<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<TABLE>
<C> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED MARCH 31, 1999
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 May 3, 1999, there were 50,056,169 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-months ended March 31, 1999 and
1998...................................................... 3
Condensed Consolidated Balance Sheets -- March 31, 1999 and
December 31, 1998......................................... 4
Condensed Consolidated Statements of Cash
Flows -- Three-months ended March 31, 1999 and 1998....... 5
Notes to Condensed Consolidated Financial Statements........ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 21
ITEM 2. CHANGES IN SECURITIES....................................... 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................. 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 21
ITEM 5. OTHER INFORMATION........................................... 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 21
SIGNATURES........................................................... 23
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERMEDIA COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Revenues:
Local network services.................................... $ 52,982 $ 33,677
Enhanced data services.................................... 60,093 36,537
Interexchange services.................................... 67,613 44,751
Integration services...................................... 24,034 21,821
----------- -----------
204,722 136,786
Expenses:
Network operations........................................ 93,908 71,543
Facilities administration and maintenance................. 22,636 15,033
Cost of goods sold........................................ 15,804 13,690
Selling, general and administrative....................... 57,314 46,347
Depreciation and amortization............................. 71,611 40,776
Charge-off of purchased in-process R&D.................... -- 63,000
Business restructuring, integration and other charges..... 5,399 --
----------- -----------
266,672 250,389
----------- -----------
Loss from operations........................................ (61,950) (113,603)
Other income (expense):
Interest expense.......................................... (62,178) (49,301)
Other income.............................................. 6,558 10,729
----------- -----------
Net loss.................................................... (117,570) (152,175)
Preferred stock dividends and accretions.................... (22,483) (18,594)
----------- -----------
Net loss attributable to common stockholders................ $ (140,053) $ (170,769)
=========== ===========
Basic and diluted loss per common share:
Net loss per common share................................... $ (2.84) $ (4.84)
=========== ===========
Weighted average number of shares outstanding -- basic and
diluted................................................... 49,352,830 35,306,268
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 4
INTERMEDIA COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 688,818 $ 387,615
Restricted investments.................................... 8,030 7,930
Accounts receivable, less allowance for doubtful accounts
of $19,508 in 1999 and $22,229 in 1998................. 188,490 178,519
Prepaid expenses and other current assets................. 24,690 27,272
----------- ----------
Total current assets.............................. 910,028 601,336
Telecommunications equipment, net......................... 1,445,536 1,371,583
Intangible assets, net.................................... 1,003,807 1,022,556
Other assets.............................................. 67,627 53,544
----------- ----------
Total assets...................................... $ 3,426,998 $3,049,019
=========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 80,986 $ 102,905
Other accrued expenses.................................... 81,050 82,088
Current portion of long-term debt and capital lease
obligations............................................ 22,384 21,880
----------- ----------
Total current liabilities......................... 184,420 206,873
Long-term debt and capital lease obligations................ 2,866,944 2,350,506
Series B redeemable exchangeable preferred stock and accrued
dividends, $1.00 par value; 600,000 shares authorized;
394,790 and 381,900 issued and outstanding in 1999 and
1998, respectively........................................ 384,813 371,678
Series D junior convertible preferred stock and accrued
dividends, $1.00 par value; 69,000 shares authorized;
54,129 issued and outstanding in 1999 and 1998............ 133,838 133,686
Series E junior convertible preferred stock and accrued
dividends, $1.00 par value; 87,500 shares authorized;
64,892 shares issued and outstanding in 1999 and 1998..... 160,279 160,086
Series F junior convertible preferred stock and accrued
dividends, $1.00 par value; 92,000 shares authorized;
80,000 shares issued and outstanding in 1999 and 1998..... 196,435 196,838
Stockholders' equity (deficit):
Preferred stock, $1.00 par value; 1,111,500 authorized in
1999 and 1998, 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 in 1999 and 1998; 49,578,316 and 48,648,993
shares issued and outstanding in 1999 and 1998,
respectively........................................... 496 486
Additional paid-in capital................................ 598,345 587,413
Accumulated deficit....................................... (1,093,632) (953,579)
Deferred compensation..................................... (4,940) (4,968)
----------- ----------
Total stockholders' deficit....................... (499,731) (370,648)
----------- ----------
Total liabilities, redeemable preferred stock and
stockholders' deficit........................... $ 3,426,998 $3,049,019
=========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 5
INTERMEDIA COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $(117,570) $(152,175)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 72,959 41,724
Amortization of deferred compensation.................. 28 392
Accretion of interest on notes payable................. 23,314 18,502
Accretion of interest on capital lease................. -- 3,924
Imputed interest related to the acquisition of
Shared................................................ -- 5,130
Charge-off of purchased in-process R&D................. -- 63,000
Provision for doubtful accounts........................ 4,666 2,731
Changes in operating assets and liabilities:
Accounts receivable.................................. (19,917) (14,745)
Prepaid expenses and other current assets............ 2,582 (2,391)
Other assets......................................... 149 (772)
Accounts payable..................................... (21,919) 3,461
Other accrued expenses............................... (1,039) 24,362
--------- ---------
Net cash used in operating activities............. (56,747) (6,857)
INVESTING ACTIVITIES
Maturities of restricted investments...................... (100) (681)
Purchase of businesses, net of cash acquired.............. -- (387,822)
Purchases of telecommunications equipment................. (127,838) (76,917)
--------- ---------
Net cash used in investing activities............. (127,938) (465,420)
FINANCING ACTIVITIES
Proceeds from issuance of senior and senior discount
notes, net of issuance costs........................... 488,110 48,493
Exercise of common stock warrants and options............. 3,210 3,913
Principal payments on long-term debt and capital lease
obligations............................................ (5,432) (1,792)
--------- ---------
Net cash provided by financing activities......... 485,888 50,614
Increase (decrease) in cash and cash equivalents............ 301,203 (421,663)
Cash and cash equivalents at beginning of period............ 387,615 756,923
--------- ---------
Cash and cash equivalents at end of period.................. $ 688,818 $ 335,260
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Assets purchased under capital lease obligations............ -- $ 417,933
Common stock issued in purchase of business................. -- 137,176
Interest paid............................................... $ 36,950 $ 2,664
Preferred stock issued as dividends on preferred stock...... 12,889 11,286
Common stock issued as dividends on preferred stock......... 8,707 6,519
Accretion of preferred stock................................ 887 789
</TABLE>
See accompanying notes.
