INTERMEDIA COMMUNICATIONS INC, 10-Q/A, 1999-02-01

INTERMEDIA COMMUNICATIONS INC
10-Q/A, 1999-02-01
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<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 MARCH 31, 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 May 1, 1998, there were 22,043,089 shares of the
Registrant's Common Stock outstanding.

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<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, 1998 (restated)
and 1997.................................................... 3
Condensed Consolidated Balance Sheets -- March 31, 1998
(restated) and December 31, 1997............................ 4
Condensed Consolidated Statements of Cash
Flows -- Three-months ended March 31, 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................................... 13

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS........................................... 23

ITEM 2. CHANGES IN SECURITIES....................................... 23

ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................. 23

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 23

ITEM 5. OTHER INFORMATION........................................... 23

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 24

SIGNATURES............................................................ 25
</TABLE>

2
<PAGE> 3

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 31,
1998 1997
----------- -----------
RESTATED --
SEE NOTE 2
<S> <C> <C>
Revenues:
Local network services.................................... $ 33,677 $ 5,210
Enhanced data services.................................... 36,537 11,320
Interexchange services.................................... 44,751 25,537
Integration services...................................... 21,821 1,871
----------- -----------
136,786 43,938
Expenses:
Network operations........................................ 71,543 30,002
Facilities administration and maintenance................. 15,033 5,635
Cost of goods sold........................................ 13,690 1,270
Selling, general and administrative....................... 46,347 19,526
Depreciation and amortization............................. 40,776 8,294
Charge off of purchased in-process R&D.................... 63,000 --
----------- -----------
250,389 64,727
----------- -----------
Loss from operations........................................ (113,603) (20,789)
Other income (expense):
Interest expense.......................................... (49,301) (11,089)
Other income.............................................. 10,729 4,474
----------- -----------
Net loss.................................................... (152,175) (27,404)
Preferred stock dividends and accretions.................... (18,594) (3,375)
----------- -----------
Net loss attributable to common stockholders................ $ (170,769) $ (30,779)
=========== ===========
Basic and diluted loss per common share:
Net loss per common share................................. $ (9.67) $ (1.89)
=========== ===========
Weighted average number of shares outstanding............... 17,653,134 16,296,744
=========== ===========
</TABLE>

See accompanying notes.

3
<PAGE> 4

INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
RESTATED --
SEE NOTE 2
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 335,260 $ 756,923
Restricted investments.................................... 7,534 6,853
Accounts receivable, less allowance for doubtful accounts
of $6,044 in 1998 and $4,251 in 1997.................... 114,200 58,579
Prepaid expenses and other current assets................. 18,281 6,122
---------- ----------
Total current assets............................... 475,275 828,477
Telecommunications equipment.............................. 1,120,706 545,380
Less accumulated depreciation........................... (107,918) (81,534)
---------- ----------
Telecommunications equipment, net......................... 1,012,788 463,846
Intangible assets, net.................................... 915,640 138,028
Investment in Shared Technologies Fairchild Inc........... -- 403,571
Other assets.............................................. 43,140 41,048
---------- ----------
Total assets....................................... $2,446,843 $1,874,970
========== ==========

LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 87,337 $ 53,630
Accrued taxes............................................. 16,526 2,448
Accrued interest.......................................... 19,007 4,639
Other accrued expenses.................................... 32,885 5,792
Advance billings.......................................... 12,004 7,251
Current portion of long-term debt......................... 775 601
Current portion of capital lease obligations.............. 7,667 6,870
---------- ----------
Total current liabilities.......................... 176,201 81,231
Long-term debt.............................................. 1,292,813 1,224,455
Capital lease obligations................................... 440,297 20,417
Series B redeemable exchangeable preferred stock and accrued
dividends, $1.00 par value; 600,000 shares authorized in
1997; 345,710 and 334,420 shares issued and outstanding in
1998 and 1997, respectively............................... 334,742 323,146
Series D junior convertible preferred stock and accrued
dividends, $1.00 par value; 69,000 shares authorized,
issued and outstanding in 1998 and 1997................... 169,936 169,722
Series E junior convertible preferred stock, $1.00 par
value; 87,500 shares authorized; 80,000 shares issued and
outstanding in 1998 and 1997.............................. 196,759 196,008
Stockholders' equity (deficit):
Preferred stock, $1.00 par value; 460,000 and 1,211,000
shares authorized in 1996 and 1997, respectively, no
shares issued........................................... -- --
Series C preferred stock, $1.00 par value; 40,000 shares
authorized, no shares issued............................ -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 20,546,482 and 17,445,300 shares issued and
outstanding in 1998 and 1997, respectively.............. 205 175
Additional paid-in capital................................ 390,565 244,114
Accumulated deficit....................................... (546,775) (376,006)
Deferred compensation..................................... (7,900) (8,292)
---------- ----------
Total stockholders' (deficit)...................... (163,905) (140,009)
---------- ----------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit)................... $2,446,843 $1,874,970
========== ==========
</TABLE>

See accompanying notes.

