-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BZvRsoZam5Nin+zYFDxcs89DCEIp/PFZJoI9oKRTuUo4A3CFyL5xMsjT0uAR5Se3 1OqzXMxPHeWdtlv97FPHhQ== 0000950144-97-009008.txt : 19970814 0000950144-97-009008.hdr.sgml : 19970814 ACCESSION NUMBER: 0000950144-97-009008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERMEDIA COMMUNICATIONS OF FLORIDA INC CENTRAL INDEX KEY: 0000885067 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 592913586 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20135 FILM NUMBER: 97658876 BUSINESS ADDRESS: STREET 1: 3625 QUEEN PALM DR STREET 2: STE 720 CITY: TAMPA STATE: FL ZIP: 33619 BUSINESS PHONE: 8138290011 10-Q 1 INTERMEDIA COMMUNICATIONS FORM 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------------- FORM 10-Q ----------------------------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1997 Commission File Number: 0-20135 INTERMEDIA COMMUNICATIONS INC. (Exact name of registrant as specified in its charter) DELAWARE 59-2913586 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3625 Queen Palm Drive Tampa, Florida 33619 (Address of principal executive offices) Telephone Number (813) 829-0011 ---------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No --- --- As of August 7, 1997, there were 16,674,258 shares of the Registrant's Common Stock outstanding. ================================================================================ Page 1 of 27 pages 2 INTERMEDIA COMMUNICATIONS INC. INDEX
PAGE NO. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED): Condensed Consolidated Statements of Operations - Three and six month periods ended June 30, 1997 and 1996.............................. 3 Condensed Consolidated Balance Sheets - June 30, 1997 and December 31, 1996 .......................................................... 4 Condensed Consolidated Statements of Cash Flows - Six month periods ended June 30, 1997 and 1996........................................ 5 Notes to Condensed Consolidated Financial Statements.......................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................... 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS............................................................. 23 ITEM 2. CHANGES IN SECURITIES......................................................... 23 ITEM 3. DEFAULT UPON SENIOR SECURITIES................................................ 24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................... 24 ITEM 5. OTHER INFORMATION............................................................. 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................. 25 SIGNATURES .............................................................................. 27
2 3 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements INTERMEDIA COMMUNICATIONS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996 ------------ ------------ ------------ ------------ Revenues: Local network services $ 8,433 $ 3,160 $ 13,642 $ 6,381 Enhanced data services 12,667 5,191 23,988 8,747 Interexchange services 27,703 7,248 53,240 12,558 Integration services 1,329 1,251 3,200 2,667 ------------ ------------ ------------ ------------ 50,132 16,850 94,070 30,353 Expenses: Network operations 37,261 9,302 67,263 16,551 Facilities administration and maintenance 5,790 1,152 11,424 1,903 Cost of goods sold 764 1,327 2,034 2,585 Selling, general and administrative 20,452 7,790 39,978 13,710 Depreciation and amortization 9,879 3,533 18,174 6,814 ------------ ------------ ------------ ------------ 74,146 23,104 138,873 41,563 ------------ ------------ ------------ ------------ Loss from operations (24,014) (6,254) (44,803) (11,210) Other income (expense): Interest expense (11,117) (8,023) (22,206) (13,405) Other income 5,482 2,034 9,956 3,478 ------------ ------------ ------------ ------------ Net loss (29,649) (12,243) (57,053) (21,137) Preferred stock dividends and accretions 9,848 -- 13,223 -- ------------ ------------ ------------ ------------ Net loss attributable to common stockholders $ (39,497) $ (12,243) $ (70,276) $ (21,137) ============ ============ ============ ============ Net loss per common share $ (2.39) $ (0.92) $ (4.30) $ (1.79) ============ ============ ============ ============ Weighted average number of shares outstanding 16,528,483 13,248,099 16,347,288 11,807,882 ============ ============ ============ ============
See accompanying notes. 3 4 INTERMEDIA COMMUNICATIONS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE INFORMATION)
JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- ASSETS Current Assets: Cash and cash equivalents $ 347,863 $ 189,546 Short-term investments 5,644 6,041 Restricted investments 16,686 26,675 Accounts receivable, less allowance for doubtful accounts of $2,574 in 1997 and $1,346 in 1996 26,835 19,272 Prepaid expenses and other current assets 6,224 5,230 --------- --------- Total current assets 403,252 246,764 Restricted investments 10,483 10,481 Telecommunications equipment 347,588 241,481 Less accumulated depreciation (53,667) (37,574) --------- --------- Telecommunications equipment, net 293,921 203,907 Intangible assets, net 46,488 48,397 Other assets 4,391 3,391 --------- --------- Total assets $ 758,535 $ 512,940 ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 27,799 $ 29,895 Other accrued expenses 14,348 10,307 Current portion of long term debt and capital lease obligation 159,693 532 --------- --------- Total current liabilities 201,840 40,734 Long-term debt and capital lease obligations 210,385 357,975 --------- --------- Total liabilities 412,225 398,709 Series B redeemable exchangeable preferred stock and accrued dividends, $1.00 par value; 600,000 shares authorized in 1997; 312,938 shares outstanding in 1997 301,387 -- Stockholders' equity: Common stock, $.01 par value; 50,000,000 shares authorized in both 1997 and 1996; 16,589,134 and 16,285,340 shares issued and outstanding in 1997 and 1996, respectively 166 163 Additional paid-in capital 210,219 212,811 Accumulated deficit (161,418) (91,141) Deferred compensation (4,044) (7,602) --------- --------- Total stockholders' equity 44,923 114,231 --------- --------- Total liabilities, redeemable preferred stock and stockholders' equity $ 758,535 $ 512,940 ========= =========
