<PAGE> 1
- --------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q/A
---------------------
<TABLE>
<C> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NUMBER: 0-20135
INTERMEDIA COMMUNICATIONS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 59-2913586
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
3625 QUEEN PALM DRIVE
TAMPA, FLORIDA 33619
(Address of principal executive offices)
(813) 829-0011
Telephone Number
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X] No [ ]
As of August 3, 1998, there were 47,343,812 shares of the
Registrant's Common Stock outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INTERMEDIA COMMUNICATIONS INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Statements of Operations -- Three and
six months ended June 30, 1998 (restated) and 1997.......... 3
Condensed Consolidated Balance Sheets -- June 30, 1998
(restated) and December 31, 1997............................ 4
Condensed Consolidated Statements of Cash Flows -- Six
months ended June 30, 1998 (restated) and 1997.............. 5
Notes to Condensed Consolidated Financial Statements........ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 31
ITEM 2. CHANGES IN SECURITIES....................................... 31
ITEM 3. DEFAULT UPON SENIOR SECURITIES.............................. 31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 31
ITEM 5. OTHER INFORMATION........................................... 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 32
SIGNATURES............................................................ 34
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERMEDIA COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- ------------- -------------
RESTATED RESTATED
SEE NOTE 2 SEE NOTE 2
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<S> <C> <C> <C> <C>
Revenues:
Local network services.................... $ 38,193 $ 8,433 $ 71,869 $ 13,642
Enhanced data services.................... 42,668 12,667 79,205 23,988
Interexchange services.................... 82,747 27,703 127,498 53,240
Integration services...................... 26,622 1,329 48,443 3,200
----------- ----------- ----------- -----------
190,230 50,132 327,015 94,070
Expenses:
Network operations........................ 88,015 37,261 159,557 67,263
Facilities administration and
maintenance............................ 18,536 5,790 33,568 11,424
Cost of goods sold........................ 17,218 764 30,909 2,034
Selling, general and administrative....... 56,402 20,452 102,747 39,978
Depreciation and amortization............. 50,215 9,879 90,991 18,174
Charge off of purchased in-process R&D.... -- -- 63,000 --
Business restructuring, integration and
other charges.......................... 50,081 -- 50,081 --
----------- ----------- ----------- -----------
280,467 74,146 530,853 138,873
----------- ----------- ----------- -----------
Loss from operations........................ (90,237) (24,014) (203,838) (44,803)
Other income (expense):
Interest expense.......................... (47,858) (11,117) (97,159) (22,206)
Other income.............................. 6,040 5,482 16,770 9,956
----------- ----------- ----------- -----------
Net loss.................................... (132,055) (29,649) (284,227) (57,053)
Preferred stock dividends and accretions.... (18,876) (9,848) (37,471) (13,223)
----------- ----------- ----------- -----------
Net loss attributable to common
stockholders.............................. $ (150,931) $ (39,497) $ (321,698) $ (70,276)
=========== =========== =========== ===========
Basic and diluted net loss per common
share..................................... $ (3.49) $ (1.19) $ (8.17) $ (2.15)
=========== =========== =========== ===========
Weighted average number of shares
outstanding............................... 43,300,889 33,056,966 39,373,704 32,694,576
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 4
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
RESTATED
SEE NOTE 2
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARE INFORMATION)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 569,203 $ 756,923
Restricted investments.................................... 8,339 6,853
Accounts receivable, less allowance for doubtful accounts
of $18,391 in 1998 and $4,251 in 1997.................. 132,818 58,579
Prepaid expenses and other current assets................. 19,877 6,122
---------- ----------
Total current assets.............................. 730,237 828,477
Telecommunications equipment.............................. 1,246,879 545,380
Less accumulated depreciation............................. (140,207) (81,534)
---------- ----------
Telecommunications equipment, net......................... 1,106,672 463,846
Intangible assets, net.................................... 1,059,589 138,028
Investment in Shared Technologies Fairchild Inc........... -- 403,571
Other assets.............................................. 53,892 41,048
---------- ----------
Total assets...................................... $2,950,390 $1,874,970
========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 86,668 $ 53,630
Other accrued expenses.................................... 105,281 20,130
Current portion of long-term debt and capital lease
obligations............................................ 9,355 7,471
---------- ----------
Total current liabilities......................... 201,304 81,231
Long-term debt and capital lease obligations................ 2,252,473 1,244,872
Series B redeemable exchangeable preferred stock and accrued
dividends, $1.00 par value; 600,000 shares authorized in
1997; 357,371 and 334,420 shares issued and outstanding in
1998 and 1997, respectively............................... 346,654 323,146
Series D junior convertible preferred stock and accrued
dividends, $1.00 par value; 69,000 shares authorized,
issued and outstanding in 1998 and 1997................... 170,135 169,722
Series E junior convertible preferred stock, $1.00 par
value; 87,500 shares authorized; 80,000 shares issued and
outstanding in 1998 and 1997.............................. 197,003 196,008
Stockholders' equity (deficit):
Preferred stock, $1.00 par value; 460,000 and 1,211,000
shares authorized in 1997 and 1998, respectively, no
shares issued.......................................... -- --
Series C preferred stock, $1.00 par value; 40,000 shares
authorized, no shares issued........................... -- --
Common stock, $.01 par value; 150,000,000 shares
authorized; 44,392,120 and 34,890,600 shares issued and
outstanding in 1998 and 1997, respectively............. 222 175
Additional paid-in capital................................ 487,785 244,114
Accumulated deficit....................................... (697,704) (376,006)
Deferred compensation..................................... (7,482) (8,292)
---------- ----------
Total stockholders' deficit....................... (217,179) (140,009)
---------- ----------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit).................. $2,950,390 $1,874,970
========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 5
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
RESTATED
SEE NOTE 2
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $(284,227) $(57,053)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 93,003 18,943
Amortization of deferred compensation.................. 810 722
Non cash items included in business restructuring,
integration and other charges......................... 11,883 --
Accretion of interest on notes payable and capital
leases................................................ 40,902 11,833
Imputed interest related to the business
acquisitions.......................................... 6,164 --
Charge off of purchased in-process R&D................. 63,000 --
Provision for doubtful accounts........................ 6,884 2,947
Changes in operating assets and liabilities:
Accounts receivable.................................... (27,908) (10,510)
Prepaid expenses and other current assets.............. (4,058) (1,057)
Other assets........................................... (1,293) (1,000)
Accounts payable....................................... (4,612) (2,095)
Accrued expenses....................................... 36,034 4,041
--------- --------
Net cash used in operating activities....................... (63,418) (33,229)
INVESTING ACTIVITIES
Purchases of restricted investments....................... (677) --
Maturities of restricted investments...................... -- 9,989
Purchase of businesses, net of cash acquired.............. (463,817) (165)
Maturities of short-term investments...................... -- 397
Purchases of telecommunications equipment................. (198,798) (107,022)
--------- --------
Net cash used in investing activities....................... (663,292) (96,801)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net of issuance
costs.................................................. -- 288,164
Proceeds from issuance of long-term debt, net of issuance
costs.................................................. 537,303 --
Exercise of stock warrants and options.................... 5,798 247
Principal payments on long-term debt and capital lease
obligations............................................ (4,111) (64)
--------- --------
Net cash provided by financing activities................... 538,990 288,347
Increase (decrease) in cash and cash equivalents............ (187,720) 158,317
Cash and cash equivalents at beginning of period............ 756,923 189,546
--------- --------
Cash and cash equivalents at end of period.................. $ 569,203 $347,863
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid............................................... $ 15,173 $ 11,181
Common stock issued as dividends on preferred stock......... 12,493 --
Common stock issued in purchase of business................. 225,925 --
Assets purchased under capital lease obligations............ 422,051 --
Preferred stock issued as dividends on preferred stock...... 22,954 12,938
Accretion of preferred stock................................ 1,466 210
</TABLE>
See accompanying notes.
5
<PAGE> 6
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) necessary to present fairly the information set
forth therein have been included. The accompanying condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and footnotes included in the Annual Report on Form 10-K as
amended of Intermedia Communications Inc. ("Intermedia" or the "Company") for
the year ended December 31, 1997.
Operating results for the three and six month periods ended June 30, 1998
are not necessarily an indication of the results that may be expected for the
year ending December 31, 1998.
STOCK SPLIT
All share and per share information presented herein and in the Company's
Condensed Consolidated Financial Statements has been retroactively restated to
reflect a two-for-one stock split of the Company's common stock, par value $.01
per share (the "Common Stock"), on June 15, 1998, paid in the form of a stock
dividend, to holders of record on June 1, 1998.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"), which supersedes Financial
Accounting Standards No. 14. SFAS 131 uses a management approach to report
financial and descriptive information about a Company's operating segments.
Operating segments are revenue-producing components of the enterprise for which
separate financial information is produced internally for the Company's
management. SFAS 131 is effective for fiscal years beginning after December 31,
1997, but is not required to be applied to interim financial statements in the
initial year of its application. Management is currently assessing the impact of
this standard.
NOTE 2. RESTATEMENT
The management of the Company and the staff ("Staff") of the Securities and
Exchange Commission (the "Commission") have had discussions with respect to the
methods used to value purchased in-process research and development ("R&D")
recorded and written off at the date of acquisition. As a result of these
discussions, the Company has modified the methods used to value purchased
in-process R&D in connection with the Company's 1998 acquisition of Shared
Technologies Fairchild Inc. ("Shared"). Initial calculations of value of the
purchased in-process R&D were based on, among other things, the after-tax cash
flows attributable to each project, and the selection of an appropriate rate of
return to reflect the risk associated with the stage of completion of each
project. Revised calculations of the value of the purchased in-process R&D are
based on adjusted after-tax cash flows that give explicit consideration to the
Staff's views on purchased in-process R&D as set forth in its September 15, 1998
letter to the American Institute of Certified Public Accountants and the Staff's
comments for the Company to consider (i) the stage of completion of the
purchased in-process R&D at the dates of acquisition, (ii) contributions of the
Company's own distinct and unique proprietary advantages, and (iii) the
estimated total project costs of the purchased in-process R&D in arriving at the
valuation amount. As a result of this modification, the Company has decreased
the amount of the purchase price of Shared allocated to purchased in-process R&D
from $85.0 million to $63.0 million for the three months ended March 31, 1998.
As a result, the Company increased goodwill by $22.0 million. In
6
<PAGE> 7
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
addition, as a further result of the discussions with the Staff, referred to
above, the Company reallocated $51.0 million of the purchase price of Shared,
originally reported as goodwill, to customer lists and work force. The shorter
lives associated with these identifiable intangible assets, coupled with the
effects on goodwill of the restatement for in-process R&D, resulted in an
increase in amortization expense of $0.9 million and $1.8 million for the three
and six month periods ended June 30, 1998, respectively. Finally, the Company
reduced the business restructuring charge by $2.5 million.
The restatement resulted in the following impact on the Company's
previously reported results of operations for the three and six month periods
ended June 30, 1998 (in thousands except per share data).
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Net loss:
As previously reported.................................... $(133,612) $(306,872)
Adjustment to purchased in-process R&D.................... -- 22,000
Adjustment related to additional amortization of
intangible assets...................................... (913) (1,825)
Adjustment to business restructuring, integration and
other charges.......................................... 2,470 2,470
--------- ---------
As restated............................................... $(132,055) $(284,227)
========= =========
Net loss per share -- basic and diluted
As previously reported.................................... $ (3.52) $ (8.75)
Adjustment to purchased in-process R&D.................... -- 0.56
Adjustment related to additional amortization of
intangible assets...................................... (.03) (0.05)
Adjustment to business restructuring, integration and
other charges.......................................... .06 .07
--------- ---------
As restated............................................... $ (3.49) $ (8.17)
========= =========
</TABLE>
NOTE 3. BUSINESS ACQUISITIONS
On March 10 1998, the Company completed its acquisition of Shared, a shared
tenant communications services provider. For convenience, the operating results
of Shared are included in the Company's consolidated financial statements
commencing on January 1, 1998. The effect on the Company's net loss from
including the operating results of Shared from January 1, 1998 was not material.