4
<PAGE> 5

INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE-MONTHS ENDED
-----------------------
MARCH 31, MARCH 31,
1998 1997
----------- ---------
RESTATED --
SEE NOTE 2
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(152,175) $(27,404)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities
Depreciation and amortization, including loan costs....... 41,724 8,679
Amortization of deferred compensation..................... 392 472
Accretion of interest on notes payable.................... 18,502 5,916
Imputed interest related to the Shared acquisition........ 5,130 --
Charge off of purchased in-process R&D.................... 63,000 --
Accretion of interest on capital lease obligations........ 3,924 --
Provision for doubtful accounts........................... 2,731 1,269
Changes in operating assets and liabilities:
Accounts receivable.................................... (14,745) (3,877)
Prepaid expenses and other current assets.............. (2,391) 195
Other assets........................................... (772) (1,024)
Accounts payable....................................... 3,461 (12,638)
Other accrued expenses................................. 24,362 19,228
--------- --------
Net cash used in operating activities............. (6,857) (9,184)
INVESTING ACTIVITIES
Maturities of restricted investments........................ (681) (430)
Purchase of businesses, net of cash acquired................ (387,822) (223)
Maturities of short-term investments........................ -- 199
Purchases of telecommunications equipment................... (76,917) (33,110)
--------- --------
Net cash used in investing activities............. (465,420) (33,564)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net of issuance
costs..................................................... -- 288,875
Proceeds from issuance of long-term debt, net of issuance
costs..................................................... 48,493 --
Exercise of stock warrants and options...................... 3,913 130
Principal payments on long-term debt and capital lease
obligations............................................... (1,792) 56
--------- --------
Net cash provided by financing activities......... 50,614 289,061
Increase (decrease) in cash and cash equivalents............ (421,663) 246,313
Cash and cash equivalents at beginning of period............ 756,923 189,546
--------- --------
Cash and cash equivalents at end of period.................. $ 335,260 $435,859
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid............................................... $ 2,664 $ 135
Common stock issued as dividends on preferred stock......... 5,973 --
Common stock issued in purchase of business................. 137,176 --
Assets purchased under capital lease obligations............ 417,933 --
Preferred stock issued as dividends on preferred stock...... 11,290 --
Accretion of preferred stock................................ 776 --
</TABLE>

See accompanying notes.

5
<PAGE> 6

INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) necessary to present fairly the information set
forth therein have been included. The accompanying condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and footnotes included in the Annual Report on Form 10-K as
amended of Intermedia Communications Inc. ("Intermedia" or the "Company") for
the year ended December 31, 1997.

Operating results for the three-month period ended March 31, 1998 are not
necessarily an indication of the results that may be expected for the year
ending December 31, 1998.

Recently Issued Accounting Standards

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"), which supersedes Financial
Accounting Standards No. 14. SFAS 131 uses a management approach to report
financial and descriptive information about a Company's operating segments.
Operating segments are revenue-producing components of the enterprise for which
separate financial information is produced internally for the Company's
management. SFAS 131 is effective for fiscal years beginning after December 31,
1997, but is not required to be applied to interim financial statements in the
initial year of its application. Management is currently assessing the impact of
this Standard.

NOTE 2. 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. As a result, the Company increased goodwill
by $22.0 million. In 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.

The restatement resulted in the following impact on the Company's
previously reported results of operations for the three month period ended March
31, 1998 (in thousands except per share data).

6
<PAGE> 7
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1998
--------------
<S> <C>
Net loss:
As previously reported.................................... $(173,263)
Adjustment related to acquired in-process R&D............. 22,000
Adjustment related to additional amortization of
intangible assets...................................... (912)
---------
As restated............................................... $(152,175)
=========
Net loss per share -- basic and diluted
As previously reported.................................... $ (10.87)
Adjustment related to acquired in-process R&D............. 1.25
Adjustment related to additional amortization of
intangible assets...................................... (0.05)
---------
As restated................................................. $ (9.67)
=========
</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.

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>

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>

7
<PAGE> 8
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The amount allocated to in-process R&D ($63 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 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
are 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.

While material progress has been made on these projects, significant risk
is associated with their completion. If these projects are unsuccessful, their
expected contribution to revenues and profits will not materialize. 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 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 LDS Communications Group ("LDS"), a
regional interexchange carrier. The operating results of LDS for the one day of
ownership during the first quarter of 1998 are considered immaterial and will be
included in the Company's consolidated statement of operations commencing on
April 1, 1998. The balance sheet as of March 31, 1998 has been included in the
Company's consolidated balance sheet as of March 31, 1998. Aggregate
consideration for the acquisition was approximately $16.4 million in cash, plus
2,679,874 shares of the Company's Common Stock, par value $.01 per share (the
"Common Stock"), valued at approximately $137.2 million and the retirement of
$15 million in LDS's long-term debt. The
8
<PAGE> 9
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

The following unaudited pro forma results of operations present the
consolidated results of operations as if the acquisitions of DIGEX, Incorporated
("DIGEX"), which was acquired by the Company in 1997, Shared and LDS had
occurred on January 1, 1997. These pro forma results do not purport to be
indicative of the results that actually would have occurred if the acquisition
had been made as of that date or of results which may occur in the future.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenue..................................................... $ 166,798 $126,035
Net loss.................................................... (142,784) (34,146)
Net loss attributable to common stockholders................ (161,378) (38,597)
Basic and diluted net loss per common share................. (7.93) (2.03)
</TABLE>

On April 30, 1998, the Company completed the acquisition of privately held
National Telecommunications of Florida, Inc. and NTC, Inc. (collectively,
"National"), an emerging switch-based competitive local exchange carrier and
established interexchange carrier. Aggregate consideration for the acquisition
was approximately $63.1 million in cash, including the repayment of
approximately $2.8 million in National debt and $0.8 million in acquisition
related costs incurred to date, plus 1,454,898 shares of Common Stock, valued at
approximately $88.7 million.

The 20 year amortization period assigned to the goodwill arising from the
Company's acquisitions of Shared and LDS 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 two entities have already
successfully conducted business operations) particularly during periods of
increasing competition and technological developments. These companies have been
in operation approximately 13 and 8 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 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.