See accompanying notes. 4 5 INTERMEDIA COMMUNICATIONS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTH PERIOD ENDED JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- OPERATING ACTIVITIES Net loss $ (57,053) $ (21,137) Adjustments to reconcile net loss to net cash (used in) provided by operating activities Depreciation and amortization, including loan costs 18,943 6,811 Amortization of deferred compensation 722 96 Accretion of discount on notes 11,833 2,826 Provision for doubtful accounts 2,947 623 Changes in operating assets and liabilities: Accounts receivable (10,510) (7,608) Prepaid expenses and other current assets (2,057) (421) Accounts payable (2,095) 2,690 Other accrued expenses 4,041 1,619 --------- --------- Net cash (used in) provided by operating activities (33,229) (14,501) INVESTING ACTIVITIES Purchase of short-term investments -- (4,750) Purchase of business, net of cash acquired (165) -- Maturities of short-term investments 397 -- Maturities of restricted investments 9,989 9,200 Purchase of telecommunications equipment (107,022) (41,047) --------- --------- Net cash used in investing activities (96,801) (36,597) FINANCING ACTIVITIES Proceeds from sale of Series A preferred stock, net of issuance costs 288,164 -- Proceeds from issuance of senior discount notes -- 171,226 Proceeds from sale of common stock -- 111,769 Exercise of stock warrants and options 247 -- Principal payments on long-term debt and capital lease obligation (64) (604) --------- --------- Net cash provided by (used in) financing activities 288,347 282,391 Increase (decrease) in cash and cash equivalents 158,317 231,293 Cash and cash equivalents at beginning of period 189,546 50,997 --------- --------- Cash and cash equivalents at end of period $ 347,863 $ 282,290 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 11,181 $ 11,123 ========= =========
See accompanying notes 5 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. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Therefore, it is suggested that the accompanying condensed consolidated financial statements be read in conjunction with the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Operating results for the three and six month period ended June 30, 1997 are not necessarily an indication of the results that may be expected for the year ending December 31, 1997. Reclassification Certain prior year amounts have been reclassified to conform to the current year presentation. Pending Accounting Changes In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No, 128, "Earnings Per Share" ("FASB 128"), which establishes standards for computing and presenting earnings per share. FASB 128 replaces the presentation of primary and fully diluted earnings per share with basic and diluted earnings per share, respectively. Basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share are computed similarly to fully diluted earnings per share. The standard is effective for financial statements for periods ending after December 15, 1997, with earlier application not permitted. For the three and six month periods ended June 30, 1997 and June 30, 1996, earnings per share, under FASB 128, would not have been impacted. 6 7 Note 2 Preferred Stock On March 7, 1997, the Company sold 30,000 shares (aggregate liquidation preference $300 million) of its Series A Redeemable Exchangeable Preferred Stock, due 2009, (the "Series A Preferred Stock") in a private placement transaction. Net proceeds to the Company amounted to approximately $288 million. On June 6, 1997, the company issued 300,000 shares (aggregate liquidation preference $300 million) of its 13 1/2% Series B Redeemable Exchangeable Preferred Stock due 2009 (the "Preferred Stock"), which were registered under the Securities Act of 1933, as amended, in exchange for all outstanding shares of the Series A Preferred Stock pursuant to a registered exchange offer. Dividends on the Preferred Stock accumulate at a rate of 13 1/2% of the aggregate liquidation preference thereof and are payable quarterly, in arrears. Dividends are payable in cash or, at the Company's option, by the issuance of additional shares of Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. The Preferred Stock is subject to mandatory redemption at its liquidation preference of $1,000 per share, plus accumulated and unpaid dividends on March 31, 2009. The Preferred Stock will be redeemable at the option of the Company at any time after March 31, 2002 at rates commencing with 106.75%, declining to 100% on March 31, 2007. The Company may, at its, option, exchange some or all shares of the Preferred Stock for the Company's 13 1/2% Senior Subordinated Debentures, due 2009 (the "Exchange Debentures"). The Exchange Debentures mature on March 31, 2009. Interest on the Exchange Debentures is payable semi-annually, and may be paid in the form of additional Exchange Debentures at the Company's option. Exchange Debentures will be redeemable by the Company at any time after March 31, 2002 at rates commencing with 106.75%, declining to 100% on March 31, 2007. The Company is accreting the Preferred Stock to its liquidation preference through the due date of the Preferred Stock. The accretion for the three and six month periods ended June 30, 1997 was $285 thousand. The Company elected to issue approximately 13,000 additional shares of Preferred Stock, in lieu of cash, with an aggregate liquidation preference of $12.9 million in June 1997, in payment of the first quarterly dividend (accumulated from March 7, 1997 through June 30, 1997). Note 3 Acquisitions During June 1996, the Company acquired the Telecommunications Division of EMI Communications corporation (EMI) in exchange for 937,500 shares of the Company's common stock, valued at approximately $16.9 million. The acquisition was accounted for by the purchase method of accounting, with the purchase price allocated to the fair values of assets acquired, principally telecommunications equipment. EMI's telecommunications division, headquartered in Syracuse, New York, is a provider of frame relay based network services and interexchange private line services primarily in 7 8 the northeastern United States. EMI operates owned and leased microwave and fiber optic digital network capacity in New York, Massachusetts, Vermont, Rhode Island, Connecticut, New Jersey, Pennsylvania, Maryland and the District of Columbia and maintains POPs in most major cities in these states. During December 1996, the Company acquired, in two separate transactions, certain assets and the related businesses of Universal Telcom, Inc. (UTT) and NetSolve, Incorporated (NetSolve). The purchase price for UTT included 31,380 shares of the Company's common stock, valued at approximately $.9 million, and the assumption of approximately $2 million of UTT's liabilities. NetSolve was purchased for cash of $12.8 million. The acquisitions are accounted for by the purchase method of accounting, with the purchase price allocated to the fair value of assets acquired, principally goodwill. The goodwill, including an additional $.2 million for legal expenses, for these acquisitions has been adjusted during the first quarter of 1997 due to the finalization of the purchase price allocation. The following unaudited pro forma results of operations presents the consolidated results of operations as if the acquisition of UTT, NetSolve and EMI had occurred on January 1, 1996, and does not purport to be indicative of the results that actually would have occurred if the companies had been acquired as of that date or of results which may occur in the future.