5
<PAGE> 6
INTERMEDIA COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) necessary to present fairly the information set
forth therein have been included. 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 of
Intermedia Communications Inc. ("Intermedia" or the "Company") for the year
ended December 31, 1998.
Operating results for the three-month period ended March 31, 1999 are not
necessarily an indication of the results that may be expected for the year
ending December 31, 1999.
STOCK SPLIT
All share and per share information presented herein and in the Company's
Condensed Consolidated Financial Statements have been retroactively restated to
reflect a two-for-one stock split of the Company's Common Stock, par value $.01
per share ("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 1998. The FASB issued Statement of Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities. The Company
expects to adopt the new Statement effective January 1, 2000. The Statement will
require the recognition of all derivatives on the Company's consolidated balance
sheet at fair value. The Company does not expect that the adoption of this
Statement will have a significant effect on its results of operations or
financial position.
NOTE 2. BUSINESS RESTRUCTURING AND INTEGRATION PROGRAM
As more fully described in the Company's 1998 Annual Report on Form 10-K,
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 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 $10.2 million of
savings in operating costs per quarter. The Company will realize these savings
as various Program activities are completed.
As provided for in the Program, the Company expensed business restructuring
and integration costs that were incurred since the inception of the Program.
These costs represent incremental, redundant, or convergence costs that resulted
directly from implementation of the Program, but are required to be expensed as
incurred.
6
<PAGE> 7
INTERMEDIA COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the components of the other business
restructuring and integration costs that were expensed as incurred during the
three months ended March 31, 1999 (in millions):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
1999
---------------
<S> <C>
Integration costs
Network integration(A).................................... $2.8
Department and employee realignment(B).................... 0.5
Functional re-engineering(C).............................. 1.4
Other(D).................................................. 0.7
----
Total............................................. $5.4
====
</TABLE>
- ---------------
(A) Consists primarily of redundant network expense and amortization of a
canceled contract for switched services.
(B) Consists of branding, employee severance, and contract termination costs.
(C) Consists primarily of consultant costs and employee severance costs.
(D) Consists primarily of professional fees and employee severance costs.
NOTE 3. LONG-TERM DEBT
On February 24, 1999, the Company sold $300 million principal amount of
9.5% Senior Notes due 2009 (the "9.5% Senior Notes") and $364 million principal
amount at maturity of 12.25% Senior Subordinated Discount Notes due 2009 (the
"12.25 Senior Subordinated Discount Notes") in a private placement transaction.
Net proceeds to the Company amounted to approximately $488.8 million from both
issuances.
Cash interest on the 9.5% Senior Notes is payable semi-annually in arrears
on March 1 and September 1 of each year, commencing September 1, 1999. The
proceeds of the offering of the 9.5% Senior Notes cannot be used for working
capital purposes, and can only be used to fund the cost of acquiring or
constructing telecommunications related assets. The 9.5% Senior Notes are
redeemable at the option of the Company at any time prior to March 1, 2004, in
whole or in part with a 30-60 day notice, plus accrued and unpaid interest. On
or after March 1, 2004, the 9.5% Senior Notes are subject to redemption by the
Company at rates commencing at 104.75%, declining to 100% on March 1, 2007.
Under certain conditions, up to 25% of the aggregate principal amount of the
9.5% Senior Notes originally issued may be redeemed at the option of the
Company.
The 12.25% Senior Subordinated Discount Notes will accrete in value through
March 1, 2004 at a fixed annual rate of 12.25%, compounded every six months.
After March 1, 2004, the 12.25% Senior Subordinated Discount Notes will accrue
interest at an annual rate of 12.25%, payable in cash every six months on March
1 and September 1, commencing September 1, 2004. The proceeds from the offering
of the 12.25% Senior Subordinated Discount Notes will be used for general
corporate purposes, including the funding of working capital and operating
losses, and the funding of a portion of the costs of acquiring or constructing
telecommunications related assets. The 12.25% Senior Subordinated Discount Notes
will be redeemable at the option of the Company at any time prior to March 1,
2004, in whole or in part with a 30-60 day notice, plus accrued and unpaid
interest. Under certain conditions, up to 25% of the aggregate principal amount
of the 12.25% Senior Subordinated Discount Notes originally issued may be
redeemed at any time prior to March 1, 2002 at a redemption price of 112.25% of
the accreted value thereof plus accrued and unpaid interest and liquidated
damages, if any.