Imputed interest of $5.1 million was recorded based on the cash consideration
paid after the effective date of the acquisition in the first quarter of 1998
and the cost for Shared was reduced accordingly. Aggregate consideration for the
acquisition was approximately $589.8 million in cash, plus the retirement of
$175.6 million in Shared's long-term debt and acquisition related expenses of
$16.7 million. The acquisition was accounted for by the purchase method of
accounting with the purchase price allocated to the fair value of assets
acquired and liabilities assumed, principally goodwill.
The purchase price allocation was as follows (in thousands):
<TABLE>
<S> <C>
Purchase price.............................................. $782,122
Less:
Interest expense adjustment............................... 5,130
Estimated fair value of Shared net assets acquired less
assumed liabilities.................................... 51,404
--------
Excess of purchase price over fair value of net assets
acquired.................................................. $725,588
========
</TABLE>
7
<PAGE> 8
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The allocation of purchase price to goodwill and identifiable intangibles
and estimated lives are (in thousands):
<TABLE>
<CAPTION>
VALUE AMORTIZATION
ALLOCATED PERIOD IN YEARS
--------- ---------------
<S> <C> <C>
Developed technology........................................ $100,000 10
Tradename................................................... 10,000 2
In-process R&D.............................................. 63,000 --
Goodwill.................................................... 501,588 20
Customer lists.............................................. 48,000 10
Work force.................................................. 3,000 10
</TABLE>
The amount allocated to in-process R&D ($63.0 million) was recorded as a
one-time charge to operations in the accompanying consolidated statements of
operations because the technology was not fully developed and had no future
alternative use. The developed technology was comprised of an intelligent
infrastructure which integrated a host of telecommunications systems, including
infrastructure (network hardware and software), service provider networks, and
inter-building communications networks. The acquired in-process R&D represents
the development of technologies associated with creating infrastructure and the
associated systems so that the Company can offer a wide range of data
telecommunications services. These proprietary projects include the development
of a multi-service access platform ("MSAP"). The MSAP will enable the client
provisioning of multiple data services as well as the realization of Shared's
existing voice services. A brief description of the three categories of
in-process R&D projects is presented below:
- Access Technology Development. These R&D projects are related to the
development of access technology, including copper connectivity and
deployment, DSL technology development and development of T-1 interfaces.
These projects were valued at approximately $47 million. As of the
transaction date, the Company believed that the overall project was
approximately 80% complete. At the date of acquisition, the expected
costs to complete the project were approximately $0.8 million in 1998 and
$1.0 million in 1999.
- R&D Related to Networking and Networking Management. These R&D projects
were related to the development of systems related to networking
management and were valued at approximately $15 million. As of the
transaction date, the Company believed that the overall project was
approximately 70% complete. At the date of acquisition, the expected
costs to complete the project were approximately $0.3 million in 1998 and
$0.3 million in 1999.
- Advanced Networking. These R&D projects are related to the development
of advanced networking functions, and were valued at approximately $1
million. As of the transaction date, the Company believed that the
overall project was approximately 25% complete. At the date of
acquisition, the expected costs to complete the project were
approximately $0.1 million in 1998 and $0.1 million in 1999.
The distinction between developed technology and acquired in-process R&D is
basically the difference between legacy voice technologies and the emerging data
technologies that are required by Intermedia's high-end corporate users; these
are very different technologies from a telecommunications perspective. The
completion of the in-process R&D will enable Shared to provide new data services
(asynchronous transfer mode, frame relay, Internet, and others) through Shared's
existing architecture. Prior to the acquisition, Shared's services portfolio did
not include data products. Historically, Shared could provide its customer base
with local and long distance voice services and customer premise equipment
products. However, Shared lost data revenue opportunities to its competitors.
8
<PAGE> 9
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
While material progress has been made on these projects, significant risk
still is associated with their completion. If these projects are unsuccessful,
their expected contribution to revenues and profits will not materialize.
The amortization period for the customer lists was determined based on
historical customer data, including customer retention and average sales per
customer. The basis for the life assigned to assembled workforce was annual
turnover rates.
On March 31, 1998, the Company acquired the Long Distance Savers group of
companies (collectively, "LDS"), a regional interexchange carrier. The operating
results of LDS for the one day of ownership during the first quarter of 1998 are
considered immaterial. The operating results of LDS are included in the
Company's consolidated financial statements commencing on April 1, 1998.
Aggregate consideration for the acquisition was approximately $15.7 million in
cash, plus 5,359,748 shares of the Company's Common Stock, valued at
approximately $137.2 million, the retirement of $15.0 million in LDS's long-term
debt, and acquisition related expenses of $2.2 million. The acquisition was
accounted for by the purchase method of accounting, with the purchase price to
be allocated to the fair value of assets acquired and liabilities assumed,
principally goodwill ($143.0 million). This goodwill will be amortized over its
estimated useful life of 20 years. The allocation of the purchase price is
tentative pending management's completion of the valuation of the purchased
assets and liabilities. However, management does not expect the final allocation
of the purchase price to differ significantly from the preliminary allocations.
On April 30, 1998, the Company completed the acquisition of privately held
National Telecommunications of Florida, Inc. and NTC, Inc. (collectively,
"National"), an emerging switch-based competitive local exchange carrier and
established interexchange carrier. The operating results of National are
included in the Company's consolidated financial statements commencing on April
1, 1998. Aggregate consideration for the acquisition was approximately $59.4
million in cash, plus 2,909,796 shares of the Company's Common Stock, valued at
approximately $88.7 million, the retirement of $2.8 million in National's
long-term debt, and $2.2 million in acquisition related costs. The acquisition
was accounted for by the purchase method of accounting, with the purchase price
allocated to the fair value of assets acquired and liabilities assumed,
principally goodwill. This goodwill will be amortized over its estimated useful
life of 20 years. The allocation of the purchase price is tentative pending
management's completion of the valuation of the purchased assets and
liabilities. However, management does not expect the final allocation of the
purchase price to differ significantly from the preliminary allocations.
The 20 year amortization period assigned to the goodwill arising from the
Company's acquisitions of Shared, LDS and National is based on the Company's
analysis of their businesses. The Company considered the general stability of
these companies (i.e. the length of time that these three entities have already
successfully conducted business operations) particularly during periods of
increasing competition and technological developments. These companies have been
in operation approximately 13, 8 and 16 years, respectively. The Company also
considered the nature of their principal products and the anticipated effects of
changes in future business demand for their services, due to, among other
things, technological change and competition. The products and services offered
by these entities are mature and have a long life expectancy. The Company
believes the useful life of the associated goodwill will not be adversely
affected by future competition and technological developments and that a life of
20 years is appropriate. On the other hand, DIGEX, Incorporated ("DIGEX"), which
was acquired by the Company in 1997, operates in an emerging Internet based
marketplace and its predominant product offerings have been developed
principally in the last 3-4 years and are subject to more rapid change.
Consequently, a 10 year life was assigned to the goodwill arising from the
acquisition of DIGEX.
9
<PAGE> 10
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma results of operations present the
consolidated results of operations as if the acquisitions of DIGEX, Shared, LDS,
and National had occurred at the beginning of the respective periods. These
proforma results do not purport to be indicative of the results that actually
would have occurred if the acquisition had been made as of that date or of
results which may occur in the future.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------ -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Revenue..................................................... $ 374,949 $297,150
Net loss.................................................... (275,235) (67,442)
Net loss attributable to common stockholders................ (312,706) (82,964)
Basic and diluted net loss per common share................. (7.12) (2.03)
</TABLE>
NOTE 4. BUSINESS RESTRUCTURING AND INTEGRATION PROGRAM
During the second quarter of 1998, management committed to and commenced
implementation of the restructuring program (the "Program") which was designed
to streamline and refocus the Company's operations and facilitate the
transformation of the Company's five separate operating companies into one
Integrated Communications Provider ("ICP"). The significant activities included
in the Program include (i) consolidation, rationalization and integration of
network facilities, collocations, network management and network facility
procurement; (ii) consolidation and integration of the sales forces of the
Company and its recent acquisitions, including the integration of the Company's
products and services and the elimination of redundant headcount and related
costs; (iii) centralization of accounting and financial functions, including the
elimination of redundant headcount and related costs; (iv) development and
integration of information systems including the integration of multiple billing
systems and the introduction and deployment of automated sales force and
workflow management tools; (v) consolidation of office space and the elimination
of unnecessary legal entities; and (vi) exiting non-strategic businesses
including the elimination of headcount and related costs. The anticipated
completion date of the Program is December 31, 1999. The ultimate effect of the
Program is currently estimated by management to result in approximately $15.0
million of savings in operating costs per quarter. These savings will commence
as various Program activities are completed.
The following table sets forth the significant components and activity in
the restructuring program reserve for the six months ended June 30, 1998 (in
millions):
<TABLE>
<CAPTION>
OTHER
EMPLOYEE BUSINESS
TERMINATION CONTRACT ASSET INTEGRATION
ACTIVITY BENEFITS(VII) TERMINATIONS IMPAIRMENTS COSTS TOTAL
- -------- ------------- ------------ ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
Network integration(i).............. $ 0.9 $ 0.9
Sales force consolidation and
branding(ii)...................... $0.4 0.4
Consolidation of financial
functions(iii).................... 0.9 0.9
Information systems
integration(iv)................... 0.7 0.7
Campus consolidation(v)............. 2.3 2.3
Exiting non-core businesses(vi)..... 0.6 11.5 $13.4 1.6 27.1
---- ----- ----- ---- -----
Total provisions
recorded................ 2.6 14.7 13.4 1.6 32.3
Payments and other adjustments...... 0.3 -- 9.2 -- 9.5
---- ----- ----- ---- -----
Balance in accrual at June 30,
1998.............................. $2.3 $14.7 $ 4.2 $1.6 $22.8
==== ===== ===== ==== =====
</TABLE>
- ---------------
(i) This activity consists primarily of the consolidation, rationalization and
integration of network facilities, collocations, network management and
network facility procurement. Contract terminations represent the estimated
costs of terminating two contracts with MCI Communications Corporation.
10
<PAGE> 11
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ii) This activity consists primarily of the consolidation and integration of
the sales forces of the Company and its recent acquisitions, including the
integration of the Company's products and services and the elimination of
redundant headcount and related costs.
(iii)This activity consists of the centralization of accounting and financial
functions, including the reduction of redundant headcount and related
costs.
(iv) This activity consists of the development and integration of information
systems, including the integration of multiple billing systems and the
introduction and deployment of automated sales force and workflow
management tools. The only costs included in this category in the table
above relate to the termination of certain employees as described in (vii)
below.
(v) This activity relates to the consolidation of office space. Contract
termination costs represent the estimated costs of lease terminations for
property exited as part of the Program.
