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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-23253
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ITC/\DELTACOM, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-2301135
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1791 O.G. Skinner Drive, West Point, Georgia 31833
(Address of principal executive offices)
(706) 385-8000
Registrant's telephone number, including area code
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Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant at March 22, 2002, based upon the last reported
sale price of the registrant's common stock on the Nasdaq National Market on
that date, was approximately $20.7 million.
The number of shares of the registrant's common stock outstanding on March
22, 2002 was 62,364,768.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business....................................................................... 1
Item 2. Properties..................................................................... 19
Item 3. Legal Proceedings.............................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders............................ 21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......... 22
Item 6. Selected Financial Data........................................................ 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................... 48
Item 8. Financial Statements and Supplementary Data.................................... 48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................... 48
PART III
Item 10. Directors and Executive Officers of the Registrant............................. 48
Item 11. Executive Compensation......................................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and Management................. 58
Item 13. Certain Relationships and Related Transactions................................. 63
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 67
.
Index to Consolidated Financial Statements.................................................. F-1
i
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," "intend," "plan" and similar words as they
relate to ITC/\DeltaCom, Inc. or our management are intended to identify some of
these forward-looking statements. All statements by ITC/\DeltaCom, Inc.
regarding our expected future financial position and operating results, our
business strategy, our financing plans, forecasted trends relating to the
markets in which we operate and similar matters are forward-looking statements.
We cannot assure you that our expectations expressed or implied in these
forward-looking statements will turn out to be correct. Our actual results could
be materially different from our expectations as a result of, among other
factors, the factors discussed under "Business-Regulation" and "-Risk
Factors."
Some of the information contained in this report concerning the markets and
industry in which we operate is derived from publicly available information and
from industry sources. Although we believe that this publicly available
information and the information provided by these industry sources is reliable,
we have not independently verified the accuracy of any of this information.
Unless we indicate otherwise, references in this report to "we," "us,"
"our" and "ITC/\DeltaCom" mean ITC/\DeltaCom, Inc. and its subsidiaries and
predecessors. Unless we indicate otherwise, we have rounded dollar amounts over
$1 million to one decimal place and dollar amounts less than $1 million to the
nearest thousand.
ii
PART I
Item 1. Business.
Overview
We provide voice and data telecommunications services to businesses in the
southern United States and regional telecommunications transmission services
over our network on a wholesale basis to other telecommunications companies. In
connection with these businesses, we own, operate or manage an extensive fiber
optic network in the southern United States.
We operate our business in three segments: retail services, broadband
transport services and e/\deltacom. Through our retail services operations, we
provide local telephone services, long distance telephone services, data
services, Internet services, customer premise equipment sale, installation and
maintenance services and related telecommunications services to customers served
by 35 branch offices in the southern United States. Through our broadband
transport services operations, we sell regional telecommunications transmission
capacity on a wholesale basis using our fiber optic network. Through our
e/\deltacom operations, which we commenced in March 2000, we provide customers
with colocation services, managed services and professional services primarily
through e/\deltacom's data center in Suwanee, Georgia.
In September 2001, we announced changes to our business plan as a result of
which:
. we have increased our focus on sales of our retail service offerings,
while planning to maintain our broadband transport services business
at current levels;
. we reduced planned capital expenditures by approximately $150 million
from $440 million through the end of 2003; and
. we reduced our workforce by approximately 20%, thereby reducing
annualized operating expenses by an estimated $22 million.
During 2001, our operational achievements included the following:
. we increased revenues from our local telephone services by 53% and
from our enhanced data services by 52%;
. we increased retail services access lines installed by 46% and
wholesale services access lines installed by 6.5%;
. we increased our total network mileage to approximately 9,980 route
miles;
. we pursued an enhanced data strategy with an introduction of a suite
of managed services, including Internet protocol, virtual private
network, firewall security, internal data services and a suite of
managed service offerings from e/\deltacom;
. we implemented new service level agreements under which e/\deltacom
undertakes to provide 100% Internet access and power availability; and
. we inaugurated a suite of e-billing solutions for retail services
customers.
1
We are incorporated in Delaware. Our principal executive offices are
located at 1791 O.G. Skinner Drive, West Point, Georgia 31833, and our telephone
number at that address is (706) 385-8000.
Services and Facilities
Services. We currently provide three basic services:
. integrated voice and data telecommunications services on a retail
basis, which we refer to as our "retail services ";
. regional telecommunications transmission services to other
telecommunications companies on a wholesale basis using our fiber
optic network and directory assistance services, which we refer to as
our "broadband transport services"; and
. colocation services, managed services and professional services
through our e/\deltacom division.
Retail Services. Our retail services involve the provision of voice and
data telecommunications services to end users and resellers. These retail
services include:
. local telephone services;
. long distance telephone services;
. toll-free calling, calling card and operator services;
. asynchronous transfer mode, frame relay and high-capacity broadband
private line services;
. primary rate interface connectivity and colocation services to
Internet service providers;
. enhanced services, including conference calling and fax broadcasting;
. consulting, integration, operation and proactive management of data
networks;
. in-depth network performance analysis and implementation and design
services for data network deployment;
. Internet and Web page hosting services; and
. customer premise equipment sales, installation and maintenance.
We intend to provide additional types of retail services to expand our
comprehensive bundle of value-added telecommunications services. Our
customer-focused software and network architecture permits us to present our
customers with one fully integrated monthly billing statement for the entire
package of retail services they purchase from us.
Local Telephone Services. We currently provide local telephone services by
using our network and facilities and by reselling the services of the former
monopoly local telephone companies, which we refer to as the "incumbent
carriers." Since our initial offering of local service in 1997, we have steadily
increased the percentage of services we provide over our network and facilities
compared to the services we provide by reselling the services of the incumbent
carriers. We offer local telephone services in all 35 markets in which we have a
branch office.
2
In connection with offering local telephone services, we have entered into
interconnection agreements with BellSouth Telecommunications, Inc., SBC
Communications Inc., Sprint Communications Company, L.P. and Verizon
Communications Inc. to resell the local telephone services of these incumbent
carriers and interconnect our network with the networks of these incumbent
carriers for the purpose of gaining immediate access to their unbundled network
elements. These interconnection agreements currently allow us to provide local
service on a resale basis or by purchasing the unbundled network elements
required to provide local service over our network and facilities. These
agreements allow us to enter new markets with reduced capital expenditures and
to offer local service to our customer base. The applicable state regulatory
authorities have either approved the terms of our interconnection agreements or
we expect that such approvals are imminent. Our interconnection agreements will
remain subject to review and modification by the applicable state regulatory
authorities. We believe, but cannot assure you, that these interconnection
agreements provide a foundation for us to provide local service on a reasonable
commercial basis. Factors that may adversely affect our ability to provide local
service on a reasonable commercial basis include unsettled legal and regulatory
issues, legal and regulatory developments and existing operational issues with
the incumbent carriers that are not resolved by the interconnection agreements.
BellSouth is the incumbent carrier in a majority of the markets in which we
offer local services. Our interconnection agreement with BellSouth, which we
entered into in March 1997 and that governed our ability to gain access to
BellSouth's unbundled network elements in all states where BellSouth is the
incumbent carrier, expired on July 1, 1999. We have entered into new
interconnection agreements with BellSouth in all nine BellSouth states. The
public utility commissions of Alabama, Florida, Georgia, North Carolina and
Tennessee have approved the new interconnection agreements applicable to those
states. Although the approval of the interconnection agreements applicable to
Kentucky, Louisiana, Mississippi and South Carolina remain pending before the
state public utility commissions of those states, we do not expect that approval
will be withheld.
Our strategy is to offer facilities-based local service in a majority of
our markets by colocating our equipment with that of the incumbent carriers with
which we have interconnection agreements. We began colocating our equipment in
some of BellSouth's central office locations during the first quarter of 1998.
As of December 31, 2001, we had completed physical colocation of 177 access
nodes and were offering our "Unity" service in all of the 35 markets in which we
have a branch office. The Unity service, which we market primarily to mid-sized
and major regional businesses, connects our customer's location to one of our
switches using a direct T-1 digital connection and provides the customer with
local and long distance calling capacity on any of the T-1's 24 available
channels.
In June 2000, we signed an agreement with BellSouth to offer a UNE-P, or
unbundled network element-platform, service in all of the BellSouth markets. To
provide the UNE-P service, we purchase all of the required facilities of
BellSouth at reduced prices. This allows us to convert existing resale customers
to facilities-based customers and to earn higher gross margins on the sale of
our services. Because of BellSouth operational delays, we did not begin to offer
this service to our customers until the fourth quarter of 2000. Through December
2001, we had installed over 36,500 UNE-P lines and expect to continue to convert
resale customers to this service during 2002. We expect that this conversion
will have a favorable impact on our gross margins.
Long Distance Telephone Services. We offer a wide range of retail long
distance telephone services, including traditional switched and dedicated long
distance, toll-free calling, international, calling card and operator services.
Data Services. We provide a variety of data services to our customers,
including point-to-point, asynchronous transfer mode, frame relay and Internet
protocol-based virtual private networking services. Our network equipment
enables customers to use a single network connection to communicate with
multiple connection sites throughout our fiber optic network. We will continue
to seek, through strategic business relationships with other providers, to
interconnect our fiber optic network with the fiber optic networks of those
other providers.
In the fourth quarter of 1999, we began offering our Integrated-T service,
which allows our customers to use a single digital T-1 transmission line for
both voice and data services, including frame relay, Internet access and private
line services. The Integrated-T service enables our customers to take advantage
of advanced features and lower costs offered by digital access and offers the
convenience of one service provider for voice and data services.
3
This product enables us to take advantage of our existing voice services and
network infrastructure by selling additional services, such as data services,
over the same transmission line.
In 2001, we inaugurated three new services intended to enhance our current
data offerings to mid-sized businesses and to take advantage of our existing
network infrastructure. These products include virtual private networking
services based on the Internet protocol, Internet security services, including
managed firewall services and our Intrusion Detection Service, and network
managed services. Our virtual private network offering provides our customers
with a dedicated line or secure dial-up access between multiple sites allowing
the same level of security, performance and availability as a private network.
The managed firewall service and our Intrusion Detection Service provide our
customers security for Internet connections and reduce our customer's capital
expenditures and personnel costs necessary to achieve this level of security.
Our network management services allow our customers to outsource all of their
frame relay network management to us. We intend to provide those customers with
complementary services that will range from reactive monitoring to proactive
vendor management.
Internet Access and Web Development. We provide dedicated Internet access,
electronic mail and Web hosting services. We expect that mid-sized and larger
businesses will require faster Internet access and larger bandwidth in the
future, and we intend to offer products that will meet that demand.
Local Telecommunications Services for Internet Service Providers. We
provide local wholesale telecommunications services to Internet service
providers. These services include primary rate interface connectivity between
our network and the network of the Internet service provider and equipment
colocation services that permit the Internet service provider to colocate its
modems, routers or network servers with our switching facilities.
Customer Premise Equipment. We sell, install and perform on-site
maintenance of equipment, such as telephones, office switchboard systems and, to
a lesser extent, private branch exchanges, for customers in the following
markets:
. Anniston, Birmingham, Dothan, Florence, Huntsville, Mobile and
Montgomery, Alabama;
. Albany, Atlanta, Augusta, Columbus and Macon, Georgia;
. Pensacola, Florida;
. Baton Rouge and New Orleans, Louisiana;
. Biloxi, Greenwood, Gulfport, Hattiesburg, Jackson and Tupelo,
Mississippi;
. Charlotte, North Carolina;
. Charleston, Columbia and Greenville, South Carolina; and
. Nashville, Tennessee.
We intend to offer these customer premise equipment sales, installation and
maintenance services in additional markets in the future, with the goals of
augmenting and supporting our sale of local and long distance services and
enhancing customer retention.
Broadband Transport Services. Our broadband transport services customers
include telecommunications carriers and non-facilities based carriers that have
switches but do not own transmission facilities, such as fiber optic cables.
These customers use our broadband transport services to transport their
customers' traffic between local access and transport areas, which are
geographic areas composed of contiguous local exchanges. Calls transmitted over
a long-haul circuit for a customer are generally routed by the customer through
a switch to a receiving terminal
4
in our network. We transmit the signals over a long-haul circuit to the terminal
where the signals are to exit our network. Our customer then routes the signals
through another switch and to the call recipient through a local carrier. We
offer our broadband transport services in varying degrees of speed and size.
Some of our services are used by our customers for very high capacity inter-city
connectivity and specialized high-speed data networking. We connect our network
to our customer's facilities either by local carrier or by a direct connection.
We typically bill our broadband transport services customers a fixed monthly
rate depending on the capacity and length of the circuit, regardless of the
amount that the circuit is actually used by the customer. We also offer
directory assistance services through our broadband transport services
business.
e/\deltacom. We established e/\deltacom in 2000. Our e/\deltacom business
provides colocation services, managed services and professional services,
primarily through its data center near Atlanta, Georgia.
Colocation Services. Our colocation services allow businesses to have a Web
presence without incurring significant capital expenditures, increasing traffic
on their corporate network or burdening their information technology staff. We
offer Web server hosting, security, software updates, monitoring and hardware
solutions. Our colocation services include Internet connectivity with varying
speeds of bandwidth, primary and secondary domain name services support, timely
reporting of system performance and continuous monitoring by our network
operations staff.
