officers and Directors shall be entitled to rely upon the advice,
opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee or the Board in good
faith shall be final and binding upon all Optionees, Grantees, Restricted
Stockholders, the Company and all other interested persons. No members of the
Committee or Board shall be personally liable for any action, determination or
interpretation made in good faith with respect to this Plan or Options, and all
members of the Committee and the Board shall be fully protected by the Company
in respect of any such action, determination or interpretation.
ARTICLE 7
MISCELLANEOUS PROVISIONS
7.1 Not Transferable.
(1) Options under this Plan may not be sold, pledged,
assigned, or transferred in any manner other than (i) a transfer made in
compliance with the federal securities laws to a trust or custodianship the
beneficiaries of which, a partnership (general or limited) the partners of
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<PAGE> 10
which, or a limited liability company the members of which, may include only
the Optionee, his or her spouse or his or her lineal descendants by blood or
adoption; provided that such transfer is made expressly subject to this Plan
and that the transferee agrees in writing to be bound by the terms and
conditions of this Plan as if such transferee were the Optionee; (ii) by will
or the laws of descent and distribution; or (iii) pursuant to a DRO, unless and
until such Options have been exercised, or the shares underlying such options
have been issued, and all restrictions applicable to such shares have lapsed.
No Option shall be liable for the debts, contracts or engagements of the
Optionee or his successors in interest or shall be subject to disposition by
transfer, alienation, anticipation, pledge, encumbrance, assignment or any
other means whether such disposition be voluntary or involuntary or by
operation of law by judgment, levy, attachment, garnishment or any other legal
or equitable proceedings (including bankruptcy), and any attempted disposition
thereof shall be null and void and of no effect, except to the extent that such
disposition is permitted by the preceding sentence.
(2) During the lifetime of the Optionee, only he or she
may exercise an Option (or any portion thereof) granted to him under the Plan,
unless it has been disposed of pursuant to the provisions of this Section 7.1.
After the death of the Optionee or permitted transferee, any exercisable
portion of an option may, prior to the time when such portion becomes
unexercisable under the Plan or the applicable Option Agreement, be exercised
by his personal representative or by any person empowered to do so under the
deceased's will or under the then applicable laws of descent and distribution.
7.2 Amendment, Suspension or Termination of this Plan.
Except as otherwise provided in this Section 7.2, this Plan may be wholly or
partially amended or otherwise modified, suspended or terminated at any time or
from time to time by the Board or the Committee. However, no action of the
Committee may be taken that would otherwise require stockholder approval as a
matter of applicable law, regulation or rule. No amendment, suspension or
termination of this Plan shall, without the consent of the holder of Options
alter or impair any rights or obligations under any outstanding Options unless
the applicable Option Agreement itself otherwise expressly so provides.
7.3 Changes in Common Stock or Assets of the Company,
Acquisition or Liquidation of the Company and Other Corporate Events.
(1) Subject to Section 7.3(d), in the event that the
Committee (or the Board, in the case of Options granted to Independent
Directors) determines that any dividend or other distribution (whether in the
form of cash, Common Stock, other securities, or other property),
recapitalization, reclassification, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, liquidation, dissolution, or sale, transfer, exchange or other
disposition of all or substantially all of the assets of the Company
(including, but not limited to, a Change in Control), or exchange of Common
Stock or other securities of the Company, issuance of warrants or other rights
to purchase Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the
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<PAGE> 11
Committee's sole discretion (or in the case of Options granted to Independent
Directors, the Board's sole discretion), affects the Common Stock such that an
adjustment is determined by the Committee to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan or with respect to an Option, then the Committee
(or the Board, in the case of Options granted to Independent Directors) shall,
in such manner as it may deem equitable, adjust any or all of
(1) the number and kind of shares of Common Stock
(or other securities or property) with respect to which
Options may be granted under the Plan (including, but not
limited to, adjustments of the limitations in Section 2.1 on
the maximum number and kind of shares which may be issued),
(2) the number and kind of shares of Common Stock
(or other securities or property) subject to outstanding
Options, and
(3) the exercise price with respect to any Option.
(2) Subject to Section 7.3, in the event of any Change in
Control or other transaction or event described in Section 7.3(a) or any
unusual or nonrecurring transactions or events affecting the Company, any
affiliate of the Company, or the financial statements of the Company or any
affiliate, or of changes in applicable laws, regulations, or accounting
principles, the Committee (or the Board, in the case of Options granted to
Independent Directors) in its sole discretion is hereby authorized to take any
one or more of the following actions whenever the Committee (or the Board, in
the case of Options granted to Independent Directors) determines that such
action is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan or
with respect to any option, right or other award under this Plan, to facilitate
such transactions or events or to give effect to such changes in laws,
regulations or principles:
(1) In its sole discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the
Board, in the case of Options granted to Independent
Directors) may provide, either by the terms of the agreement
or by action taken prior to the occurrence of such transaction
or event and either automatically or upon the Optionee's
request, for either the purchase of any such Option for an
amount of cash equal to the amount that could have been
attained upon the exercise of such Option had such Option been
currently exercisable or fully vested or the replacement of
such Option with other rights or property selected by the
Committee (or the Board, in the case of Options granted to
Independent Directors) in its sole discretion;
(2) In its sole discretion, the Committee (or the
Board, in the case of Options granted to Independent
Directors) may provide, either by the terms of
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<PAGE> 12
such Option, or by action taken prior to the occurrence
of such transaction or event that it cannot be exercised after
such event;
(3) In its sole discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the
Board, in the case of Options granted to Independent
Directors) may provide, either by the terms of such Option, or
by action taken prior to the occurrence of such transaction or
event, that for a specified period of time prior to such
transaction or event, such Option shall be exercisable as to
all shares covered thereby, notwithstanding anything to the
contrary in (i) Section 4.4 or (ii) the provisions of such
Option;
(4) In its sole discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the
Board, in the case of Options granted to Independent
Directors) may provide, either by the terms of such Option or
by action taken prior to the occurrence of such transaction or
event, that upon such event, such Option be assumed by the
successor or survivor corporation, or a parent or subsidiary
thereof, or shall be substituted for by similar options
covering the stock of the successor or survivor corporation,
or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices;
(5) In its sole discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the
Board, in the case of Options granted to Independent
Directors) may make adjustments in the number and type of
shares of Common Stock (or other securities or property)
subject to outstanding Options and/or in the terms and
conditions of (including the grant or exercise price), and the
criteria included in, outstanding Options, and Options, which
may be granted in the future.