(vi) This activity consists of the exiting of non-strategic businesses including
the elimination of redundant headcount and related costs. Contract
termination costs include the estimated cost to cancel a switched services
contract with WorldCom, Inc. ("WorldCom") ($10.1 million) and lease
termination payments. Asset impairments relate to $9.2 million of accounts
receivable balances from four customers that were reserved as a result of
the Company's exit of the wholesale long-distance business. A majority of
the accounts receivable associated with the wholesale long distance
business arose during the first five months of 1998. As of March 31, 1998,
the Company believed that those amounts were collectible. Following the
Company's May 1998 announcement that it intended to exit the wholesale long
distance business, one of the customers in that business brought a lawsuit
against the Company for breach of contract. At that time, the Company
reassessed the collectibility of all accounts receivable remaining from
customers in the exited business in light of the stated refusal of the
customers to pay and the pending law suit, and reserved 100% of those
amounts. The Company began to pursue its legal remedies, commencing with a
countersuit, to collect a portion of the balances. No facts and
circumstances have changed which would lead management to believe that a
portion of the balances will ultimately be collectible; rather, the
indications are that the outcome originally estimated will be experienced.
If and when a final determination is made to forgo any further collection
activities or pursuit of its legal remedies, the accounts will be written
off. However, no such determination has been made to date. In addition,
this category also includes $2.8 million related to equipment write-downs.
The impaired assets consist of terminal servers with an estimated fair
value of $0.4 million as of June 30, 1998. The fair value estimate was
based on the Company's review of the historical operations and cash flows
of the related Internet business that such assets support. The impairment
loss of $2.8 million was recognized in connection with the Company's
decision to outsource these services and to dispose of these assets. The
remaining life of the assets of six months correlates to the time required
to migrate the business to the third party provider. The revenue generated
from operations that the Company has exited amounted to $4.7 million for
the quarter ended June 30, 1998.
(vii)The total number of employees affected by the restructuring program was
280. The terminated employees were notified that their termination was
involuntary and of their associated benefit arrangements, prior to the date
of the financial statements.
Payments and other adjustments were comprised of the following (in
millions):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ------
<S> <C>
Cash payments related to severance.......................... 0.3
Allowance for doubtful accounts receivable related to exit
of wholesale long-distance business....................... 9.2
-----
$ 9.5
=====
</TABLE>
11
<PAGE> 12
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As provided for in the Program, the Company also expensed other business
restructuring and integration costs that were incurred in the second quarter.
These costs represent incremental, redundant, or convergence costs that resulted
directly from implementation of the Program, but are required to be expensed as
incurred.
The following table summarizes total Program costs and sets forth the
components of the other business restructuring and integration costs that were
expensed as incurred during the second quarter of 1998 (in millions):
<TABLE>
<CAPTION>
THREE AND SIX
MONTHS ENDED
JUNE 30, 1998
--------------
<S> <C>
Business restructuring charges
Employee termination benefits(A).......................... $ 2.6
Contract terminations(A).................................. 14.7
Other charges
Asset impairments(A)...................................... 13.4
Legal costs(A)............................................ 1.6
Integration costs
Network integration(B).................................... 12.4
Facilities Integration(C)................................. 0.1
Department and employee realignment(D).................... 0.7
Functional reengineering(E)............................... 0.7
Year 2000(F).............................................. 0.1
Other(G).................................................. 3.8
-----
$50.1
=====
</TABLE>
- ---------------
(A) See prior table for components of cost.
(B) Consists primarily of redundant network expense, with some employee salary
costs of severed employees through their severance date.
(C) Consists of rent expense for redundant facilities.
(D) Consists of branding, training and relocation expenses.
(E) Consists of consultant costs and some employee salary costs (as explained
above).
(F) Consists of consultant costs.
(G) Consists of losses on divested businesses, employee salary costs (as
explained above), legal, accounting and consulting costs.
NOTE 5. LONG-TERM DEBT
In January 1998, the over-allotment option with respect to the December
1997 issuance of the Company's 8.5% Senior Notes due 2008 (the "8.5% Senior
Notes") was exercised, and the Company sold an additional $50 million principal
amount of 8.5% Senior Notes. Net proceeds to the Company amounted to
approximately $48.4 million.
On May 27, 1998, the Company sold $450 million principal amount of 8.6%
Senior Notes due 2008 (the "8.6% Senior Notes") in a private placement
transaction. Subsequent thereto, the over-allotment option with respect to the
8.6% Senior Notes was exercised and the Company sold an additional $50 million
principal amount. Net proceeds to the Company, including the over allotment,
amounted to approximately $488.9 million. Cash interest on the 8.6% Senior Notes
is payable semi-annually in arrears on June 1 and December 1 of each year,
commencing December 1, 1998. The 8.6% Senior Notes are redeemable at the option
of the Company at any time prior to June 1, 2003, in whole or in part, at the
Make-Whole Price (the greater of the sum of the principal amount plus the
present value of the principal, premium, and interest with respect to such
12
<PAGE> 13
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
notes as of June 1, 2003, and the redemption price of such notes on June 1,
2003), plus accrued and unpaid interest and Liquidated Damages (as defined in
the indenture setting forth the terms of such notes), if any, thereon to the
redemption date. On or after June 1, 2003, the 8.6% Senior Notes are subject to
redemption by the Company, at rates commencing at 104.3%, declining to 100% on
June 1, 2006. In addition, at the option of the Company, up to 25% of the
aggregate principal amount of the 8.6% Senior Notes originally issued may be
redeemed at any time prior to June 1, 2001 at a redemption price of 108.6% of
the principal amount thereof plus accrued and unpaid interest and Liquidation
Damages, if any, thereon to the date of redemption, with the net proceeds of one
or more Qualified Equity Offerings (as defined in the indenture setting forth
the terms of such notes); provided, however that at least 75% in aggregate
principal remains outstanding following any such redemption and, provided
further, that such redemption occurs within 90 days of the date of the closing
of such offering.
NOTE 6. CAPITAL LEASE OBLIGATIONS
As disclosed in the Company's Annual Report on Form 10-K as amended for the
year ended December 31, 1997, the Company is party to various capital lease
agreements for fiber optic cable, underground conduit equipment and utility
poles which extend through the year 2015.
In March 1998, the Company and Williams Communications, Inc. ("Williams")
executed a Capacity Purchase Agreement which provides the Company with the right
to purchase transmission capacity on a non-cancelable indefeasible right of use
basis on the Williams fiber network for the next 20 years. The agreement covers
approximately 14,000 route miles of network facilities. The capitalized asset,
consisting of the Company's rights to use network facilities, including but not
limited to, fiber, optronics/electronics, digital encoders/decoders, telephone
lines and microwave facilities, in the amount of $418.0 million, is being
depreciated over the 20-year estimated useful life of the primary underlying
network asset, the fiber.
Future minimum payments (in thousands) under the Williams capital lease at
June 30, 1998, are as follows:
<TABLE>
<S> <C>
Six Months ended December 31, 1998.......................... $ 11,765
Twelve Months ended:
1999........................................................ 32,354
2000........................................................ 39,707
2001........................................................ 45,590
2002........................................................ 51,472
2003........................................................ 52,943
Thereafter.................................................. 754,434
---------
988,265
Less amount representing interest........................... (567,581)
---------
Present value of future minimum lease payments.............. $ 420,684
=========
</TABLE>
Certain executory costs, principally maintenance, associated with the
Williams agreement are being expensed as incurred.
NOTE 7. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"). SFAS 130 requires that total comprehensive income be disclosed with equal
prominence as net income. Comprehensive income is defined as changes in
stockholders' equity exclusive of transactions with owners such as capital
contributions and dividends. Adoption of SFAS 130 had no impact on the Company,
as comprehensive income for the Company, as defined by SFAS 130, equals net
income for the quarter ended June 30, 1998.
13
<PAGE> 14
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss
per common share (in thousands, except shares and per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net loss.......................... $ (132,055) $ (29,649) $ (284,227) $ (57,053)
Preferred stock dividends and
accretions..................... (18,876) (9,848) (37,471) (13,223)
----------- ----------- ----------- -----------
Numerator for basic loss per
share -- loss attributable to
common stockholders............ (150,931) (39,497) (321,698) (70,276)
Effect of dilutive securities..... -- -- --
----------- ----------- ----------- -----------
Numerator for diluted loss per
share -- income attributable to
common stockholders after
assumed conversions............ (150,931) (39,497) (321,698) $ (70,276)
Denominator:
Denominator for basic loss per
share -- weighted-average
shares......................... 43,300,889 33,056,966 39,373,704 32,694,576
Effect of dilutive securities..... -- -- -- --
----------- ----------- ----------- -----------
Denominator for diluted loss per
share -- adjusted
weighted-average shares........ 43,300,889 33,056,966 39,373,704 32,694,576
=========== =========== =========== ===========
Basic loss per common share......... $ (3.49) $ (1.19) $ (8.17) $ (2.15)
=========== =========== =========== ===========
Diluted loss per common share....... $ (3.49) $ (1.19) $ (8.17) $ (2.15)
=========== =========== =========== ===========
</TABLE>
Unexercised options to purchase 6,327,258 and 5,135,470 shares of Common
Stock for the three and six months ended June 30, 1998 and 1997, respectively,
and outstanding convertible preferred stock, convertible into 15,483,745 shares
of Common Stock for the three and six months ended June 30, 1998, were not
included in the computations of diluted loss per share because assumed
exercise/conversion would be antidilutive.
NOTE 9. 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.
14
<PAGE> 15
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These cases are in the early stages, and no assurance can be given as to
their ultimate outcome. Intermedia, after consultation with its counsel,
believes that there are meritorious factual and legal defenses to the claims in
the Complaints. Intermedia intends to defend vigorously the claims in the
Complaints.
The Company is not a party to any other pending legal proceedings except
for various claims and lawsuits arising in the normal course of business. The
Company does not believe that these normal course of business claims or lawsuits
will have a material effect on the Company's financial condition, results of
operations or cash flows.
The Company maintains interconnection agreements with incumbent local
exchange carriers ("ILECs") in Florida, Georgia, and North Carolina. These
contracts govern the reciprocal amounts to be billed by competitive carriers for
terminating local traffic of internet service providers ("ISPs") in each state.
During 1997, the Company recognized revenue from these ILECS of
approximately $10.1 million for these services. During the first half of 1998,
the Company recognized an additional $13.4 million in revenue from these
services. No payments were received as the ILECs are disputing the Company's
right to bill for such services.
The Company accounts for reciprocal compensation with the ILECs, including
the activity associated with the disputed ISP traffic, as local traffic pursuant
to the terms of its interconnection agreements. Accordingly, revenue is
recognized in the period that the traffic is terminated. The circumstances
surrounding the disputes, including the status of cases that have arisen by
reason of similar disputes referred to below, is considered by management
periodically in determining whether reserves against unpaid balances are
warranted. As of June 30, 1998, provisions have not been considered necessary by
management.
Management believes the issue related to mutual compensation for Internet
traffic to be an industry wide matter that will ultimately be resolved on a
state-by-state basis. To date, twenty of twenty-one state commissions that have
ruled on the issue found that ILECs must pay compensation to competitive
carriers for local calls to ISPs located on competitive carriers' networks. A
contrary ruling by an administrative law judge in Oklahoma is currently being
appealed. A number of other state commissions currently have proceedings pending
to consider this matter. Management is pursuing this matter vigorously and
believes the ILECs will ultimately pay all amounts in full.
NOTE 10. SUBSEQUENT EVENTS
During July and August 1998, the Company exchanged (a) approximately 2.029
million shares of its common stock for approximately 1.487 million Depository
Shares (each representing a 1/100th interest in a share of 7% Series D Junior
Convertible Preferred Stock) and (b) approximately 665,000 shares of its Common
Stock for approximately 710,000 Depository Shares (each representing a 1/100th
interest in a share of 7% Series E Junior Convertible Preferred Stock), pursuant
to exchange agreements with certain holders of such Depository Shares.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto included herewith, and with
the Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations and audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K as amended for the
year ended December 31, 1997 filed with the Commission.