NOTE 4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

In January 1998, the over-allotment option with respect to the 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 $48.8 million.

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.

9
<PAGE> 10
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In March 1998, the Company and Williams Communications, Inc. ("Williams")
executed a Capacity Purchase Agreement which provides the Company with the right
to purchase transmission capacity on a non-cancelable indefeasible right of use
basis on the Williams fiber network for the next 20 years. The agreement covers
approximately 14,000 route miles of existing and planned network facilities. The
capitalized asset, consisting of the Company's rights to use network facilities,
including but not limited to, fiber, optronics/electronics, digital
encoders/decoders, telephone lines and microwave facilities, in the amount of
$417 million, is being depreciated over the 20-year estimated useful life of the
primary underlying network asset, the fiber.

Future minimum payments under the capital leases at March 31, 1998 are as
follows:

<TABLE>
<CAPTION>
WILLIAMS ALL OTHERS TOTAL
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Nine Months ended December 31, 1998.................. $ 17,648 $ 7,777 $ 25,425
Twelve Months ended:
1999................................................. 35,295 9,478 44,773
2000................................................. 41,178 6,612 47,790
2001................................................. 47,060 2,203 49,263
2002................................................. 52,943 1,745 54,688
2003................................................. 52,943 1,776 54,719
Thereafter........................................... 751,126 8,888 760,014
--------- -------- ----------
998,193 38,479 1,036,672
Less amount representing interest.................... (577,509) (11,199) (588,708)
--------- -------- ----------
Present value of future minimum lease payments....... 420,684 27,280 447,964
Less current portion................................. -- (7,667) (7,667)
--------- -------- ----------
$ 420,684 $ 19,613 $ 440,297
========= ======== ==========
</TABLE>

Certain executory costs, principally maintenance, associated with the
Williams agreement are being expensed as incurred.

NOTE 5. COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"). SFAS 130 requires that total comprehensive income be disclosed with equal
prominence as net income. Comprehensive income is defined as changes in
stockholders' equity exclusive of transactions with owners such as capital
contributions and dividends. Adoption of SFAS 130 had no impact on the Company,
as comprehensive income for the Company, as defined by SFAS 130, equals net
income for the quarter ended March 31, 1998.

10
<PAGE> 11
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6. 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 MARCH 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Numerator:
Net loss.................................................. $ (152,175) $ (27,404)
Preferred stock dividends and accretions.................. (18,594) (3,375)
----------- -----------
Numerator for basic loss per share -- loss attributable to
common stockholders.................................... (170,769) (30,779)
Effect of dilutive securities............................. -- --
----------- -----------
Numerator for diluted loss per share -- income
attributable to common stockholders after assumed
conversions............................................ $ (170,769) $ (30,779)
=========== ===========
Denominator:
Denominator for basic loss per share -- weighted-average
shares................................................. 17,653,134 16,296,744
Effect of dilutive securities............................. -- --
----------- -----------
Denominator for diluted loss per share -- adjusted
weighted-average shares and assumed conversions........ 17,653,134 16,296,744
=========== ===========
Basic loss per common share................................. $ (9.67) $ (1.89)
=========== ===========
Diluted loss per common share............................... $ (9.67) $ (1.89)
=========== ===========
</TABLE>

Unexercised options to purchase 2,796,777 and 2,382,112 shares of Common
Stock at March 31, 1998 and 1997, respectively, and outstanding convertible
preferred stock, convertible into 7,741,872 shares of Common Stock at March 31,
1998, were not included in the computations of diluted loss per share because
assumed exercise/conversion would be antidilutive.

NOTE 7. CONTINGENCIES

On June 20, 1997, two purported class action complaints were filed in the
Court of Chancery of the State of Delaware in and for New Castle County
respectively by TAAM Associates, Inc. and David and Chaile Steinberg (the
"Complaints"), purported stockholders of DIGEX on behalf of all non-affiliated
common stockholders of DIGEX against Intermedia, DIGEX and the Directors of
DIGEX (the "DIGEX Directors"). The Complaints allege that the DIGEX Directors
violated their fiduciary duties to the public stockholders of DIGEX by agreeing
to vote in favor of the merger between DIGEX and a wholly owned subsidiary of
Intermedia (the "Merger") and that Intermedia knowingly aided and abetted such
violation by offering to retain DIGEX management in their present positions and
consenting to stock option grants to certain executive officers of DIGEX. The
Complaints sought a preliminary and permanent injunction enjoining the Merger
but no applications were made for such injunctions prior to consummation of the
Merger on July 11, 1997. In addition, the Complaints seek cash damages from
DIGEX Directors. In August 1997, a motion to dismiss the Complaints was filed on
behalf of Intermedia, DIGEX and the DIGEX Directors. The action has been dormant
since that time.

These cases are in the early stages and no assurance can be given as to
their ultimate outcome. Intermedia, after consultation with its counsel,
believes that there are meritorious factual and legal defenses to the claims in
the Complaints. Intermedia intends to defend vigorously the claims in the
Complaints.

The Company is not a party to any other pending legal proceedings except
for various claims and lawsuits arising in the normal course of business. The
Company does not believe that these normal course of business

11
<PAGE> 12
INTERMEDIA COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 between the ILECs and the
Company related to terminating local traffic, which includes traffic terminating
with Internet service providers ("ISPs"), on each others' networks. During 1997,
the Company recognized revenue from these ILECs of approximately $10.2 million
for these services. During the first quarter of 1998, the Company recognized an
additional $5.4 million in revenue from these services. No payments were
received as the ILECs are disputing the Company's right to bill for such
services.