(3) With respect to Options intended to qualify as
performance-based compensation under Section 162(m), no adjustment or action
described in this Section 7.3 or in any other provision of the Plan shall be
authorized to the extent that such adjustment or action would cause such Option
to fail to so qualify under Section 162(m), as the case may be, or any
successor provisions thereto. Furthermore, no such adjustment or action shall
be authorized to the extent such adjustment or action would result in
short-swing profits liability under Section 16 of the Exchange Act or violate
the exemptive conditions of Rule 16b-3 unless the Committee (or the Board, in
the case of Options granted to Independent Directors) determines that the
Option is not to comply with such exemptive conditions. The number of shares
of Common Stock subject to any option shall always be rounded to the next whole
number.
7.4 Effective Date. This Restatement of the 1996 Plan
shall be effective as of the merger of the Company and DIGEX.
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<PAGE> 13
7.5 Tax Withholding. The Company shall be entitled to
require payment in cash or deduction from other compensation payable to each
Optionee of any sums required by federal, state or local tax law to be withheld
with respect to the exercise of any Option. The Committee (or the Board, in
the case of options granted to Independent Directors) may in its discretion and
in satisfaction of the foregoing requirement allow such Optionee to elect to
have the Company withhold shares of Common Stock otherwise issuable under such
Option (or allow the return of shares of Common Stock) having a Fair Market
Value equal to the sums required to be withheld.
7.6 Loans. The Committee may, in its sole discretion,
extend one or more loans to Optionees in connection with the exercise of an
Option. The terms and conditions of any such loan shall be set by the
Committee.
7.7 Limitations Applicable to Section 16 Persons and
Performance Based Compensation. Notwithstanding any other provision of this
Plan, this Plan, and any Option, to any individual who is then subject to
Section 16 of the Exchange Act, shall be subject to any additional limitations
set forth in any applicable exemptive rule under Section 16 of the Exchange Act
(including any amendment to Rule 16b-3 of the Exchange Act) that are
requirements for the application of such exemptive rule. To the extent
permitted by applicable law, the Plan and Options granted hereunder shall be
deemed amended to the extent necessary to conform to such applicable exemptive
rule. Furthermore, notwithstanding any other provision of this Plan, any
Option intended to qualify as performance-based compensation as described in
Section 162(m)(4)(C) of the Code shall be subject to any additional limitations
set forth in Section 162(m) of the Code (including any amendment to Section
162(m) of the Code) or any regulations or rulings issued thereunder that are
requirements for qualification as performance-based compensation as described
in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to
the extent necessary to conform to such requirements.
7.8 Effect of Plan Upon Options and Compensation Plans.
The adoption of this Plan shall not affect any other compensation or incentive
plans in effect for the Company or any Subsidiary. Nothing in this Plan shall
be construed to limit the right of the Company (i) to establish any other forms
of incentives or compensation for employees, directors or consultants of the
Company or any Subsidiary or (ii) to grant or assume options or other rights
otherwise than under this Plan in connection with any proper corporate purpose
including but not by way of limitation, the grant or assumption of options in
connection with the acquisition by purchase, lease, merger, consolidation or
otherwise, of the business, stock or assets of any corporation, partnership,
firm or association.
7.9 Compliance with Laws. This Plan, the granting and
vesting of Options under this Plan and the issuance and delivery of shares of
Common Stock and the payment of money under this Plan or under Options granted
hereunder are subject to compliance with all applicable federal and state laws,
rules and regulations (including but not limited to state and federal
securities law and federal margin requirements) and to such approvals by any
listing,
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<PAGE> 14
regulatory or governmental authority as may, in the opinion of counsel for the
Company, be necessary or advisable in connection therewith. Any securities
delivered under this Plan shall be subject to such restrictions, and the person
acquiring such securities shall, if requested by the Company, provide such
assurances and representations to the Company as the Company may deem necessary
or desirable to assure compliance with all applicable legal requirements. To
the extent permitted by applicable law, the Plan or Options granted hereunder
shall be deemed amended to the extent necessary to conform to such laws, rules
and regulations.
7.10 Titles. Titles are provided herein for convenience
only and are not to serve as a basis for interpretation or construction of this
Plan.
7.11 Governing Law. This Plan and any agreements
hereunder shall be administered, interpreted and enforced under the internal
laws of the State of Florida without regard to conflicts of laws thereof.
* * *
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<PAGE> 1
Exhibit 10.4
INTERMEDIA COMMUNICATIONS INC.