7
<PAGE> 8
INTERMEDIA COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss
per share of Common Stock (dollars in thousands, except shares and per share
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Numerator:
Net loss.................................................. $ (117,570) $ (152,175)
Preferred stock dividends and accretions.................. (22,483) (18,594)
----------- -----------
Numerator for basic loss per share --
loss attributable to common stockholders............... (140,053) (170,769)
Effect of dilutive securities............................. -- --
----------- -----------
Numerator for diluted loss per share income attributable
to common stockholders after assumed conversions....... $ (140,053) $ (170,769)
Denominator:
Denominator for basic loss per share weighted-average
shares................................................. 49,352,830 35,306,268
Effect of dilutive securities............................. -- --
----------- -----------
Denominator for diluted loss per share -- adjusted
weighted-average shares................................... 49,352,830 35,306,268
=========== ===========
Basic loss per share of Common Stock........................ $ (2.84) $ (4.84)
=========== ===========
Diluted loss per share of Common Stock...................... $ (2.84) $ (4.84)
=========== ===========
</TABLE>
Unexercised options to purchase 8,074,154 and 5,593,554 shares of Common
Stock as of March 31, 1999 and 1998, respectively, and outstanding convertible
preferred stock, convertible into 17,076,495 shares of Common Stock as of March
31, 1999, were not included in the computations of diluted loss per share
because assumed exercise/conversion would be anti-dilutive.
NOTE 5. CONTINGENCIES
As more fully discussed in the Company's 1998 Annual Report on Form 10-K,
two purported class action complaints were filed against Intermedia, DIGEX,
Incorporated ("DIGEX") and the directors of DIGEX on June 20, 1997. These
complaints alleged 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 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. In April 1999, the class action complaints
were dismissed without prejudice.
The Company is not a party to any 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, North Carolina, Tennessee, and
in several other states across the country. 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 and
1998, the Company recognized revenue from these ILECs of approximately $46.0
million for these services. During the first quarter of 1999, the Company
recognized approximately $17.7 million in revenue for these services.
8
<PAGE> 9
INTERMEDIA COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for reciprocal compensation with the ILECs, including
the activity associated with the disputed ISP traffic, as local network services
(local traffic), fully subject to mutual compensation, pursuant to the terms of
its interconnection agreements. Accordingly, revenue is recognized in the period
that the traffic is terminated. A number of ILECs have refused to pay these
reciprocal compensation amounts, however, citing a variety of legal theories.
The circumstances surrounding the disputes, including the status of cases that
have arisen by reason of similar disputes referred to below, are considered by
management periodically in determining whether reserves against unpaid balances
are warranted. As of March 31, 1999, 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. As of December 31, 1998, 31 state commissions had issued
final orders finding that ILECs must pay mutual compensation to competitive
carriers for local calls to ISPs located on competitive carriers' networks, and
no state commission had ruled to the contrary. A number of other state
commissions currently have proceedings pending to consider this matter. On
February 25, 1999, the FCC issued an order that concluded that calls delivered
to ISPs continue to ultimate Internet web site destinations, which are often
located in other states, and that local access calls and ISP routing constitute
a single end-to-end transmission and are jurisdictionally "interstate" in
nature. However, the FCC further declared that where parties have previously
agreed that reciprocal compensation must be paid for ISP-bound traffic, the
parties are bound by those agreements, as interpreted and enforced by state
commissions. To date, at least five state commissions have considered the effect
of the FCC's order and have reaffirmed their earlier decisions requiring payment
of mutual compensation. No state commission has ruled to the contrary.
Management is pursuing this matter vigorously and believes the ILECs will
ultimately pay all amounts in full.
NOTE 6. SUBSEQUENT EVENT
On April 27, 1999, the Company's web hosting subsidiary, Digex,
Incorporated ("Digex"), filed a Form S-1 registration statement with the
Securities Exchange Commission for an initial public offering of common stock.
In connection with the offering, the Company's Internet connectivity subsidiary,
formerly known as DIGEX, Incorporated, changed its name to Business Internet,
Inc. Intermedia expects to own a majority interest in Digex immediately
following the public offering. However, the Company may take other actions in
the future which would further decrease its ownership interest. As more fully
disclosed in the Form S-1 as filed by Digex on April 27, 1999, there can be no
assurance that Digex will successfully complete the planned public offering.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto included herewith, and with
the Management's Discussion and Analysis of Financial Condition and Results of
Operations and audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998, filed with the Commission.
OVERVIEW
Intermedia has experienced substantial revenue growth since its inception
in 1986. 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.
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 728 network to network interfaces ("NNIs") and 167
data switches, Intermedia has established one of the most densely deployed frame
relay switching networks in the nation. The Company's nationwide interexchange
network, carries both its data network traffic and its voice network traffic.
The Company achieved $28.9 and $15.1 million positive EBITDA before certain
charges in 1998 and the first quarter of 1999, respectively, 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, charges 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.
The Company is party to various agreements with companies within the
telecommunications industry. These agreements are part of the Company's ICP
strategy and allow the Company to economically expand its product offerings into
new markets. On January 29, 1998, the Company announced a definitive multi-year
agreement to become a US West Communications' ("US West") interLATA data
services provider. Under the terms of this agreement, the Company granted US
West a license to utilize and market the Company's portfolio of enhanced data
services. 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 a 20 year period. The agreement covers approximately 14,000
route miles. On May 19, 1998, the Company entered into an agreement with
Ameritech Communications International ("Ameritech") for the mutual provisioning
of national data services. On September 21, 1998, the Company entered into a
multi-year agreement, having multiple one-year extension options, with Bell
Atlantic Corporation ("Bell Atlantic"). Under the terms of this agreement, Bell
Atlantic will resell Intermedia's high-speed and low-speed frame relay services
under the Bell Atlantic brand. The
10
<PAGE> 11
operational alignment between the two companies should result in an integrated
extension of Bell Atlantic's operations and service delivery functions, all
transparent to the customer, and Bell Atlantic will be licensed to use the
Company's advanced network monitoring system. Service under this agreement will
begin when and if Bell Atlantic gains approval to offer long-distance services
in its primary East Coast markets under the Telecommunications Act of 1996. On
April 27, 1999, the Company announced that it has entered into strategic
alliances with two DSL (digital subscriber line) companies, NorthPoint
Communications and Rhythms NetConnection Inc. These agreements will allow the
Company to purchase DSL transport to provide additional telecommunications
services such as high speed internet access, local and long distance services,
and frame relay to Intermedia's small and medium sized customers. Intermedia has
implemented DSL technology using its own network facilities for its
shared-tenant services (Comactiv) buildings to provide greater bandwidth for
data, voice, and internet access. The NorthPoint and Rhythms alliances will
enable the Company to increase its existing market coverage for its DSL
services.