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 March 31, 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 8. SUBSEQUENT EVENT

On April 29, 1998, the Company announced that it has committed resources to
plan and implement the integration of acquired businesses to maximize the
synergies that will be realized and to reduce future costs. In connection with
the integration and realignment of the Company's businesses and operating
structure, the Company expects to record a one-time restructuring charge later
this year, the amount and timing of which is subject to the completion of a
detailed restructuring program.

12
<PAGE> 13

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 accelerating rate of revenue
growth. Building from its original base in Florida, Intermedia now provides
integrated telecommunications services nationally with a focus on customers who
have a substantial presence in the eastern United States. Through a combination
of internally generated growth and targeted acquisitions the Company has
expanded its service territory and dramatically increased its customer base.

Intermedia's customers include a broad range of business and government end
users and, to a lesser extent, ISPs and other carriers. The Company delivers
local network services, including local exchange service, primarily through
Company owned local and long distance switches and over a Company owned or
leased digital transport network. Often, leasing facilities enables the Company
to more rapidly initiate service to customers, reduces the risk of network
construction or acquisition and potentially improves cash flow due to the
reduction or deferment of capital expenditures. The Company also utilizes the
resale of ILEC local exchange services as a means of rapidly entering new
markets and establishing customer relationships. These resale customers may
later be migrated onto the Company's switches and network. The Company offers
enhanced data services to its customers on an extensive intercity network that
connects its customers, either through its own network or through other
carriers, to locations throughout the country and internationally. Through its
433 network to network interfaces ("NNIs") and 150 data switches, Intermedia has
established the most densely deployed frame relay switching network in the
nation. The Company's nationwide interexchange network, which it is upgrading to
provide 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.

The development of the Company's business and the expansion of its network
and systems infrastructure have resulted in substantial capital expenditures and
net losses during the past several years of its operations. Network operating
costs, administration and maintenance of facilities, depreciation of network
capital expenditures and sales, general and administrative costs will continue
to represent a large portion of the Company's expenses for the next several
years. In addition, the Company is experiencing rapid growth in marketing and
selling expenses consistent with the addition of new customers and an increased
level of selling and marketing

13
<PAGE> 14

activity. The Company anticipates that as its customer base grows, incremental
revenues will be greater than incremental operating expenses.

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 before interest, income taxes,
depreciation, amortization and one-time and certain non-recurring charges such
as the charge for in-process R&D. 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 1997 and the first quarter of 1998. The Company
expects EBITDA before certain charges to be positive for 1998.

On January 29, 1998, the Company announced a definitive multi-year
agreement to become US West Communication's ("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 certain
transaction expenses and fees relating to certain agreements with the final
payment made March 10, 1998 and funded with the Company's existing cash reserves
in March 1998. The operating results of Shared are included in the Company's
consolidated financial statements commencing on January 1, 1998.

On March 31, 1998, the Company acquired LDS, a regional interexchange
carrier. Aggregate consideration for the acquisition was approximately $16.4
million in cash, plus 2,679,874 shares of Common Stock, valued at approximately
$137.2 million and the retirement of $15 million in LDS's long-term debt. The
cash portion of the acquisition was funded with the Company's existing cash
reserves in March 1998. The operating results of LDS for the one day of
ownership during the first quarter of 1998 are considered immaterial and will be
included in the Company's consolidated statement of operations commencing on
April 1, 1998. The balance sheet as of March 31, 1998 has been included in the
Company's consolidated balance sheet as of March 31, 1998.

In March 1998, the Company and Williams executed a Capacity Purchase
Agreement which provides the Company with the right to purchase transmission
capacity on a non-cancelable indefeasible right of use basis on the Williams
fiber network for the next 20 years. The agreement covers approximately 14,000
route miles of existing and planned network facilities.

14
<PAGE> 15

National debt and $0.8 million in acquisition related costs incurred to date,
plus 1,454,898 shares of Common Stock, valued at approximately $88.7 million.

PLAN OF OPERATION

In 1998, the Company believes that its growth will be balanced among its
local exchange, long distance and enhanced data services. Based on the Company's
analysis of Federal Communications Commission data and its knowledge of the
industry, the Company estimates that the market for local exchange, long
distance and data services was approximately $34 billion in 1997 in the
Company's service territory. As a result of the Company's planned expansion in
1998, including the consummation of the acquisitions of Shared, LDS and
National, the Company expects to be positioned to provide these services in
markets with a total opportunity of more than $90 billion by the end of 1998.

In order to develop its business more rapidly and efficiently utilize its
capital resources, the Company plans to use the existing fiber optic
infrastructure of other providers in addition to using its own existing
networks. The Company believes transport provided on fiber optic systems has
become commodity-like, and its capital expenditures are better focused on
intelligent switching and other more strategic network components required to
implement a Packet/Cell Switched Network. While the Company will use significant
amounts of capital to deploy enhanced data and voice switches on a demand driven
basis in selected markets, Intermedia believes its substantial existing network
capacity should enable it to add new customers and provide additional services
that will result in 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 ENDED
-------------------------------
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
Local network services.................................. 24.6% 11.8%
Enhanced data services.................................. 26.7 25.8
Interexchange services.................................. 32.7 58.1
Integration services.................................... 16.0 4.3
------ -----
100.0 100.0
Expenses:
Network operations...................................... 52.3 68.3
Facilities administration and maintenance............... 11.0 12.8
Cost of goods sold...................................... 10.0 2.9
Selling, general and administrative..................... 33.9 44.4
Depreciation and amortization........................... 29.8 18.9
Charge off of purchased in-process R&D.................. 46.1 --
------ -----
Loss from operations...................................... (83.1) (47.3)
Other income (expense):
Interest expense........................................ (36.0) (25.2)
Other income............................................ 7.8 10.2
------ -----
</TABLE>