OVERVIEW
Intermedia has experienced continuous revenue growth since its inception in
1986. Since 1992, the Company has experienced an accelerated rate of revenue
growth. Building from its original base in Florida, Intermedia now provides
integrated telecommunications services nationally with a focus on customers who
have a substantial presence in the eastern United States. Through a combination
of internally generated growth and targeted acquisitions, the Company has
expanded its service territory and dramatically increased its customer base.
Intermedia's customers include a broad range of business and government end
users and, to a lesser extent, ISPs and other carriers. The Company delivers
local network services, including local exchange service, primarily through
Company owned local and long distance switches and over a Company owned or
leased digital transport network. Often, leasing facilities enables the Company
to more rapidly initiate service to customers, reduces the risk of network
construction or acquisition and potentially improves cash flow due to the
reduction or deferment of capital expenditures. The Company also utilizes the
resale of ILEC local exchange services as a means of rapidly entering new
markets and establishing customer relationships. These resale customers may
later be migrated onto the Company's switches and network. The Company offers
enhanced data services to its customers on an extensive inter-city network that
connects its customers, either through its own network or through other
carriers, to locations throughout the country and internationally. Through its
553 network to network interfaces ("NNIs") and 153 data switches, Intermedia has
established one of the most densely deployed frame relay switching network in
the nation. The Company's nationwide interexchange network, which it is
upgrading to provide asynchronous transfer mode ("ATM") capability, carries both
its data network traffic and its voice network traffic.
At its inception, Intermedia provided special access and private line
services to interexchange carriers ("IXCs"). In 1988, Intermedia was the first
telecommunications provider in Florida to begin providing special access and
private line services to business customers. In 1991, Intermedia began offering
specialized integration services such as construction of campus local area
networks ("LANs"), and in 1992, Intermedia introduced its first enhanced data
services based on frame relay technology, providing flexible capacity and highly
reliable end-to-end data service. The Company began offering interexchange long
distance service in December 1994, Internet services in 1995, local exchange
services in 1996 and integrated voice/data services via Single-T(SM) in 1997.
The pace with which the Company has introduced new service offerings has enabled
it to achieve substantial growth, expand its base of customers and diversify its
sources of revenue. The Company believes that business and government customers
will continue to account for a substantial share of its revenue, because of
Intermedia's ability to offer such customers integrated, cost-effective
telecommunications solutions. The Company believes that during the first few
years of local exchange competition, some IXCs may enter the local exchange
market by becoming resellers of the Company's local services. If the IXCs pursue
a resale strategy, the amount of revenue the Company realizes from carriers may
increase during this period, although the Company does not depend on these IXC
resale revenues to satisfy its business plan.
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. The
Company anticipates that as its customer base grows, incremental revenues will
be greater than incremental operating expenses.
16
<PAGE> 17
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 before certain charges of the Company in
the near term. From 1992 through 1995, the Company achieved positive EBITDA
before certain charges and increased its revenue base substantially. EBITDA
before certain charges consists of earnings (loss) before interest expense,
interest and other income, income taxes, depreciation, amortization, charge for
in-process R&D and business integration, restructuring and other costs
associated with the Program. EBITDA before certain charges does not represent
funds available for management's discretionary use and is not intended to
represent cash flow from operations. EBITDA before certain charges should not be
considered as an alternative to net loss as an indicator of the Company's
operating performance or to cash flows as a measure of liquidity. In addition,
EBITDA before certain charges is not a term defined by generally accepted
accounting principals and as a result the EBITDA before certain charges
presented herein may not be comparable to similarly titled measures used by
other companies. The Company believes that EBITDA before certain charges is
often reported and widely used by analysts, investors and other interested
parties in the telecommunications industry. Accordingly, this information has
been disclosed herein to permit a more complete comparative analysis of the
Company's operating performance relative to other companies in the industry. As
a result of significant investments in the resources necessary to launch local
exchange services and expand enhanced data services, the Company's EBITDA before
certain charges was negative for 1996 and 1997. The Company expects EBITDA
before certain charges to be positive for the full year of 1998.
In January 1998, the over-allotment option with respect to the Company's
8.5% Senior Notes (December 23, 1997 issuance) was exercised and the Company
sold an additional $50 million principal amount of 8.5% Senior Notes. Net
proceeds to the Company amounted to approximately $48.4 million.
On January 29, 1998, the Company announced a definitive multi-year
agreement to become US West Communications' ("US West") preferred interLATA data
services provider. Under the terms of this preferred provider agreement, the
Company will grant US West a license to utilize and market the Company's
portfolio of enhanced data services.
On March 10, 1998, the Company completed its acquisition of Shared, a
shared tenant communications services provider. Aggregate cash consideration for
the acquisition was approximately $782.1 million, including $62.3 million of
transaction expenses and fees relating to certain agreements, with the final
payment made March 10, 1998, and funded with the Company's existing cash
reserves in March 1998. The operating results of Shared are included in the
Company's consolidated financial statements commencing on January 1, 1998.
On March 31, 1998, the Company acquired LDS, a regional interexchange
carrier. Aggregate consideration for the acquisition was approximately $15.7
million in cash, plus 5,359,748 shares of the Company's Common Stock, valued at
approximately $137.2 million, the retirement of $15 million in LDS's long-term
debt, and acquisition related expenses of $2.2 million. The cash portion of the
acquisition was funded with the Company's existing cash reserves in March 1998.
The operating results of LDS for the one day of ownership during the first
quarter of 1998 are considered immaterial. The operating results of LDS are
included in the Company's consolidated financial statements commencing on April
1, 1998.
In March 1998, the Company and Williams executed a Capacity Purchase
Agreement which provides the Company with the right to purchase transmission
capacity on a non-cancelable indefeasible right of use basis on the Williams
fiber network for the next 20 years. The agreement covers approximately 14,000
route miles.
On April 29, 1998, the Company announced that it had committed resources to
the Program, a plan and implement the integration of acquired businesses to
maximize the synergies that will be realized and to reduce future costs. During
the second quarter of 1998, the Company developed and began implementation of
the restructuring Program which was designed to streamline and refocus the
Company's operations and transform Intermedia's five separate operating
companies into a single ICP. The significant activities included in the Program
include (i) consolidation, rationalization and integration of network
facilities, collocations, network
17
<PAGE> 18
management and network facility procurement; (ii) consolidation and integration
of the sales forces of the Company and its recent acquisitions, including the
integration of the Company's products and services and the elimination of
redundant headcount and related costs; (iii) centralization of accounting and
financial functions, including the elimination of redundant headcount and
related costs; (iv) development and integration of information systems including
the integration of multiple billing systems and the introduction and deployment
of automated sales force and workflow management tools; (v) consolidation of
office space and the elimination of unnecessary legal entities; and (vi) exiting
non-strategic businesses including the elimination of headcount and related
costs. The anticipated completion date of the Program is December 31, 1999. The
ultimate effect of the Program is currently estimated by management to result in
approximately $15.0 million of savings in operating costs per quarter. These
savings will commence as various Program activities are completed.
The Company recorded a restructuring charge during the second quarter of
approximately $32.3 million, and expensed other business restructuring and
integration costs associated with the Program that were incurred in the second
quarter of approximately $17.8 million. Management anticipates that all
activities included in the Program will be completed by the end of 1999, and the
Company anticipates incurring additional related business integration and
restructuring costs through the end of that period, which will continue to be
excluded from the Company's calculation of EBITDA before certain charges.
On April 30, 1998, the Company completed the acquisition of privately held
National, an emerging switch-based competitive local exchange carrier and
established interexchange carrier. Aggregate consideration for the acquisition
was approximately $59.4 million in cash, plus 2,909,796 shares of the Company's
Common Stock, valued at approximately $88.7 million, the retirement of $2.8
million in National's long-term debt, and $2.2 million in acquisition related
costs. The cash portion of the acquisition was funded with the Company's
existing cash reserves in April 1998. The operating results of National are
included in the Company's consolidated financial statements commencing on April
1, 1998.
On May 19, 1998, the Company entered into a two-part agreement with
Ameritech Communications International ("Ameritech") for the mutual provisioning
of national data services. First, the Company and Ameritech have established a
teaming arrangement which will enable the Company to offer jointly-provided
services to customers on a nationwide basis. Second, the Company will be
Ameritech's vendor of choice for certain out of region interLATA frame relay and
ATM services.
On May 27, 1998, the Company sold $450.0 million principal amount of its
8.6% Senior Notes in a private placement transaction. Subsequently, the
over-allotment option with respect to the 8.6% Senior Notes was exercised and
the Company sold an additional $50 million principal amount. Net proceeds to the
Company, including the over allotment, amounted to approximately $488.9 million.
Cash interest on the 8.6% Senior Notes is payable semi-annually in arrears on
June 1 and December 1 of each year, commencing December 1, 1998. The 8.6% Senior
Notes are redeemable at the option of the Company at any time prior to June 1,
2003, in whole or in part, at the Make-Whole Price (the greater of the sum of
the principal amount plus the present value of the principal, premium, and
interest with respect to the 8.6% Senior Notes as of June 1, 2003, and the
redemption price of the 8.6% Senior Notes on June 1, 2003), plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the redemption date.
On or after June 1, 2003, the 8.6% Senior Notes are subject to redemption by the
Company, at rates commencing at 104.3%, declining to 100% on June 1, 2006. In
addition, at the option of the Company, up to 25% of the aggregate principal
amount of the 8.6% Senior Notes originally issued may be redeemed at any time
prior to June 1, 2001 at a redemption price of 108.6% of the principal amount
thereof plus accrued and unpaid interest and Liquidation Damages, if any,
thereon to the date of redemption, with the net proceeds of one or more
Qualified Equity Offerings; provided, however that at least 75% in aggregate
principal remains outstanding following any such redemption and, provided
further, that such redemption occurs within 90 days of the date of the closing
of such offering.
On August 4, 1998, the Company commenced a private placement of $200
million liquidation preference of Depository Shares (each representing a 1/100th
interest in a share of Series F Junior Convertible Preferred Stock, liquidation
preference $2,500 per share), pursuant to Rule 144A promulgated under the
Securities Act of 1933, as amended. The net proceeds from the offering of such
Depository Shares will be used to finance the
18
<PAGE> 19
continued expansion of the Company's telecommunications networks and for general
corporate purposes. However, there can be no assurance that the placement of
securities will be successful.
PLAN OF OPERATION
In 1998, the Company believes that its growth will be balanced among its
enhanced data, local exchange, and interexchange services. Based on the
Company's analysis of Federal Communications Commission data and its knowledge
of the industry, the Company estimates that the market for enhanced data, local
exchange, and interexchange services was approximately $34 billion in 1997 in
the Company's service territory. As a result of the Company's planned expansion
in 1998, including the consummation of the acquisitions of Shared, LDS and
National, the Company expects to be positioned to provide these services in
markets with a total opportunity of more than $90 billion by the end of 1998.