Six Months Ended (In thousands) June 30, 1996 ----------------- Revenue $ 56,235 Net loss (22,368) Net loss attributable to common stockholders (22,368) Net loss per share (1.89)
Note 4 Subsequent Events On July 11, 1997, Intermedia's wholly owned subsidiary, Daylight Acquisition Corp., completed a merger with DIGEX, Incorporated, a leading nationwide business Internet services provider. The aggregate consideration for the acquisition was approximately $155 million and was funded with the Company's existing cash reserves. On July 10, 1997, the Company sold 6,000,000 Depositary Shares (the "Depositary Shares") (aggregate liquidation preference $150,000,000) each representing a one- hundredth interest in a share of the Company's 7% Series D Junior Convertible Preferred Stock, (the "Series D Preferred Stock"), in a private placement transaction. Subsequent thereto, the over-allotment option with respect to the Depositary Shares was exercised and the Company sold an additional 900,000 Depositary Shares (aggregate liquidation preference of $22,500,000). Net proceeds to the Company amounted to approximately $167 million. Dividends on the Series D Preferred Stock will accumulate at a rate of 7% of the aggregate liquidation preference thereof and are payable quarterly, in arrears. Dividends are payable in cash or, at the Company's option, by the issuance of 8 9 shares of Common Stock of the Company. The Series D Preferred Stock will be redeemable at the option of the Company at any time on or after July 19, 2000 at rates commencing with 104%, declining to 100% on July 19, 2004. The Depositary Shares will be convertible at any time after October 7, 1997, at the option of the holder into Common Stock of the Company at a conversion price of $38.90 per share of Common Stock, subject to certain adjustments. Concurrently with the sale of the Depositary Shares, the Company sold $606 million principal amount at maturity of 11 1/4% Senior Discount Notes due 2007 (the "Senior Discount Notes") in a private placement transaction. Subsequent thereto, the over- allotment option with respect to the Senior Discount Notes was exercised and the Company sold an additional $43 million principal amount at maturity of Senior Discount Notes. The issue price of the Senior Discount Notes was $577.48 per $1,000 principal amount at maturity of the Senior Discount Notes. Net proceeds to the Company amounted to approximately $365 million. Cash interest will not accrue on the Senior Discount Notes prior to July 15, 2002. Commencing January 15, 2003, cash interest on the Senior Discount Notes will be payable semi-annually in arrears on July 15 and January 15 at a rate of 11 1/4% per annum. The Senior Discount Notes will be redeemable, at the Company's option at any time on or after July 15, 2002, and are pari passu with all other senior indebtedness. The proceeds of the concurrent private offerings of the Depositary Shares and Senior Discount Notes will be used to retire or defease (the "Retirement") Intermedia's outstanding 13 1/2% Senior Notes due 2005 (the "13 1/2% Notes"), to fund continued implementation of the Company's business plan and for general corporate purposes. The Retirement will result in an extraordinary loss of approximately $42 million in the third quarter of 1997, related to the write-off of unamortized deferred finance costs and pre-payment penalties. Until such time as the Retirement becomes effective, the issuance by the Company of the 11 1/4% Senior Discount Notes will constitute an event which could be declared an Event of Default under the Indenture governing the 13 1/2% Notes 30 days after the receipt of notice from the trustee or the holders of 25% of the outstanding principal amount of the 13 1/2% Notes. If such an Event of Default were declared and the maturity of the 13 1/2% Notes were accelerated, this would constitute an Event of Default under the Indenture governing the Company's 12 1/2% Senior Discount Notes due 2006 (the "12 1/2% Notes") and under the Certificate of Designation setting forth the rights of the Preferred Stock. If the 13 1/2% Notes were accelerated, a portion of the funds deposited with the trustee could be used to repay the 13 1/2% Notes. If the 12 1/2% Notes were also accelerated, the Company would have available funds to pay the 12 1/2% Notes, but such payment would significantly deplete the funds available for the Company's capital expansion plan. An Event of Default would not lead to acceleration of the Preferred Stock or any other securities of the Company. 9 10 The Company has classified the 13 1/2% Notes as a current liability as of June 30, 1997 in the accompanying Balance Sheet due to the Company's intent that the Retirement be completed before the end of the current year. 10 11 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included herewith, and with the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations and audited consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1996 filed with the Securities and Exchange Commission. OVERVIEW Intermedia Communications Inc. (Intermedia or the Company), formerly Intermedia Communications of Florida, Inc. through May 29, 1996, is a rapidly growing provider of integrated telecommunications solutions for business, government, and the telecommunications industry. Headquartered in Tampa, Florida, Intermedia is the third largest (based on annualized telecommunications revenues) among providers referred to as Competitive Local Exchange Carriers (CLECs). Intermedia offers a full suite of local, long-distance and enhanced data telecommunications services to business and government end user customers, long distance carriers, Internet service providers, resellers, and wireless communications companies serving customers from 36 sales offices located throughout the eastern United States. Intermedia also provides enhanced data/ATM and Internet services in approximately 2,500 cities nationwide, offering customers seamless end-to-end connectivity virtually anywhere in the world. Since its inception in 1987, the Company has experienced substantial growth. Building from its original base in Florida, Intermedia is now a provider of integrated telecommunications services to customers that have a presence in the eastern United States. The Company currently has ten digital, fiber optic networks and provides end-to-end connectivity throughout the United States and many international markets. As its networks and service offerings have expanded, the Company has experienced significant year to year growth in revenues and customers. Intermedia competes with the Incumbent Local Exchange Carriers (ILECs) and Interexchange Carriers (IXCs) in its service territory and offers a full range of voice and data telecommunications services. Intermedia's customers include a broad range of business and government end users and IXC's. The Company delivers local network services, including local exchange service, primarily over digital fiber optic telecommunications networks that it either owns or leases. In some circumstances, 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 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. This intercity network combined with the Company's local/long distance voice switches allows the Company to provide interexchange long distance service domestically and internationally. At its inception, Intermedia provided special access and private line services to IXC's. 