15
<PAGE> 16

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net loss.................................................. (111.3) (62.3)
Preferred stock dividends and accretions................ (13.6) (7.7)
------ -----
Net loss attributable to common stockholders.............. (124.9)% (70.0)%
====== =====
</TABLE>

The following table sets forth other statistical data derived from the
Company's operating records:

<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Local and Long Distance Services:(1)
Buildings connected(2).................................. 4,071 1,157
Voice switches in operation............................. 19 6
Long distance billable minutes.......................... 184,227,094 87,501,080
Access line equivalents................................. 220,587 17,385
Access line equivalents per local switch(3)............. 4,928 1,510
Enhanced data services:(1)
Data switches installed................................. 150 100
Frame relay cities(4)................................... 4,146 2,526
Nodes in service(5)..................................... 22,789 12,447
NNI connections......................................... 433 293
Employees................................................. 3,329 1,026
</TABLE>

- ---------------

(1) Amounts reflected in the table are based upon information contained in the
Company's operating records.
(2) Includes both on-net direct connections with Intermedia-owned fiber optic
cable and on-net extended connections with leased circuits.
(3) Calculated by dividing the number of on-switch access line equivalents by
the number of switches providing local service. Excludes access lines
contributed by Shared.
(4) Represents the number of discrete postal cities to which enhanced data
services are provided by the Company.
(5) Amount represents an individual point of origination and termination of data
served by the Company's enhanced network.

Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997:

Revenue

Total revenue increased 211% to $136.8 million for the first quarter of
1998 compared to $43.9 million for the same period in 1997. This increase was
principally through the acquisitions of DIGEX and Shared, the introduction of
new services and the increased focus of the Company's sales force on offering a
full suite of telecommunications services to an expanding market.

Local network services revenue increased 546% to $33.7 million for the
first quarter of 1998 compared to $5.2 million for the same period in 1997. This
increase was principally due to the acquisition of Shared during the first
quarter of 1998 and the continued rollout of local exchange services into
additional markets. The number of access line equivalents has increased by
203,202 since April 1, 1997, of which 111,600 are related to the acquisition of
Shared. The Company has received competitive local exchange ("CLEC")
certification in 36 states plus the District of Columbia as of the end of the
first quarter of 1998. Local network services revenue will be positively
impacted starting in the second quarter of 1998 by the acquisition of National
which closed on April 30, 1998.

Enhanced data services revenue increased 223% to $36.5 million for the
first quarter of 1998 compared to $11.3 million for the same period in 1997.
This increase was principally from the acquisition of DIGEX in July 1997 and the
expansion of the Company's enhanced data network by 50 switches, 140 NNI
connections and 10,342 new frame relay nodes since April 1, 1997. In addition,
the number of frame relay cities has increased by

16
<PAGE> 17

1,620 during the same time period. Enhanced data services revenue will be
positively impacted starting in the second quarter of 1998 by the acquisition of
LDS which closed on March 31, 1998.

Interexchange services revenue increased 75% to $44.8 million for the first
quarter of 1998 compared to $25.5 million for the same period in 1997. This
increase was principally from the acquisition of Shared during the first quarter
of 1998, strong growth in long distance switched revenue and steady growth in
interLATA transport. Long distance billable minutes have increased to 184.2
million minutes for the first quarter of 1998 compared to 87.5 million minutes
for the same period in 1997. Interexchange revenues will be negatively impacted
by an estimated $2 million per month by the Company's decision to exit the low
margin wholesale international long distance segment starting in the second
quarter of 1998. Interexchange revenues will be positively impacted starting in
the second quarter of 1998 by the acquisitions of LDS and National.

Integration services revenue increased 1,066% to $21.8 million for the
first quarter of 1998 compared to $1.9 million for the same period in 1997. This
increase was principally due to the acquisition of Shared during the first
quarter of 1998.

Operating Expenses

Total operating expenses increased 287% to $250.4 million for the first
quarter of 1998 compared to $64.8 million for the same period in 1997. The
increase was principally from the acquisition of DIGEX in July 1997, the
acquisition of Shared in the first quarter of 1998, increased expenditures to
prepare for the expected increase in volume from the US West agreement,
increased network operations expenditures related to increased traffic and
increased expenditures related to the implementation of manual processes and
procedures to augment some of the back-office functions which are at or near
capacity from an automation perspective. In addition, there has been significant
expansion of the Company's owned and leased networks and the continued expansion
in personnel to sustain and support the Company's growth. Operating expenses
will be impacted starting in the second quarter by the acquisition of both LDS
and Shared.

Network operations expenses increased 138% to $71.5 million for the first
quarter of 1998 compared to $30.0 million for the same period in 1997. The
increase was principally from the acquisition of DIGEX in July 1997 and the
acquisition of Shared in the first quarter of 1998. In addition, the Company has
incurred increases in leased network capacity that is associated with the growth
of local network service, enhanced data service and interexchange service
revenues. The Williams agreement is expected to positively impact network
operations expenses by eliminating certain backbone network leases that were
accounted for as operating leases.

Facilities administration and maintenance expenses increased 167% to $15.0
million for the first quarter of 1998 compared to $5.6 million for the same
period in 1997. The increase was principally from the acquisition of DIGEX in
July 1997 and the acquisition of Shared in the first quarter of 1998. In
addition, the increase resulted from the expansion of the Company's owned and
leased network capacity, increases in maintenance expense due to the network
expansion and increased payroll expenses related to hiring additional
engineering and operations staff to support and service the expanding network,
including the expected increase in volume on account of the US West agreement.