1997 STOCK OPTION PLAN FOR THE BENEFIT
OF EMPLOYEES OF DIGEX, INCORPORATED
1. PURPOSE.
In connection with the merger of Intermedia
Communications Inc. (the "Company") with DIGEX, Incorporated ("DIGEX"), the
Company assumed the Digital Express Group, Inc. 1995 Stock Option Plan (the
"1995 Plan") and all outstanding options to acquire DIGEX common stock granted
thereunder. No new options will be granted under the plan after the merger.
This 1997 Stock Option Plan for the Benefit of Employees of DIGEX, Incorporated
(the "Plan") is a restatement (the "Restatement") of the 1995 Plan as assumed
by the Company.
The 1995 Plan when adopted was intended to secure for
the Company and its shareholders the benefits arising from capital stock
ownership by employees, officers and directors of, and consultants or advisors
to, DIGEX and its parent and subsidiary corporations who were expected to
contribute to DIGEX's future growth and success. The Company assumed the 1995
Plan in order to encourage the recipients of options under such plan to
continue to exert their maximum efforts to the success of the Company and
DIGEX. Except where the context otherwise requires, the term "Company" and
"DIGEX" shall include the parent and all present and future subsidiaries of the
Company and DIGEX, as the case may be, as defined in Sections 424(e) and 424(f)
of the Internal Revenue Code of 1986, as amended or replaced from time to time
(the "Code"). Those provisions of the Plan which make express reference to
Section 422 shall apply only to Incentive Stock options (as that term is
defined in the Plan).
2. TYPE OF OPTIONS AND ADMINISTRATION.
(a) Types of options. Prior to the Restatement,
only options that did not meet the statutory requirements of Section 422 of the
Code were granted ("Non-Statutory Options"). After the Restatement, no options
shall be granted under the Plan.
(b) Administration.
(i) After the Restatement, the Plan will
be administered by the Board of Directors of the Company (the "Board of
Directors" or "Board"), whose construction and interpretation of the terms and
provisions of the Plan shall be final and conclusive. The Board shall have
authority, subject to the express provisions of the Plan, to construe the
respective option agreements and the Plan, to prescribe, amend and rescind
rules and regulations relating to the Plan, and to make all other
determinations which are, in the judgment of the Board of Directors, necessary
or desirable for the administration of the Plan. The Board of Directors may
correct any defect, supply any omission or reconcile any inconsistency in the
Plan or in any option agreement in the manner and to the extent it shall deem
expedient to carry the Plan into
<PAGE> 2
effect and it shall be the sole and final judge of such expediency. No
director or person acting pursuant to authority delegated by the Board of
Directors shall be liable for any action or determination under the Plan made
in good faith.
(ii) The Board of Directors may, to the
full extent permitted by or consistent with applicable laws or regulations,
delegate any or all of its powers under the Plan to a committee (the
"Committee") appointed by the Board of Directors, and if the Committee is so
appointed all references to the Board of Directors in the Plan shall mean and
relate to such Committee.
3. ELIGIBILITY.
After the Restatement, no person shall be eligible
for option grants.
4. STOCK SUBJECT TO PLAN.
Subject to adjustment as provided in Section 13
below, the maximum number of shares of the Company's Common Stock, par value
$.01 per share ("Common Stock"), which may be issued and sold under the Plan is
352,507 shares.
5. PURCHASE PRICE.
(a) General. The purchase price per share of
stock deliverable upon the exercise of an option shall equal the price set
forth in the applicable option agreement as appropriately adjusted pursuant to
Section 2.9 of the Agreement and Plan of Merger, dated June 4, 1997, by and
among the Company, Daylight Acquisition Corp. and DIGEX.
(b) Payment of Purchase Price. Options granted
under the Plan may provide for the payment of the exercise price by delivery of
cash or a check to the order of the Company in an amount equal to the exercise
price of such options, or, to the extent provided in the applicable option
agreement, by delivery to the Company of shares of Common Stock of the Company
already owned by the optionee having a fair market value equal in amount to the
exercise price of the options being exercised. The Board of Directors, in its
sole discretion, may permit payment of the exercise price by any other means
(including, without limitation, by delivery of a promissory note of the
optionee payable on such terms as are specified by the Board of Directors)
which the Board of Directors determines are consistent with the purpose of the
Plan and with applicable laws and regulations (including, without limitation,
the provisions of Regulation T promulgated by the Federal Reserve Board, if
applicable). The fair market value of any shares of the Company's Common Stock
or other non-cash consideration which may be delivered upon exercise of an
option shall be determined by the Board of Directors.
6. OPTION PERIOD.
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<PAGE> 3
Each option and all rights thereunder shall expire on
such date as set forth in the applicable option agreement and shall be subject
to earlier termination as provided in the Plan.
7. EXERCISE OF OPTIONS.
Each option granted under the Plan shall be
exercisable either in full or in installments at such time or times and during
such period as set forth in the agreement evidencing such option, subject to
the provisions of the Plan.
8. NONTRANSFERABILITY OF OPTIONS.
Options shall not be assignable or transferable by
the person to whom they are granted, either voluntarily or by operation of law,
except by will or the laws of descent and distribution, and, during the life of
the optionee, shall be exercisable only by the optionee.
9. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER
RELATIONSHIP.