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 11 12 integration services in response to customer's needs and in 1992, Intermedia introduced its first enhanced data services to provide flexible capacity and highly reliable end-to-end data service for its business and government customers. The Company began offering interexchange long distance service in December 1994, Internet services in 1995 and local exchange services in 1996. The pace with which the Company has introduced new service offerings has enabled it to achieve substantial growth, improve its mix 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 over the next several years, 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, the IXC's may enter the market by becoming resellers of the Company's local services. If the IXC's pursue a reseller strategy, the amount of revenue the Company realizes from carriers may increase during this period. From 1992 through 1995, the Company had achieved positive EBITDA and increased its revenue base substantially. However, as a result of significant investments in resources necessary to launch local exchange services and expand enhanced data services, EBITDA decreased as a percentage of revenue and the Company's EBITDA was negative for 1996 and the two quarters of 1997. This was due to the significant up front expenses related to the development of its networks and leased facilities, the revenue from which is expected to be realized in later periods. The development of the Company's business and the installation and expansion of its networks have resulted in substantial capital expenditures and net losses during this period of its operations. Procurement of rights-of-way, 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 during its rapid expansion. In addition, the Company is experiencing rapid growth in marketing and selling expenses consistent with the addition of new customers and an increased level of selling and marketing activity. All of the marketing and selling expenses associated with the acquisition of new customers are expensed as they are incurred even though these customers are expected to generate recurring revenue for the Company for several years. The continued expansion of the Company's networks in anticipation of new customers and the marketing of services to new and existing customers is therefore adversely impacting EBITDA of the Company in the near term. The Company anticipates, but there can be no assurance, that as its customer base grows, incremental revenues will be greater than incremental operating expenses. On July 11, 1997, Intermedia's wholly owned subsidiary, Daylight Acquisition Corp., completed a merger (the "Merger") with DIGEX, Incorporated ("DIGEX"), a leading nationwide business Internet services provider. The aggregate consideration for the acquisition was approximately $155 million and was funded with the Company's existing cash reserves in July 1997. On June 24, 1997, the Company purchased from Telco Communications Group, Inc. ("Telco") five long distance voice switches and ancillary network equipment located in Atlanta, Chicago, Dallas, Los Angeles and New York (the "Telco Acquisition"). Three of these switches will be upgraded to local/long distance voice switches, consistent with the Company's planned deployment of fifteen local/long distance voice switches by the end of 1997. As part of the Telco Acquisition, the Company also acquired certain network transport services for a three 12 13 year period. The aggregate purchase price of the Telco Acquisition was approximately $38 million, which was substantially included in the Company's planned expenditures for 1997. The company believes that the Telco Acquisition will allow the Company to more rapidly deploy local/long distance voice switches in these markets and to do so at a lower overall cost. In addition, the transport services acquired as part of the Telco Acquisition will permit the Company to accelerate its deployment of ATM in its intercity and intracity networks. Implementation of ATM will facilitate additional enhanced data and voice services and network efficiencies. During the remainder of 1997 and beyond, the Company believes that its growth will be balanced among its local exchange, long distance and enhanced data services. Based on the Company's analysis of FCC data and its knowledge of the industry, the Company estimates that the market for local exchange, long distance and data services was approximately $25 billion in 1996 in the Company's service territory. As a result of the Company's planned expansion in 1997, the Company expects to be positioned to provide these services in markets with a total opportunity of approximately $34 billion by the end of 1997, exclusive of the opportunities provided by the DIGEX acquisition. In order to develop its business more rapidly and efficiently utilize its capital resources, Intermedia plans to use the existing fiber optic infrastructure of other providers in addition to using its existing networks. 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 that 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, over time improve its EBITDA. For example, selling additional services, such as local exchange services, to existing or new customers allows the Company to utilize unused portions of the capacity inherent in its existing fiber optic networks. This operating leverage increases the utilization of the network with limited additional capital expenditures. The Company's strategy to offer a full complement of telecommunications services is designed to enable the Company to take advantage of the operating leverage of its networks. The following table presents, for the periods indicated, certain information derived from the Company's Condensed Consolidated Statements of Operations, expressed in percentages of revenue:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1997 1996 1997 1996 ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Local network services 16.8 % 18.8 % 14.5 % 21.0 % Enhanced data services 25.3 30.8 25.5 28.8 Interexchange services 55.3 43.0 56.6 41.4 Integration services 2.6 7.4 3.4 8.8 ----- ----- ----- ----- 100.0 100.0 100.0 100.0 Expenses: Network operations 74.3 55.2 71.5 54.5 Facilities administration and 11.5 6.8 12.1 6.3 maintenance Cost of goods sold 1.5 7.9 2.2 8.5 Selling, general and administrative 40.8 46.2 42.5 45.2 Depreciation and amortization 19.7 21.0 19.3 22.4 ----- ----- ----- ----- Loss from operations (47.8) (37.1) (47.6) (36.9) Other income (expense): Interest expense (22.2) (47.6) (23.6) (44.2) Other income 10.9 12.1 10.6 11.5 ----- ----- ----- ----- Net loss (59.1) (72.6) (60.6) (69.6) Preferred stock dividends and accretions 19.6 -- 14.1 -- ===== ===== ===== ===== Net loss attributable to common stockholders (78.7)% (72.6)% (74.7)% (69.6)% ===== ===== ===== =====
13 14 The following table sets forth other statistical data derived from the Company's operating records:
JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- Transport services: Buildings connected 1,680 414 Route miles 692 571 Fiber optic miles 33,197 21,232 Network cities in operation 10 9 Enhanced data services: Data switches installed 111 45 Frame relay cities 2,720 944 Nodes in service 15,096 3,521 NNI connections 321 110 Local and Long Distance Services: Voice switches in operation 12 3 Long distance billable minutes 101,538,231 49,025,233 Access line equivalents 30,733 - Employees 1,143 453