Cost of goods sold increased 978% to $13.7 million for the first quarter of
1998 compared to $1.3 million for the same period in 1997. This increase was
principally due to the acquisition of Shared during the first quarter of 1998.

Selling, general and administrative expenses increased 137% to $46.3
million for the first quarter of 1998 compared to $19.5 million for the same
period in 1997. The increase was principally from the acquisition of DIGEX in
July 1997 and the acquisition of Shared in the first quarter of 1998. The
acquisitions of DIGEX and Shared contributed to the increase by approximately
$8.3 million and $8.6 million, respectively. In addition, the increase was due
to the Company's continued growth, the increase in costs to prepare for the US
West agreement, and continued personnel growth represented by departmental
increases in sales of approximately $7.2 million, marketing of approximately
$0.8 million, management information services of approximately $1.1 million, and
customer service of approximately $2.5 million. Other increases of approximately
$10.2 million relate to one time expenditures for employee recruitment,
relocation, training, and increased commissions, relating to the rise

17
<PAGE> 18

in revenues for these periods. These expenses were also negatively impacted from
the increased expenditures related to the implementation of manual processes and
procedures to augment some of the back-office functions which are at or near
capacity from an automation perspective.

Depreciation and amortization expenses increased 392% to $40.8 million for
the first quarter of 1998 compared to $8.3 million for the same period in 1997.
This increase was principally from additions to telecommunications equipment
placed in service since April 1, 1997, relating to ongoing network expansion, as
well as the DIGEX acquisition, the Shared acquisition and the LDS acquisition
which contributed, based on preliminary estimates, approximately $113.3 million,
$662.6 million and $141 million of intangibles, respectively. Depreciation and
amortization expense is expected to increase in future periods as the Company
expands the network, depreciates the capital assets leased from Williams and
amortizes 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 this acquisition, 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 Shared purchase price 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 flow, 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, 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 these development
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 would result in the loss of the expected return inherent in the fair value
allocation.

Interest Expense

Interest expense increased 345% to $49.3 million for the first quarter of
1998 compared to $11.1 million for the same period in 1997. This increase
primarily resulted from interest expense on approximately $1.3 billion of senior
notes issued by the Company in 1997 and in January 1998, the non-cash imputed
interest charge of $5.1 million related to the acquisition of Shared and the
interest related to the capital lease with Williams. Included in 1998 interest
expense is $18.5 million of debt discount amortization and $0.9 million of
deferred loan cost amortization, both of which are non-cash items. Interest
expense capitalized in connection with the Company's
18
<PAGE> 19

construction of telecommunications equipment amounted to approximately $2.0
million and $0.8 million for the three months ended March 31, 1998 and 1997,
respectively.

Other Income

Other income increased 140% to $10.7 million for the first quarter of 1998
compared to $4.5 million for the same period in 1997. This increase was
primarily the result of interest earned on the cash available from the proceeds
of the issuance of securities in 1997 and the exercise of the over-allotment
option with respect to the 8.5% Senior Notes in January 1998.

Net Loss

Net loss increased 455% to $152.2 million for the first quarter of 1998
compared to $27.4 million for the same period in 1997. The increase was
principally from the acquisition of DIGEX in July 1997, and the acquisition of
Shared in the first quarter of 1998. In addition, the increased operating
expenses resulting from the expansion of the network, increased selling, general
and administrative costs, the charge for in-process R&D, and increased interest
costs contributed to the increase.

Preferred Stock Dividends and Accretions

Preferred stock dividends and accretions increased 451% to $18.6 million
for the first quarter of 1998 compared to $3.4 million for the same period in
1997. The increase was due to the issuance of the three series of preferred
stock in March 1997, July 1997 and October 1997. Preferred stock dividends were
paid in the form of Common Stock and preferred stock. No cash dividends are
expected by management in the foreseeable future.

EBITDA Before Certain Charges

EBITDA before certain charges increased 21.3% to $(9.8) million for the
first quarter of 1998 compared to $(12.5) million for the same period in 1997.
This increase was the result of the acquisition of Shared and the decrease in
network operation expenses, facilities administration and maintenance expenses
and selling, general and administrative expenses as a percentage of revenue in
the first quarter of 1998 as compared to the same period in 1997.

LIQUIDITY AND CAPITAL RESOURCES

The Company's operations have required substantial capital investment for
the purchase of telecommunications equipment and the design, construction and
development of the Company's networks. Capital expenditures for the Company were
approximately $77 million and $33 million for the three months ended March 31,
1998 and 1997, respectively, excluding capital leases and telecommunications
equipment acquired in connection with business acquisitions. The Company expects
that it will continue to have substantial capital requirements in connection
with the (i) expansion and improvement of the Company's existing networks, (ii)
design, construction and development of new networks, (iii) connection of
additional buildings and customers to the Company's networks, (iv) purchase of
switches necessary for local exchange services and expansion of interexchange
services and (v) continued development of the Company's enhanced data services.
During the first quarter of 1998, the Company utilized approximately $367
million of its available cash to complete the Shared acquisition and
approximately $31.5 million of its available cash to complete the LDS
acquisition. In addition, the Company utilized approximately $63.1 million of
its available cash to complete the acquisition of National in April 1998.