Subject to the provisions of the Plan, the period of
time during which an optionee may exercise an option following (i) the
termination of the optionee's employment or other relationship with DIGEX or
the Company or (ii) the death or disability of the optionee shall be as set
forth in the agreement evidencing such option, provided that the Company is
added or substituted for DIGEX where appropriate in such agreement.
10. ACCELERATION, EXTENSION, ETC.
The Board of Directors may, in its sole discretion,
(i) accelerate the date or dates on which all or any particular option or
options granted under the Plan may be exercised or (ii) extend the dates during
which all or any particular option or options granted under the Plan may be
exercised.
11. GENERAL RESTRICTIONS.
(a) Investment Representations. The Company may
require any person to whom an option is granted, as a condition of exercising
such option, to give written assurances in substance and form satisfactory to
the Company to the effect that such person is acquiring the Common Stock
subject to the option for, his or her own account for investment and not with
any present intention of selling or otherwise distributing the same, and to
such other effects as the Company deems necessary or appropriate in order to
comply with federal and applicable state securities laws, or with covenants or
representations made by the Company in connection with any public offering of
its Common Stock.
3
<PAGE> 4
(b) Compliance with Securities Laws. Each option
shall be subject to the requirement that if, at any time, counsel to the
Company shall determine that the listing, registration or qualification of the
shares subject to such option upon any securities exchange or under any state
or federal law, or the consent or approval of any governmental or regulatory
body, or that the disclosure of non-public information or the satisfaction of
any other condition is necessary as a condition of, or in connection with, the
issuance or purchase of shares thereunder, such option may not be exercised, in
whole or in part, unless such listing, registration, qualification, consent or
approval, or satisfaction of such condition shall have been effected or
obtained on conditions acceptable to the Board of Directors. Nothing herein
shall be deemed to require the Company to apply for or to obtain such listing,
registration or qualification, or to satisfy such condition.
12. RIGHTS AS A SHAREHOLDER.
The holder of an option shall have no rights as a
shareholder with respect to any shares covered by the option (including,
without limitation, any rights to receive dividends or non-cash distributions
with respect to such shares) until the date of issue of a stock certificate to
him or her for such shares. Except as provided in Section 13, no adjustment
shall be made for dividends or other rights for which the record date is prior
to the date such stock certificate is issued.
13. ADJUSTMENT PROVISIONS FOR RECAPITALIZATION AND
RELATED TRANSACTIONS.
(a) General. If, through or as a result of any
merger, consolidation, sale of all or substantially all of the assets of the
Company, reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split or other similar transaction, (i) the
outstanding shares of Common Stock are increased, decreased or exchanged for a
different number or kind of shares or other securities of the Company, or (ii)
additional shares or new or different shares or other securities of the Company
or other non-cash assets are distributed with respect to such shares of Common
Stock or other securities, an appropriate and proportionate adjustment may be
made in (x) the maximum number and kind of shares reserved for issuance under
the Plan, (y) the number and kind of shares or other securities subject to any
then outstanding options under the Plan, and (z) the price for each share
subject to any then outstanding options under the Plan, without changing the
aggregate purchase price as to which such options remain exercisable.
(b) Board Authority to Make Adjustments. Any
adjustments under this Section 13 will be made by the Board of Directors, whose
determination as to what adjustments, if any, will be made and the extent
thereof will be final, binding and conclusive. No fractional shares will be
issued under the Plan on account of any such adjustments.
14. MERGER, CONSOLIDATION, ASSET SALE, LIQUIDATION, ETC.
4
<PAGE> 5
In the event of a transaction which would constitute
a Change in Control, as defined below, the Board of Directors of the Company,
or the board of directors of any corporation assuming the obligations of the
Company, may, in its discretion, take any one or more of the following actions,
as to outstanding options: (i) provide that such options shall be assumed, or
equivalent options shall be substituted, by the acquiring or succeeding
corporation (or an affiliate thereof), provided that any such options
substituted for Incentive Stock Options shall meet the requirements of Section
424(a) of the Code, (ii) upon written notice to the optionees, provide that all
unexercised options will terminate immediately prior to the consummation of
such transaction unless exercised by the optionee within a specified period
following the date of such notice, (iii) in the event of a merger under the
terms of which holders of the Common Stock of the Company will receive upon
consummation thereof a cash payment for each share surrendered in the merger
(the "Merger Price"), make or provide for a cash payment to the optionees equal
to the difference between (A) the Merger Price times the number of shares of
Common Stock subject to such outstanding options (to the extent then
exercisable at prices not in excess of the Merger Price) and (B) the aggregate
exercise price of all such outstanding options in exchange for the termination
of such options, and (iv) provide that all or any outstanding options shall
become exercisable in full immediately prior to such event. A "Change in
Control" shall mean any transaction in which the Company is to be consolidated
with or acquired by another entity in a merger, all or substantially all of the
Company's assets are to be sold, or all or substantially all of the capital
stock of the Company is to be sold, or the approval by the stockholders of the
company of a plan of complete liquidation of the Company.
15. NO SPECIAL EMPLOYMENT RIGHTS.
Nothing contained in the Plan or in any option shall
confer upon any optionee any right with respect to the continuation of his or
her employment by DIGEX or the Company or interfere in any way with the right
of DIGEX or the Company at any time to terminate such employment or to increase
or decrease the compensation of the optionee.
16. OTHER EMPLOYEE BENEFITS.
Except as to plans which by their terms include such
amounts as compensation, the amount of any compensation deemed to be received
by an optionee as a result of the exercise of an option or the sale of shares
received upon such exercise will not constitute compensation with respect to
which any other employee benefits of such optionee are determined, including,
without limitation, benefits under any bonus, pension, profit-sharing, life
insurance or salary continuation plan, except as otherwise specifically
determined by the Board of Directors.