Managed Services. The four basic managed services we offer encompass
enhanced monitoring, managed security services, storage management services and
hardware management services. Our enhanced monitoring services consist of
extended monitoring to include not only port level monitoring, but also server
monitoring and detailed reporting. Our managed security services involve
firewall deployment, virtual private networks, vulnerability assessments,
content and virus scanning and authentication systems. e/\deltacom's storage
management services include the assessment and implementation of storage
solutions, which offer customers multiple technology and hardware choices. Our
hardware management services offer the customer e/\deltacom's ability to provide
hardware maintenance for servers from numerous vendors.
Professional services. Our professional services provide our customers with
a single source for the design and implementation of an e-business solution from
the needs assessment phase to the design, implementation and support phases.
These professional services include project management and methodology,
consulting, system design, implementation and deployment services, and
maintenance and support services.
During 2001, our e/\deltacom segment continued to experience an increase in
negative EBITDA, as adjusted, in operating losses and in negative cash flows
from operations. EBITDA, as adjusted, represents earnings before extraordinary
item, preacquisition loss, net interest, other income and other expenses,
income taxes and depreciation and amortization. Based on current market
conditions, we do not expect that this segment will generate positive EBITDA, as
adjusted, or positive cash flows from operations in the near term. As a result
of our need for improved liquidity and our strategic focus on our retail
services, we continue to evaluate alternatives for this segment, including the
elimination of additional operating expenses.
Facilities. As of December 31, 2001, we owned or managed approximately
9,980 route miles of a fiber optic network which covered portions of ten states
in the southern United States. As of the same date, our network extended to
approximately 175 points of presence, which are the locations along our network
where we are able to deliver telecommunications traffic to, and receive
telecommunications traffic from, other carriers for further transmission or
ultimate delivery to an end-user. These points of presence are located in most
major population centers in the areas covered by our fiber optic network and in
a significant number of smaller cities where our only competitor is the
incumbent carrier.
As of December 31, 2001, we owned approximately 6,180 route miles of our
fiber optic network, which we have built or acquired since 1992, either directly
or through indefeasible rights of use arrangements. In addition, we have
strategic relationships principally with three public utilities, Duke Power
Company, Florida Power & Light Company and Entergy Technology Company, pursuant
to which we market, sell and manage capacity on approximately 3,800 route miles
of network owned and operated by these three utilities. In addition, we are able
to purchase network capacity to some cities not covered by our owned and managed
network in North Carolina and South Carolina under a buy-sell agreement with CFN
FiberNet, LLC, which manages fiber optic facilities in those two states and in
one
5
additional state. This agreement enables the parties to buy and sell capacity on
each other's networks at pre-established prices, which are generally more
favorable than the prices for such capacity available in the open market. Under
this agreement, neither party is responsible for network maintenance charges
relating to the other party's network.
As a result of the changes to our business plan that we announced in
September 2001, we do not expect to spend a significant amount on capital
expenditures for our broadband transport business. We expect little, if any,
expansion of our network route mileage during 2002 and anticipate that any
capital expenditures associated with our network will be applied to maintain the
existing capabilities of the network.
We have implemented electronic redundancy, which enables traffic to be
rerouted to another fiber in the same fiber sheath in the event of a partial
fiber cut or electronic failure, over a portion of our network. At December 31,
2001, over 70% of our network traffic was also protected by geographical diverse
routing, a network design also called a "self healing ring," which enables
traffic to be rerouted in the event of a total cable cut to an entirely
different fiber optic cable, assuming capacity is available.
We purchase much of our network equipment, including switches, optical
transport products and access nodes, from Nortel Networks Inc. Under the
purchase agreement we entered into in November 2000, we have committed to
purchase up to $250 million of products and services from Nortel Networks from
November 1999 through December 2002. As of December 31, 2001, we had purchased
$113.1 million of such products and services. For additional information about
our agreement with Nortel Networks, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."
A key component of our network is our switches, which are the primary
electronic components that connect customers to our network and transmit voice
and data communications over our network. Our primary switching facilities for
voice and data communications consist of Nortel DMS-500 switches in the
following locations:
. Anniston, Birmingham and Montgomery, Alabama;
. Jacksonville, Ocala and West Palm Beach, Florida;
. Atlanta, Georgia;
. Gulfport, Mississippi;
. Greensboro, North Carolina;
. Columbia, South Carolina;
. Nashville, Tennessee; and
. Houston, Texas.
The Nortel DMS-500 switches are capable of handling both local and long distance
voice and data traffic.
We expect to continue to evaluate our network and assess the need for
additional switching capacity. We also have colocated 177 Nortel access nodes in
various markets in the southern United States. These access nodes enable us to
perform remote local and long distance switching in additional markets where we
do not have switches by using our Nortel DMS-500 switches as hosts to the access
nodes we locate in remote markets. The Nortel access nodes are connected to our
Nortel DMS-500 switching platform using our fiber optic network wherever
possible. This networking design, together with our interconnection agreements
with incumbent carriers such as BellSouth, has
6
enabled us to be a facilities-based provider of local and long distance
telephone services in all of our markets.
We are a member of the Associated Communications Companies of America, an
eight-member trade association that negotiates with carriers for wholesale
telecommunications services for its members. The collective buying power of its
members enables the association to negotiate as if it were one of the larger
long distance providers in the United States.
In November 2000, we opened and commenced operations in an initial portion
of e/\deltacom's data center in Suwanee, Georgia. We completed the remainder of
the facility in 2001. The data center, which serves as e/\deltacom's
headquarters, is a centralized facility that provides advanced Web server
hosting, server colocation and other services. Our e/\deltacom management team
manages the implementation and integration of e/\deltacom's services from this
facility. The data center floor space contains open racks, enclosed cabinets,
caged areas and suites or fully enclosed vaults. The center is connected through
multiple and diverse connections to our fiber optic network. Site access is
controlled by security officers, video surveillance and enhanced security
procedures, and the center is protected by advanced fire protection devices.
Temperature, humidity and dust are carefully maintained to promote uninterrupted
server operation. The data center also has redundant power supply systems to
provide a constant source of power in the event of a component failure.
Sales and Marketing
Retail Services. We focus our retail sales efforts on small, mid-sized and
major regional businesses in the southern United States. We market our retail
services through a sales force composed of direct sales personnel, technical
consultants and technicians. We believe that high-quality employee training is a
prerequisite for superior customer service and, as a result, require each member
of our retail sales force to complete our intensive training program. Our
marketing strategy is built upon the belief that customers prefer to hold one
company accountable for all of their telecommunications services. Each branch
office provides technical assistance for its voice, data, Internet and customer
premise equipment as required. Our customers are assured that they will have a
single point of contact, 24 hours a day, seven days a week, to support all of
the services they receive from us.
Our sales personnel make direct calls to prospective and existing business
customers, conduct analyses of business customers' usage histories and service
needs, and demonstrate how our service package will improve a customer's
communications capabilities and costs. Sales personnel locate potential business
customers by several methods, including customer referrals, market research,
telemarketing, and networking alliances, such as endorsement agreements with
trade associations and local chambers of commerce. Our sales personnel work
closely with our network engineers and information systems consultants to design
new service products and applications. Our branch offices also are primarily
responsible for coordinating service and customer premise equipment installation
activities. Technicians survey customers' premises to assess power and space
requirements, and coordinate delivery, installation and testing of equipment.
Our retail services contracts generally provide for payment in arrears
based on minutes of use for long distance services and in advance for local
telephone and data services. The agreements also generally provide that the
customer may terminate the affected service without a charge for early
termination in the event of substantial and prolonged outages arising from
causes within our control and for other specified causes. Generally, the
agreements provide that the customer must utilize at least a minimum amount,
measured by dollars or minutes of use, of switched long distance services per
month for the term of the agreement.
We also market our retail services through public relations,
advertisements, event sponsorships, trade journals, direct mail and trade
forums. Because we seek to distinguish our retail services largely based on the
convenience of our integrated bundle of these services and the benefits of our
comprehensive and individualized customer support, we continue to believe that
advertising and public relations will play a significant role in our retail
services marketing strategy.
7
Broadband Transport Services. We provide long distance voice and data
transmission services through long distance circuit contracts with other long
distance carriers, including WorldCom, Inc., Sprint, Qwest Communications
International Inc. and Cable & Wireless plc. As of December 31, 2001, we had
remaining future long-term contract commitments for broadband transport services
totaling approximately $69.2 million. These contracts expire on various dates
through 2008 and are expected to generate approximately $66.7 million in
revenues for us through 2006. We also provide our long-haul transmission
services to customers after contract expiration on a month-to-month basis. Our
long-haul contracts provide for fixed monthly payments, which are generally made
in advance. Although sales volumes from particular customers vary from year to
year, we have historically experienced success in retaining customers and
renewing long-haul circuit contracts.
e/\deltacom. e/\deltacom provides colocation services, managed services and
professional services from our data center in Suwanee, Georgia to business
customers primarily located in the Atlanta, Georgia area. e/\deltacom's sales
personnel make direct calls to prospective and existing business customers, work
closely with our engineering staff to design specific solutions for each
customer and seek to market e/\deltacom's services along with our bundle of
retail service offerings.
e/\deltacom markets its brand and services through advertising and public
relations campaigns, event sponsorships, trade journals and trade forums.
Competition
The telecommunications industry is highly competitive. We compete primarily
on the basis of price, availability, transmission quality, reliability, customer
service and variety of product offerings. Our ability to compete effectively
depends on our ability to maintain high-quality services at prices generally
equal to or below those charged by our competitors. In particular, price
competition in the retail services and broadband transport services markets
generally has been intense and is expected to increase. Our competitors include,
among others, AT&T Corp., Sprint and WorldCom for long distance telephone
services and BellSouth for local telephone services. These companies, among
others, have substantially greater financial, personnel, technical, marketing
and other resources, larger numbers of established customers and more prominent
name recognition than ITC/\DeltaCom. These companies also operate more extensive
transmission networks than we do. In addition, companies such as Broadwing Inc.
and Qwest have constructed or are constructing nationwide fiber optic systems,
including routes through portions of the southern United States in which we
operate our fiber optic network. We also increasingly face competition in the
long distance market from local carriers, resellers, cable companies and
satellite carriers, and may compete with electric utilities. We also may
increasingly face competition from businesses offering long distance data and
voice services over the Internet. These businesses could enjoy a significant
cost advantage because, at this time, they generally do not pay carrier access
charges or universal service fees.
Our principal competitor for local services is the incumbent carrier in the
particular market, including BellSouth in a large majority of our market areas.
Incumbent carriers enjoy substantial competitive advantages arising from their
historical monopoly position in the local telephone market, including
pre-existing customer relationships with all or virtually all end-users.
Further, we are highly dependent on incumbent carriers for local network
facilities and wholesale services required in order for us to assemble our own
local retail services. We also face competition from local carriers other than
incumbent carriers, which we refer to as "competitive carriers," some of which
already have established local operations in some of our current and target
markets. In addition, incumbent carriers are expected to compete in each other's
markets in some cases. Wireless telecommunications providers may develop into
effective substitutes for wireline local telephone service, which would further
increase competition.
Local and long distance marketing is converging, as other carriers offer
integrated retail services. For example, many competitive carriers also offer
long distance service to their customers and large long distance carriers, such
as AT&T, Sprint and WorldCom, have begun to offer local services in some
markets. We also compete with numerous direct marketers, telemarketers and
equipment vendors and installers with respect to portions of our business.
8
Regional Bell operating companies, such as BellSouth, are allowed to
provide outside their home regions "interLATA" long distance services, which are
long distance services that originate and terminate in different local access
and transport areas, as well as interLATA mobile services within their regions.
Under the Telecommunications Act of 1996, the regional Bell operating companies
are allowed to provide interLATA long distance services within their regions
after meeting requirements intended to foster opportunities for local telephone
competition. These companies already have extensive fiber optic cable, switching
and other network facilities in their respective regions that they can use to
provide long distance services. BellSouth and other regional Bell operating
companies are taking significant steps toward obtaining approval to provide
in-region long distance service. As of March 20, 2002, the FCC had approved
applications of Verizon Communications to provide in-region long distance
service in Connecticut, Massachusetts, New York, Pennsylvania and Rhode Island,
and of SBC Communications to provide in-region long distance service in
Arkansas, Texas, Kansas, Missouri and Oklahoma. Verizon Communications has an
additional application pending in Vermont, and BellSouth has filed for approval
to enter the long distance market in Georgia and Louisiana. If the FCC permits
BellSouth to provide long distance service in those or other states before
meeting our local interconnection needs, BellSouth would be able to duplicate
our integrated local and long distance services and could have a significant
competitive advantage in marketing those services to its existing local
customers.