In order to develop its business more rapidly and efficiently utilize its
capital resources, the Company plans to use the existing fiber optic
infrastructure of other providers in addition to using its own existing
networks. The Company believes transport provided on fiber optic systems has
become commodity-like, and its capital expenditures are better focused on
intelligent switching and other more strategic network components required to
implement a Packet/Cell Switched Network. While the Company will use significant
amounts of capital to deploy enhanced data and voice switches on a demand driven
basis in selected markets, Intermedia believes its substantial existing network
capacity should enable it to add new customers and provide additional services
that will result in increased revenues with lower incremental costs and,
correspondingly, improve its EBITDA before certain charges. For example, selling
additional services, such as local exchange services, to existing or new
customers allows the Company to utilize unused portions of the capacity inherent
in its existing fiber optic networks. This operating leverage increases the
utilization of the network with limited additional capital expenditures. The
Company's strategy to offer a full complement of telecommunications services is
designed to enable the Company to take advantage of the operating leverage of
its networks.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain
information derived from the Unaudited Condensed Consolidated Statements of
Operations of the Company, expressed in percentages of revenue:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
--------------- ----------------
1998 1997 1998 1997
----- ----- ------ -----
<S> <C> <C> <C> <C>
Revenues:
Local network services........................ 20.1% 16.8% 22.0% 14.5%
Enhanced data services........................ 22.4 25.3 24.2 25.5
Interexchange services........................ 43.5 55.3 39.0 56.6
Integration services.......................... 14.0 2.6 14.8 3.4
----- ----- ------ -----
100.0 100.0 100.0 100.0
Expenses:
Network operations............................ 46.3 74.3 48.8 71.5
Facilities administration and maintenance..... 9.7 11.5 10.3 12.1
Cost of goods sold............................ 9.1 1.5 9.5 2.2
Selling, general and administrative........... 29.6 40.8 31.4 42.5
Depreciation and amortization................. 26.4 19.7 27.8 19.3
Charge off of purchased in-process R&D........ -- -- 19.3 --
Business restructuring and integration........ 26.3 -- 15.3 --
----- ----- ------ -----
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
--------------- ----------------
1998 1997 1998 1997
----- ----- ------ -----
<S> <C> <C> <C> <C>
Loss from operations............................ (47.4) (47.8) (62.3) (47.6)
Other income (expense):
Interest expense.............................. (25.2) (22.2) (29.7) (23.6)
Other income.................................. 3.2 10.9 5.1 10.6
----- ----- ------ -----
Net loss........................................ (69.4) (59.1) (86.9) (60.6)
Preferred stock dividends and accretions...... (9.9) (19.6) (11.5) (14.1)
===== ===== ====== =====
Net loss attributable to common stockholders.... (79.3)% (78.7)% (98.4)% (74.7)%
===== ===== ====== =====
</TABLE>
The following table sets forth other statistical data derived from the
Company's operating records:
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Local and Long Distance Services:(1)
Buildings connected(2).................................... 4,309 1,680
Voice switches in operation............................... 21 12
Long distance billable minutes(6)......................... 551,145,010 101,538,231
Access line equivalents................................... 280,144 30,733
Access line equivalents per local switch(3)............... 6,180 1,143
Enhanced data services:(1)
Data switches installed................................... 153 111
Frame relay cities(4)..................................... 4,320 2,720
Nodes in service(5)....................................... 27,123 15,096
NNI connections........................................... 553 321
Employees................................................... 3,597 1,143
</TABLE>
- ---------------
(1) Amounts reflected in the table are based upon information contained in the
Company's operating records.
(2) Includes both on-net direct connections with Intermedia-owned fiber optic
cable and on-net extended connections with leased circuits.
(3) Calculated by dividing the number of on-switch access line equivalents by
the number of switches providing local service. Excludes access lines
contributed by Shared.
(4) Represents the number of discrete postal cities to which enhanced data
services are provided by the Company.
(5) Amount represents an individual point of origination and termination of data
served by the Company's enhanced network.
(6) Amount represents billable minutes for the three months ended June 30, 1998.
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997:
REVENUE
Total revenue increased 279.5% to $190.2 million for the second quarter of
1998 compared to $50.1 million for the same period in 1997. This increase was
principally the result of the acquisitions of DIGEX, Shared, LDS, and National.
The Company has also continued its efforts to introduce new services and
increase the focus of the Company's sales force on offering a full suite of
telecommunications services to an expanding market. The Company expects revenue
growth to continue, with increased emphasis on sales of key services such as
enhanced data and local service and the integration of the recent acquisitions
and further development of cross-selling programs.
Local network services revenue increased 352.9% to $38.2 million for the
second quarter of 1998 compared to $8.4 million for the same period in 1997.
This increase was principally due to the acquisition of Shared during the first
quarter of 1998, the acquisition of National during the second quarter of 1998,
and the continued rollout of local exchange services into additional markets.
The number of access line equivalents has
20
<PAGE> 21
increased by 249,411 from July 1, 1997 through the end of the second quarter of
1998. The Company was certified as a competitive local exchange carrier ("CLEC")
in 36 states and the District of Columbia as of the end of the second quarter of
1998.
Enhanced data services revenue increased 236.8% to $42.7 million for the
second quarter of 1998 compared to $12.7 million for the same period in 1997.
This increase was principally due to the acquisition of DIGEX in the second half
of 1997, the acquisition of LDS during the first quarter of 1998, and the
expansion of the Company's enhanced data network by 42 switches, 232 NNI
connections, and 12,027 new frame relay nodes from July 1, 1997 through the end
of the second quarter of 1998. In addition, the number of frame relay cities
increased by 1,600 during the same time period.
Interexchange services revenue increased 198.7% to $82.7 million for the
second quarter of 1998 compared to $27.7 million for the same period in 1997.
This increase resulted principally from the acquisitions of Shared and LDS
during the first quarter of 1998, the acquisition of National during the second
quarter of 1998, strong growth in long distance switched revenue, and steady
growth in interLATA transport. Interexchange revenues were negatively impacted
during the second quarter of 1998 by the Company's decision to exit the low
margin wholesale international long distance segment. Long distance billable
minutes increased to 551.1 million for the second quarter of 1998 compared to
101.5 million for the same period in 1997. Interexchange revenues are expected
to be negatively impacted by an estimated $3 million to $5 million during the
third quarter of 1998 as this exit strategy is further implemented.
Integration services revenue increased 1,903.2% to $26.6 million for the
second quarter of 1998 compared to $1.3 million for the same period in 1997.
This increase was principally due to the acquisition of Shared during the first
quarter of 1998.
OPERATING EXPENSES
Total operating expenses increased 277.9% to $280 million for the second
quarter of 1998 compared to $74.1 million for the same period in 1997. The
increase resulted principally from the acquisition of DIGEX in July 1997, the
acquisitions of Shared and LDS during the first quarter of 1998, and the
acquisition of National during the second quarter of 1998. The Company has
recorded approximately $50.1 million for the execution of the business
restructuring and integration program, has increased expenditures for
significant expansion of the Company's owned and leased networks, and has
continued expansion in personnel to sustain and support the Company's growth.
Network operations expenses increased 136.2% to $88 million for the second
quarter of 1998 compared to $37.3 million for the same period in 1997. The
increase resulted principally from the acquisition of DIGEX in July 1997, the
acquisitions of Shared and LDS in the first quarter of 1998, and the acquisition
of National in the second quarter of 1998. The Company has incurred increased
expenses in leased network capacity associated with the growth of local network
service, enhanced data service, and interexchange service revenues. The Williams
agreement positively impacted network operations expenses during 1998 by
eliminating certain backbone network costs that were previously accounted for as
operating leases.
Facilities administration and maintenance expenses increased 220.1% to
$18.5 million for the second quarter of 1998 compared to $5.8 million for the
same period in 1997. The increase was principally due to the acquisition of
DIGEX in July 1997, the acquisitions of Shared and LDS in the first quarter of
1998, and the acquisition of National in the second quarter of 1998. The
increase also resulted from the expansion of the Company's owned and leased
network capacity, increases in maintenance expenses due to network expansion and
increased payroll expenses related to hiring additional engineering and
operations staff to support and service the expanding network, including the
increase in volume relating to the US West and Ameritech agreements.
Cost of goods sold increased 2,153.7% to $17.2 million for the second
quarter of 1998 compared to $0.8 million for the same period in 1997. This
increase was principally due to the acquisition of Shared during the first
quarter of 1998.
21
<PAGE> 22
Selling, general and administrative expenses increased 175.8% to $56.4
million for the second quarter of 1998 compared to $20.5 million for the same
period in 1997. The increase was principally due to the acquisition of DIGEX in
July 1997, the acquisitions of Shared and LDS in the first quarter of 1998, and
the acquisition of National in the second quarter of 1998. The acquisitions of
DIGEX, Shared, LDS, and National contributed to the increase by approximately
$10.1 million, $8.2 million, $4.8 million, and $2.8 million, respectively. The
Company has experienced continued personnel growth, represented by departmental
increases in sales of approximately $7.0 million, marketing of approximately
$1.0 million, management information services of approximately $1.6 million, and
customer service of approximately $2.6 million. Other increases of approximately
$10.9 million relate to one- time expenditures for employee recruitment,
relocation, training, and increased commissions relating to the rise in revenues
for these periods. These expenses were also negatively impacted by the increased
expenditures related to the implementation of manual processes and procedures to
augment some of the back-office functions, which are at or near capacity from an
automation perspective.
Depreciation and amortization expenses increased 408.3% to $50.2 million
for the second quarter of 1998 compared to $9.9 million for the same period in
1997. This increase was principally due to additions to telecommunications
equipment placed in service since July 1, 1997 relating to ongoing network
expansion, as well as the acquisitions of DIGEX, Shared, LDS, and National which
contributed, based on preliminary estimates, approximately $113.3 million,
$662.6 million, $142.8 million, and $147.7 million of intangibles, respectively.
Additional depreciation charges resulted from the long-term lease of capital
assets from Williams in March 1998. Depreciation and amortization expense is
expected to increase in future periods as the Company expands the network and
depreciates and amortizes intangibles associated with the businesses acquired.
Previously reported amortization expense has been restated as a result of the
Company's restatement of the charge for in-process R&D and restatement for the
reallocation of goodwill to identifiable intangible assets.
Business restructuring and integration expense of approximately $50.1
million was recorded by the Company during the second quarter of 1998. The
restructuring charge of $32.3 million is comprised of contract termination costs
of approximately $14.7 million, asset impairments of $13.4 million, employee
termination benefits of $2.6 million, and other business integration costs of
$1.6 million. In addition, the Company expensed approximately $17.8 million,
including businesses exited and integration and other restructuring costs, that
were incurred in the second quarter. Such costs were comprised primarily of
network integration and information systems integration costs. These costs
represent incremental, redundant or convergence costs that result directly from
implementation of the Program, but are required to be expensed as incurred. Such
costs were substantially in line with the amounts expected for the second
quarter by management. Additional incremental, redundant and convergence costs
within this category of Program cost will be expensed as they are incurred each
quarter over the Program implementation period. Management currently expects the
additional costs to amount to approximately $45.0 million over the remainder of
the Program. Future cash outlays are expected for all components of the
remaining $22.8 million accrual (refer to Note 4), with the exception of
approximately $4.2 million for asset impairment write-downs, which are expected
to occur during the fourth quarter of 1998. The Company expects future cash
outlays of approximately $2.0 million during the third quarter of 1998, $13.0
million during the fourth quarter of 1998, $1.9 million during 1999, and the
Company expects approximately $1.7 million to occur evenly throughout the
Program.
The Company's condensed consolidated financial statements have been
restated to reflect a reduction of this charge by $2.5 million as described
herein and in Note 2 of the Notes to Condensed Consolidated Financial
Statements.