PLAN OF OPERATION
For the remainder of 1999, the Company believes its revenue growth will be
balanced between its enhanced data and local exchange services. Based on the
Company's analysis of Federal Communications Commission market data and its
knowledge of the industry, the Company estimates that the market for enhanced
data, local exchange, and interexchange services will exceed $100.0 billion in
1999 in its service territory.
In order to develop its business more rapidly and efficiently utilizing 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, which efficiently combines multiple
data and voice protocols over a single network fabric. 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 revenue 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 Intermedia's 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 this operating leverage inherent in its networks.
11
<PAGE> 12
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain
information derived from the Unaudited Condensed Consolidated Statements of
Operations of the Company, expressed in percentages of revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------ -------
<S> <C> <C>
Revenues:
Local network services.................................... 25.9% 24.6%
Enhanced data services.................................... 29.4 26.7
Interexchange services.................................... 33.0 32.7
Integration services...................................... 11.7 16.0
----- ------
100.0 100.0
Expenses:
Network operations........................................ 45.9 52.3
Facilities administration and maintenance................. 11.1 11.0
Cost of goods sold........................................ 7.7 10.0
Selling, general and administrative....................... 28.0 33.9
Depreciation and amortization............................. 35.0 29.8
Charge off of purchased in-process R&D.................... -- 46.1
Business restructuring and integration.................... 2.6 --
----- ------
Loss from operations.............................. (30.3) (83.1)
Other income (expense):
Interest expense.......................................... (30.4) (36.0)
Other income.............................................. 3.2 7.8
----- ------
Net Loss.......................................... (57.4) (111.3)
Preferred stock dividends and accretions.................. (11.0) (13.6)
----- ------
Net loss attributable to common stockholders...... (68.4)% (124.9)%
===== ======
</TABLE>
The following table sets forth other statistical data derived from the
Company's operating records:
<TABLE>
<CAPTION>
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Transport, Local and Long Distance Services:(1)
Buildings connected(2).................................. 4,359 4,071
Voice switches in operation............................. 23 19
Access line equivalents................................. 376,742 220,587
Access line equivalents per local switch(3)............. 13,862 4,928
Enhanced data services:(1)
Data switches in operation.............................. 167 150
Nodes in service(4)..................................... 39,171 22,789
NNI connections......................................... 728 433
Employees(1).............................................. 4,128 3,329
</TABLE>
- ---------------
(1) Amounts reflected in the table are based upon information contained in the
Company's operating records.
(2) Includes buildings connected to Intermedia's network via facilities leased
by Intermedia in addition to those connected to Intermedia's network via
facilities constructed by or otherwise owned by Intermedia.
(3) Calculated by dividing the number of on-switch access line equivalents by
the number of switches providing local service.
(4) Amount represents an individual point of origination and termination of data
served by the Company's enhanced network.
12
<PAGE> 13
Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998:
Revenue
Total revenue increased 49.7% to $204.7 million for the first quarter of
1999 compared to $136.8 million for the same period in 1998. This increase was
partially due to the acquisitions of the affiliated entities known as the Long
Distance Savers group of companies (collectively, "LDS") at the end of the first
quarter of 1998 and National Telecommunications of Florida, Inc. and NTC, Inc.
(collectively, "National") during the second quarter of 1998. 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's core strategic revenue categories
continue to grow, and the Company plans to maintain its emphasis on sales of key
services such as enhanced data and local service. The Company also expects
continued demand created by customers in need of Year 2000 upgrades, which is a
catalyst for new systems purchases, as well as a positive revenue impact
resulting from the data agreements. The Company expects enhanced data and
Internet services to be a core component of its growth in revenue.
Local network services revenue increased 57.3% to $53.0 million for the
first quarter of 1999 compared to $33.7 million for the same period in 1998.
This increase was principally due to the acquisition of National during the
second quarter of 1998, and the continued rollout of local exchange services
into additional markets. The number of access line equivalents has increased by
156,155 from April 1, 1998 through the end of the first quarter of 1999. The
additional access line equivalents were primarily on-switch, contributing to
improved gross margins and allowing the Company to cross-sell additional
services to its customers. The Company has also continued its efforts to reduce
its base of local customers who utilize resale lines, which have historically
yielded low margins for Intermedia. In addition, the Company was certified as a
competitive local exchange carrier ("CLEC") in 37 states and the District of
Columbia as of the end of the first quarter of 1999.
Enhanced data services revenue increased 64.5% to $60.1 million for the
first quarter of 1999 compared to $36.5 million for the same period in 1998.
This increase was principally a result of the expansion of the Company's frame
relay and ATM network as well as strong growth in Internet and web related
services. As a result of the Company's integration of recent acquisitions, the
Company has consolidated a portion of its data traffic over fewer frame relay
switches for efficiency. Intermedia's data network expanded by 295 NNI
connections, 16,382 new frame relay nodes, and 17 data switches since April 1,
1998. In addition, the Company experienced an increase in sales of frame relay
services as a result of the Company's agreements with US West and Ameritech
during this time. The Company also experienced increased sales in Internet and
web hosting services due to improved revenue per customer and an increase in the
number of web hosting servers on line since April 1, 1998.
Interexchange services revenue increased 51.1% to $67.6 million for the
first quarter of 1999 compared to $44.8 million for the same period in 1998.