A continuing trend toward consolidation, mergers, acquisitions and
strategic alliances in the telecommunications industry also could increase the
level of competition faced by our broadband transport customers or us. SBC
Communications acquired Ameritech Corporation in October 1999, GTE Corporation
and Bell Atlantic Corporation merged to form Verizon Communications in June
2000, Qwest acquired US WEST, Inc. in June 2000, Time Warner, Inc. merged with
America Online, Inc. to form AOL Time Warner Inc. in January 2001, and AT&T
entered into an agreement to merge its AT&T Broadband unit with Comcast
Corporation in December 2001. In addition, SBC Communications and Williams
Communications, a long distance services provider, entered into a strategic
alliance in 2000 pursuant to which the two companies have agreed to supply
services to each other. The telecommunications market is very dynamic, and we
believe additional competitive changes are likely in the future.
Regulation
Overview. Our services are subject to federal, state and local regulation.
Through our wholly-owned subsidiaries, we hold numerous federal and state
regulatory authorizations. The FCC exercises jurisdiction over
telecommunications common carriers to the extent they provide, originate or
terminate interstate or international communications. The FCC also establishes
rules and has other authority over some issues related to local telephone
competition. State regulatory commissions retain jurisdiction over
telecommunications carriers to the extent they provide, originate or terminate
intrastate communications. Local governments may require us to obtain licenses,
permits or franchises in order to use the public rights-of-way necessary to
install and operate our networks.
Federal Regulation. We are categorized as a non-dominant carrier by the FCC
and, as a result, are subject to relatively limited regulation of our interstate
and international services. Some general policies and rules of the FCC apply to
us, and we are subject to some FCC reporting requirements, but the FCC does not
review our billing rates. We possess the operating authority required by the FCC
to conduct our long distance business as it is currently conducted. As a
non-dominant carrier, we may install and operate additional facilities for the
transmission of domestic interstate communications without prior FCC
authorization, except to the extent that radio licenses are required.
The FCC required non-dominant long distance companies, including us, to
detariff interstate long distance domestic and international services in 2001.
In 2001 the FCC also permitted competitive local carriers, including us, to
choose either to detariff the interstate access services that we sell to long
distance companies that originate or terminate traffic from or to our local
customers, or to maintain tariffs but comply with rate caps. Tariffs set forth
the rates, terms and conditions for service and must be updated or amended when
rates are adjusted or products are added or removed. Before detariffing, we
filed tariffs with the FCC to govern our relationship with most of our long
distance customers and with long distance companies that originated or
terminated traffic from or to our local customers. The detariffing process
required us, among other things, to post these tariffs on our Website instead of
to
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file them at the FCC. Because detariffing precludes us from filing our tariffs
at the FCC, we are no longer subject to the "filed rate doctrine," under which
the tariff controls all contractual disputes between a carrier and its
customers. The detariffing process effectively required us to enter into
individual contracts with each of our customers and notify them of the change.
This process increases our costs of doing business. Detariffing may expose us to
legal liabilities and costs if we can no longer rely on the filed rate doctrine
to settle contract disputes with our customers.
The FCC's role with respect to local telephone competition arises
principally from the Telecommunications Act of 1996. The Telecommunications Act
preempts state and local laws to the extent that they prevent competitive entry
into the provision of any telecommunications service. Subject to this
limitation, however, the state and local governments retain telecommunications
regulatory authority. The Telecommunications Act imposes a variety of new duties
on local carriers, including competitive carriers such as ITC/\DeltaCom, in
order to promote competition in local telephone services. These duties include
requirements to:
. complete calls originated by customers of competing carriers on a
reciprocal basis;
. permit the resale of services;
. permit users to retain their telephone numbers when changing carriers;
and
. provide competing carriers access to poles, ducts, conduits and
rights-of-way at regulated prices.
Incumbent carriers also are subject to additional duties. These duties
include obligations to:
. interconnect their networks with networks or facilities of
competitors;
. offer colocation of competitors' equipment at their premises;
. make available elements of their networks, including network
facilities, features and capabilities, on non-discriminatory,
cost-based terms; and
. offer wholesale versions of their retail services for resale at
discounted rates.
Collectively, these requirements recognize that local telephone service
competition is dependent upon cost-based and non-discriminatory interconnection
with and use of incumbent carrier networks and facilities. Failure to achieve
such arrangements could have a material adverse impact on our ability to provide
competitive local telephone services. Under the Telecommunications Act,
incumbent carriers are required to negotiate in good faith with carriers
requesting any or all of the foregoing arrangements. In addition, in August
1996, the FCC released the "interconnection decision" implementing the
interconnection portions of the Telecommunications Act. The FCC subsequently
adopted further specific rules to implement these requirements. The
interconnection decision has been the subject of significant legal dispute. In
January 1999, the U.S. Supreme Court rejected most of the challenges to the
interconnection decision and affirmed the authority of the FCC to establish
rules governing interconnection. The Supreme Court required the FCC to revise
its method for determining which network elements incumbent carriers must
provide to competitive carriers. The FCC's actions in response to the decision
of the Supreme Court resulted in changes to the number and type of network
elements available to competitive carriers. Additional disputes regarding the
interconnection decision and other related FCC actions are pending, and we
believe additional disputes are likely. Currently, the FCC is considering
changes to the rule on compensation for services provided by one carrier to
another and on the provision of unbundled network elements by incumbent
carriers. Any changes to these rules could have a significant impact on the
industry and on us.
We cannot assure you that FCC rules, together with rules adopted by state
public utility commissions, will be implemented in a manner that will permit
local telephone competition to develop to a substantial extent and without
significant delays. For example, many new carriers, including ITC/\DeltaCom,
have experienced problems with
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respect to the operations support systems used by new carriers to order and
receive network elements and wholesale services from the incumbent carriers.
These systems are necessary for new carriers like us to provide local service to
customers on a timely and competitive basis. In September 1999, the FCC adopted
revised rules defining the circumstances under which incumbent carriers must
make network elements available to competitors. In a number of ways, these rules
are more favorable to competitors than prior rules, but the FCC's pricing
methodology for network elements included in these rules are being challenged in
the Supreme Court. In other ways, these rules are less favorable to competitors
than the prior rules. The revised rules restrict in some respects the
availability of some network elements and limit in some respects the services
that competitors can provide over those elements. Additionally, the FCC
currently is considering whether incumbent carriers should have to make
available to competitors network elements used to provide broadband services.
The FCC also is considering removing certain network elements from the list of
network elements incumbent carriers are required to make available to
competitors. Legislation has been proposed in Congress and passed in the House
of Representatives that would further restrict competitive carriers' access to
incumbent local carriers' network elements. Any restriction on, or contraction
of, the availability of network elements could have a material adverse effect on
us.
Among other interconnection agreements, we entered into an interconnection
agreement with BellSouth in 1997 that enabled us to provide local service in all
nine BellSouth states on either a resale basis or by purchasing all unbundled
network elements required to provide local service on a facilities basis,
without using facilities we own. The initial term of the interconnection
agreement expired in 1999, but we have replaced the agreement in each of the
nine BellSouth states. The public utility commissions of Alabama, Florida,
Georgia, North Carolina and Tennessee have approved the new interconnection
agreements applicable to those states. Although the approval of the
interconnection agreements applicable to Kentucky, Louisiana, Mississippi and
South Carolina remain pending before the public utility commissions of those
states, we do not expect that approval will be withheld. The expired 1997
interconnection agreement did not resolve, and the new BellSouth interconnection
agreements to which we are a party do not resolve, all operational issues,
including those relating to the colocation of our equipment with that of
BellSouth. We expect, but cannot assure you, that each new BellSouth
interconnection agreement to which we are a party will provide a foundation for
us to provide local service in the nine BellSouth states on a reasonable
commercial basis.
In July 2001, the FCC adopted revised rules affecting its equipment
colocation requirements, which initially were adopted by the FCC in 1999 but
then sent back to the FCC for reconsideration by a reviewing court. In a number
of ways, the FCC's revised rules are favorable to competing carriers such as
ITC/\DeltaCom. In other ways, however, these rules may prevent competing
carriers from colocating their equipment in a manner that best suits their
business needs. We expect that the interconnection agreements we enter into with
BellSouth and with other carriers will be subject to the FCC's revised
colocation rules, but we cannot assure you that these rules will not change or
otherwise accrue to the advantage of incumbent carriers.
The Telecommunications Act eliminated previous prohibitions on the
provision of interLATA long distance services by the regional Bell operating
companies and GTE Corporation, which is now part of Verizon Communications. The
regional Bell operating companies are permitted to provide interLATA long
distance service outside those states in which they provide local service, or
"out-of-region long distance service," upon receipt of any necessary state and
federal regulatory approvals that are otherwise applicable to the provision of
intrastate and interstate long distance service. Under the Telecommunications
Act, the regional Bell operating companies will be allowed to provide long
distance service within the regions in which they also provide local service, or
"in-region long distance service," on a state-by-state basis upon specific
approval of the FCC and satisfaction of other conditions, including a checklist
of interconnection requirements intended to open local telephone markets to
competition.
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In the future, an important element of providing competitive local services
may be the ability to offer customers high-speed broadband local connections. As
noted above, the FCC currently is considering whether to expand or restrict the
unbundled network elements that incumbent carriers must make available to
competitors to enable them to provide broadband services to customers using
incumbent carrier networks. The FCC also is considering what regulatory
treatment, if any, should be accorded to digital subscriber line services
provided by telecommunications companies and to cable modem services, which are
used by cable companies to deploy high-speed Internet access services. The FCC
has sought comment on a number of other regulatory proposals that could affect
the speed and manner in which high-speed broadband local services are deployed
by our competitors. Congress also is considering legislation that would
deregulate some aspects of the incumbent local carriers' broadband services and
would reduce the extent to which those carriers must provide access to their
networks to competitive local carriers for the provision of broadband services.
Several cable companies already are offering broadband Internet access over
their network facilities, and incumbent carriers and competitive carriers also
offer such service through digital subscriber line technology. If we are unable
to meet the future demands of our customers for broadband local access on a
timely basis at competitive rates, we may be at a significant competitive
disadvantage.
The FCC regulates the interstate access rates charged by incumbent carriers
for the origination and termination of interstate long distance traffic. These
access rates make up a significant portion of the cost of providing long
distance service. The FCC is in the process of implementing access policy
changes that over time are expected to reduce access rates and the cost of
providing long distance service, especially to business customers. In 2001, the
FCC continued its efforts to lower access charges. Further FCC action in this
area is expected. The full impact of the FCC's decisions will not be known until
its decisions are implemented over the next several years, at which time they
could have an adverse impact on our business.
In April 2001, the FCC issued a ruling changing the compensation mechanism
for traffic exchanged between telecommunications carriers that is destined for
Internet service providers. In doing so, the FCC prescribed a new rate structure
for this traffic and prescribed gradually reduced caps for its compensation.
ITC/\DeltaCom may, in the course of its business, exchange the traffic of
Internet service providers with other carriers. The FCC's ruling in connection
with such traffic affected a large number of carriers, including ITC/\DeltaCom,
and further developments in this area could have a significant impact on the
industry and on us.
The FCC has granted incumbent carriers some flexibility in pricing their
interstate special and switched access services. Under this pricing scheme,
local carriers may establish pricing zones based on access traffic density and
charge different prices for access provided in each zone. The FCC recently
granted incumbent carriers additional pricing flexibility as local competition
develops in their markets. We cannot assure you that this pricing flexibility
will not place us at a competitive disadvantage, either as a purchaser of access
for our long distance operations or as a vendor of access to other carriers or
end-user customers.
In a related proceeding, the FCC has adopted changes to the methodology by
which access has been used in part to subsidize universal telephone service and
other public policy goals. Telecommunications providers like us now pay a fee
calculated as a percentage of revenues to support these goals. Some states are
also implementing universal service funds. The effects of these decisions are
uncertain and subject to change.
In addition, the FCC continues to consider related questions regarding the
applicability of access charges and universal service fees to Internet service
providers. Currently, Internet service providers are not subject to these
expenses, and a federal court of appeals has upheld the FCC's decision not to
impose such fees. However, the incumbent carriers and other parties argue that
this exemption unfairly benefits Internet service providers, particularly when
they provide data, voice or other services in direct competition with
conventional telecommunications services. The FCC recently initiated a
proceeding to examine this issue. We are not in a position to determine how
these issues regarding access charges and universal service fees will be
resolved or whether such resolution will be harmful to our competitive position
or our results of operations.
The FCC imposes prior approval requirements on transfers of control and
assignments of radio licenses and operating authorizations. The FCC has the
authority generally to condition, modify, cancel, terminate or revoke
12
licenses and operating authority for failure to comply with federal laws and the
rules, regulations and policies of the FCC. Fines or other penalties also may be
imposed for such violations. We cannot assure you that the FCC or third parties
will not raise issues with regard to our compliance with applicable laws and
regulations.
As a general matter, we cannot provide assurance regarding how quickly or
how adequately we will be able to take advantage of the opportunities created by
the Telecommunications Act. We could be materially adversely affected if a court
decision reversing some of the FCC's rules or problems in the related
arbitration and negotiation process increase our costs of using incumbent
carrier network elements or services, or if such actions otherwise delay or
impede the development of local telephone competition.
State Regulation. We are subject to various state laws and regulations.
Most state public utility commissions require providers such as ITC/\DeltaCom to
obtain authority from the commission before initiating service in that state. In
most states, including Alabama, Georgia and Florida, we also are required to
file tariffs or price lists setting forth the terms, conditions and prices for
services that are classified as intrastate and to update or amend our tariffs
when we adjust our rates or add new products. We also are subject to various
reporting and record-keeping requirements. In addition, some states are ordering
the detariffing of services, which may impede our reliance on the filed rate
doctrine and increase our costs of doing business.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply with
state law or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such violations.