Quarter Ended June 30, 1997 Compared to Quarter Ended June 30, 1996: Revenue Total revenue increased 198% to $50.1 million for the second quarter of 1997 compared to $16.9 million for the same period in 1996. This increase primarily resulted from the acquisition of EMI, 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. Of the increase, approximately $14.7 million was attributable to the inclusion of EMI's operating results for the second quarter of 1997. Local network services revenue increased 167% to $8.4 million for the second quarter of 1997 compared to $3.2 million for the same period in 1996. This increase primarily resulted from the continued rollout of local exchange services into additional markets. The Company has 14 15 received CLEC certification in 26 states plus the District of Columbia as of the end of the second quarter of 1997. Enhanced data services revenue increased 144% to $12.7 million for the second quarter of 1997 compared to $5.2 million for the same period in 1996. This increase primarily resulted from the expansion of the Company's enhanced data network by 66 switches and 11,575 new frame relay nodes since July 1, 1996. In addition, the number of frame relay cities has increased by 1,776 during the same time period. Of the revenue increase, approximately $4.2 million was attributable to the inclusion of EMI's operating results for the second quarter of 1997. Interexchange services revenue increased 282% to $27.7 million for the second quarter of 1997 compared to $7.2 million for the same period in 1996. This increase primarily resulted from strong growth in long distance switched revenue and steady growth in interLATA transport. Of the increase, approximately $10.4 million was attributable to the inclusion of EMI's operating results for the second quarter of 1997. Integration services revenue increased 6% to $1.3 million for the second quarter of 1997 compared to $1.3 million for the same period in 1996. This increase primarily resulted from the Company's increased focus on providing a total service package for the customer. Operating Expenses Total operating expenses increased 221% to $74.1 million for the second quarter of 1997 compared to $23.1 million for the same period in 1996. The increase primarily resulted from the costs associated with the significant expansion of the Company's owned and leased networks and the continued expansion in personnel to sustain and support the Company's growth. Of the increase, approximately $11.8 million was attributable to the inclusion of EMI's operating results for the second quarter of 1997. Network operations expenses increased 301% to $37.3 million for the second quarter of 1997 compared to $9.3 million for the same period in 1996. This increase primarily resulted from the increases in leased network capacity that is associated with the growth of local network service, enhanced data service and interexchange service revenues. Of the increase, approximately $8.5 million was attributable to the inclusion of EMI's operating results for the second quarter of 1997. Facilities administration and maintenance expenses increased 403% to $5.8 million for the second quarter of 1997 compared to $1.2 million for the same period in 1996. Of the increase, approximately $1.2 million was attributable to the inclusion of EMI's operating results for the second quarter of 1997. In addition, the increase resulted from the expansion of the Company's owned and leased network capacity, increases in maintenance expense due to the network expansion and increased payroll expenses related to hiring additional engineering and operations staff to support and service the expanding network. 15 16 Selling, general and administrative expenses increased 163% to $20.5 million for the second quarter of 1997 compared to $7.8 million for the same period in 1996. This increase primarily resulted from the Company's continued growth and represented a major increase in the sales, marketing, management information services and customer service personnel, one time expenditures for employee recruitment, relocation, training and increased commissions relating to the rise in revenues for these periods. Of the increase, approximately $.9 million was attributable to the inclusion of EMI's operating results for the second quarter of 1997. Depreciation and amortization expenses increased 180% to $9.9 million for the second quarter of 1997 compared to $3.5 million for the same period in 1996. This increase primarily resulted from additions to telecommunications equipment placed in service during 1996 and the first six months of 1997, relating to ongoing network expansion. Interest Expense Interest expense increased 39% to $11.1 million for the second quarter of 1997 compared to $8 million for the same period in 1996. This increase primarily resulted from interest expense on the May 1996 issuance of $330 million principal amount of the Company's 12 1/2% Senior Discount Notes (the "12 1/2% Notes"). Other Income Other income increased 170% to $5.5 million for the second quarter of 1997 compared to $2 million for the same period in 1996. This increase was primarily the result of interest earned on the cash available from the excess proceeds relating to the May 1996 issuance of the 12 1/2% Notes, the May 1996 issuance of 4,674,503 common shares, par value $.01 per share, at $26.00 per share and the March 1997 issuance of 30,000 shares (aggregate liquidation preference $300 million) of the Company's 13 1/2% Series A Redeemable Exchangeable Preferred Stock (the "Series A Preferred Stock"). Net Loss Net loss increased 142% to $29.7 million for the second quarter of 1997 compared to $12.2 million for the same period in 1996. This increase was due primarily to the increased operating expenses resulting from the expansion of the network and increased interest costs. Preferred Stock Dividends and Accretions Preferred stock dividends and accretions of $9.8 million resulted from the March 1997 issuance of 30,000 shares (aggregate liquidation preference $300 million) of the Company's Series A Preferred Stock. EBITDA EBITDA decreased 420% to $(14.1) million for the second quarter of 1997 compared to $(2.7) million for the same period in 1996. This decline was the result of the acceleration in the deployment of Intermedia's capital expansion plan which significantly increased growth oriented 16 17 expenses, such as increases in sales, customer service and market development costs, prior to realizing revenues associated with these expenditures. Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996: Revenue Total revenue increased 210% to $94.1 million for the six months ended June 30, 1997 compared to $30.4 million for the same period in 1996. This increase primarily resulted from the acquisitions of EMI, 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. Of the increase, approximately $28.7 million was attributable to the inclusion of EMI's operating results for the six months ended June 30, 1997. Local network services revenue increased 114% to $13.6 million for the six months ended June 30, 1997 compared to $6.4 million for the same period in 1996. This increase primarily resulted from the continued rollout of local exchange services into additional markets. The Company has received CLEC certification in 26 states plus the District of Columbia as of the end of the second quarter of 1997. Enhanced data services revenue increased 174% to $24 million for the six months ended June 31, 1997 compared to $8.7 million for the same period in 1996. This increase primarily resulted from the expansion of the Company's enhanced data network by 66 switches and 11,575 new frame relay nodes since July 1, 1996. In addition, the number of frame relay cities has increased by 1,776 during the same time period. Of the revenue increase, approximately $8.2 million was attributable to the inclusion of EMI's operating results for the six months ended June 30, 1997. Interexchange services revenue increased 324% to $53.2 million for the six months ended June 30, 1997 compared to $12.6 million for the same period in 1996. This increase