17. AMENDMENT OR TERMINATION OF THE PLAN.
5
<PAGE> 6
(a) The Board of Directors may at any time, and
from time to time, terminate, modify or amend the Plan in any respect.
(b) The termination or any modification or
amendment of the Plan shall not, without the consent of an optionee, affect his
or her rights under an option previously granted to him or her. With the
consent of the optionee affected, the Board of Directors may amend outstanding
option agreements in a manner not inconsistent with the Plan.
18. WITHHOLDING.
The Company shall have the right to deduct from
payments of any kind otherwise due to the optionee any federal, state or local
taxes of any kind required by law to be withheld with respect to any shares
issued upon exercise of options under the Plan. Subject to the prior approval
of the Company, which may be withheld by the Company in its sole discretion,
the optionee may elect to satisfy such obligations, in whole or in part, (i) by
causing the Company to withhold shares of Common Stock otherwise issuable
pursuant to the exercise of an option or (ii) by delivering to the Company
shares of Common Stock already owned by the optionee. The shares so delivered
or withheld shall have a fair market value equal to such withholding
obligation. The fair market value of the shares used to satisfy such
withholding obligations shall be determined by the Company as of the date that
the amount of tax to be withheld is to be determined. An optionee who has made
an election pursuant to this Section 18 may only satisfy his or her withholding
obligation with shares of Common Stock which are not subject to any purchase,
forfeiture, unfulfilled vesting or other similar requirements.
19. ADJUSTMENT OF OPTION EXERCISE PRICES.
The Board of Directors shall have the authority to
effect, at any time and from time to time, with the consent of the affected
optionees, the amendment of the terms of any and all outstanding options under
the Plan to provide an option exercise price per share which is higher or lower
than the then-current exercise price per share of such outstanding options.
20. EFFECTIVE DATE AND DURATION OF THE PLAN.
(a) Effective Date. This Restatement of the 1995
Stock Option Plan became effective on the effective date of the merger of the
Company and DIGEX. Amendments to the Plan shall become effective when adopted
by the Board of Directors. Notwithstanding the foregoing, no option shall be
granted under the Plan after the effective date of the Restatement of the 1995
Plan.
(b) Termination. Unless sooner terminated in
accordance with Section 17, the Plan shall terminate upon the close of business
on September 18, 2005. Options outstanding on such date shall continue to have
force and effect in accordance with the provisions of the instruments
evidencing such options.
6
<PAGE> 7
21. PROVISION FOR FOREIGN PARTICIPANTS.
The Board of Directors may, without amending the
Plan, modify awards or options granted to participants who are foreign
nationals or employed outside the United States to recognize differences in
laws, rules, regulations or customs of such foreign jurisdictions with respect
to tax, securities, currency, employee benefit or other matters.
7
<PAGE> 1
Exhibit 10.6
August 27, 1996
Mr. Robert M. Manning
16646 Calle De Nancy
Pacific Palisades, CA 90272
Dear Rob:
It is with great pleasure that I offer you the position of Senior Vice
President and Chief Financial Officer of ICI. Assuming that you accept this
offer, you will officially assume this position on or before September 16,
1996.
The primary responsibilities of this position are to lead and direct all
financial and accounting activities for the corporation. This includes building
"world class" finance, accounting, and administration departments. Among other
things, this will entail staffing the department with highly talented people,
and providing the necessary guidance, motivation, and development to your
staff. The organization expects this position to be the catalyst that brings
all the functions of the company together in order to insure the development
and implementation of sound financial and control strategies.
This is an extremely important executive officer position of ICI. The position
reports directly to me and pays a yearly base salary of $200,000 (based on 52
weeks service). In addition, this position has an annual management incentive
compensation target opportunity of 40% of base salary, which would be pro rated
for 1996. (Assuming you start on September 10, 1996, you would be eligible for
4/12 of this target opportunity, or $26,400.) This bonus opportunity is
contingent upon the achievement of corporate revenue, EBITDA, and capital
budget objectives as well as the achievement of two to five individual
objectives which relate to your primary responsibilities. You are expected to
establish these individual objectives, with my approval.
You will receive two separate stock awards under the Company's Long-Term
Incentive Plan as described on the following page. For purposes of the stock
option grant your employment start date will be deemed to be Tuesday, August
27, 1996.
<PAGE> 2
Grant 1. A stock option covering 85,000 shares of common stock which will vest
in equal installments over the 60-month period commencing with the date of your
employment by the Company, subject to customary terms contained in the standard
incentive stock options issued by the Company under the Plan. For pricing
purposes, the date of grant will be deemed to be the date upon which we have
reached agreement as to the terms of your employment and the option has been
approved by the Compensation Committee of the Board of Directors.
Grant 2. You will receive a contingent restricted stock award covering 35,000
shares of common stock on the date you join the Company. The restricted stock
covered by this award will only be issued if and when the fair market value for
the Company's common stock, measured over a 90-day period or upon the
occurrence of a change in control, reaches a price of $40.00 per share within
the first two years of your employment with ICI. Any restricted stock issued
will vest in equal monthly increments over the next five years as long as you
continue to be employed by ICI.
The options comprising Grant 1 and any restricted stock issued pursuant to
Grant 2 will immediately vest upon a change in control of the Company.