INTEREST EXPENSE
Interest expense increased 330.5% to $47.9 million for the second quarter
of 1998 compared to $11.1 million for the same period in 1997. This increase
primarily resulted from interest expense on approximately $1.8 billion of senior
notes issued by the Company in 1997, January 1998, and May 1998, plus the
non-cash imputed interest charges of $1.0 million related to the acquisition of
National during the second quarter of
22
<PAGE> 23
1998. In addition, the Company recorded interest expense of $9.9 million related
to the capital lease with Williams. Also included in 1998 interest expense is
$18.5 million of debt discount amortization and $1.1 million of deferred loan
cost amortization, both of which are non-cash items. Interest expense
capitalized in connection with the Company's construction of telecommunications
equipment amounted to approximately $1.6 million and $0.8 million for the three
months ended June 30, 1998 and 1997, respectively.
OTHER INCOME
Other income increased 10.2% to $6 million for the second quarter of 1998
compared to $5.5 million for the same period in 1997. This increase was
primarily the result of interest earned on the cash available from the proceeds
of the issuance of securities in 1997, the exercise of the over-allotment option
with respect to the 8.5% Senior Notes in January 1998, and the issuance of the
8.6% Senior Notes in May 1998.
NET LOSS
Net loss increased 346.3% to $(132.1) million for the second quarter of
1998 compared to $29.6 million for the same period in 1997. The increase
resulted principally from the acquisition of DIGEX in July 1997, the acquisition
of Shared in the first quarter of 1998, and the acquisition of National in the
second quarter of 1998. In addition, the increased operating expenses resulting
from the expansion of the network, increased selling, general and administrative
costs, the business restructuring and integration expenses, and increased
interest costs contributed to the increase in the net loss.
PREFERRED STOCK DIVIDENDS AND ACCRETIONS
Preferred stock dividends and accretions increased 91.7% to $18.9 million
for the second quarter of 1998 compared to $9.8 million for the same period in
1997. The increase was due to the issuance of the three series of preferred
stock issued in March 1997, July 1997, and October 1997. Preferred stock
dividends were paid in the form of Common Stock and preferred stock. Management
does not expect to pay cash dividends in the foreseeable future.
EBITDA BEFORE CERTAIN CHARGES
EBITDA before certain charges increased 171.1% to $10.1 million for the
second quarter of 1998 compared to $(14.1) million for the same period in 1997.
The increase was principally from the acquisition of DIGEX in July 1997, the
acquisitions of Shared and LDS in the first quarter of 1998, and the acquisition
of National in the second quarter 1998. The Company has continued its efforts to
consolidate traffic through the Williams backbone network as well as through the
Company's existing networks in an efficient manner. In addition, the Company has
been successful in selling more of its local services "on switch" and increasing
its mix of higher margin products. The business restructuring and integration
program has yielded benefits by eliminating redundant costs associated with
rationalizing and integrating the recent acquisitions. In addition, the Company
has reduced network operation expenses, facilities administration and
maintenance expenses, and selling, general and administrative expenses as a
percentage of revenue in the second quarter of 1998 as compared to the same
period in 1997.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997:
REVENUE
Total revenue increased 247.6% to $327 million for the six months ended
June 30, 1998 compared to $94.1 million for the same period in 1997. The
increase was principally the result of the acquisition of DIGEX in July 1997,
the acquisitions of Shared and LDS in the first quarter of 1998, the acquisition
of National in the second quarter of 1998, the introduction of new services and
the increased focus of the Company's sales force on offering a full suite of
telecommunications services to an expanding market. The Company expects revenue
growth to continue for the remainder of 1998, with increased emphasis on sales
of key services such as enhanced data and local service and on the integration
of the recent acquisitions and further development of cross-selling programs.
23
<PAGE> 24
Local network services revenue increased 426.8% to $71.9 million for the
six months ended June 30, 1998 compared to $13.6 million for the same period in
1997. This increase was principally due to the acquisition of Shared during the
first quarter of 1998, the acquisition of National during the second quarter of
1998, and the increased number of local customers over the same period in 1997.
The number of access line equivalents increased by 249,411 from July 1, 1997
through the end of the second quarter of 1998. Additionally, the Company
successfully continued its rollout of local exchange services into additional
markets. The Company was certified as a CLEC in 36 states and the District of
Columbia as of the end of the second quarter of 1998.
Enhanced data services revenue increased 230.2% to $79.2 million for the
six months ended June 30, 1998 compared to $24.0 million for the same period in
1997. This increase resulted principally from the acquisition of DIGEX during
the second half of 1997, the acquisition of LDS during the first quarter of
1998, and the expansion of the Company's enhanced data network by 42 switches,
232 NNI connections, and 12,207 new frame relay nodes from July 1, 1997 through
the end of the second quarter of 1998. In addition, the number of frame relay
cities increased by 1,600 during the same time period.
Interexchange services revenue increased 139.5% to $127.5 million for the
six months ended June 30, 1998 compared to $53.2 million for the same period in
1997. This increase resulted principally from the acquisitions of Shared and LDS
in the first quarter of 1998, and the acquisition of National in the second
quarter of 1998. The Company has experienced strong growth in long distance
switched revenue and steady growth in interLATA transport. Interexchange
revenues were negatively impacted during the second quarter of 1998 by the
Company's decision to exit the low margin wholesale international long distance
segment. Long distance billable minutes increased to 735.4 million for the first
half of 1998 compared to 189.0 million for the same period in 1997.
Interexchange revenues are expected to be negatively impacted by an estimated $3
million to $5 million during the third quarter of 1998 as this exit strategy is
further implemented.
Integration services revenue increased 1,413.8% to $48.4 million for the
six months ended June 30, 1998 compared to $3.2 million for the same period in
1997. This increase resulted primarily from the acquisition of Shared during the
first quarter 1998 as well as the Company's continued focus on providing a total
service package to its customers.
OPERATING EXPENSES
Total operating expenses increased 282.2% to $530.9 million for the six
months ended June 30, 1998 compared to $138.9 million for the same period in
1997. The increase resulted principally from the acquisition of DIGEX in July
1997, the acquisitions of Shared and LDS in the first quarter of 1998, and the
acquisition of National in the second quarter of 1998. The Company has recorded
a one-time charge to earnings of $63 million during the first quarter of 1998
for purchased in-process R&D associated with the acquisition of Shared.
Additionally, the Company recorded expenses of approximately $50.1 million for
the execution of the business restructuring and integration program during the
second quarter 1998, increased expenditures for significant expansion of the
Company's owned and leased networks, and has continued expanding its personnel
to sustain and support the Company's growth.
Network operations expenses increased 137.2% to $159.6 million for the six
months ended June 30, 1998 compared to $67.3 million for the same period in
1998. The increase resulted principally from the acquisition of DIGEX in July
1997, the acquisitions of Shared and LDS in the first quarter of 1998, and the
acquisition of National in the second quarter of 1998. The Company has incurred
increased expenses in leased network capacity associated with the growth of
local network service, enhanced data service, and interexchange service
revenues. The Williams agreement positively impacted network operations expenses
during 1998 by eliminating certain backbone network costs that were previously
accounted for as operating leases.
Facilities administration and maintenance expenses increased 193.8% to
$33.6 million for the six months ended June 30, 1998 compared to $11.4 million
for the same period in 1997. The increase was principally the result of the
acquisition of DIGEX in July 1997, the acquisitions of Shared and LDS in the
first quarter of 1998, and the acquisition of National in the second quarter of
1998. The increase also resulted from the expansion of the Company's owned and
leased network capacity, increases in maintenance expense due to network
expansion, and increased payroll expenses related to hiring additional
engineering and operations staff
24
<PAGE> 25
to support and service the expanding network, including the increase in volume
relating to the US West and Ameritech agreements.
Cost of goods sold increased 1,419.6% to $30.9 million for the six months
ended June 30, 1998 compared to $2 million for the same period in 1997. This
increase was principally due to the acquisition of Shared during the first
quarter of 1998.
Selling, general and administrative expenses increased 157% to $102.7
million for the six months ended June 30, 1998 compared to $40.0 million for the
same period in 1997. The increase was principally due to the acquisition of
DIGEX in July 1997, the acquisitions of Shared and LDS in the first quarter of
1998, and the acquisition of National in the second quarter of 1998. The
acquisitions of DIGEX, Shared, LDS, and National contributed to the increase by
approximately $18.5 million, $16.9 million, $4.8 million, and $2.8 million,
respectively. The Company has experienced continued personnel growth,
represented by departmental increases in sales of approximately $14.3 million,
marketing of approximately $1.8 million, management information services of
approximately $2.7 million, and customer service of approximately $5.1 million.
Other increases of approximately $21.2 million relate to one-time expenditures
for employee recruitment, relocation, training, and increased commissions
relating to the rise in revenues for these periods. These expenses were also
negatively impacted by the increased expenditures related to the implementation
of manual processes and procedures to augment some of the back-office functions,
which are at or near capacity from an automation perspective.
Depreciation and amortization expenses increased 400.7% to $91.0 million
for the six months ended June 30, 1998 compared to $18.2 million for the same
period in 1997. This increase was principally due to additions to
telecommunications equipment placed in service since July 1, 1997, relating to
ongoing network expansion, as well as the acquisitions of DIGEX, Shared, LDS,
and National which contributed, based on preliminary estimates, approximately
$113.3 million, $662.6 million, $142.8 million, and $147.7 million of
intangibles, respectively. Additional depreciation charges resulted from the
long-term lease of capital assets from Williams in March 1998. Depreciation and
amortization expense is expected to increase in future periods as the Company
expands the network and depreciates and amortizes intangibles associated with
the businesses acquired. Previously reported amortization expense has been
restated as a result of the Company's restatement of the charge for in-process
R&D and restatement for the reallocation of goodwill to identifiable intangible
assets discussed below.
Charge for in-process R&D of $63.0 million represents the amount of
purchased in-process R&D associated with the purchase of Shared. In connection
with the purchase of Shared, the Company allocated $63.0 million of the purchase
price to in-process R&D projects. This allocation represents the estimated fair
value based on risk-adjusted cash flows related to the incomplete projects. At
the date of acquisition, the development of these projects had not yet reached
technological feasibility and in-process R&D had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date and were
recorded as a one-time charge to earnings in the first quarter of 1998. In
previously issued financial statements, the Company recorded a charge for
purchased in-process R&D of $85.0 million in connection with the acquisition of
Shared. After discussions with the Staff of the Commission, the Company has
reduced the amount of the write-offs for purchased in-process R&D to $63.0
million. This reduction has been reallocated to goodwill. In addition, the
Company reallocated $51.0 million of the purchase price of Shared to other
intangibles. The Company's condensed consolidated financial statements have been
restated to reflect such adjustments as described herein and in Note 2 of the
Notes to Condensed Consolidated Financial Statements.
In making its purchase price allocation, the Company relied on present
value calculations of income and cash flows, an analysis of project
accomplishments and completion costs, an assessment of overall contribution, as
well as project risk. The amounts assigned to the in-process R&D were determined
by identifying significant research projects for which technological feasibility
had not been established. In-process R&D included the development and deployment
of an innovative multi-service access platform, which will enable Shared to
provision new data services.
Remaining development efforts for Shared projects include various phases of
design, development, and testing. Anticipated completion dates for the
in-process R&D projects will occur during the next two years,
25
<PAGE> 26
after which time the Company expects to begin generating economic benefits from
the technologies. Expenditures to complete these projects are expected to total
approximately $1.2 million in 1998 and $1.4 million in 1999.