primarily resulted from strong growth in long distance switched revenue and steady growth in interLATA transport. Of the increase, approximately $20.5 million was attributable to the inclusion of EMI's operating results for the six months ended June 30, 1997. Integration services revenue increased 20% to $3.2 million for the six months ended June 30, 1997 compared to $2.7 million for the same period in 1996. This increase primarily resulted from the Company's increased focus on providing a total service package for the customer. Operating Expenses Total operating expenses increased 234% to $138.9 million for the six months ended June 30, 1997 compared to $41.6 million for the same period in 1996. The increase primarily resulted from the costs associated with the significant expansion of the Company's owned and leased networks and the continued expansion in personnel to sustain and support the Company's 17 18 growth. Of the increase, approximately $22 million was attributable to the inclusion of EMI's operating results for the six months ended June 30, 1997. Network operations expenses increased 306% to $67.3 million for the six months ended June 30, 1997 compared to $16.6 million for the same period in 1996. This increase primarily resulted from the increases in leased network capacity that is associated with the growth of local network service, enhanced data service and interexchange service revenues. Of the increase, approximately $15.6 million was attributable to the inclusion of EMI's operating results for the six months ended June 30, 1997. Facilities administration and maintenance expenses increased 500% to $11.4 million for the six months ended June 30, 1997 compared to $1.9 million for the same period in 1996. Of the increase, approximately $2.2 million was attributable to the inclusion of EMI's operating results for the six months ended June 30, 1997. In addition, the increase resulted from the expansion of the Company's owned and leased network capacity, increases in maintenance expense due to the network expansion and increased payroll expenses related to hiring additional engineering and operations staff to support and service the expanding network. Selling, general and administrative expenses increased 192% to $40 million for the six months ended June 30, 1997 compared to $13.7 million for the same period in 1996. This increase primarily resulted from the Company's continued growth and represented a major increase in the sales, marketing, management information services and customer service personnel, one time expenditures for employee recruitment, relocation, training and increased commissions relating to the rise in revenues for these periods. Of the increase, approximately $1.7 million was attributable to the inclusion of EMI's operating results for the six months ended June 30, 1997. Depreciation and amortization expenses increased 167% to $18.2 million for the six months ended June 30, 1997 compared to $6.8 million for the same period in 1996. This increase primarily resulted from additions to telecommunications equipment placed in service during 1996 and the first six months of 1997, relating to ongoing network expansion. Interest Expense Interest expense increased 66% to $22.2 million for the six months ended June 30, 1997 compared to $13.4 million for the same period in 1996. This increase primarily resulted from interest expense on the May 1996 issuance of the 12.5% Notes. Other Income Other income increased 186% to $10 million for the six months ended June 30, 1997 compared to $3.5 million for the same period in 1996. This increase was primarily the result of interest earned on the cash available from the excess proceeds relating to the May 1996 issuance of the 12.5% Notes, the May 1996 issuance of 4,674,503 common shares, par value $.01 per share, at $26.00 per share and the March 1997 issuance of 30,000 shares (aggregate liquidation preference $300 million) of the Series A Preferred Stock. 18 19 Net Loss Net loss increased 170% to $57.1 million for the six months ended June 30, 1997 compared to $21.1 million for the same period in 1996. This increase was due primarily to the increased operating expenses resulting from the expansion of the network and increased interest costs. Preferred Stock Dividends and Accretions Preferred stock dividends and accretions of $13.2 million resulted from the March 1997 issuance of 30,000 shares (aggregate liquidation preference $300 million) of the Series A Preferred Stock. EBITDA EBITDA decreased 506% to $(26.7) million for the six months ended June 30, 1997 compared to $(4.4) million for the same period in 1996. This decline was the result of the acceleration in the deployment of Intermedia's capital expansion plan which significantly increased growth oriented expenses, such as increases in sales, customer service and market development costs, prior to realizing revenues associated with these expenditures. 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 $107.1 million and $41 million for the six months ended June 30, 1997 and 1996, respectively. 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) development of the Company's enhanced data services. In addition, the Company utilized approximately $155 million of its available cash to complete the acquisition of DIGEX in July 1997. The Company has funded a substantial portion of these expenditures through the public sale of debt and equity securities and to a lesser extent, privately placed debt. From inception through December 31, 1996, the Company raised approximately $212.6 million from the sale of Common Stock, including Common Stock issued in connection with the acquisitions of FiberNet, Phone One, EMI and UTT, and $324.6 million from the sale of senior debt. The substantial capital investment required to build the Company's network has resulted in negative cash flow from operations after consideration of investing activities over the last five year period. This negative cash flow after investing activities was 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 19 20 investing activities for the next several years due to the expansion activities associated with the development of the Company's networks. Until sufficient cash flow after investing activities is generated from operations, 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 spending necessary to more rapidly exploit the market opportunity in the local exchange market. The Company expects to expend substantial amounts to upgrade its existing networks in order to switch traffic within the local service area in those states where it is currently permitted to provide such services. The Company is certified as a CLEC in 26 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 toward the further development of the Company's enhanced data service and interchange service offerings. The Company currently estimates that it will require approximately $90 million to fund anticipated capital requirements during the remainder of 1997, which it expects to fund from its available cash. The Company does not believe that the acquisition of DIGEX will have a material impact on its capital expenditure requirements. On March 7, 1997, the Company sold 30,000 shares (aggregate liquidation preference $300,000,000) of the Series A Preferred Stock in a private placement transaction. Net proceeds to the Company amounted to approximately $288 million. On June 6, 1997, the company issued 300,000 shares (aggregate liquidation preference $300 million) of its 13 1/2% Series B Redeemable Exchangeable Preferred Stock due 2009 (the "Preferred Stock"), which were registered under the Securities Act of 1933, as amended, in