The Company has funded a substantial portion of these expenditures through
the public and private sale of debt and equity securities. From inception
through December 31, 1996, the Company raised approximately $212.6 million in
net proceeds from the sale of Common Stock, including Common Stock issued in
connection with certain acquisitions, and $324.6 million in net proceeds from
the sale of senior notes. During 1997 the Company raised approximately $957.5
million in net proceeds from the sale of senior notes and approximately $648.6
million in net proceeds from the sale of three series of preferred stock. All of
these issued series of preferred stock include provisions that may cause the
securities to be redeemed upon a change of control of the Company. As a result
of these redemption provisions, the Company is required to classify the
preferred stock
19
<PAGE> 20

outside of stockholders' equity on the Company's condensed consolidated balance
sheet at March 31, 1998. Additionally, none of the outstanding series of
preferred stock require the Company to pay cash dividends in the foreseeable
future.

The substantial capital investment required to build the Company's network
has resulted in negative cash flow after consideration of investing activities
over the last five year period. This negative cash flow after investing
activities is a result of the requirement to build a substantial portion of the
Company's network in anticipation of connecting revenue generating customers.
The Company expects to continue to produce negative cash flow after investing
activities for the next several years due to the continuous expansion and the
development of the Company's networks. Until sufficient cash flow after
investing activities is generated, the Company will be required to utilize its
current and future capital resources to meet its cash flow requirements,
including the issuance of additional debt and/or equity securities.

In response to the new pro-competitive telecommunications environment, the
Company has accelerated and expanded its capital deployment plan to allow for an
increased level of demand-driven capital spending necessary to more rapidly
exploit the market opportunity in the local exchange market. The Company expects
to commit substantial amounts of funds to upgrade its existing network in order
to switch traffic within the local service area in those states where it is
currently permitted to provide such services. As of March 31, 1998, the Company
was certified as a CLEC in 36 states and the District of Columbia, allowing the
Company to provide local exchange services in those markets. In addition, the
Company expects to expend capital for the further development of the Company's
enhanced data service and interchange service offerings.

A portion of the Company's expansion has occurred, and may continue to
occur, by means of acquisitions. In July 1997, the Company acquired DIGEX, a
leading nationwide business ISP. The aggregate cash consideration for the
acquisition was approximately $160 million and was funded with the Company's
then existing cash reserves. In March 1998, the Company acquired Shared. The
total aggregate cash consideration for Shared was approximately $769 million,
which was paid out in 1998 and 1997, including certain transaction expenses and
fees relating to certain agreements. This amount includes repayment of $123.5
million of Shared's outstanding bank debt (including accrued interest and
outstanding fees) in connection with the consummation of the acquisition. In
March 1998, the Company completed its acquisition of LDS for a purchase price of
approximately $169 million, of which approximately $137 million was paid in
Common Stock and approximately $31.5 million was paid in cash, including the
repayment of approximately $15 million of LDS debt.

On April 30, 1998, the Company completed the acquisition of privately held
National, an emerging switch-based competitive local exchange carrier and
established interexchange carrier. The aggregate consideration for the
acquisition was approximately $151.8 million, of which approximately $88.7
million was paid by delivering approximately 1.5 million shares of Common Stock
and approximately $63.1 million was paid in cash, including the repayment of
approximately $2.8 million in National debt and $0.8 million in acquisition
related costs incurred to date.

The Company expects that it will be EBITDA before certain charges positive
for 1998 and that its 1998 capital requirements (estimated as approximately $400
million which does not include the non-cash Williams network capacity purchase)
will be funded from available cash, cash generated from its 1998 operations, the
bank credit facility discussed below and/or other offerings of the Company's
debt securities. Continued funding of the Company's accelerated and expanded
capital deployment plan will require the Company to raise additional debt or
equity capital by the end of 1999. Depending on market conditions, the Company
may determine to raise additional capital before such time. There can be no
assurance, however, that the Company will be successful in raising sufficient
debt or equity on terms that it will consider acceptable. Moreover, the terms of
the Company's outstanding indebtedness and preferred stock impose certain
restrictions upon the Company's ability to incur additional indebtedness or
issue additional preferred stock. The Company has entered discussions with
several banks for a bank credit facility, although there can be no assurance
that a bank facility on terms satisfactory to the Company will be established.

The Company has from time to time held, and continues to hold, preliminary
discussions with (i) potential strategic investors (i.e. investors in the same
or a related business) who have expressed an interest in making an investment in
or acquiring the Company, (ii) potential joint venture partners looking toward
formation of strategic
20
<PAGE> 21

alliances that would expand the reach of the Company's network or services
without necessarily requiring an additional investment in or by the Company and
(iii) companies that represent potential acquisition opportunities for the
Company. There can be no assurance that any agreement with any potential
strategic investor, joint venture partner or acquisition target will be reached
nor does management believe that any thereof is necessary to successfully
implement its strategic plans.

IMPACT OF YEAR 2000

The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.

Based on an assessment, the Company determined that it will be required to
modify or replace portions of its software and hardware so that its systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company presently believes that with modifications to existing software and
conversions to new software and hardware, the Year 2000 issue will not pose
significant operational problems for its systems. However, if such modifications
and conversions are not made, or are not completed in timely fashion, the Year
2000 problems could have a material impact on the operations of the Company.

The Company is in the process of contacting all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues. The Company's total Year 2000 project cost and
estimates to complete include the estimated costs and time associated with the
impact of third party Year 2000 issues based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and would not have a
material adverse effect on the Company's systems.

The Company will utilize both internal and external resources to reprogram,
or replace, and test the software and hardware for Year 2000 compliance. The
Company's objective is to complete the Year 2000 project not later than December
31, 1998, which is prior to any anticipated impact on its operating systems. The
1998 cost of the Year 2000 project for the core Intermedia business is estimated
to be $1.3 million in external personnel costs, and is being funded through
operating cash flows. This cost may be reduced if software and hardware are
replaced with compliant systems as a result of other capital projects currently
scheduled. The remaining expenses would not be expected to have a material
effect on the results of operations. Through year-end 1997, the Company has
incurred approximately $380,000 in expenses related to the assessment of, and
preliminary efforts on, its Year 2000 project and the development of plans for
systems modifications and testing. For the first quarter of 1998, the Company
has incurred approximately $250,000 on its ongoing Year 2000 project.