As an employee of ICI, you will be entitled to all employee benefits: Medical
insurance, prescription drug card, dental insurance, long-term disability, life
insurance, 401k Plan, educational reimbursement, holidays, sick leave, military
leave, bereavement leave, voting time off and jury duty leave, and supplemental
executive life insurance. Assuming you start on or before September 10, 1996,
your medical benefits will be effective November 1, 1996. You will be eligible
for 3 weeks of paid vacation per year, including your first year of employment.
This offer includes a relocation allowance of up to $112,000. Subject to this
limit, you will be reimbursed for relocation expenses (documented by receipts)
in accordance with ICI's Relocation Policy, a copy of which is attached.
Reimbursable expenses include items such as transportation of you and your
family, movement of household goods, real estate commission for the sale of the
old home, closing costs associated with the purchase of the new home,
incidental expenses, house hunting trips, temporary living, and trips home from
the temporary residence. The Company will "gross up" the taxable elements of
this reimbursement. The "gross-up" is not considered part of the relocation
allowance.
This relocation assistance will be forgiven over a 12 month period commencing
on the date of your relocation. If you voluntarily terminate your employment
with ICI prior to the end of this 12 month period, the relocation balance that
exceeds the forgiven amount must be repaid to the Company.
In addition, in the event that your employment terminates involuntarily for any
reason other than unacceptable behavior, as described in the ICI Employee
Manual, you will be entitled to twelve months severance pay (base salary only)
and executive level outplacement services.
2
<PAGE> 3
Rob, we sincerely believe that ICI has an exciting future, filled with
substantial opportunity for business growth and success. We also feel that you
are a very talented person with significant potential to help us grow and
succeed. We are excited about the prospect of you joining the ICI team.
Sincerely,
David C. Ruberg
President & CEO
By signing below I accept this offer:
______________________________ _________
Signature Date
<PAGE> 1
Exhibit 10.7
September 23, 1996
Mr. Robert Rouse
624 Nalls Farmway
Great Falls, VA 22066
Dear Bob:
It is with great pleasure that I offer you the position of Executive Vice
President. Assuming that you accept this offer, you will officially assume this
position on or before October 7, 1996.
The primary responsibilities of this position are to lead and direct the
operations and engineering functions for the corporation. This includes
building "world class" organizations in engineering, customer service, field
operations, network operations and the systems necessary to support them. Among
other things, this will entail staffing the organization with highly talented
people, and providing the necessary guidance, motivation, and development to
your staff. The organization expects this position to be the catalyst that
brings all the functions of the company together in order to insure the
development and implementation of sound operational strategies.
This is an extremely important executive officer position of ICI. The position
reports directly to me and pays a yearly base salary of $220,000 (based on 52
weeks service). You will be elligible for an annual salary review, commensing
October 7, 1997. In addition, this position has an annual management incentive
compensation target opportunity of 50% of base salary, which would be pro rated
for 1996. (Assuming you start on October 1, 1996, you would be eligible for
3/12 of this target opportunity, or $36,300.) This bonus opportunity is
contingent upon the achievement of corporate revenue, EBITDA, and capital
budget objectives as well as the achievement of two to five individual
objectives which relate to your primary responsibilities. You are expected to
establish these individual objectives, with my approval.
You will receive two separate stock awards under the Company's Long-Term
Incentive Plan as described on the following page. For purposes of the stock
option grant your employment start date will be deemed to be Friday, September
20, 1996, the day this offer was approved by the Board of Directors.
<PAGE> 2
Grant 1. A stock option covering 100,000 shares of common stock which will vest
in equal installments over the 60-month period commencing with the date of your
employment by the Company, subject to customary terms contained in the standard
incentive stock options issued by the Company under the Plan.
Grant 2. You will receive a contingent restricted stock award covering 20,000
shares of common stock on the date you join the Company. The restricted stock
covered by this award will only be issued if and when the fair market value for
the Company's common stock, measured over a 90-day period or upon the
occurrence of a change in control, reaches a price of $40.00 per share within
the first two years of your employment with ICI. Any restricted stock issued
will vest in equal monthly increments over the next five years as long as you
continue to be employed by ICI.
The options comprising Grant 1 and any restricted stock issued pursuant to
Grant 2 will immediately vest upon a change in control of the Company. You will
receive consideration annually for additional stock option awards, based on
your performance and the performance of the Company.
As an employee of ICI, you will be entitled to all employee benefits: Medical
insurance, prescription drug card, dental insurance, long-term disability, life
insurance, 401k Plan, educational reimbursement, holidays, sick leave, military
leave, bereavement leave, voting time off and jury duty leave, and supplemental
executive life insurance. Assuming you start on or before October 7, 1996, your
medical benefits will be effective December 1, 1996. You will be eligible for 3
weeks of paid vacation per year, including your first year of employment.
In addtion to the standard ICI medical benefits, you will be reimbursed for the
cost of Cobra benefits continuation for the first 12 months of your employment
by ICI.
This offer includes a relocation allowance of up to $112,000. Subject to this
limit, you will be reimbursed for relocation expenses (documented by receipts)
in accordance with ICI's Relocation Policy, a copy of which is attached.
Reimbursable expenses include items such as transportation of you and your
family, movement of household goods, real estate commission for the sale of the
old home, closing costs associated with the purchase of the new home,
incidental expenses, house hunting trips, temporary living, and trips home from
the temporary residence. The Company will "gross up" the taxable elements of
this reimbursement. The "gross-up" is not considered part of the relocation
allowance.