These estimates are subject to change, given the uncertainties of the
development process, and no assurance can be given that deviations from these
estimates will not occur. Management expects to continue development of these
efforts and believes the Company has a reasonable chance of successfully
completing the in-process R&D programs. However, there is a risk associated with
the completion of the projects and there is no assurance that any will meet with
either technological or commercial success. Failure to complete the in-process
R&D programs would result in the loss of the expected return inherent in the
fair value allocation.
Business restructuring and integration expense of approximately $50.1
million was recorded by the Company during the second quarter of 1998. The
restructuring charge of $32.3 million is comprised of contract termination costs
of approximately $14.7 million, asset impairments of $13.4 million, employee
termination benefits of $2.6 million and other business integration costs of
$1.6 million. In addition, the Company expensed approximately $17.8 million,
including businesses exited and integration and other restructuring costs, that
were incurred in the second quarter. Such costs were comprised primarily of
network integration and information systems integration costs. These costs
represent incremental, redundant or convergence costs that result directly from
implementation of the Program, but are required to be expensed as incurred. Such
costs were substantially in line with the amounts expected for the second
quarter by management. Additional incremental, redundant and convergence costs
within this category of Program cost will be expensed as they are incurred each
quarter over the Program implementation period. Management currently expects
these additional costs to amount to approximately $45.0 million over the
remainder of the Program. Future cash outlays are expected for all components of
the remaining $22.8 million accrual (refer to Note 4), with the exception of
approximately $4.2 million for asset impairment write-downs, which are expected
to occur during the fourth quarter of 1998. The Company expects future cash
outlays of approximately $2.1 million during the third quarter of 1998, $13.2
million during the fourth quarter of 1998, $1.9 million during 1999, and the
Company expects approximately $1.7 million to occur evenly throughout the
Program.
The Company's condensed consolidated financial statements have been
restated to reflect a reduction of this charge by $2.5 million as described
herein and in Note 2 of the Notes to Condensed Consolidated Financial
Statements.
INTEREST EXPENSE
Interest expense increased 337.5% to $97.2 million for the six months ended
June 30, 1998 compared to $22.2 million for the same period in 1997. This
increase primarily resulted from interest expense on approximately $1.8 billion
of senior notes issued by the Company in 1997 and 1998, plus the non-cash
imputed interest charges of $5.1 million related to the acquisition of Shared
and $1 million related to the acquisition of National. In addition, the Company
recorded interest expense of $19.9 million related to the capital lease with
Williams. Included in 1998 interest expense is $37.0 million of debt discount
amortization and $2.0 million of deferred loan cost amortization, both of which
are non-cash items. Interest expense capitalized in connection with the
Company's construction of telecommunications equipment amounted to approximately
$3.6 million and $1.6 million for the six months ended June 30, 1998 and 1997,
respectively.
OTHER INCOME
Other income increased 68.4% to $16.8 million for the six months ended June
30, 1998 compared to $10.0 million for the same period in 1997. This increase
was primarily the result of interest earned on the cash available from the
proceeds of the issuance of securities in 1997 and the exercise of the over
allotment option with respect to the 8.5% Senior Notes in January 1998, and the
issuance of the 8.6% Senior Notes in May 1998.
26
<PAGE> 27
NET LOSS
Net loss increased 397.7% to $284.2 million for the six months ended June
30, 1998 compared to $57.1 million for the same period in 1997. The increase was
principally due to the acquisition of DIGEX in July 1997, the acquisition of
Shared in the first quarter of 1998, and the acquisition of National in the
second quarter of 1998. In addition, the increased operating expenses resulting
from the expansion of the network, increased selling, general and administrative
costs, the charge for in-process R&D, business restructuring and integration
expenses, and increased interest costs contributed to the increase in net loss.
PREFERRED STOCK DIVIDENDS AND ACCRETIONS
Preferred stock dividends and accretions increased 183.4% to $37.5 million
for the six months ended June 30, 1998 compared to $13.2 million for the same
period in 1997. The increase was due to the issuance of three series of
preferred stock in March 1997, July 1997, and October 1997. Preferred stock
dividends were paid in the form of Common Stock and preferred stock. Management
does not expect to pay cash dividends in the foreseeable future.
EBITDA BEFORE CERTAIN CHARGES
EBITDA before certain charges increased 100.9% to $0.2 million for the six
months ended June 30, 1998 compared to $(26.6) million for the same period in
1997. The increase was principally from the acquisition of DIGEX in July 1997,
the acquisitions of Shared and LDS in the first quarter of 1998, and the
acquisition of National in the second quarter of 1998. The Company has continued
its efforts to consolidate traffic through the Williams backbone network as well
as through the Company's existing networks in an efficient manner. In addition,
the Company has been successful in selling more of its local services "on
switch" and increasing its mix of higher margin products. The business
restructuring and integration program has yielded benefits from the elimination
of redundant costs associated with rationalizing and integrating the recent
acquisitions. In addition, the Company has reduced network operation expenses,
facilities administration and maintenance expenses, and selling, general and
administrative expenses as a percentage of revenue in the six month period ended
June 30, 1998 as compared to the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have required substantial capital investment for
the purchase of telecommunications equipment and the design, construction and
development of the Company's networks. Capital expenditures for the Company were
approximately $198.8 million and $107 million for the six months ended June 30,
1998 and 1997, respectively, excluding capital leases and telecommunications
equipment acquired in connection with business acquisitions. The Company expects
that it will continue to have substantial capital requirements in connection
with the (i) expansion and improvement of the Company's existing networks, (ii)
design, construction and development of new networks, (iii) connection of
additional buildings and customers to the Company's networks, (iv) purchase of
switches necessary for local exchange services and expansion of interexchange
services and (v) continued development of the Company's enhanced data services.
During the first quarter of 1998, the Company utilized approximately $770.5
million of its available cash to complete the Shared acquisition and
approximately $32.9 million of its available cash to complete the LDS
acquisition. In addition, the Company utilized approximately $64.4 million of
its available cash to complete the acquisition of National in April 1998.
The Company has funded a substantial portion of these expenditures through
the public and private sale of debt and equity securities. From inception
through December 31, 1996, the Company raised approximately $212.6 million in
net proceeds from the sale of Common Stock, including Common Stock issued in
connection with certain acquisitions, and $324.6 million in net proceeds from
the sale of senior notes. During 1997 the Company raised approximately $957.5
million in net proceeds from the sale of senior notes and approximately $648.6
million in net proceeds from the sale of three series of preferred stock. During
1998, the Company raised approximately $537.3 million in net proceeds from the
sale of senior notes, including the overallotment exercises. All of the
Company's issued series of preferred stock include provisions that may cause the
27
<PAGE> 28
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 stockholders' equity on the Company's condensed
consolidated balance sheet at June 30, 1998. Additionally, none of the
outstanding series of preferred stock require the Company to pay cash dividends
in the foreseeable future.
The substantial capital investment required to build the Company's network
has resulted in negative cash flow after consideration of investing activities
over the last five-year period. This negative cash flow after investing
activities is a result of the requirement to build a substantial portion of the
Company's network before connecting revenue-generating customers. The Company
expects to continue to produce negative cash flow after investing activities for
the next several years due to the continuous expansion and the development of
the Company's networks. Until sufficient cash flow after investing activities is
generated, the Company will be required to utilize its current and future
capital resources to meet its cash flow requirements, including the issuance of
additional debt and/or equity securities.
In response to the new pro-competitive telecommunications environment, the
Company has accelerated and expanded its capital deployment plan to allow for an
increased level of demand-driven capital spending necessary to more rapidly
exploit the market opportunity in the local exchange market. The Company expects
to commit substantial amounts of funds to upgrade its existing network in order
to switch traffic within the local service area in those states where it is
currently permitted to provide such services. As of June 30, 1998, the Company
was certified as a CLEC in 36 states plus the District of Columbia, allowing the
Company to provide local exchange services in those markets, and is currently
seeking CLEC certification in 11 additional states. The Company expects to
expend capital for the further development of the Company's enhanced data
service and interchange service offerings.
A portion of the Company's expansion has occurred, and may continue to
occur, by means of acquisitions. In July 1997, the Company acquired DIGEX, a
leading nationwide business ISP. The aggregate cash consideration for the
acquisition was approximately $160 million and was funded with the Company's
then existing cash reserves. In March 1998, the Company acquired Shared. The
total aggregate cash consideration for Shared was approximately $770.5 million,
which was paid out in 1998 and 1997, including certain transaction expenses and
fees relating to certain agreements. This amount includes repayment of $175.6
million of Shared's outstanding bank debt (including accrued interest and
outstanding fees) in connection with the consummation of the acquisition. In
March 1998, the Company completed its acquisition of LDS for a purchase price of
approximately $170.1 million, of which approximately $137.2 million was paid in
Common Stock and approximately $32.9 million was paid in cash, including the
repayment of approximately $15.0 million of LDS debt.
On April 30, 1998, the Company completed the acquisition of privately held
National, an emerging switch-based competitive local exchange carrier and
established interexchange carrier. Aggregate consideration for the acquisition
was approximately $59.5 million in cash, plus 2,909,796 shares of the Company's
Common Stock valued at approximately $88.7 million, the retirement of $2.8
million in National's long-term debt, and $2.2 million in acquisition related
costs.
During July and August 1998, the Company exchanged (a) approximately 2.029
million shares of its Common Stock for approximately 1.487 million Depository
Shares (each representing a 1/100th interest in a share of 7% Series D Junior
Convertible Preferred Stock) and (b) approximately 665,000 shares of its Common
Stock for approximately 710,000 Depository Shares (each representing a 1/100th
interest in a share of 7% Series E Junior Convertible Preferred Stock), pursuant
to exchange agreements with certain holders of such Depository Shares.
The Company expects that it will be EBITDA before certain charges positive
for 1998 and that its capital requirements (estimated at approximately $400.0
million, of which approximately $198.8 million has been expended during the
first six months of 1998, which does not include the non-cash Williams network
capacity purchase) will be funded from available cash, cash generated from its
1998 operations, the bank credit facility discussed below and/or other offerings
of the Company's securities. Continued funding of the Company's accelerated and
expanded capital deployment plan will require the Company to raise additional
debt or equity capital by the end of 1999. Depending on market conditions, the
Company may determine to raise additional
28
<PAGE> 29
capital before such time. There can be no assurance, however, that the Company
will be successful in raising sufficient debt or equity on terms that it will
consider acceptable. Moreover, the terms of the Company's outstanding
indebtedness and preferred stock impose certain restrictions upon the Company's
ability to incur additional indebtedness or issue additional preferred stock. On
August 4, 1998, the Company commenced a private placement of $200 million
liquidation preference of Depository Shares (each representing a 1/100th
interest in a share of Series F Junior Convertible Preferred Stock, liquidation
preference $2,500 per share), pursuant to Rule 144A promulgated under the
Securities Act of 1933, as amended. The net proceeds from the offering of the
Depository Shares will be used to finance the continued expansion of the
Company's telecommunications networks and for general corporate purposes.
However, there can be no assurance that the placement of securities will be
successful. The Company has entered discussions with several banks for a bank
credit facility, although there can be no assurance that a bank facility on
terms satisfactory to the Company will be established.
The Company has from time to time held, and continues to hold, preliminary
discussions with (i) potential strategic investors (i.e. investors in the same
or a related business) who have expressed an interest in making an investment in
or acquiring the Company, (ii) potential joint venture partners looking toward
formation of strategic alliances that would expand the reach of the Company's
network or services without necessarily requiring an additional investment in or
by the Company and (iii) companies that represent potential acquisition
opportunities for the Company. There can be no assurance that any agreement with
any potential strategic investor, joint venture partner or acquisition target
will be reached nor does management believe that any thereof is necessary to
successfully implement its strategic plans.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date ending in "00"
as the year 1900 rather than the year 2000. This could result in system failure
or miscalculations causing disruptions of operations including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Based on an assessment, the Company determined that it will be required to
modify or replace portions of its software and hardware so that its systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company presently believes that with modifications to existing software and
conversions to new software and hardware, the Year 2000 issue will not pose
significant operational problems for its systems. However, if such modifications
and conversions are not made, or are not completed in timely fashion, the Year
2000 problems could have a material impact on the operations of the Company.