Costs and timetables for Year 2000 projects associated with corporate
mergers and acquisitions are not included in the above estimates, and will be
funded on a case-by-case basis as they occur. During the first quarter of 1998
the Company has incurred approximately $25,000 related to systems review for two
of the Company's acquisitions. Assessments relating to additional costs to be
incurred for the Year 2000 project as it relates to the Company's acquisitions
is expected to be completed in the second quarter of 1998.

The costs of the project and the date which the Company has established to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, unanticipated mergers
and acquisitions, and similar uncertainties.

21
<PAGE> 22

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.

22
<PAGE> 23

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.

ITEM 2. CHANGES IN SECURITIES

On March 31, 1998, the Company acquired LDS for approximately $168.6
million including 2,679,874 shares of Common Stock (the "LDS Shares"), valued at
approximately $137.2 million. The LDS Shares were issued by the Company to the
former shareholders of LDS (the "LDS Shareholders"). The number of LDS Shares
payable to the LDS Shareholders was based upon the provisions in the Acquisition
Agreement dated as of December 17, 1997 by and among the Company and the LDS
Shareholders that set forth (i) the purchase price, (ii) the adjustments to be
made to the purchase price, (iii) the portion of the purchase price to be paid
by the issuance of Common Stock and (iv) that the Common Stock to be delivered
to the LDS Shareholders shall be deemed to be valued at $51.1875 per share. The
LDS Shares were transferred to the LDS Shareholders pursuant to an exemption
from registration provided for under Section 4(2) of the Securities Act of 1933,
as amended. Prior to the issuance of the LDS Shares, the LDS Shareholders
represented to the Company that: (i) they are acquiring the LDS Shares for their
own account for investment and without any view to any distribution thereof;
(ii) they understand that they must bear the economic risk of their investment
in the LDS Shares for an indefinite period of time; and (iii) they are aware of
the Company's business affairs and financial condition and have acquired
sufficient information about the Company to reach an informed and knowledgeable
decision to acquire the LDS Shares.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

23
<PAGE> 24

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ -------
<C> <C> <S>
2.1 -- Agreement and Plan of Merger dated as of February 11, 1998
among Intermedia, Sumter One Acquisition, Inc., Sumter Two
Acquisition, Inc., National Telecommunications of Florida,
Inc., NTC, Inc. and the stockholders of National. Exhibit
2.4 to Intermedia's Form S-3 (No. 333-46369) filed with the
Commission on February 13, 1998 is incorporated by
reference.
3.1 -- Restated Certificate of Incorporation of the Company,
together with all amendments thereto. Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the Quarter
ended September 30, 1997 is incorporated herein by
reference.
3.2 -- By-laws of the Company, together with all amendments
thereto. Exhibit 3.2 to the Company's Registration Statement
on Form S-1 (No. 33-64053) is incorporated herein by
reference.
27 -- Financial Data Schedule (For Commission Use Only)
</TABLE>

(b) Reports on Form 8-K

The following reports on Form 8-K were filed during the first quarter of
1998:

The Company filed a Current Report on Form 8-K, dated January 16,
1998, reporting under Item 5 the exercise of the over-allotment option
related to its private placement of 8 1/2% Senior Notes on December 23,
1997. The Company also reported under Item 7 the filing of pro forma
financial statements which give effect to certain recent and pending
acquisitions and recently completed financings as an exhibit to this
report.

The Company filed a Current Report on Form 8-K, dated February 11,
1998, reporting under Item 5 the issuance of a press release announcing the
execution of a definitive agreement to purchase National.

The Company filed a Current Report on Form 8-K, dated March 10, 1998,
reporting under Item 2 the merger of Moonlight Acquisition Corp.
("Moonlight"), a wholly owned subsidiary of Intermedia with and into Shared
as the final step in its acquisition of Shared. Intermedia filed Amendment
No. 1 to the Current Report on From 8-K, dated March 10, 1998, to report
under Item 2 the merger of Moonlight with and into Shared as the final step
in its acquisition of Shared. The unaudited pro forma condensed
consolidated financial statements were filed as an exhibit to this report.

24
<PAGE> 25

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.

INTERMEDIA COMMUNICATIONS INC.
(Registrant)

/s/ JEANNE M. WALTERS
--------------------------------------
Jeanne M. Walters
Vice President, Controller
and Chief Accounting Officer

Dated: January 29, 1999

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 342,794
<SECURITIES> 0
<RECEIVABLES> 120,244
<ALLOWANCES> 6,044
<INVENTORY> 0
<CURRENT-ASSETS> 475,275
<PP&E> 1,120,706
<DEPRECIATION> 107,918
<TOTAL-ASSETS> 2,446,843
<CURRENT-LIABILITIES> 176,201
<BONDS> 1,741,552
334,742
366,695
<COMMON> 205
<OTHER-SE> (163,810)
<TOTAL-LIABILITY-AND-EQUITY> 2,446,843
<SALES> 21,821
<TOTAL-REVENUES> 136,786
<CGS> 13,690
<TOTAL-COSTS> 100,266
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,731
<INTEREST-EXPENSE> 49,301
<INCOME-PRETAX> (152,175)
<INCOME-TAX> 0
<INCOME-CONTINUING> (152,175)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (170,769)
<EPS-PRIMARY> (9.67)
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</TABLE>