We cannot assure you that public utility commissions or third parties will not
raise issues with regard to our compliance with applicable laws or regulations.
We have authority to offer intrastate long distance services in all 50 U.S.
states and the District of Columbia. We have obtained authority to provide long
distance service in states outside of our current and target markets to enhance
our ability to attract business customers with offices, or whose employees
travel, outside of our markets.
We provide local services in our region by reselling the retail local
services of the incumbent carrier in a given territory and, in some established
markets, using incumbent network elements and our own local switching
facilities. We possess authority to provide local telephone services in Alabama,
Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina,
South Carolina, Tennessee and Texas.
Many issues remain open regarding how new local telephone carriers will be
regulated at the state level. For example, although the Telecommunications Act
preempts the ability of states to forbid local service competition, the
Telecommunications Act preserves the ability of states to impose reasonable
terms and conditions of service and other regulatory requirements. These
statutes and related issues arising from the Telecommunications Act will be
refined through rules and policy decisions made by public utility commissions as
they address local service competition issues.
We also will be affected by state public utility commission decisions
related to the incumbent carriers despite recent U.S. Supreme Court decisions
upholding the FCC's rule-making power under the Telecommunications Act. For
example, public utility commissions have responsibility under the
Telecommunications Act to oversee relationships between incumbent carriers and
their new competitors with respect to such competitors' use of the incumbent
carriers' network elements and wholesale local services. Public utility
commissions arbitrate interconnection agreements between the incumbent carriers
and competitive carriers such as us when necessary. Important issues regarding
the scope of the authority of public utility commissions in this area and the
extent to which the commissions will adopt policies that promote local telephone
service competition remain unresolved. We believe it is too early to evaluate
how these matters will be resolved or their impact on our ability to pursue our
business plan.
13
States also regulate the intrastate carrier access services of the
incumbent carriers. We are required to pay access charges to the incumbent
carriers when they originate or terminate our intrastate long distance traffic.
We could be materially adversely affected by high access charges, particularly
to the extent that the incumbent carriers do not incur the same level of costs
with respect to their own intrastate long distance services. States also will be
developing intrastate universal service charges parallel to the interstate
charges created by the FCC. For example, incumbent carriers such as BellSouth
advocate the formation of state-level funds that would be supported by
potentially large payments by businesses such as ITC/\DeltaCom based on their
total intrastate revenues. Another issue is the use by some incumbent carriers,
with the approval of the relevant public utility commissions, of extended local
area calling that converts otherwise competitive intrastate toll service to
local service. States also are or will be addressing various intraLATA dialing
parity issues that may affect competition. Our business could be materially
adversely affected by these or other developments.
We also will be affected by how states regulate the retail prices of the
incumbent carriers with which we compete. We believe that, as the degree of
intrastate competition increases, the states will offer the incumbent carriers
increasing pricing flexibility. This flexibility may present the incumbent
carriers with an opportunity to subsidize services that compete with our
services with revenues generated from non-competitive services, thereby allowing
incumbent carriers to offer competitive services at prices lower than most or
all of their competitors. In addition, BellSouth has obtained authority to
create affiliates that would operate on a much less regulated basis and,
therefore, could provide significant competition even if the traditional
BellSouth local business does not receive more pricing flexibility. Kentucky has
placed limitations on such affiliates, while Tennessee has refused such
affiliate applications of BellSouth. We cannot predict the extent to which these
developments may affect our business.
Local Government Authorizations and Related Rights-of-Way. We are required
to obtain street use and construction permits and licenses or franchises to
install and expand our fiber optic network using municipal rights-of-way. In
some municipalities where we have installed network equipment, we are required
to pay license or franchise fees based on a percentage of gross revenues or a
per linear foot basis. We cannot assure you that, following the expiration of
existing franchises, fees will remain at their current levels. In many markets,
the incumbent carriers do not pay these franchise fees or they pay fees that are
substantially less than those required to be paid by us, although the
Telecommunications Act requires that, in the future, such fees be applied in a
competitively neutral manner. To the extent that competitors do not pay the same
level of fees as we do, we could be at a competitive disadvantage. Termination
of the existing franchise or license agreements before their expiration dates,
or a failure to renew the franchise or license agreements, and a requirement
that we remove the corresponding portion of our facilities or abandon the
corresponding portion of our network could have a material adverse effect on us.
In addition, we would be adversely affected if we are unable to obtain
additional authorizations for any new network construction on reasonable terms.
Further, unresolved issues exist regarding the ability of new local service
providers to gain access to commercial office buildings to serve tenants.
Employees
As of December 31, 2001, we had more than 1,900 full-time employees, none
of whom was represented by a union or covered by a collective bargaining
agreement. We believe that our relationship with our employees is good. In
connection with the construction and maintenance of our fiber optic network and
the conduct of our other business operations, we use third-party contractors,
some of whose employees may be represented by unions or covered by collective
bargaining agreements.
Risk Factors
Our business is subject to a number of risks, including the following:
14
In order to continue as a going concern, we will need to achieve a significant
improvement in our liquidity position by August 2002.
Our independent public accountants have stated in their report on our 2002
audited consolidated financial statements included elsewhere in this report that
our recurring losses from operations and negative cash flows from operations and
limited access to additional capital raise substantial doubt about our ability
to continue as a going concern. We must achieve a significant improvement in our
liquidity position by August 2002 to conduct our business and to continue to
service our indebtedness. For information about our current liquidity position,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity."
We have significant indebtedness and may be unable to continue to service that
indebtedness.
We had indebtedness of $723.9 million as of December 31, 2001, and our
earnings were insufficient to cover our fixed charges by $215.6 million for the
year ended December 31, 2001. To continue to service our current indebtedness,
we will need to raise significant additional funds to supplement our operating
cash flows. Our ability to raise additional funds will be subject to prevailing
economic conditions and to financial, business and other factors. If we do not
obtain additional funds, we will not be able to continue to meet our current
debt service obligations. For information about our current liquidity position,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity."
Unless our liquidity position improves significantly, we will not be able to
make additional capital expenditures to support our growth.
We have historically made significant capital expenditures to expand our
network, operations and services according to our business plan. During 2001, we
made capital expenditures of approximately $162 million. Because of our current
need for additional funds, we expect to use little, if any, capital to expand
our network, operations and services in 2002, but instead expect to apply any
capital expenditures associated with our network to maintain the network's
existing capabilities. To conserve cash while we seek to complete a potential
restructuring to alleviate the significant constraints on our liquidity, we plan
to further reduce our capital expenditures. Such a reduction could have a
material negative effect on our expected revenue growth. As a result, we do not
expect that any growth in revenues or operations we are able to achieve in 2002
will be as significant as the growth we have achieved in previous years.
Agreements governing our current indebtedness contain restrictive covenants that
place limits on our business activities.
We are subject to restrictions under the indentures pursuant to which we
issued our publicly traded senior notes, under our $160 million senior secured
credit facility and under our $40 million capital lease facility. These
restrictions affect and, in some cases, significantly limit or prohibit, among
other things, our ability to incur additional indebtedness, create liens, make
investments, issue stock and sell assets. Our senior note indentures restrict
our ability to incur indebtedness, other than indebtedness to finance the
acquisition of equipment, inventory or network assets and other specified
indebtednes. Our senior secured credit facility and our $40 million capital
lease facility also contain restrictions on our ability to incur indebtedness.
In order to incur additional indebtedness under the foregoing agreements, we
must meet minimum specified leverage and interest coverage ratios based on our
operating cash flow. As of February 28, 2002, we had not met, and we do not
expect that we will be able to meet in the foreseeable future, the measurement
criteria under these ratios that would allow us to incur additional
indebtedness. These agreements may also limit our flexibility to plan for, or
react to, changes in our business, place us at a competitive disadvantage
relative to our competitors who have less debt, make us more vulnerable to a
downturn in our business or the economy generally, and require us to use a
substantial portion of our cash flow from operations to pay principal and
interest on our debt, rather than for working capital and capital expenditures.
15
We are dependent upon rights-of-way and other third-party agreements to maintain
our fiber optic network.
To maintain our fiber optic network, we have obtained easements,
rights-of-way, franchises and licenses from various private parties, including
actual and potential competitors, local governments, private landowners and
others. We cannot assure you that we will continue to use or have access to all
of our existing easements, rights-of-way, franchises and licenses or that we
will be able to renew or replace them after they expire. Third parties have
challenged some of our licenses to use the rights-of-way of others, including
our licenses to use the rights-of-way of Mississippi Power Company, Florida
Power Company, Gulf Power Company and Georgia Power Company. If these or similar
future challenges are successful, or if we otherwise are unsuccessful in
maintaining or renewing our rights to use our network easements, rights-of-way,
franchises and licenses, we may be forced to abandon a significant portion of
our network and possibly pay monetary damages. For information on legal
proceedings related to some of our rights-of-way, see "Legal Proceedings."
Our business is subject to significant competitive pressures.
Our industry is highly competitive, and the level of competition,
particularly with respect to pricing, is increasing. For example, the prices we
charge for our retail local, long distance and data services and for our
broadband transport services have declined significantly in recent years. Some
or all of these prices may continue to decline, which will adversely affect our
gross margins as a percentage of revenues. If the FCC authorizes BellSouth to
provide in-region long distance services in one or more of our markets, we may
be required to reduce our prices for the local, long distance or data services
we provide in the affected markets.
In addition, many of our existing and potential competitors, such as
BellSouth, AT&T and WorldCom, have financial, technical and other resources and
customer bases and name recognition far greater than our own. We expect to
continue to face significant pricing and product competition from BellSouth and
the other large, established telephone companies which currently are the
dominant providers of telecommunications services in our markets. We also will
face significant competitive product and pricing pressures from other companies
like us that attempt to compete in the local services market. As a result of
these factors, we cannot assure you that we will be able to achieve operating
profitability, adequate market share or continued significant revenue growth in
any of our markets.
The local and long distance industries are subject to significant government
regulation, and the regulations may change.
We are required to obtain authorizations from the FCC and state public
utility commissions to offer some of our telecommunications services. We are
also required to file tariffs for many of our services and to comply with local
license, franchise or permit requirements relating to installation and operation
of our network. Any of the following events related to the manner in which our
business is regulated could have a material adverse effect on our business,
results of operations and financial condition:
. our failure to maintain proper federal and state tariffs;
. our failure to maintain proper state certifications;
. our failure to comply with federal, state or local laws and
regulations;
. our failure to obtain and maintain required licenses, franchises and
permits;
. the imposition of burdensome license, franchise or permit
requirements to operate in public rights-of-way; and
. the occurrence of burdensome or adverse regulatory requirements or
developments.
Although the local telephone services market was opened to competition
through the passage of the Telecommunications Act in 1996, the FCC and the
states are still implementing many of the rules and policies necessary for local
telephone competition and addressing other related consumer issues. As a result,
we believe that we may see increased state regulation of competitive carriers.
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We depend on access service from incumbent carriers to provide long distance
services, and we could be adversely affected if we do not benefit from reduced
access charges at least as much as our competitors.
We continue to depend on other telecommunications companies to originate
and terminate a significant portion of the long distance traffic initiated by
our customers. We could be adversely affected if we do not experience access
cost reductions proportionally equivalent to those of our competitors.
Historically, charges for access service have made up a significant percentage
of the overall cost of providing long distance service. In 1998, the FCC
implemented changes to its interstate access rules that, among other things,
have reduced per-minute access charges and substituted new per-line flat rate
monthly charges. The FCC also approved reductions in overall access rates, and
established new rules to recover subsidies to support universal service and
other public policies. Additional access charge adjustments were implemented in
July 2000, and others are expected in the future. The impact of these changes on
our competitors or us is not yet clear. New Internet-based competitors generally
are exempt from these charges, which could give them a significant cost
advantage in this area.
If we are unable to interconnect with BellSouth and other incumbent carriers on
acceptable terms, our ability to offer local telephone services will be
adversely affected.
Our March 1997 interconnection agreement with BellSouth, which expired on
July 1, 1999, was our most significant interconnection agreement and enabled us
to provide local telephone services in all nine states in which BellSouth
operates. Although we eventually reached new terms with BellSouth for all nine
BellSouth states, it took a significant amount of resources and time to reach
those terms, and the new terms applicable to four of the nine states remain
subject to approval by the public utility commissions in those states. We cannot
assure you that these agreements will be approved or that, in the future, we
will be able to enter into new interconnection agreements with BellSouth or
other carriers on favorable terms, in a timely manner, or at all. If we are
unable to enter into or maintain favorable interconnection agreements in our
markets, our ability to provide local services on a competitive and profitable
basis may be materially adversely affected. Any successful effort by the
incumbent carriers to deny or substantially limit our access to their network
elements or wholesale services also would have a material adverse effect on our
ability to provide local telephone services.