This increase resulted principally from the acquisitions of LDS at the end of
the first quarter of 1998 and National during the second quarter of 1998. These
increases were partially offset by the Company's decision during the second
quarter of 1998 to exit the low margin wholesale long distance business.
Integration services revenue increased 10.1% to $24.0 million for the first
quarter of 1999 compared to $21.8 million for the same period in 1998. This
increase was principally due to an increased demand for long term maintenance
contracts and the installation and sale of telecommunications equipment as
compared to the first quarter of 1998.
Operating Expenses
Total operating expenses increased 6.5% to $266.7 million for the first
quarter of 1999 compared to $250.4 million for the same period in 1998. The 1998
operating expenses include a $63.0 million charge for in-process research and
development that was recorded as a one time charge during the first quarter of
1998 in connection with the acquisition of Shared Technologies Fairchild Inc
("Shared"). The remaining net increase of $79.3 million resulted principally
from the acquisitions of LDS at the end of the first quarter of 1998 and
13
<PAGE> 14
National during the second quarter of 1998. The Company has also experienced
increased support costs relating to the significant expansion of the Company's
owned and leased networks and the increase in personnel to sustain and support
the Company's growth. In addition, the Company incurred approximately $5.4
million of restructuring Program costs in the first quarter of 1999.
Network expenses increased 31.3% to $93.9 million for the first quarter of
1999 compared to $71.5 million for the same period in 1998. The increase
resulted principally from the acquisitions of LDS at the end of the first
quarter of 1998 and National in the second quarter of 1998. The Company has also
incurred increased expenses in leased network capacity associated with the
growth of local network service, enhanced data service, and interexchange
service revenues. These increases are partially offset by reduced network
expenses, as a percentage of revenue, resulting from the Company's integrated
business strategy. The Company has also benefited from several network
agreements, including the Company's network agreement with Williams. Finally,
the Company has focused its selling efforts to on-switch access lines, which
have better gross margins and improved provisioning time.
Facilities administration and maintenance expenses increased 50.6% to $22.6
million for the first quarter of 1999 compared to $15.0 million for the same
period in 1998. The increase was principally due to the acquisitions of LDS at
the end of the first quarter of 1998 and National in the second quarter of 1998.
The increase also resulted from support costs relating to 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 additional
engineering and operations staff necessary to support and service the expanding
network. These increases were offset by administrative cost efficiencies that
were realized from the Company's integrated business strategy. Facilities
administration and maintenance expenses were also positively impacted by the
Company's exit of the wholesale long distance business.
Cost of goods sold increased 15.4% to $15.8 million for the first quarter
of 1999 compared to $13.7 million for the same period in 1998. This increase was
principally due to the increase in demand for telecommunications equipment.
Selling, general and administrative expenses increased 23.7% to $57.3
million for the first quarter of 1999 compared to $46.3 million for the same
period in 1998. The increase was principally due to the acquisitions of LDS at
the end of the first quarter of 1998 and National in the second quarter of 1998,
coupled with the Company's core growth strategy that required increases in sales
and marketing efforts and other increased support costs. Specifically, sales and
marketing increased approximately $5.5 million, management information services
increased approximately $.5 million, customer operations and circuit design and
provisioning increased approximately $3.0 million, and other general
administrative costs to support the administrative departments and corporate
development increased approximately $2.0 million. The increased employee base
was directly related to the need to support the Company's data agreements and
for the expansion in web hosting services facilities.
Depreciation and amortization expenses increased 75.6% to $71.6 million for
the first quarter of 1999 compared to $40.8 million for the same period in 1998.
This increase was principally due to depreciation and amortization of
telecommunications equipment placed in service since April 1, 1998 relating to
ongoing network expansion (including the irrecoverable right of use acquired
from Williams), and telecommunications equipment and intangibles purchased in
connection with the acquisitions of LDS and National. Depreciation and
amortization expense is expected to increase in future periods based on the
Company's plans to continue expanding its network.
The charge for in-process R&D of $63.0 million in the first quarter of 1998
represents the amount of purchased in-process R&D associated with the purchase
of Shared. This allocation represents the estimated fair value based on
risk-adjusted cash flows related to 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. The amounts assigned
to the in-process R&D were determined by identifying significant research
projects for which technological feasibility had not been
14
<PAGE> 15
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 nine months, after which time
the Company expects to begin generating economic benefits from the technologies.
Expenditures to complete these projects are expected to total approximately $1.0
million in 1999. This estimate is subject to change, given the uncertainties of
the development process, and no assurance can be given that deviations from this
estimate will not occur. Management expects to continue development of these
efforts and believes the Company has a reasonable chance of successfully
completing the 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 $5.4
million was recorded by the Company during the first quarter of 1999, which
consists of costs related to businesses exited and integration and other
restructuring costs. Such costs were comprised primarily of network integration,
back office accounting integration and information systems integration costs and
costs associated with positions scheduled to be eliminated by the second quarter
of 1999. These costs represent incremental, redundant, or convergence costs that
result directly from implementation of the Program but are required to be
expensed as incurred. Such costs were substantially in line with the amounts
expected 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 to
incur up to approximately $12.9 million of these costs over the remainder of the
Program. In addition, the Company expects future cash outlays of up to
approximately $17.3 million during the remainder of 1999.
Interest Expense
Interest expense increased 26.1% to $62.2 million for the first quarter of
1999 compared to $49.3 million for the same period in 1998. This increase
primarily resulted from interest expense on approximately $1.2 billion of Senior
Notes and Senior Subordinated Discount Notes issued from April 1, 1998 through
the end of the first quarter of 1999. Interest cost capitalized in connection
with the Company's construction of telecommunications equipment amounted to
approximately $2.5 million for the three months ended March 31, 1999.