The Company is continuing to contact all of its significant suppliers and
large customers to determine the extent to which the Company's interface systems
are vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company's total Year 2000 project cost and estimates to complete
include the estimated costs and time associated with the impact of third party
Year 2000 issues (based on presently available information). However, there can
be no guarantee that the systems of other companies on which the Company's
systems rely will be timely converted and will not have a material adverse
effect on the Company's systems.
The Company is actively engaged in utilizing both internal and external
resources to reprogram, or replace, and test the software and hardware for Year
2000 compliance. The Company's objective is to complete the Year 2000 project
not later than December 31, 1998, which is prior to any anticipated impact on
its operating systems. The 1998 cost of the Year 2000 project for the core
Intermedia business is estimated to be $1.2 million in external personnel costs
and $0.7 million in internal personnel costs, both of which are 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 currently scheduled
capital projects. The remaining expenses are not expected to have a material
effect on the results of operations. During the first and second quarters of
1998 the Company has incurred approximately $0.5 million in external staffing
costs, $0.4 million in internal staffing costs, and $0.2 million in hardware and
software costs.
29
<PAGE> 30
Costs and timetables for Year 2000 projects associated with corporate
mergers and acquisitions are not included in the above estimates, and will be
funded on a case-by-case basis as they occur. During the second quarter of 1998,
the Company incurred approximately $0.2 million in costs related to the review
of systems acquired as part of the acquisitions of DIGEX, Shared, LDS, and
National. Systems modification and testing associated with Year 2000 activities
relating to such acquisitions is estimated to be $1.8 million for the third and
fourth quarter of 1998. Internal personnel costs associated with Year 2000
activities relating to the Company's recent acquisitions were approximately $0.1
million for the second quarter. It is projected that internal personnel costs
associated with such Year 2000 activities relating to the acquisitions of Shared
and DIGEX will be $0.4 million. An estimate of the internal personnel costs
associated with Year 2000 conversions at LDS and National is expected to be
determined in the third quarter of 1998.
Approximately $0.2 million was spent in the second quarter on upgrades to
the Company's hardware and software. A preliminary estimate for hardware and
software upgrades during the third and fourth quarter is $2.8 million, due
primarily to data network upgrades needed with respect to data network
components acquired in a 1996 acquisition. Projected costs associated with
hardware and software upgrades relating to the acquisitions of Shared, DIGEX,
and LDS are $2.3 million, largely in shared tenant equipment and office
infrastructure upgrades. An estimate of the costs associated with hardware and
software upgrades for National is expected to be determined in the third
quarter.
The costs of the project and the date which the Company has established to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, unanticipated mergers
and acquisitions, and similar uncertainties.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's operations over
the past 3 years.
The information set forth above in "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" include forward-looking
statements that involve numerous risks and uncertainties. Forward-looking
statements can be identified by 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. The Company's
actual results could differ materially from those anticipated in such
forward-looking statements as a result of certain factors, including those set
forth in the section entitled "Risk Factors" in the Company's Annual Report on
Form 10-K as amended for the year ended December 31, 1997.
30
<PAGE> 31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as described below, the Company is not a party to any pending legal
proceedings other than various claims and lawsuits arising in the normal course
of business. The Company does not believe that these normal course of business
claims or lawsuits will have a material effect on the Company's financial
condition or results of operations.
On June 20, 1997, two purported class action complaints were filed in the
Court of Chancery of the State of Delaware in and for New Castle County
respectively by TAAM Associates, Inc. and David and Chaile Steinberg, purported
stockholders of DIGEX on behalf of all non-affiliated common stockholders of
DIGEX against Intermedia, DIGEX and the DIGEX Directors. The cases have been
dormant since August 1997 when a motion to dismiss the Complaints was filed on
behalf of Intermedia, DIGEX and the DIGEX Directors. See Note 9 to the Company's
Condensed Consolidated Financial Statements included herein.
ITEM 2. CHANGES IN SECURITIES
On April 30, 1998, the Company acquired National for approximately $151.8
million including 2,909,796 shares of Common Stock (the "National Shares"),
valued at approximately $88.8 million. The National Shares were issued by the
Company to the former shareholders of National (the "National Shareholders").
The number of National Shares payable to the National Shareholders was based
upon the merger consideration provisions in the Agreement and Plan of Merger
dated as of February 11, 1998 by and among the Company, National, the National
Shareholders, and certain other parties, as amended, that set forth (i) the
merger consideration, (ii) the adjustments to be made to the merger
consideration, (iii) the portion of the merger consideration to be paid by the
issuance of Common Stock and (iv) that the Common Stock to be delivered to the
National Shareholders shall be deemed to be valued at $61 per share. The
National Shares were transferred to the National Shareholders pursuant to an
exemption from registration provided for under Section 4(2) of the Securities
Act of 1933, as amended. Prior to the issuance of the National Shares, the
National Shareholders represented to the Company that: (i) they are acquiring
the National Shares for their own account for investment and without any view to
any distribution thereof; (ii) they understand that they must bear the economic
risk of their investment in the National Shares for an indefinite period of
time; and (iii) they are aware of the Company's business affairs and financial
condition and have acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the National Shares.
The Company increased the number of authorized shares of Common Stock from
50,000,000 to 150,000,000. The Company also completed a two-for-one stock split
effected as a stock dividend on June 15, 1998.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 20, 1998. At the
meeting, the following actions were taken by the stockholders:
The following member was elected to the Company's Board of Directors to
hold office for a term of three years. The voting on the resolution was as
follows:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHOLD AUTHORITY
------- ---------- ------------------
<S> <C> <C>
John C. Baker............................................ 18,758,113 114,859
</TABLE>
31
<PAGE> 32
The number of shares of Common Stock authorized for issuance under the
Company's Long-Term Incentive Plan was increased from 2,500,000 shares to
4,500,000 shares (5,000,000 shares to 9,000,000 shares post stock split). The
voting on the resolution was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED NOT VOTED
- ---------- --------- --------- ---------
<S> <C> <C> <C>
11,539,710.. 5,628,391 159,452 1,545,419
</TABLE>
An amendment to the Company's Restated Certificate of Incorporation, as
amended, to increase the number of authorized shares of Common Stock from
50,000,000 shares to 150,000,000 was approved. The voting on the resolution was
as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED NOT VOTED
- ---------- --------- --------- ---------
<S> <C> <C> <C>
15,807,168 3,033,377 32,427 --
</TABLE>
The appointment of Ernst & Young LLP as the independent auditors of the
Company for the fiscal year ending December 31, 1998 was ratified. The voting on
the resolution was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED NOT VOTED
- ---------- ------- --------- ---------
<S> <C> <C> <C>
18,785,345 77,354 10,273 --
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ -------
<C> <S> <C>
2.1 -- Agreement and Plan of Merger, dated as of February 11, 1998,
among the Company, Sumter One Acquisition, Inc., Sumter Two
Acquisition, Inc., National Telecommunications of Florida,
Inc. NTC, Inc. and the stockholders of National. Exhibit 2.4
to the Company's Registration Statement on Form S-3 filed
with the Commission on February 13, 1998 (No. 333-46369) is
incorporated herein by reference.
3.1 -- Restated Certificate of Incorporation of the Company,
together with all amendments, thereto. Exhibit 3.1 to the
Company's Registration Statement on Form S-4, filed with the
Commission on June 16, 1998 (No. 333-56939) (the "S-4") is
incorporated herein by reference.
4.1 -- Indenture, dated as of May 27, 1998, between the Company and
SunTrust Bank, Central Florida, National Association, as
trustee. Exhibit 4.6 to the S-4 is incorporated herein by
reference.
4.2 -- Registration Rights Agreement, dated as of May 27, 1998,
among the Company and the Initial Purchasers. Exhibit 4.7 to
the S-4 is incorporated herein by reference.
27.1 -- Financial Data Schedule (For Commission Use Only)
</TABLE>
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the second quarter of
1998:
The Company filed a Current Report on Form 8-K, dated April 1998,
reporting under Item 2 the acquisition of LDS. The Company also reported
under Item 7 the acquisition agreement for LDS and the related press
release.
The Company filed a Current Report on Form 8-K, dated April 30, 1998,
reporting under Item 5 the issuance of a press release discussing the first
quarter results. The Company also reported under Item 7 the filing of the
press release.
The Company filed a Current Report on Form 8-K, dated May 1, 1998,
reporting under Item 5 the issuance of a press release announcing the
consummation of the acquisition of National.
32
<PAGE> 33
The Company filed a Current Report on Form 8-K/A, dated May 13, 1998,
reporting under Item 2 its acquisition of the LDS. The Company also filed
under Item 7 the filing of Exhibit 2.1 which is the Acquisition Agreement,
dated December 17, 1997 among Intermedia and LDS.
The Company filed a Current Report on Form 8-K, dated May 20, 1998,
reporting under Item 5 the commencement of a private offering of $350
million principal amount of senior notes. The Company also reported under
Item 5 the announcement of a two-part agreement with Ameritech. The Company
also reported under Item 5 the announcement of a split of its Common Stock
to be effected as a stock dividend payable on June 15, 1998 to stockholders
of record on June 1, 1998. The Company also reported under Item 7 the
filing of the Agreement and Plan of Merger relating to the acquisitions of
National, which was consummated on April 29, 1998.
The Company filed a Current Report on Form 8-K, dated May 29, 1998,
reporting under Item 5 the completion of a private offering of $350 million
principal amount of its 8.6% Senior Notes, which was subsequently increase
to $450 million and closed on May 27, 1998. The Company also reported under
Item 7 the filing of pro forma financial statements which give effect to
certain recent and pending acquisitions and recently completed financings
as an exhibit to this report.
The Company filed a Current Report on Form 8-K/A, dated June 11, 1998,
reporting under Item 7 the filing of the Unaudited Pro Forma Condensed
Financial Statements as of March 31, 1998.
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: January 29, 1999
INTERMEDIA COMMUNICATIONS INC.
(Registrant)
/s/ JEANNE M. WALTERS
--------------------------------------
Jeanne M. Walters
Vice President, Controller and
Chief Accounting Officer
34
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 577,542
<SECURITIES> 0
<RECEIVABLES> 151,209
<ALLOWANCES> 18,391
<INVENTORY> 0
<CURRENT-ASSETS> 730,237
<PP&E> 1,246,879
<DEPRECIATION> 140,207
<TOTAL-ASSETS> 2,950,390
<CURRENT-LIABILITIES> 201,304
<BONDS> 2,261,828
713,792
0
<COMMON> 222
<OTHER-SE> (209,919)
<TOTAL-LIABILITY-AND-EQUITY> 2,950,390
<SALES> 48,443
<TOTAL-REVENUES> 327,015
<CGS> 30,909
<TOTAL-COSTS> 224,034
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,884
<INTEREST-EXPENSE> 97,159
<INCOME-PRETAX> (284,227)
<INCOME-TAX> 0
<INCOME-CONTINUING> (284,227)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (321,698)
<EPS-PRIMARY> (8.17)
<EPS-DILUTED> (8.17)
</TABLE>