Under the Telecommunications Act, BellSouth and the other regional Bell
operating companies are not permitted to provide in-region long distance service
to customers in their primary markets until there is adequate competition in the
local services industry. This provides some incentive to these carriers to
provide access to their facilities to competitive new entrants such as
ITC/\DeltaCom. We cannot assure you, however, that once BellSouth or other
regional Bell operating companies are permitted to offer in-region long distance
service, they will continue to be willing to enter into interconnection
agreements with us that will enable us to provide local services on competitive
and profitable terms.
Our inability to maintain our network infrastructure, portions of which we do
not own, could adversely affect our business, results of operations and
financial condition.
We have effectively extended our network with minimal capital expenditures
by entering into marketing and management agreements with three public utility
companies to sell long-haul private line services on the fiber optic networks
owned by these companies. Under these agreements, we generally earn a commission
based upon a percentage of the gross revenues generated by the sale of capacity
on the utility's networks. One of these agreements, under which we continue to
operate, expired in January 2002 and the other two agreements will expire in
March 2003 and October 2004, respectively. We expect to replace the expired
agreement with a new agreement, the term of which we expect will commence
effective as of February 2002 and expire in February 2004, although we cannot
assure you that the terms of the new agreement will be on the same or
substantially similar terms as the expired agreement. We also purchase network
capacity from CFN FiberNet, a manager of fiber optic facilities, in North
Carolina and South Carolina under a buy-sell agreement expiring in February
2004. Cancellation or non-renewal of any of the foregoing agreements, or any
future failure by us to acquire and maintain similar network agreements in these
or other markets as necessary, could materially adversely affect our business,
results of
17
operations and financial condition. In addition, two of our three agreements
with the public utility companies are nonexclusive, and any reduction in the
amount of capacity that is made available to us could adversely affect us.
Our business also could be materially adversely affected by a cable cut or
equipment failure along our fiber optic network. A significant portion of our
fiber optic network is not protected by electronic redundancy or geographical
diverse routing. Our lack of these protections would not enable us to reroute
traffic to another fiber in the same fiber sheath in the event of a partial
fiber cut or electronics failure or to an entirely different fiber optic route,
assuming capacity is available, in the event of a total cable cut.
We depend on a few large customers for a significant percentage of our revenues
and cannot assure you that we will be able to retain those customers.
The table below sets forth, for 2001 and 2000, the approximate percentages
of our total revenues generated by our five largest retail services customers
and our two largest broadband transport services customers:
Year Ended Year Ended
December 31, 2001 December 31, 2000
----------------- -----------------
Five largest retail services customers.. 6.3% 7.5%
Two largest broadband transport
services customers.................... 10.2% 11.5%
We cannot assure you that we will be able to retain our customers or that
we will not be required to lower our prices in an effort to maintain customers.
For both retail services and broadband transport services, our customers,
including some large customers, generally have concurrent arrangements with more
than one service provider. This enables our customers to reduce their use of our
services and switch to other providers without incurring significant expense.
Our agreements with our retail customers generally provide that the customer may
terminate service without incurring a discontinuation charge for termination of
the agreement before its expiration in the event of specified types of outages
in service and for other defined causes. As of December 31, 2001, our broadband
transport services business had remaining future long-term contract commitments
totaling approximately $69.2 million. Some of those contractual commitments
provide that, if the customer is offered lower pricing with respect to any
circuit by another carrier, the customer's commitment to us will be reduced to
the extent we do not match the price for that circuit and the customer purchases
that circuit from the other carrier.
We depend on sophisticated billing, customer service and information systems.
We depend on sophisticated information and processing systems to grow,
monitor costs, bill customers, provision customer orders and achieve operating
efficiencies. As we increase our provision of dial tone and other services, our
need for enhanced billing and information systems will also increase. Our
inability to identify adequately all of our information and processing needs, to
process the information adequately or accurately or to upgrade our systems as
necessary could have a material adverse effect on our results of operations and
financial condition.
We are subject to risks associated with rapid changes in technology.
The telecommunications industry is subject to rapid and significant changes
in technology. We may be required to select one emerging technology over
another, but it will be impossible to predict with any certainty, at the time we
are required to make our investment, which technology will prove to be the most
economic, efficient or capable of attracting customer usage. Unexpected
developments, or our failure to adapt to them, could have a material adverse
effect on our business, results of operations and financial condition.
18
Our success depends on our ability to attract and retain key personnel.
Our business is currently managed by a small number of key management and
operating personnel, including our executive officers. We do not maintain "key
man" insurance on these employees. In addition, we have relied on awards of
stock options as a significant component of the compensation we offer to our
current and potential key employees. Because of the downward trend in the market
price of our common stock since 2000, our stock option program may not provide
an adequate incentive to current or potential key employees to become or remain
employed by us. The loss of the services of our key personnel, or our inability
to attract, recruit and retain sufficient or additional qualified personnel,
could have a material adverse effect on our business, results of operations and
financial condition.
Our operating results could vary significantly from period to period.
Our revenues and operating results could vary significantly from period to
period for many reasons, including:
. significant expenses associated with the operation, maintenance or
future expansion of our network or services;
. competition and regulatory developments;
. changes in market growth rates for our products and services;
. availability or announcement of alternative technologies; and
. general economic conditions.
These factors and any resulting fluctuations in our operating results will
make period-to-period comparisons of our financial condition less meaningful and
could have a material adverse effect on our business, results of operations and
financial condition.
Item 2. Properties.
We own our corporate headquarters in West Point, Georgia and the
e/\deltacom data center in Suwanee, Georgia.
We own switch sites in Anniston, Birmingham and Montgomery, Alabama and
Nashville, Tennessee and lease space for a network operations center in Arab,
Alabama. We also lease space for our switch sites in the following locations:
. Jacksonville, Ocala and West Palm Beach, Florida;
. Atlanta, Georgia;
. Gulfport, Mississippi;
. Greensboro, North Carolina;
. Columbia, South Carolina; and
. Houston, Texas.
The leases for these switch sites expire on various dates from 2002 to 2014.
19
We have constructed and own a multi-service facility in Anniston, Alabama,
which functions as a centralized switching control center for our network and as
an operator services center. In addition, we lease space to operate a customer
network operations center in Atlanta, Georgia. The lease for this space is
renewable on an annual basis.
We operate branch offices in the following locations:
. Anniston, Birmingham, Dothan, Florence, Huntsville, Mobile and
Montgomery, Alabama;
. Daytona, Ft. Lauderdale, Jacksonville, Ocala, Orlando, Pensacola,
Tallahassee and Tampa, Florida;
. Albany, Atlanta (two offices), Augusta, Columbus and Macon, Georgia;
. Baton Rouge and New Orleans, Louisiana;
. Biloxi, Hattiesburg and Jackson, Mississippi;
. Charlotte, Greensboro and Raleigh, North Carolina;
. Charleston, Columbia and Greenville, South Carolina; and
. Chattanooga, Knoxville and Nashville, Tennessee.
The leases for these branch offices expire on various dates from 2002 through
2006. We also lease office space for various administrative functions, including
accounting, legal, sales and human resources, in Huntsville, Alabama, and own an
administrative office in Arab, Alabama.
As part of our fiber optic network and switched service system, we own or
lease rights-of-way, land, office space and towers throughout the southern
United States.
See "Business-Services and Facilities-Facilities" for additional
information about our facilities.
Item 3. Legal Proceedings.
General. We are a party to legal proceedings in the ordinary course of our
business, including disputes with contractors or vendors, which we believe are
not material to our business. We also are a party to regulatory proceedings
affecting the segments of the communications industry in which we operate.
Proceedings Affecting Rights-of-Way. Third parties have challenged some of
our licenses to use the rights-of-way of others, including our licenses to use
the rights-of-way of Mississippi Power Company, Gulf Power Company, Georgia
Power Company and others.
A portion of our network runs through fiber optic cables owned by the
Mississippi Power Company over its rights-of-way located in Jasper County,
Mississippi. A proceeding involving Mississippi Power and several landowners who
have granted Mississippi Power rights-of-way in Jasper County resulted in a
January 1999 order of the Mississippi Supreme Court holding that Mississippi
Power could not permit third parties to use its rights-of-way at issue for any
purpose other than in connection with providing electricity to customers of
Mississippi Power. We became a party to the proceeding after the January 1999
order. The Circuit Court of the First Judicial District of Jasper County,
Mississippi has directed us not to use that portion of our fiber optic network
located on Mississippi Power's rights-of-way in Jasper County, except in an
emergency, pending the outcome of the trial. We have rerouted all of the
circuits on the affected portion of our network so that we may continue to
provide services to our customers along the affected route. If the courts
ultimately agree with the landowners that the existing easements do not permit
our use, we believe our potential liability for damages may be limited to the
value of a permanent easement for that
20
use. We cannot assure you in this respect, however, since the landowners are
seeking damages equal to the profits or gross revenues received by us from our
use of Mississippi Power's rights-of-way in Jasper County and punitive damages
for our use of the route.
We initiated a civil suit in August 2001 in the U.S. District Court for the
Southern District of Mississippi, Southern Division, in which we seek a
declaratory judgment confirming our continued use of cables in Mississippi Power
Company's rights-of-way on 37 parcels of land or, alternatively, condemnation of
the right to use the cables upon payment of just compensation to the landowners.
Some of the defendants have filed a counterclaim against Mississippi Power and
us seeking a constructive trust upon the revenues earned on those rights-of-way,
together with compensatory and punitive damages. Although we have resolved the
issue of our use of the rights-of-way with some of the defendants, we cannot
assure you that we will be successful in this proceeding. This civil suit has
been consolidated with another pending civil suit in the U.S. District Court for
the Southern District of Mississippi initiated by landowners claiming to
represent a class of landowners and seeking compensatory and punitive damages
against Mississippi Power arising from Mississippi Power's allowance of third
parties to use its rights-of-way for telecommunications purposes.
We use the rights-of-way of Gulf Power Company in Florida for a portion of
our network. In the fourth quarter of 2000, Gulf Power was sued in the Circuit
Court of Gadsden County, Florida, by two landowners that claim to represent a
class of all landowners over whose property Gulf Power has facilities that are
used by third parties. The landowners have alleged that Gulf Power does not have
the authority to permit us or other carriers to transmit telecommunications
services over the rights-of-way. We were made a party to this litigation in
August 2001. In March 2002, the court dismissed this matter without prejudice on
the basis that, among other things, there was no additional burden on the
property as a result of third-party use of the rights-of-way for
telecommunications purposes and that the easements were broad enough in scope to
permit such third-party use. However, the court also is permitting the
plaintiffs to amend their complaint to allege additional facts to support their
contention that there is an additional burden on the property because of the
maintenance requirements of the fiber routes and the placement of buildings and
other physical telecommunications equipment on the rights-of-way.
We use rights-of-way of Georgia Power Company in Georgia for a portion of
our network. In July 2001, a suit filed in the Superior Court of Decatur County,
Georgia, by a group seeking compensatory and punitive damages and claiming to
represent a class of landowners alleged that Georgia Power and the other
entities do not have the right to grant third parties the use of the
rights-of-way for the transmission of telecommunications services of such third
parties. We were made a party to the suit in January 2002.
In August 2001, we filed suit in the Superior Court of Troup County,
Georgia, against Southern Telecom, Inc., Alabama Power Company, Georgia Power
Company, Mississippi Power Company, Gulf Power Company and related entities from
which we have obtained use of rights-of-way for our fiber optic
telecommunications network. We seek a declaratory judgment that the defendants
are legally required to use their best efforts to defend against any claims that
we do not have the right to use the rights-of-way granted to these entities and
to defend, indemnify and hold us harmless against all such claims. In December
2001, we filed for summary judgment, but the court has not ruled on this action.
The defendants have filed a counterclaim requesting, among other items, that we
reimburse them for the cost of perfecting the applicable rights-of-way.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to our security holders in the fourth
quarter of 2001.
21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock is traded on the Nasdaq National Market under the symbol
"ITCD." The following table sets forth for the last two years the high and low
sales prices per share of the common stock as reported by the Nasdaq National
Market:
2000 High Low
- ---- ------- -------
First Quarter........ $43.500 $24.750
Second Quarter....... 35.625 16.312
Third Quarter........ 23.250 8.375
Fourth Quarter....... 12.500 4.375
2001 High Low
- ---- ------- ------
First Quarter........ $11.438 $4.750
Second Quarter....... 6.700 2.910
Third Quarter........ 4.500 1.060
Fourth Quarter....... 1.330 0.510
On March 22, 2002, there were approximately 920 holders of record of our
common stock.
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying cash dividends on our common stock in the foreseeable
future. It is the current policy of our board of directors to retain earnings,
if any, to finance our business. The indentures under which we have issued our
publicly traded senior notes, the agreement for our $160 million senior secured
credit facility and the agreement for our $40 million capital lease facility
contain restrictions on our ability to pay cash dividends. We must satisfy debt
incurrence and other financial tests to pay cash dividends under these
agreements.
22
Item 6. Selected Financial Data.
The following table sets forth selected financial and operating data for
ITC/\DeltaCom. The selected historical statement of operations data for each of
the years ended December 31, 2001, 2000, 1999, 1998 and 1997 and the selected
historical balance sheet data for the years then ended have been derived from
the consolidated financial statements that have been audited by Arthur Andersen
LLP, independent public accountants.