Other Income
Other income decreased 38.9% to $6.6 million for the first quarter of 1999
compared to $10.7 million for the same period in 1998. This decrease was
primarily the result of interest earned on the comparatively higher level of
average cash balances in the first quarter of 1998 as compared to the first
quarter of 1999. The Company's high level of cash in the first quarter of 1998
was commensurate with the cash available for the Company's business acquisitions
that occurred during the first and second quarters of 1998. The 9.5% Senior
Notes and the 12.25% Senior Subordinated Discount Notes that were issued during
the first quarter of 1999 earned approximately one month of interest income for
the first quarter of 1999.
Net Loss
Net loss decreased 22.7% to $117.6 million for the first quarter of 1999
compared to $152.2 million for the same period in 1998. The decrease resulted
from the absence of the $63.0 million charge for in-process research and
development that was recorded as a one time charge during the first quarter of
1998 (discussed above), partially offset by increases in other costs (discussed
above). In addition, the Company has realized improved operating margins as a
result of the restructuring and integration program, improved product strategy,
and reduced network costs due to the network agreements. The Company's
"on-switch" sales strategy and focus on higher margin data and local products
have also contributed to the improved overall
15
<PAGE> 16
gross margins for Intermedia. The Company has reduced network operations expense
and selling, general and administrative expenses as a percentage of revenue as
compared to the first quarter of 1998.
Preferred Stock Dividends and Accretions
Preferred stock dividends and accretions increased 20.9% to $22.5 million
for the first quarter of 1999 compared to $18.6 million for the same period in
1998. The increase was due to the issuance of the Series F preferred stock in
August 1998. In addition, the Company paid dividends on the increased
outstanding shares 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 $24.9 million to $15.1 million for
the first quarter of 1999 compared to $(9.8) million for the same period in
1998. The integration of recent acquisitions contributed to improved EBITDA
before certain charges as a result of consolidating sales forces and introducing
the Company's products into additional markets. The Company has made significant
strides in restructuring its back-office and administrative functions and has
integrated its information systems and resources. 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 access lines "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 expenses and selling, general and
administrative expenses as a percentage of revenue in the first quarter of 1999
as compared to the same period in 1998.
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 $127.8 million and $77.0 million for the three months ended March
31, 1999 and 1998, 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, and (iv) continued
expansion of data centers related to the development of the Company's web
services.
During the first quarter of 1998, the Company utilized approximately $782.2
million of its available cash to complete the acquisition of Shared and
approximately $33.2 million of its available cash to complete the acquisition of
LDS. In addition, the Company utilized approximately $64.5 million of its
available cash to complete the acquisition of National in April 1998.
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 years. 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, including the
issuance of additional debt and/or equity securities, to meet its cash flow
requirements.
As more fully disclosed in Note 3 to the Condensed Consolidated Financial
Statements, the Company sold $300 million principal amount of 9.5% Senior Notes
and $364 million principal amount of 12.25% Senior Subordinated Discount Notes
in a private placement transaction on February 24, 1999. Net proceeds to the
Company amounted to approximately $488.8 million from both issuances. The
proceeds of the offering of the 9.5% Senior Notes cannot be used for working
capital purposes, and can only be used to fund the cost of acquiring or
constructing telecommunications related assets. The proceeds from the offering
of the 12.25%
16
<PAGE> 17
Senior Subordinated Discount Notes will be used for general corporate purposes,
including the funding of working capital and operating losses, and the funding
of a portion of the cost of acquiring or constructing telecommunications related
assets.
The Company believes its business plan to be funded through the first half
of 2000. Depending on market conditions, the Company may determine to raise
additional capital before such time. There can be no assurance, however, that
the Company will be successful in raising sufficient debt or equity on terms
that it will consider acceptable. Moreover, the terms of the Company's
outstanding indebtedness and preferred stock impose certain restrictions upon
the Company's ability to incur additional indebtedness or issue additional
preferred stock.
The Company has 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 such transaction 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. To ensure that its computer systems and
applications will function properly beyond 1999, the Company has implemented a
Year 2000 program.
Project and State of Readiness
The Company has developed a five-phase plan that is designed to assess the
impact of the Year 2000 issue on its information technology ("IT") and
non-information technology ("Non-IT") and remediate as necessary the
non-compliant components. This table represents management's best estimates with
respect to the mission-critical and non-mission-critical systems as outlined
below. The percentages indicate management's best estimate of completion as of
March 31, 1999.
<TABLE>
<CAPTION>
PHASE COMPLETION IT COMPLETION NON-IT COMPLETION
- ---------------- --- ---------- ------ ----------
<C> <S> <C> <C> <C> <C>
I Preliminary Activity............................... 100% 12/31/97 100% 12/31/97
II Problem Determination.............................. 100% 9/30/98 80% 3/31/99
III Plan Complete & Resources Committed................ 90% 06/01/99 80% 6/01/99
IV Operational Sustainability......................... 70% 9/30/99 70% 9/30/99
V Fully Compliant.................................... 70% 9/30/99 70% 11/30/99
</TABLE>
Due to the fact that it is not always necessary to complete one phase prior
to beginning the next, some projects within a given phase have been started,
while there may be outstanding tasks associated with prior phases. Priority is
always placed on mission critical systems.
Phase I Preliminary Activity
This is a phase of awareness and education. The outcome of this phase was
Intermedia's understanding of the criticality, risks, size and scope of its Year
2000 problem.