This offer includes a hiring bonus of $45,000, payable February 1, 1997.
The relocation assistance and hiring bonus create a debt to ICI which will be
forgiven over a 12 month period commencing on your date of hire. If you
voluntarily terminate your employment with ICI prior to the end of this 12
month period, the relocation balance that exceeds the forgiven amount must be
repaid to the Company.
2
<PAGE> 3
In the event of a change in control of the Company and should your employment
be terminated involuntarily or should you voluntarily terminate your employment
as a result of a substantial diminution of your position and responsibilities,
you will be entitled to twelve months severance pay (base salary only) and
executive level outplacement services.
In addition, in the event that your employment is terminated involuntarily for
any reason other than unacceptable behavior, as described in the ICI Employee
Manual, you will be entitled to twelve months severance pay (base salary only)
and executive level outplacement services.
Bob, we sincerely believe that ICI has an exciting future, filled with
substantial opportunity for business growth and success. We also feel that you
are a very talented person with significant potential to help us grow and
succeed. We are excited about the prospect of you joining the ICI team.
Sincerely,
David C. Ruberg
President & CEO
By signing below I accept this offer:
______________________________ _________
Signature Date
<PAGE> 1
EXHIBIT 12
Intermedia Communications Inc.
Statement re: Computation of Ratios
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Loss before extraordinary items ($19,157) ($57,198) ($197,289)
Income tax benefit 0 0 0
Loss before income taxes ($19,060) ($57,198) ($197,289)
Fixed Charges:
Interest expensed $13,355 $35,213 $58,744
Capitalized interest 677 2,780 4,654
Amortization of deferred financing costs 412 1,252 1,918
Estimated interest factor on operating leases 428 1,598 3,286
Dividends on redeemable preferred stock 0 0 43,742
---------- ---------- ----------
Total fixed charges $14,872 $40,843 $112,344
========== ========== ==========
Earnings:
Loss before income tax ($19,157) ($57,198) ($197,289)
Fixed charges excluding capitalized interest 14,195 38,063 63,498
---------- ---------- ----------
Total earnings ($4,962) ($19,135) ($133,341)
========== ========== ==========
Ratio of earnings to fixed charges (0.33) (0.47) (1.19)
========== ========== ==========
Insufficiency of earnings to cover fixed charges $19,834 $59,978 $245,685
========== ========== ==========
</TABLE>
<PAGE> 1
Exhibit 21
INTERMEDIA COMMUNICATIONS INC.
SUBSIDIARIES
Intermedia Licensing Company
Eastern Message Communications Inc.
EMI Telecommunications Inc.
DIGEX, Incorporated
Sumter One Acquisition, Inc.
Sumter Two Acquisition, Inc.
Intermedia Capital Inc.
Shared Technologies Fairchild Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-64752 and Form S-8 No. 33-97720) pertaining to the Intermedia
Communications of Florida, Inc. 1992 Stock Option Plan, (Form S-8 No. 333-32155)
pertaining to the Intermedia Communications Inc. 1997 Equity Participation Plan
and Stock Option Plan for the Benefit of Employees of DIGEX, Inc., (Form S-3 No.
33-94702) pertaining to the issuance of common stock in connection with the
acquisition of Fibernet, (Form S-3 No.33-99940) pertaining to the registration
of warrants issued in connection with the 13.5% Series B Senior Notes, (Form S-3
No. 333-33415) pertaining to the registration of Depositary Shares each
representing a one-hundredth interest in a share of 7% Series D Junior
Convertible Preferred Stock, 7% Series D Junior Convertible Preferred Stock and
Common Stock issuable as dividends on the 7% Series D Junior Convertible
Preferred Stock and Common Stock issuable upon conversion of the Depositary
Shares and 7% Series D Junior Convertible Preferred Stock, (Form S-3 No.
333-42999) pertaining to the issuance of Depositary Shares each representing a
one-hundredth interest in a share of 7% Series E Junior Convertible Preferred
Stock, 7% Series E Junior Convertible Preferred Stock and Common Stock issuable
as dividends on the 7% Series E Junior Convertible Preferred Stock and Common
Stock issuable upon conversion of the Depositary Shares and 7% Series E Junior
Convertible Preferred Stock, (Form S-3 No. 333-44875) pertaining to the
registration of the Company's 8 1/2% Series B Senior Notes Due 2008, and (Form
S-3 No. 333-45019) pertaining to registration of $500,000,000 of Debt
Securities, Preferred Stock, Depositary Shares and Common Stock of our report
dated February 17, 1998, except for Note 15, as to which the date is March 10,
1998, with respect to the consolidated financial statements and schedule of
Intermedia Communications Inc. and Subsidiaries included in the Annual Report
(Form 10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Tampa, Florida
March 18, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-64752 and Form S-8 No. 33-97720) pertaining to the Intermedia
Communications of Florida, Inc. 1992 Stock Option Plan, (Form S-8 No. 333-32155)
pertaining to the Intermedia Communications Inc. 1997 Equity Participation Plan
and Stock Option Plan for the Benefit of Employees of DIGEX, Inc., (Form S-3 No.
33-94702) pertaining to the issuance of common stock in connection with the
acquisition of Fibernet, (Form S-3 No. 33-99940) pertaining to the registration
of warrants issued in connection with the 13.5% Series B Senior Notes, (Form S-3
No. 333-33415) pertaining to the registration of Depositary Shares each
representing a one-hundredth interest in a share of 7% Series D Junior
Convertible Preferred Stock, 7% Series D Junior Convertible Preferred Stock and
Common Stock issuable as dividends on the 7% Series D Junior Convertible
Preferred Stock and Common Stock issuable upon conversion of the Depositary
Shares and 7% Series D Junior Convertible Preferred Stock, (Form S-3 No.