2001 2000 1999 1998 1997(a)(b)
----------- ----------- ----------- ----------- -----------
Income Statement Data:
Operating revenues .................................. $ 415,339 $ 363,648 $ 244,844 $ 171,838 $ 114,590
----------- ----------- ----------- ----------- -----------
Expenses:
Cost of services .................................. 186,121 155,000 118,721 82,979 54,550
Inventory write-down .............................. 1,663 0 0 0 0
Selling, operations and administration ............ 188,712 151,050 96,854 64,901 38,255
Depreciation and amortization ..................... 118,938 86,519 53,810 30,887 18,332
Special charges (c) ............................... 74,437 0 0 0 0
----------- ----------- ----------- ----------- -----------
Total expenses .................................. 569,871 392,569 269,385 178,767 111,137
----------- ----------- ----------- ----------- -----------
Operating (loss) income ............................. (154,532) (28,921) (24,541) (6,929) 3,453
Interest expense .................................... (58,833) (55,482) (45,293) (31,930) (21,367)
Interest and other income (expense), net ............ 1,434 14,337 14,949 6,499 4,251
----------- ----------- ----------- ----------- -----------
Loss before income taxes, preacquisition loss and
extraordinary item ................................. (211,931) (70,066) (54,885) (32,360) (13,663)
Income tax expense (benefit) ........................ 0 (512) 94 (6,454) (3,324)
Preacquisition loss ................................. 0 0 0 0 74
Extraordinary item (net of tax) ..................... 0 (1,321) 0 (8,436) (508)
----------- ----------- ----------- ----------- -----------
Net loss ............................................ (211,931) (70,875) (54,979) (34,342) (10,773)
Preferred stock dividends and accretion ............. (3,713) 0 0 0 0
----------- ----------- ----------- ----------- -----------
Net loss applicable to common stockholders ...... $ (215,644) $ (70,875) $ (54,979) $ (34,342) $ (10,773)
=========== =========== =========== =========== ===========
Basic and diluted net loss per common share:(d)
Before extraordinary loss ......................... $ (3.46) $ (1.14) $ (0.98) $ (0.51) $ (0.26)
Extraordinary loss ................................ 0.00 (0.02) 0.00 (0.16) (0.01)
----------- ----------- ----------- ----------- -----------
Net loss applicable to common stockholders ...... $ (3.46) $ (1.16) $ (0.98) $ (0.67) $ (0.27)
=========== =========== =========== =========== ===========
Basic and diluted weighted average common shares
outstanding (d) ................................... 62,292,085 60,928,387 56,370,269 50,972,361 40,249,816
Balance Sheet Data:
Working (deficit) capital ........................... $ (6,741) $ 85,094 $ 244,913 $ 190,118 $ 116,446
Total assets ........................................ 878,332 1,048,526 807,598 587,517 386,104
Long-term debt and capital lease
obligations, including current portions ........... 723,874 713,869 516,907 417,934 203,889
Stockholders' (deficit) equity ...................... (21,930) 181,053 218,162 118,200 148,266
Other Financial Data:
Capital expenditures ................................ 161,965 309,831 165,540 147,842 43,874
Cash flows (used in) provided by operating activities (10,524) 45,931 (5,334) 9,512 6,302
Cash flows used in investing activities ............. 154,798 305,208 149,995 118,166 93,854
Cash flows provided by financing activities ......... 65,225 151,986 219,593 198,447 180,625
EBITDA, as adjusted(e) .............................. (35,594) 57,598 29,269 23,958 21,785
Ratio of earnings to fixed charges(f) ............... -- -- -- -- --
- ----------
(a) On March 27, 1997, ITC/\DeltaCom purchased fiber and fiber-related assets,
including a significant customer contract for network services in Georgia,
from SCANA Corporation. The results of operations for these assets are
included in our consolidated statements of operations beginning March 27,
1997.
(b) On March 27, 1997, ITC/\DeltaCom purchased the remaining 64% partnership
interest in Gulf States FiberNet that it did not already own from SCANA
Corporation. Gulf States FiberNet's revenues and expenses have been
included in the consolidated statement of operations data effective January
1, 1997, with the preacquisition loss attributable to the previous owner
deducted to determine the consolidated net loss for the year ended December
31, 1997.
23
(c) In 2001, ITC/\DeltaCom recorded nonrecurring special charges consisting of
a write-down of impaired property and equipment of $23.0 million and a
write-down of goodwill and other intangible assets of $51.4 million. See
Note 9 to our consolidated financial statements included elsewhere in this
report.
(d) On September 4, 1998, ITC/\DeltaCom effected a two-for-one stock split of
its common stock in the form of a stock dividend. All references to number
of shares, except shares authorized, and to per share information in the
foregoing table have been adjusted to reflect the stock
split on a retroactive basis.
(e) EBITDA, as adjusted, represents earnings before extraordinary item,
preacquisition loss, net interest, other income and other expenses, income
taxes and depreciation and amortization. EBITDA, as adjusted, is provided
because it is a measure commonly used in our industry. EBITDA, as adjusted,
is not a measurement of financial performance under accounting principles
generally accepted in the United States and should not be considered an
alternative to net income as a measure of performance or to cash flow as a
measure of liquidity. EBITDA, as adjusted, is not necessarily comparable to
similarly titled measures for other companies.
(f) Earnings consist of income before income taxes, plus fixed charges. Fixed
charges consist of interest charges and amortization of debt issuance costs
and the portion of rent expense under operating leases representing
interest, estimated to be one-third of such expense. Earnings were
insufficient to cover fixed charges for the years ended December 31, 2001,
2000, 1999, 1998 and 1997 by $215.6 million, $70.1 million, $54.9 million,
$32.4 million and $13.7 million, respectively.
24
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The words "anticipate," "believe," "estimate," "expect,"
"intend," "plan" and similar words as they relate to ITC/\DeltaCom, Inc. or our
management are intended to identify some of these forward-looking statements.
All statements by us regarding our expected future financial position and
operating results, our business strategy, our financing plans, forecasted trends
relating to the markets in which we operate and similar matters are
forward-looking statements. We cannot assure you that our expectations expressed
or implied in these forward-looking statements will turn out to be correct. Our
actual results could be materially different from our expectations as a result
of, among other factors, the factors discussed in this report under
"Business-Regulation" and "-Risk Factors."
We have included data with respect to EBITDA, as adjusted, in the following
analysis because it is a measure commonly used in our industry. EBITDA, as
adjusted, represents earnings before extraordinary item, preacquisition loss,
net interest, other income and other expenses, income taxes and depreciation and
amortization. EBITDA, as adjusted, is not a measure of financial performance
under accounting principles generally accepted in the United States and should
not be considered an alternative to net income as a measure of performance or to
cash flow as a measure of liquidity. EBITDA, as adjusted, is not necessarily
comparable to similarly titled measures for other companies.
Overview
We provide voice and data telecommunications services on a retail basis to
businesses in the southern United States. Through our broadband transport
business, we also provide regional telecommunications transmission services to
other telecommunications companies on a wholesale basis using our network. In
connection with these businesses, we own, operate or manage an extensive fiber
optic network in the southern United States. Through our e/\deltacom business,
we provide customers with colocation services, managed services and professional
services primarily through e/\deltacom's data center in Suwanee, Georgia.
We provide our retail services individually or in a bundled package
tailored to the business customer's specific needs. We derive our retail
services revenues from the following four sources:
. sales of integrated telecommunications services, including local
exchange, long distance, enhanced data and Internet services, to
end-user customers;
. sales of local dial-up services to Internet service providers for use
in their provision of services to their customers;
. sales of nonrecurring equipment and professional services to end-user
customers; and
. sales of wholesale long distance services for resale by other
telecommunications carriers.
At December 31, 2001, we provided our retail services to approximately
15,400 customers, which were served by 35 branch offices, and had sold
approximately 297,600 access lines, of which approximately 278,650 had been
installed. The following table presents, for the periods indicated, selected
operating data, in thousands, for our retail services segment.
Year Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Operating revenues ...................... $305,074 $269,947 $171,991
EBITDA, as adjusted ..................... (14,969) 29,354 (8,662)
Operating loss .......................... (75,445) (15,810) (33,533)
25
Year Ended December 31,
-------------------------------
2001 2000 1999
------- ------- -------
Pro forma EBITDA, as adjusted ........... $18,577 $13,254 $(8,662)
Pro forma EBITDA, as adjusted, for our retail services excludes $1.5
million of revenues for 2001 and $16.1 million of revenues for 2000 related to
prior-period interconnection agreement settlements. Pro forma EBITDA, as
adjusted, for our retail services for 2001 also excludes a $1.7 million
write-down of inventory, $4.0 million of restructuring expenses included in
selling, operations and administration expenses and $29.4 million of special
charges related to the write-down of impaired assets. See the discussion below
for more information about these expenses and charges.
Our broadband transport services include the provision to other
telecommunications companies of regional telecommunications transmission
services on a wholesale basis using our network, as well as the provision of
directory assistance services. In 2001, we extended our fiber network by
approximately 340 route miles to approximately 9,980 route miles. We own,
through construction, indefeasible rights of use agreements or long-term capital
leases, the network fiber and related electronic components for approximately
6,180 of our total network route miles and we manage and market under our own
name the network fiber and related switching capacity for the remaining 3,800
route miles under long-term agreements with the owners of those networks. The
following table presents, for the periods indicated, selected operating data, in
thousands, for our broadband transport services segment.
Year Ended December 31,
-------------------------------
2001 2000 1999
------- ------- -------
Operating revenues ..................... $95,034 $83,336 $72,853
EBITDA, as adjusted .................... 49,797 40,963 37,931
Operating income ....................... 706 3,033 9,074
Pro forma EBITDA, as adjusted .......... $49,972 $40,963 $37,931
Pro forma EBITDA, as adjusted, for our broadband transport services for
2001 excludes $120,000 of restructuring expenses included in selling, operations
and administration expenses and $55,000 of special charges related to the
write-down of impaired assets. See the discussion below for more information
about these expenses and charges.
Through our e/\deltacom business, we provide secure space for servers and
other computer equipment, Internet connections, managed services and
professional services integral to operating important business applications over
the Internet. e/\deltacom began generating revenue in May 2000. The following
table presents, for the periods indicated, selected operating data, in
thousands, for our e/\deltacom services segment.
Year Ended December 31,
-------------------------------
2001 2000 1999
-------- -------- -------
Operating revenues ..................... $ 15,231 $ 10,365 --
EBITDA, as adjusted .................... (70,422) (12,719) --
Operating loss ......................... (79,711) (16,062) --
Pro forma EBITDA, as adjusted .......... $(23,280) $(12,719) --
Pro forma EBITDA, as adjusted, for our e/\deltacom segment for 2001
excludes $2.1 million of restructuring expenses included in selling, operations
and administration expenses and $45.0 million of special charges related to the
write-down of impaired assets. See the discussion below for more information
about these expenses and charges.
During 2001, our e/\deltacom segment continued to experience an increase in
negative EBITDA, as adjusted, in operating losses and in negative cash flows
from operations. Based on current market conditions, we do not expect that this
segment will generate positive EBITDA, as adjusted, or positive cash flows from
operations in the near
26
term. As a result of our need for improved liquidity and our strategic focus on
our retail services, we continue to evaluate alternatives for this segment,
including the elimination of additional operating expenses.
In September 2001, we announced changes to our business plan and other
actions intended to reduce our operating expenses through a 20% reduction of our
workforce by approximately 430 employees and to reduce our non-personnel
operating expenses and our planned capital expenditures. As a result of this
restructuring, in September and December 2001 we recorded $4.8 million and
$251,000, respectively, in restructuring costs, which are included as components
of selling, operations and administration expenses. The restructuring charges
include our estimate of employee severance and related costs for employees
terminated as a result of the revised business plan. The restructuring charges
also include estimates of office space lease commitments where we closed
offices, net of any estimated sublease rentals, and other exit costs. In
connection with the restructuring, we closed an administrative office in Arab,
Alabama, retail services offices in Atlanta, Georgia and Greenwood and Tupelo,
Mississippi, and an e/\deltacom office in Nashville, Tennessee. We terminated
some employees in each department and did not specifically identify the
termination of an entire function or department. We have estimated that,
compared to our operating cost rates in the middle of the third quarter of 2001,
our operating costs have been reduced by approximately $21 million on an
annualized basis as a result of this restructuring.
In September 2001, we also recorded impairment charges in accordance with
Statement of Financial Accounting Standards No. 121 related to the net book
value of property and equipment removed from service less expected salvage
totaling $1.8 million, $21.2 million of impaired assets relating to the
e/\deltacom data center, and intangible assets consisting of goodwill and
customer lists related to the e/\deltacom and retail services segments totaling
$51.4 million. The impairment of property and equipment, except for the property
and equipment of e/\deltacom, relates to assets that we no longer plan to use as
a result of our restructuring. Based on market conditions and operating results
of e/\deltacom, we tested our e/\deltacom assets for impairment. We determined
that an impairment existed and wrote the related assets down to estimated fair
value. In the third quarter of 2001, we expensed goodwill of $23.9 million
related to e/\deltacom and $21.2 million of e/\deltacom property and equipment.
We determined fair value based on estimates of market values for comparable
properties.