17
<PAGE> 18
Phase II Problem Determination
In this phase the Company performed an inventory and assessment to
determine which portions of its hardware and software would have to be replaced
or modified in order for its networks, office equipment and information
management systems to function properly after December 31, 1999. Such
determinations were based in part on representations made by hardware and
software vendors as to the Year 2000 compliance of systems utilized by the
Company. However, there can be no assurances that any vendor representations
received by the Company were accurate or complete. The Company also conducted a
risk assessment to identify those systems whose failure would be expected to
result in the greatest risk to the Company's business. As of March 31, 1999,
Phase II of the plan was 100% complete with respect to IT and 80% complete with
respect to Non-IT. The Company expects this phase to be ongoing throughout the
Year 2000 plan, as new systems are added and evaluated for compliance.
Much of the network equipment is located outside of the Company's
headquarters, and there can be no assurance that all mission critical equipment
has been inventoried and assessed.
Phase III Plan Complete & Resources Committed
During Phase III, the Company designed a plan to make the necessary
modifications to and/or replace the impacted software and hardware and committed
approximately $19.0 million towards the execution of such a plan. While the
Company believes it has substantially completed its plan for achieving Year 2000
compliance, the discovery of additional IT or Non-IT systems requiring
remediation could adversely impact the current plan and the resources required
to implement the plan.
Phase IV Operational Sustainability
The Company is actively engaged in Phase IV, utilizing both internal and
external resources to reprogram, or replace, and test certain components of its
networks and information processing systems for Year 2000 compliance and
scheduling the installation of other necessary hardware and software upgrades.
Although the Company intends to conduct tests to ensure the equipment is Year
2000 compliant, it will focus primarily on those systems whose failure would
pose the greatest risks to the Company's operations. There can be no assurance
that the Company has identified all mission critical IT or Non-IT systems. The
Company will likely not test all of its equipment and will rely upon vendor
representations, if received, where tests are not conducted. There can be no
assurance that any vendor representation will be accurate or complete. As of
March 31, 1999, Phase IV of the plan was 70% complete for IT and Non-IT. The
Company expects to complete Phase IV by September 30, 1999.
Phase V Fully Compliant
The Company plans to be fully compliant on mission-critical components no
later than November 30, 1999, which is prior to any anticipated impact on its
operating systems. Though the majority of the work will be completed by the
third quarter of 1999, there are elements that will not be completed (Phase V)
until the fourth quarter of 1999 primarily due to limited availability of
compliant software and hardware and prioritization of mission critical systems.
As of March 31, 1999, the Company estimates that its remediation efforts are
approximately 70% complete overall.
Intermedia is actively engaged in activities associated with Phase V with
respect to its core information systems and those of its recently acquired
subsidiaries as well as with respect to the associated hardware and network
components. The Company believes that it has allocated adequate resources for
this purpose and expects Phase V to be successfully completed on a timely basis.
However, there can be no assurance that it will successfully implement all of
the necessary upgrades or replacements in a timely manner. 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 or have any significant adverse impact on the Company's
customers or business units. However, if such modifications and conversions are
not made, or are not completed in a timely fashion, the Year 2000 problems could
have a material impact on the operations of the Company.
18
<PAGE> 19
Costs
The five-phase plan encompasses enterprise-wide projects which include
updating or replacing certain of the Company's core business systems. The
Company has tracked Year 2000 costs on an enterprise-wide basis, segregating its
internal and external costs and hardware and software costs. The internal costs
are comprised of employee hours and external costs are comprised of outside
consultant costs.
The cost estimates presented below do not include system upgrades that
would otherwise result as part of the Company's capital expenditure program
associated with integrating acquired companies. The estimated 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.
A summary of historical and estimated costs for the Year 2000 project are
listed below (in millions):
<TABLE>
<CAPTION>
EXTERNAL INTERNAL
-------- --------
<S> <C> <C>
Historical to date.......................................... $ 8.2 $1.8
Estimated for 1999.......................................... 11.6 2.0
</TABLE>
<TABLE>
<CAPTION>
SOFTWARE/HARDWARE
-----------------
<S> <C>
Historical to date.......................................... $13.3
Estimated for 1999.......................................... 14.4
</TABLE>
Risks and Contingency Plan
While the Company is working to test its own mission-critical systems for
Year 2000 compliance, the Company does not control the systems of its suppliers.
The Company is currently seeking assurance from its suppliers and strategic
business partners regarding the Year 2000 readiness of their systems. The
Company is currently conducting interoperability tests to ensure that its
suppliers' and business partners' systems will accurately interact with the
Company's systems into and beyond the Year 2000. Notwithstanding these measures
there is some risk that the interaction of the Company's systems and those of
its suppliers or business partners may be impacted by the Year 2000 date change.
In addition, in light of the vast interconnection and interoperability of
telecommunications networks worldwide, the ability of any telecommunications
provider, including the Company, to provide services to its customers (e.g., to
complete calls and transport data and to bill for such services) is dependent,
to some extent, on the networks and systems of other carriers. To the extent the
networks and systems of those carriers are adversely impacted by Year 2000
problems, the ability of the Company to service its customers may be adversely
impacted as well. Any such impact could have a material adverse effect on the
Company's operations.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Year 2000 Project is expected
to significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material suppliers and business partners. The Company believes that, with the
implementation of new business systems and completion of the Year 2000 project
as scheduled, the possibility of significant interruptions of normal operations
should be reduced.
19
<PAGE> 20
In a recent Securities and Exchange Commission release regarding Year 2000
disclosure, the Securities and Exchange Commission stated that public companies
must disclose the most reasonably likely worst case Year 2000 scenario. Although
it is not possible to assess the likelihood of any of the following events, each
must be included in a consideration of worst case scenarios: widespread failure
of electrical, gas, and similar supplies serving the Company; widespread
disruption of the services provided by common communications carriers; similar
disruption to the means and modes of transportation for the Company and its
employees, contractors, suppliers, and customers; significant disruption to the
Company's ability to gain access to, and remain working in, office buildings and
other facilities; the failure of substantial numbers of the Company's critical
computer hardware and software systems, including both internal business systems
and systems controlling operational facilities such as electrical generation,
transmission, and distribution systems; and the failure of outside entities'
systems, including systems related to banking and finance.