333-42999) pertaining to the issuance of Depositary Shares each representing a
one-hundredth interest in a share of 7% Series E Junior Convertible Preferred
Stock, 7% Series E Junior Convertible Preferred Stock and Common Stock issuable
as dividends on the 7% Series E Junior Convertible Preferred Stock and Common
Stock issuable upon conversion of the Depositary Shares and 7% Series E Junior
Convertible Preferred Stock, (Form S-3 No. 333-44875) pertaining to the
registration of the Company's 8 1/2% Series B Senior Notes Due 2008, and (Form
S-3 No. 333-45019) pertaining to registration of $500,000,000 of Debt
Securities, Preferred Stock, Depositary Shares and Common Stock of our report
dated February 13, 1998, except for Note 20, as to which the date is March 10,
1998, with respect to the consolidated financial statements of Shared
Technologies Fairchild Inc. and Subsidiaries included the Annual Report (Form
10-K) of Intermedia Communications Inc. for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Vienna, Virginia
March 18, 1998
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 7, 1997 with respect to the consolidated financial statements
of Shared Technologies Fairchild Inc. and Subsidiaries included in this Form
10-K of Intermedia Communications Inc., into the following previously filed
Registration Statements (Form S-8 No. 33-64752 and Form S-8 No. 33-97720)
pertaining to the Intermedia Communications of Florida, Inc. 1992 Stock Option
Plan, (Form S-8 No. 333-32155) pertaining to the Intermedia Communications Inc.
1997 Equity Participation Plan and Stock Option Plan for the Benefit of
Employees of DIGEX, Inc., (Form S-3 No. 33-94702) pertaining to the issuance of
common stock in connection with the acquisition of Fibernet, (Form S-3 No.
33-99940) pertaining to the registration of warrants issued in connection with
the 13.5% Series B Senior Notes, (Form S-3 No. 333-33415) pertaining to the
registration of Depositary Shares each representing a one-hundredth interest in
a share of 7% Series D Junior Convertible Preferred Stock, 7% Series D Junior
Convertible Preferred Stock and Common Stock issuable upon the conversion of the
Depositary Shares and Series D Junior Convertible Preferred Stock, (Form S-3 No.
333-42999) pertaining to the issuance of Depositary Shares each representing a
one-hundredth interest in a share of 7% Series E Junior Convertible Preferred
Stock, 7% Series E Junior Convertible Preferred Stock and Common Stock issuable
as dividends on the Series E Junior Convertible Preferred Stock and Common Stock
issuable upon conversion of the Depositary Shares and Series E Junior
Convertible Preferred Stock, (Form S-3 No. 333-44875) pertaining to the
registration of the Company's 8 1/2% Series B Senior Notes Due 2008, and (Form
S-3 No. 333-45019) pertaining to registration of $500,000,000 of Debt
Securities, Preferred Stock, Depositary Shares and Common Stock.
Arthur Andersen LLP
Washington, D.C.
March 19, 1998
<PAGE> 1
Exhibit 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-64752 and Form S-8 No. 33-97720) pertaining to the Intermedia
Communications of Florida, Inc. 1992 Stock Option Plan, (Form S-8 No. 333-32155)
pertaining to the Intermedia Communications Inc. 1997 Equity Participation Plan
and Stock Option Plan for the Benefit of Employees of DIGEX, Inc., (Form S-3 No.
33-94702) pertaining to the issuance of common stock in connection with the
acquisition of Fibernet, (Form S-3 No. 33-99940) pertaining to the registration
of warrants issued in connection with the 13.5% Series B Senior Notes, (Form S-3
No. 333-33415) pertaining to the registration of Depositary Shares each
representing a one-hundredth interest in a share of 7% Series D Junior
Convertible Preferred Stock, 7% Series D Junior Convertible Preferred Stock and
Common Stock issuable as dividends on the Series D Junior Convertible Preferred
Stock and Common Stock issuable upon conversion of the Depositary Shares and
Series D Junior Convertible Preferred Stock, (Form S-3 No. 333-42999) pertaining
to the issuance of Depositary Shares each representing a one-hundredth interest
in a share of 7% Series E Junior Convertible Preferred Stock, 7% Series E Junior
Convertible Preferred Stock and Common Stock issuable as dividends on the Series
E Junior Convertible Preferred Stock and Common Stock issuable upon conversion
of the Depositary Shares and Series E Junior Convertible Preferred Stock, (Form
S-3 No. 333-44875) pertaining to the registration of the Company's 8 1/2% Series
B Senior Notes Due 2008, and (Form S-3 No. 333-45019) pertaining to registration
of $500,000,000 of Debt Securities, Preferred Stock, Depositary Shares and
Common Stock of our report which contains an explanatory paragraph relating to
the changing of the method of accounting for Shared Technologies Fairchild
Inc.'s investment in one of its subsidiaries, dated March 1, 1996, except for
Note 1, as to which the date is March 13, 1996, with respect to the
consolidated statements of operations, stockholders' equity, and cash flows of
Shared Technologies Fairchild Inc. and Subsidiaries included in the Annual
Report (Form 10-K) of Intermedia Communications Inc. for the year ended December
31, 1997.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
March 18, 1998
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