Based on the expected operating results of our AvData Systems, Inc. network
solutions business, which we acquired in 1999, and the expected operating
results from customers acquired in our 1998 acquisition of IT Group
Communications, we tested the related assets for impairment. We determined that
an impairment existed and, in the third quarter of 2001, expensed $24.4 million
of goodwill and $1.6 million of customer base assets related to the AvData
Systems network solutions business and $1.6 million of customer base assets
related to former IT Group Communications customers.
In September 2001, we also recorded a total of $2.9 million of other
special charges, including a $1.7 million write-down of our retail services
inventory of telephone systems and related equipment as a result of a decline in
demand for those systems. These charges are included as a component of cost of
services. We also recorded additional bad debt expense of $1.2 million, which is
included in selling, operations and administration expenses. Of this amount,
$809,000 was associated with disputed access charge revenues billed to
interexchange carriers by our retail services segment and $392,000 was
associated with a discontinued service in our e/\deltacom business. We believe
that we may be able to recover at least part of the disputed access charge
revenues through our continued negotiations with the interexchange carriers.
As part of our revised business plan and restructured operations, we expect
to focus our operations primarily on offerings to our end-user, retail
customers.
During 2001, our operational achievements included the following:
. we increased revenues from our local telephone services by 53% and
from our enhanced data services by 52%;
27
. we increased retail services access lines installed by 46% and
wholesale services access lines installed by 6.5%;
. we increased our total network mileage to approximately 9,980 route
miles;
. we reduced planned capital expenditures by approximately $150.0
million from $440.0 million through the end of 2003;
. we pursued an enhanced data strategy with an introduction of a suite
of managed services, including Internet protocol, virtual private
network, firewall security, internal data services and a suite of
managed service offerings from e/\deltacom;
. we implemented new service level agreements under which e/\deltacom
undertakes to provide 100% Internet access and power availability; and
. we inaugurated a suite of e-billing solutions for our retail services
customers.
Future New Segment Presentation
Beginning in the first quarter of 2002, we will revise our segment
reporting to align our financial presentation more closely with our basic retail
and wholesale customer businesses and to reflect more accurately the trends in
those customer bases. One segment will consist of our integrated retail
telecommunications business and the second segment will consist of our broadband
transport business. We will report revenues, gross margins, selling, operations
and administration expenses, and EBITDA, as adjusted, for these two segments
separately. Beginning in the first quarter of 2002, our e/\deltacom business
will no longer be reported as a separate segment, but instead will be included
in our integrated retail telecommunications business segment.
Critical Accounting Policies, Estimates, Risks and Uncertainties
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require us
to make estimates and assumptions. We believe that, of our significant
accounting policies described in Note 2 to our consolidated financial statements
included elsewhere in this report, the following may involve a higher degree of
judgment and complexity.
Revenue Recognition. We generate recurring or multi-year operating
revenues, as well as nonrecurring revenues. We recognize revenues in accordance
with SEC Staff Accounting Bulletin, or SAB, No. 101, "Revenue Recognition in
Financial Statements," as amended by SAB Nos. 101A and 101B. SAB No. 101
requires that the following four basic criteria must be satisfied before
revenues can be recognized:
. there is persuasive evidence that an arrangement exists;
. delivery has occurred or services rendered;
. the fee is fixed and determinable; and
. collectibility is reasonably assured.
We base our determination of the third and fourth criteria above on our
judgement regarding the fixed nature of the fee we have charged for the services
rendered and products delivered, and the prospects that those fees will be
collected. Should changes in conditions cause us to determine that these
criteria likely will not be met for certain future transactions, revenue
recognized for any reporting period could be materially adversely affected.
28
We generate recurring revenues from our offering of local exchange
services, long distance services, data and Internet services, which includes
Internet access, Web hosting and colocation services, and the sale of
transmission capacity to other telecommunications carriers. Revenues from these
sources, which generally consist of recurring monthly charges for such services,
are recognized as services are provided. Advance billings or cash payments
received in advance of services performed are recorded as deferred revenue.
We generate nonrecurring revenues from the sale of telephone systems, other
equipment, software and professional services. Revenues from these sources are
recognized upon installation or as services are performed. Nonrecurring revenues
such as the sale of telephone systems may be part of multiple element
arrangements. We estimate the fair value of the separate elements and recognize
revenues for a delivered element only when the undelivered element is delivered.
We recognize some revenues net as an agent versus gross as principal. We
applied the guidance provided in EITF 99-19 to classify and record such amounts.
During the year ended December 31, 2001, we recorded $16.3 million of revenues
net as an agent. See Note 2 to our consolidated financial statements included
elsewhere in this report for additional information regarding revenues we
recognize net as an agent.
Allowance for Doubtful Accounts. We use estimates to determine our
allowance for bad debts. These estimates are based on our historical collection
experience, current trends, credit policy and a percentage of our budgeted
sales. In determining these percentages, we look at historical write-offs of our
receivables, but our history is limited. We also look at current trends in the
credit quality of our customer base as well as changes in the credit policies.
The following table identifies the amounts we had reserved as of December 31,
2001, 2000 and 1999.
As of December 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Retail services ........................ $3,819,000 $2,209,000 $1,355,000
Broadband transport services ........... 1,632,000 166,000 169,000
e/\deltacom ............................ 238,000 628,000 --
---------- ---------- ----------
Total ............................... $5,689,000 $3,003,000 $1,524,000
========== ========== ==========
We have attempted to reserve for expected losses based on the foregoing
factors and believe our reserves are adequate. It is possible, however, that the
accuracy of our estimation process could be materially affected as the
composition of our receivables changes over time. We continually review and
refine the estimation process to take account of these changes, but we cannot
guarantee that we will be able to estimate accurately credit losses on our
receivables.
Valuation of Long-Lived and Intangible Assets and Goodwill. We assess the
impairment of identifiable intangibles, long-lived assets and related goodwill
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable in accordance with Statement of Financial Accounting
Standards, or SFAS, No. 121 and, beginning January 1, 2002 SFAS No. 144. Factors
we consider important and that could trigger an impairment review include the
following:
. significant underperformance of our assets relative to expected
historical or projected future operating results;
. significant changes in the manner in which we use our assets or in our
overall business strategy;
. significant negative industry or economic trends;
. a significant decline in our common stock price for a sustained
period; and
. our market capitalization relative to net book value.
29
When we determine that the carrying value of intangibles, long-lived assets
and goodwill may not be recoverable based upon the existence of one or more of
the foregoing indicators of impairment, we measure any impairment based on an
estimate of fair value. Estimates may be based on the projected discounted cash
flow method using a discount rate we determine to be commensurate with the risk
inherent in our current business model, or estimates may be based on other
methods. Net intangible assets, long-lived assets and goodwill amounted to
$747.0 million as of December 31, 2001.
During 2001, we wrote down some of our long-lived assets and goodwill
because we determined impairment existed. We recognized a loss of $74.4 million
in connection with the write-down. See Note 9 to our consolidated financial
statements included elsewhere in this report for additional information
regarding this write-down. We cannot provide assurance that other write-downs
will not occur in 2002 or any year thereafter.
During 2001, our e/\deltacom segment continued to experience an increase in
negative EBITDA, as adjusted, in operating losses and in negative cash flows
from operations. Based on current market conditions, we do not expect that this
segment will generate positive EBITDA, as adjusted, or positive cash flows from
operations in the near term. As a result, we may be required to record an
additional impairment loss in 2002 related to this segment, and we cannot assure
you that the assets associated with this segment will not be further written
down in subsequent periods.
On January 1, 2002, SFAS No. 142, "Goodwill and Other Intangible Assets,"
became effective and, as a result, we will cease to amortize approximately $59.7
million of goodwill that is recorded as of December 31, 2001. We had recorded
approximately $2.0 million of amortization on these amounts during 2001 and
would have recorded approximately $2.0 million of amortization in 2002. In lieu
of amortization, we are required to perform an initial impairment review of our
goodwill in 2002 and an annual impairment review thereafter. We expect to
complete our initial review by June 30, 2002. Until we complete the review, we
will not be able to determine the amount of impairment loss, if any.
We cannot provide assurance that, at each periodic review date, a material
impairment charge will not be recorded.
The foregoing list is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles generally accepted
in the United States, with no need for us to judge their application. There are
also areas in which our judgment in selecting any available alternative would
not produce a materially different result. See our consolidated financial
statements and related notes thereto included elsewhere in this report, which
contain accounting policies and other disclosures required by accounting
principles generally accepted in the United States.
Operating Revenues
Retail services and broadband transport services currently account for the
vast majority of our operating revenues.
Retail Services. We derive our retail services revenues, which are
generally recurring monthly charges, principally from the provision of local
exchange services, long distance services and data and Internet services. Our
retail services revenues also include nonrecurring revenues from the sale and
installation of telephone systems and related equipment. Our retail services
generated revenues of $305.1 million in 2001. At December 31, 2001, we offered
local telephone services in all of the 35 markets in which we had a branch
office.
We derived in 2001, and expect we will derive in 2002, an increasing
percentage of our revenue from local services, primarily local services provided
under our interconnection agreements with other local telephone companies, and
data and Internet services. We expect that gross margin as a percentage of
revenues associated with our facilities-based local, data and Internet retail
services will be slightly higher than the gross margin as a percentage of
revenues associated with our long distance retail services.
30
We expect that, as we continue to increase our provision of local services
using our own network and facilities rather than reselling the service of other
telephone companies, we will realize increased revenues when we originate and
terminate calls by customers of other carriers with our local end-user
customers.
As we continue to use portions of the networks of other local telephone
companies to provide services over our network and facilities instead of
reselling services over the networks of the other local telephone companies, we
expect our gross margin on local service to improve. We believe that this
improvement will result from reduced access charges and from efficiencies
realized through increased reliance on our network. Competitive market pressures
to reduce prices for our retail services, however, could offset these expected
margin improvements.
Rates for long distance services continued to decline in 2001. This had a
negative impact on our revenues, since we derive a significant portion of our
revenues from long distance services. The effect of the decline in rates was
partially offset by an increase in the minutes used by our customers. We expect
that the trend of declining rates may begin to slow during 2002. Such a
development could positively affect our long distance revenues and gross margin.
During 2001, we began selling our retail services to smaller business
customers, which require fewer telephone lines than our average base of retail
customers. We expect that sales to these smaller business customers will provide
us additional sources of revenue, although the sales may adversely affect our
gross margins, since we provide this service primarily using the networks of
other telephone companies. We have hired a dedicated sales force to sell this
product.
During 2000, we reached a settlement with BellSouth of our long-standing
dispute over BellSouth's payment of reciprocal compensation to us for local
calls placed by customers of BellSouth and terminated to our customers,
including calls terminated to our Internet service provider customers. The
settlement agreement provides for the settlement of all amounts claimed by us to
be due for reciprocal compensation before the date of the agreement at rates
consistent with or in excess of amounts previously recognized by us as revenue.
The agreement also establishes rates for all reciprocal compensation traffic on
our network for the portion of 2000 that remained after the date of the
settlement agreement, for 2001 and for 2002. The terms of the settlement
agreement are not subject to modification by changes in law or subsequent FCC,
court or state commission decisions.
The settlement agreement provided for a cash payment of approximately $53
million, which BellSouth made in October 2000. This payment represented payment
for reciprocal compensation amounts billed to BellSouth before the date of the
settlement agreement and for estimated reciprocal compensation billings after
the date of the settlement agreement through December 31, 2001. The portion of
the payment related to 2001 is subject to reconciliation procedures. Under the
initial reconciliation procedure that occurred in July 2001, we repaid $5.5
million to BellSouth, which represented the difference between the forecasted
amount of reciprocal compensation upon which the prepayment was based and the
actual amount of reciprocal compensation generated by BellSouth during the first
six months of 2001 and a revised forecasted amount for the last six months of
2001. The repayment had no effect on our recorded revenues for 2001, since we
recognize reciprocal compensation revenue as it is earned. We recorded the
repayment as a reduction to deferred revenue. The portion of the prepayment
related to 2001 reciprocal compensation is subject to additional reconciliation
procedures covering the last six months of 2001. We do not expect that we will
be required to pay additional amounts to BellSouth related to the remainder of
2001 under the reconciliation procedure.
The settlement agreement also required BellSouth to prepay an additional
amount to us in December 2001 related to expected reciprocal compensation
traffic levels in 2002. In December 2001, we received a prepayment from
BellSouth of $17.6 million under this provision. This amount will be subject to
quarterly reconciliation procedures based upon the actual amount of reciprocal
compensation traffic during 2002. These procedures may require us to repay a
portion of the 2002 reciprocal compensation prepayment. Our consolidated balance
sheets included elsewhere in this report include $17.6 million in unearned
revenue related to the prepayment for 2002. In the settlement agreement, we have
agreed to limit our reciprocal compensation to be received from BellSouth to
$29.5 million in 2002.
31
Effective May 2000, we entered into an agency agreement with an equipment
and hardware provider to market and sell equipment and hardware to our
customers. We recognize commission revenues resulting from this agreement equal
to any gross margin we retain after payment to the supplier. These nonrecurring
revenues are combined for financial reporting purposes with revenues from sales
of customer premise equipment, other equipment and software. We derived revenues
from this agreement of $3.2 million in 2001 and $5.6 million in 2000, but
discontinued equipment sales under this agreement in December 2001. Although we
expect that the termination of this agreement will have little, if any, effect
on our absolute gross margins, we may experience a slight increase in our gross
margins as a percentage of revenues since these commissions have little
associated costs. See Note 2 to our consolidated financial statements included
elsewhere in this report for additional information regarding this agency
agreement.