exchange for all outstanding shares of the Series A Preferred Stock pursuant to a registered exchange offer. Dividends on the Preferred Stock accumulate at a rate of 13 1/2% of the aggregate liquidation preference thereof and are payable quarterly, in arrears. Dividends are payable in cash or, at the Company's option, by the issuance of additional shares of Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. The Preferred Stock is subject to mandatory redemption at its liquidation preference of $1,000 per share, plus accumulated and unpaid dividends on March 31, 2009. The Preferred Stock will be redeemable at the option of the Company at any time after March 31, 2002 at rates commencing with 106.75%, declining to 100% on March 31, 2007. The Company may, at its, option, exchange some or all shares of the Preferred Stock for the Company's 13 1/2% Senior Subordinated Debentures, due 2009 (the "Exchange Debentures"). The Exchange Debentures mature on March 31, 2009. Interest on the Exchange Debentures is payable semi-annually, and may be paid in the form of additional Exchange Debentures at the Company's option. Exchange Debentures will be redeemable by the Company at any time after March 31, 2002 at rates commencing with 106.75%, declining to 100% on March 31, 2007. On July 11, 1997, Intermedia's wholly owned subsidiary, Daylight Acquisition Corp., completed a merger (the "Merger") with DIGEX, Incorporated ("DIGEX"), a leading 20 21 nationwide business Internet services provider. The aggregate consideration for the acquisition was approximately $155 million and was funded with the Company's existing cash reserves in July 1997. On July 10, 1997, the Company sold 6,000,000 Depositary Shares (the "Depositary Shares") (aggregate liquidation preference $150,000,000) each representing a one-hundredth interest in a share of the Company's 7% Series D Junior Convertible Preferred Stock, (the "Series D Preferred Stock"), in a private placement transaction. Subsequent thereto, the over-allotment option with respect to the Depositary Shares was exercised and the Company sold an additional 900,000 Depositary Shares (aggregate liquidation preference of $22,500,000). Net proceeds to the Company amounted to approximately $167 million. Dividends on the Series D Preferred Stock will accumulate at a rate of 7% of the aggregate liquidation preference thereof and are payable quarterly, in arrears. Dividends are payable in cash or, at the Company's option, by the issuance of shares of Common Stock of the Company. The Series D Preferred Stock will be redeemable at the option of the Company at any time on or after July 19, 2000 at rates commencing with 104%, declining to 100% on July 19, 2004. The Depositary Shares will be convertible at any time after October 7, 1997, at the option of the holder into Common Stock of the Company at a conversion price of $38.90 per share of Common Stock, subject to certain adjustments. Concurrently with the sale of the Depositary Shares, the Company sold $606 million principal amount at maturity of 11 1/4% Senior Discount Notes due 2007 (the "Senior Discount Notes") in a private placement transaction. Subsequent thereto, the over-allotment option with respect to the Senior Discount notes was exercised and the Company sold an additional $43 million principal amount at maturity of Senior Discount Notes. The issue price of the Senior Discount Notes was $577.48 per $1,000 principal amount at maturity of the Senior Discount Notes. Net proceeds to the Company amounted to approximately $365 million. Cash interest will not accrue on the Senior Discount Notes prior to July 15, 2002. Commencing January 15, 2003, cash interest on the Senior Discount Notes will be payable semi-annually in arrears on July 15 and January 15 at a rate of 11 1/4% per annum. The Senior Discount Notes will be redeemable, at the Company's option at any time on or after July 15, 2002, and are pari passu with all other senior indebtedness. The proceeds of the concurrent private offerings of the Depositary Shares and Senior Discount Notes will be used to retire or defease (the "Retirement") Intermedia's outstanding 13 1/2% Senior Notes due 2005 (the "13 1/2% Notes"), to fund continued implementation of the Company's business plan and for general corporate purposes. The Retirement will result in an extraordinary loss of approximately $42 million in the third quarter of 1997, related to the write-off of unamortized deferred finance costs and pre-payment penalties. Until such time as the Retirement becomes effective, the issuance by the Company of the 11 1/4% Senior Discount Notes will constitute an event which could be declared an Event of Default under the Indenture governing the 13 1/2% Notes 30 days after the receipt of notice from the trustee or the holders of 25% of the outstanding principal amount of the 13 1/2% Notes. If such an Event of Default were declared and the maturity of the 13 1/2% Notes were accelerated, this would constitute an Event of Default under the Indenture governing the 12 1/2% Notes and 21 22 under the Certificate of Designation setting forth the rights of the Preferred Stock. If the 13 1/2% Notes were accelerated, a portion of the funds deposited with the trustee could be used to repay the 13 1/2% Notes. If the 12 1/2% Notes were also accelerated, the Company would have available funds to pay the 12 1/2% Notes, but such payment would significantly deplete the funds available for the Company's capital deployment plan. An Event of Default would not lead to acceleration of the Preferred Stock or any other securities of the Company. The Company has classified the 13 1/2% Notes as a current liability as of June 30, 1997 in the accompanying Balance Sheet due to the Company's intent that the Retirement be completed before the end of the current year. The Company expects that its available cash, including proceeds from the concurrent offerings of the Senior Discount Notes and Depositary Shares and the exercise of the over-allotment options related to those concurrent offerings, and credit availability will be sufficient to fund its accelerated and expanded capital deployment plan. If the Company were to require additional financing, it would seek to obtain such financing through the sale of public or private debt and/or equity securities or through securing a bank credit facility. There can be no assurance as to the availability of the terms upon which such financing might be available. Moreover, the 12 1/2% Notes, the Senior Discount Notes and the 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 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 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" includes forward-looking statements that involve numerous risks and uncertainties. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in the section entitled "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 22 23 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 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, Incorporated ("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 and that Intermedia knowingly aided and abetted such violation by offering to retain DIGEX management in their present positions and consenting to stock option grants to certain executive officers of DIGEX. The Complaints sought preliminary and permanent injunction enjoining the 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 the DIGEX Directors. These cases are in their very early stages and no assurance can be given as to their ultimate outcome. Intermedia, after consultation with its counsel, believes that there are meritorious factual and legal defenses to the claims in the Complaints. Intermedia intends to defend vigorously the claims in the Complaints. ITEM 2. Changes in Securities On July 10, 1997, the Company sold 6,000,000 Depositary Shares (aggregate liquidation preference $150,000,000) each representing a one-hundredth interest in a share of Series D Preferred Stock, in a private placement transaction. Subsequent thereto, the over-allotment option with respect to the Depositary Shares was exercised and the Company sold an additional 900,000 Depositary Shares (aggregate liquidation preference of $22,500,000). Net proceeds to the Company amounted to approximately $167 million. Dividends on the Series D Preferred Stock will accumulate at a rate of 7% of the aggregate liquidation preference thereof and are payable quarterly, in arrears. Dividends are payable in cash or, at the Company's option, by the issuance of shares of Common Stock of the Company. The Series D Preferred Stock will be redeemable at the option of the Company at any time on or after July 19, 2000 at rates commencing with 104%, declining to 100% on July 19, 2004. The Depositary Shares will be convertible at any time after October 7, 1997, at the option of the holder into Common Stock of the Company at a conversion price of $38.90 per share of Common Stock, subject to certain adjustments. The Depositary Shares were issued and sold to the initial purchasers pursuant to an exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the "Act"). Each of the initial purchasers of the Depositary Shares represented to the Company, among other things, that (i) it is a qualified institutional buyer ("QIB"), (ii) it is not acquiring the Depositary Shares with a view to any distribution thereof that would violate the Act or the securities laws of any state of the United States or any other applicable jurisdiction, (iii) it will be re-offering and reselling the Depositary Shares only to QIBs in reliance on the exemption from the registration requirements of the Act provided by Rule 144A and to accredited investors in a private placement exempt from the registration requirements of the Act, 23 24 and (iv) no form of general solicitation or general advertising has been or will be used by it or any of its representatives in connection with the offer and sale of any of the Depositary Shares. ITEM 3. Defaults Upon Senior Securities The proceeds of the concurrent private offerings of the Depositary Shares and Senior Discount Notes will be used to fund the Retirement, to fund continued implementation of the Company's business plan and for general corporate purposes. The Retirement will result in an extraordinary loss of approximately $42 million in the third quarter of 1997, related to the write-off of unamortized deferred finance costs and pre-payment penalties. Until such time as the Retirement becomes effective, the issuance by the Company of the Senior Discount Notes will constitute an event which could be declared an Event of Default under the Indenture governing the 13 1/2% Notes 30 days after the receipt of notice from the trustee or the holders of 25% of the outstanding principal amount of the 13 1/2% Notes. If such an Event of Default were declared and the maturity of the 13 1/2% Notes were accelerated, this would constitute an Event of Default under the Indenture governing the 12 1/2% Notes and under the Certificate of Designation setting forth the rights of the Preferred Stock. If the 13 1/2% Notes were accelerated, a portion of the funds deposited with the trustee could be used to repay the 13 1/2% Notes. If the 12 1/2% Notes were also accelerated, the Company would have available funds to pay the 12 1/2% Notes, but such payment would significantly deplete the funds available for the Company's capital expansion plan. An Event of Default would not lead to acceleration of the Preferred Stock or any other securities of the Company. The Company has classified the 13 1/2% Notes as a current liability as of June 30, 1997 in the accompanying Balance Sheet due to the Company's intent that the Retirement will be completed before the end of the current year. ITEM 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders was held on May 22,1997. At the meeting, the following actions were taken by the stockholders: The following two members were re-elected to the Company's Board of Directors to hold office for terms expiring in 2000 or when their respective successors have been duly elected and qualified. The voting on the resolution was as follows:
Nominee For Against Abstained - ------- --- ------- --------- David C. Ruberg 15,162,700 - 307,900 Philip A. Campbell 15,167,500 - 303,100
The number of shares of Common Stock authorized for issuance under the Company's Long-Term Incentive Plan was increased from 1,500,000 shares to 2,500,000 shares. The voting on the resolution was as follows:
For Against Abstained Not voted --- ------- --------- --------- 8,645,042 3,679,125 23,042 3,123,391
24 25 An amendment to the Company's Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of preferred stock from 500,000 shares to 2,000,000 was approved. The voting on the resolution was as follows:
For Against Abstained Not voted --- ------- --------- --------- 9,926,378 2,389,584 31,247 3,123,391
An amendment to the Company's Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of the Company's 13 1/2% Series B Redeemable Exchangeable Preferred Stock due 2009 from 60,000 shares to 600,000 shares and to concurrently decrease the liquidation preference of each authorized share of Preferred Stock from $10,000 per share to $1,000 per share was approved. The voting on the resolution was as follows:
For Against Abstained Not voted --- ------- --------- --------- 11,613,514 667,048 66,647 3,123,391
The appointment of Ernst & Young LLP as the independent auditors of the Company for the fiscal year ending December 31, 1997 was ratified. The voting on the resolution was as follows:
For Against Abstained Not voted --- ------- --------- --------- 15,440,093 19,865 10,642 -
ITEM 5. Other Information None. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (For SEC Use Only) (b) Reports on Form 8-K The following reports on Form 8-K were filed during the second quarter of 1997 and through July 9, 1997: The Company filed a Current Report on Form 8-K, dated June 5, 1997, reporting under Item 5 an announcement concerning the Company's execution of a definitive agreement for the acquisition of DIGEX, Incorporated. The Company filed a Current Report on Form 8-K, dated June 24, 1997, reporting under Item 5 the commencement of two concurrent private offerings of its securities. The Company filed a Current Report on Form 8-K, dated July 9, 1997, reporting under Item 2 the completion of the acquisition of DIGEX, Incorporated by Daylight Acquisition, Corp., a wholly owned subsidiary of Intermedia 25 26 Communications Inc. The Company also reported under Item 5 the completion of the concurrent private placements of its securities. 26 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 11, 1997 INTERMEDIA COMMUNICATIONS INC. (Registrant) /s/ Robert M. Manning ------------------------------- Robert M. Manning Senior Vice President and Chief Financial Officer /s/ Jeanne M. Walters ------------------------------- Jeanne M. Walters Controller and Chief Accounting Officer 27 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF INTERMEDIA COMMUNICATIONS, INC. FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 347,863 32,813 26,835 2,574 0 403,252 347,588 53,667 758,535 201,840 370,078 301,387 0 166 44,757 758,535 3,200 94,070 2,034 138,873 0 0 22,206 (57,053) 0 (57,053) 0 0 0 (70,276) (4.30) (4.30)
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