If the Company cannot operate effectively after December 31, 1999, the
Company could, among other things, face substantial claims by customers or loss
of revenue due to service interruptions, inability to fulfill contractual
obligations or to bill customers accurately and on a timely basis, and increased
expenses associated with litigation, stabilization of operations following
critical system failures, and the execution of contingency plans. The Company
could also experience an inability by customers and others to pay, on a timely
basis or at all, obligations owed to the Company. Under these circumstances, the
adverse effects, although not quantifiable at this time, would be material.
The Company believes that its critical systems will be Year 2000 compliant
before January 1, 2000. The Company formed an Executive Steering Committee
(ESC), which is comprised of senior management of the Company. The first meeting
of the ESC occurred during the first quarter 1999 to oversee and allocate
additional resources, if required, for the final plans for year 2000 readiness.
Having identified the mission-critical systems of the Company and its key
suppliers, and the associated risks of failure to ensure that those systems are
Year 2000 ready, the Company is in the process of devising contingency plans
which will be implemented in the event any such systems are not Year 2000
compliant in a timely manner. Business continuity plans are under development by
the Company and will be ready for implementation by the fourth quarter of 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
While all of the Company's long term debt bears fixed interest rates, the
fair market value of the Company's fixed rate long-term debt is sensitive to
changes in interest rates. The Company runs the risk that market rates will
decline and the required payments will exceed those based on the current market.
Under its policies, the Company does not use interest rate derivative
instruments to manage its exposure to interest rate changes.
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 the use of forward-looking terminology such as
"estimates," "projects," "anticipates," "expects," "intends," "believes," or the
negative thereof or other variations thereon or comparable terminology or by
discussions of strategy that involve risks and uncertainties. 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 report for the year ended December 31, 1998.
20
<PAGE> 21
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.
As more fully discussed in the Company's 1998 Annual Report on Form 10-K,
two purported class action complaints were filed against Intermedia, DIGEX, and
the directors of DIGEX on June 20, 1997. These complaints alleged 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 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. In
April 1999, the class action complaints were dismissed without prejudice.
ITEM 2. CHANGES IN SECURITIES
On February 24, 1999, the Company sold $300 million principal amount of
9.5% Senior Notes and $364 million principal amount at maturity of 12.25% Senior
Subordinated Discount Notes in a private placement transaction. Net proceeds to
the Company amounted to approximately $488.8 million for both issuances. For
additional information regarding the terms of 9.5% Senior Notes and 12.25%
Senior Subordinated Discount Notes refer to Note 3 of the Condensed Consolidated
Financial Statements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ -------
<C> <C> <S>
3.1 -- Restated Certificate of Incorporation of the Company,
together with all amendments, thereto. Exhibit 3.1 to the
Company's Registration Statement on Form S-4, filed with the
SEC on June 16, 1998 (No. 333-46369) is incorporated herein
by reference.
4.1 -- Senior Note Indenture, dated as of February 24, 1999,
between Intermedia and SunTrust Bank, Central Florida,
National Association, as trustee. Exhibit 4.7 to
Intermedia's Registration Statement on Form S-4 filed with
the SEC on April 15, 1999 (No. 333-76363) is incorporated
herein by reference.
4.2 -- Senior Subordinated Note Indenture, dated as of February 24,
1999 between Intermedia and SunTrust Bank, Central Florida,
National Association, as trustee. Exhibit 4.8 to
Intermedia's Registration Statement on Form S-4 filed with
the SEC on April 15, 1999 (No. 333-76363) is incorporated
herein by reference.
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ -------
<C> <C> <S>
4.3 -- Senior Note Registration Rights Agreement, dated as of
February 24, 1999, among Intermedia and the Initial
Purchasers. Exhibit 4.9 to Intermedia's Registration
Statement on Form S-4 filed with the SEC on April 15, 1999
(No. 333-76363) is incorporated herein by reference.
4.4 -- Senior Subordinated Note Registration Rights Agreement,
dated as of February 24, 1999, among Intermedia and the
Initial Purchasers. Exhibit 4.10 to Intermedia's
Registration Statement on Form S-4 filed with the SEC on
April 15, 1999 (No. 333-76363) is incorporated herein by
reference.
27.1 -- Financial Data Schedule (For SEC Use Only)
</TABLE>
(b) Reports on Form 8-K
The following reports on Form 8-K of the Company were filed during the
first quarter of 1999:
The Company filed a Current Report on Form 8-K/A, dated February 1,
1999, reporting under Item 7 the Company's Unaudited Pro Forma Condensed
Consolidated Financial Statements as of March 31, 1998.
The Company filed a Current Report on Form 8-K/A, dated February 1,
1999, reporting under Item 7 the Company's Unaudited Pro Forma Condensed
Consolidated Financial Statements as of June 30, 1998 and December 31,
1997.
The Company filed a Current Report on Form 8-K, dated February 9,
1999, reporting under Item 5 the commencement of a private offering of $500
million of ten-year notes, which was subsequently consummated and included
the Company's 9.5% Senior Notes and 12.25% Senior Subordinated Notes. In
addition, the Company reported its approval of a 1999 capital expenditure
budget of approximately $480 million. The Company also reported its intent
to cause its wholly-owned web hosting subsidiary, DIGEX, Incorporated, to
offer to sell a portion of its capital stock to the public.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 1999
INTERMEDIA COMMUNICATIONS INC.
(Registrant)
/s/ JEANNE M. WALTERS
--------------------------------------
Jeanne M. Walters
Vice President, Controller and
Chief Accounting Officer
23
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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875,365
0
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