We expect that a significant portion of our revenue growth will come from
our retail services business. Although we have experienced moderate success in
obtaining market share in the markets where we provide local services, including
in one market where we have achieved a market share of over 25% and in eight
other markets where we have achieved a market share of over 7%, we generally do
not expect that our retail services will command a significant share of the
market for telecommunications services in the southern United States. The
customer contracts for our retail services generally provide for payment in
arrears based on minutes of use for switched services and payment in advance for
local exchange, data and Internet services. The contracts generally provide that
the customer may terminate the affected services without penalty in the event of
specified outages in service and for other defined causes. The contracts also
typically provide that the customer must use at least a minimum dollar amount of
switched long distance services per month for the term of the contract. During
the past several years, market prices for many telecommunications services have
been declining. To maintain and develop our customer base in response to these
and other competitive pressures, we have modified some of our retail contracts
to extend lower rates over longer terms to selected customers. We may decide in
the future to modify other retail customer contracts in a similar manner to
emphasize lower pricing and longer commitment periods.
Broadband Transport Services. We derive our broadband transport services
revenues, which are generally recurring monthly charges, from the provision to
other telecommunications companies of telecommunications transmission capacity
on our network, as well as from the provision of directory assistance services.
Our broadband transport services generated revenues of $95.0 million in 2001.
We provide transmission capacity to other telecommunications companies on a
"take or pay" long-term basis, on an individual circuit basis, or on a
month-to-month basis after the initial term of the "take or pay" or individual
circuit contract has expired. As of December 31, 2001, we had remaining future
long-term contract commitments totaling approximately $69.2 million. These
contracts expire on various dates through 2008 and are expected to generate
approximately $66.7 million in revenues for us through 2006.
Broadband transport services also include commission revenues from the
marketing, sale and management of capacity on the portions of our network that
are owned by utilities but managed and marketed by us. Negligible incremental
costs are associated with these commissions, because we use the same marketing
and sales force in servicing the utility-owned portions of the network that we
use for the portions we own. Our commission revenues from these arrangements
amounted to approximately $11.3 million for 2001, $10.2 million for 2000 and
$8.4 million for 1999. See Note 2 to our consolidated financial statements
included elsewhere in this report for additional information regarding these
commissions.
We have not recorded revenues in our consolidated statements of operations
related to fiber swap or other asset swap agreements. In addition, we have not
recorded revenue in our consolidated statements of operations related to sales
of our fiber optic cables or related equipment.
The rates we charge to other telecommunication companies for our broadband
transport services continued to decline in 2001. The negative impact on our
revenues of the decline in rates was partially offset by an increase in the
services used by our customers. We expect that we will continue to experience a
slight reduction in rates in 2002,
32
but will be able partially to mitigate the effects of the reduction by
increasing the amount of broadband services we sell.
Operating Expenses
Our principal operating expenses consist of cost of services, selling,
operations and administration expenses, and depreciation and amortization.
Cost of Services. We currently provide our retail services by using our
network and facilities and by reselling the services of other telephone
companies. Cost of services related to our retail services consists primarily of
the access charges and local facility charges we are required to pay to other
telephone companies when we use a portion of their network or facilities in
providing services to our customers, as well as charges we are required to pay
to other telephone companies when they originate, terminate or transport
messages sent by our customers.
We expect that our cost of providing local service as a percentage of
revenue will not increase significantly, if at all, over our 2001 results. Since
our initial offering of local service in 1997, we have steadily increased the
percentage of local services we provide over our own network and facilities
compared to the services we provide by reselling the services of other telephone
companies. At December 31, 2001, approximately 81% of the access lines we had in
service were provided over our own network and facilities compared to
approximately 78% at December 31, 2000 and 57% at December 31, 1999. Providing
local services over our network generally reduces the amounts we are required to
pay to other telephone companies for the use of their networks and facilities.
As a result, our cost of providing local services as a percentage of revenue has
decreased since 1997. During 2002, as we initiate sales of local services to
smaller businesses primarily through the use of the networks and facilities of
other telephone companies, we expect that the percentage of access lines we
provide over our network will increase only slightly, if at all. We expect that
our sales to the smaller business customers generally will generate higher gross
margins than the off-network services we have historically provided because of
favorable wholesale pricing we have obtained from other telephone companies. We
expect that the term and volume discounts we negotiated in early 2002 regarding
the purchase from the local telephone companies of network elements that we do
not own, but use to provide local services, will also contribute to decreases in
our cost of providing these services.
Our cost of services also includes charges for labor and inventory sold
related to our sale, installation and repair of telephone systems and related
equipment.
Cost of services related to our broadband transport services includes
substantially all fixed costs attributable to the following:
. the leasing of unused fiber under long-term operating leases;
. the leasing of capacity outside our owned or managed network, which we
refer to as "off-net capacity," to meet customer requirements for
network capacity; and
. network costs associated with the provision of signaling system 7
services, which allow us to monitor the status of lines and circuits
on the network, alert us to events occurring on the network, and
transmit routing and destination signals over the network.
Cost of services for e/\deltacom currently consists of third-party contract
personnel, direct labor costs and manufacturers' service contracts.
Selling, Operations and Administration Expenses. Selling, operations and
administration expenses consist of expenses of selling and marketing, field
personnel engaged in direct network maintenance and monitoring, customer service
and corporate administration.
33
Depreciation and Amortization. Depreciation and amortization include
depreciation of our telecommunications network and equipment and amortization of
goodwill and other intangible assets related to acquisitions, primarily the
acquisition of DeltaCom, Inc. in 1996, our acquisition of AvData Systems, Inc.
in 1999 and our acquisition of Bay Data Consultants, Inc. in 2000. In September
2001, we wrote off all of the goodwill recorded as a result of the AvData
Systems and Bay Data Consultants transactions. For more information about our
amortization expense, see Notes 4 and 9 to our consolidated financial statements
included elsewhere in this report.
As we expand our revenue base and purchase new equipment and facilities, we
expect cost of services, selling, operations and administration expenses and
depreciation and amortization to increase. Accordingly, we expect to continue to
incur operating losses at least through the end of 2003. Although we anticipate
that we will generate positive cash flows from operations by the first quarter
of 2003, we expect that cash flows from operations will be more than offset by
capital expenditures at least through part, if not all, of 2003 as we continue
to implement our business plan.
Other Information About Our Business
The following table presents, as of the dates indicated, additional
information about our operations and business. The data presented, except branch
office, colocation and switch data, are rounded to the nearest whole number.
December 31, September 30, June 30, March 31, December 31,
2001 2001 2001 2001 2000
------------ ------------- -------- --------- ------------
Branch offices ............................... 35 35 37 37 37
Business customers served-retail services (1) 15,400 14,720 14,420 14,100 13,700
Route miles .................................. 9,980 9,980 9,840 9,730 9,640
Colocations .................................. 177 177 177 177 176
Voice switches ............................... 12 12 13 13 13
ATM switches ................................. 10 10 10 10 10
Frame relay switches ......................... 17 17 17 17 17
Unisphere SMX-2100 switches .................. 42 41 39 37 37
Passport switches ............................ 53 53 53 42 36
Number of employees .......................... 2,030 1,960 2,360 2,300 2,445
Lines sold cumulative (2) .................... 297,600 287,300 260,500 309,500 303,700
Lines installed cumulative ................... 278,650 275,600 242,400 282,900 226,650
Lines installed/lines sold percentage ........ 94% 96% 93% 91% 75%
- ----------
(1) Reflects the combination of multiple accounts of some customers into a
single customer account.
(2) Net of lines disconnected or canceled.
We generally provide our services to the following two types of customers:
(1) ultimate end-users that purchase our services on a retail basis; and (2)
other communications companies that purchase our services on a wholesale basis
in connection with their provision of services to their customers. The following
tables present information about our revenues generated by our retail customers
and wholesale customers and about telephone access lines installed for and sold
to each type of customer. The following tables do not present results of our
retail services, broadband transport services or e/\deltacom business segments,
which are included below under "-Results of Operations." The dollar amounts are
shown in thousands.
Year Ended December 31,
------------------------------
2001 2000 1999
-------- -------- --------
Revenues generated by retail customers:(1)
Local(2) ................................... $ 83,931 $ 54,764 $ 29,185
Long distance(2) ........................... 64,268 70,189 72,523
Enhanced data(2)(3) ........................ 44,800 29,383 22,534
-------- -------- --------
34
Year Ended December 31,
------------------------------
2001 2000 1999
-------- -------- --------
Total integrated telecom ................ 192,999 154,336 124,242
Equipment and other(2)(3) .................. 49,911 52,278 21,460
-------- -------- --------
Total retail revenues ................... $242,910 $206,614 $145,702
======== ======== ========
Revenues generated by wholesale customers:(1)
Broadband transport(4) ..................... $ 95,034 $ 83,336 $ 72,853
Local/interconnection(2) ................... 55,101 36,363 6,578
Long distance and data(2) .................. 16,855 17,401 14,977
Other(2) ................................... 3,939 3,834 4,734
-------- -------- --------
Total wholesale revenues ................ $170,929 $140,934 $ 99,142
======== ======== ========
As of December 31,
------------------------------
2001 2000 1999
-------- -------- --------
Lines sold to retail customers(5) ............. 143,724 102,228 67,884
Lines sold to wholesale customers(5) .......... 153,887 201,457 60,306
------- ------- -------
Total lines sold(5) ...................... 297,611 303,685 128,190
======= ======= =======
Lines installed for retail customers .......... 136,761 93,484 60,780
Lines installed for wholesale customers........ 141,904 133,193 40,756
------- ------- -------
Total lines installed .................... 278,665 226,677 101,536
======= ======= =======
Lines installed/sold percentage:
Retail customers ........................... 95% 91% 90%
Wholesale customers ........................ 92% 66% 68%
- ----------
(1) Excludes payments for prior-period interconnection agreement settlements.
(2) Reported as revenues of our retail services segment.
(3) Reported as revenues of our e/\deltacom segment.
(4) Reported as revenues of our broadband transport services segment.
(5) Reported net of disconnects and cancellations.
Results of Operations
The following tables present, for the periods indicated, selected
statements of operations data in dollars and as a percentage of revenues for our
retail services, broadband transport services and e/\deltacom segments. The
dollar amounts are shown in thousands.
Retail Services
Year Ended December 31,
----------------------------------------------------------
2001 % 2000 % 1999 %
-------- --- -------- --- -------- ---
Operating revenues ...................... $305,074 100% $269,947 100% $171,991 100%
Cost of services ........................ 163,729 53 138,850 51 107,950 63
Inventory write-down .................... 1,663 1 -- -- -- --
-------- -------- --------
Gross margin ............................ 139,682 46 131,097 49 64,041 37
-------- -------- --------
Selling, operations and administration .. 125,293 41 101,743 38 72,703 42
Depreciation and amortization ........... 60,476 20 45,164 17 24,871 14
35
Retail Services
Year Ended December 31,
----------------------------------------------------------
Special charges ......................... 29,358 10 -- -- -- --
-------- -------- --------
Total operating expenses ................ 215,127 71 146,907 55 97,574 56
-------- -------- --------
Operating loss .......................... $(75,445) (25) $(15,810) (6) $(33,533) (19)
-------- -------- --------
EBITDA, as adjusted ..................... $(14,969) (5) $ 29,354 11 $ (8,662) (5)
======== ======== ========
BroadBand Transport Services
Year Ended December 31,
----------------------------------------------------------
2001 % 2000 % 1999 %
-------- --- -------- --- -------- ---
Operating revenues....................... $95,034 100% $83,336 100% $72,853 100%
Cost of services......................... 11,203 12 9,387 11 10,771 15
------- ------- -------
Gross margin............................. 83,831 88 73,949 89 62,082 85
------- ------- -------
Selling, operations and administration... 33,979 36 32,986 40 24,151 33
Depreciation and amortization............ 49,091 51 37,930 45 28,857 40
Special charges.......................... 55 -- -- -- -- --
------- ------- -------
Total operating expenses................. 83,125 87 70,916 85 53,008 73
------- ------- -------
Operating income......................... $ 706 1 $ 3,033 4 $ 9,074 12
======= ======= =======
EBITDA, as adjusted...................... $49,797 52 $40,963 49 $37,931 52
======= ======= =======
e/\deltacom
Year Ended December 31,
----------------------------------------------------------
2001 % 2000 % 1999 %
-------- --- -------- --- -------- ---
Operating revenues ...................... $ 15,231 100% $ 10,365 100% -- --
Cost of services ........................ 11,189 73 6,763 65 -- --
-------- --------
Gross margin ............................ 4,042 27 3,602 35 -- --
-------- --------
Selling, operations and administration .. 29,440 193 16,321 158 -- --
Depreciation and amortization ........... 9,289 61 3,343 32 -- --
Special charges ......................... 45,024 296 -- -- -- --
-------- --------
Total operating expenses ................ 83,753 550 19,664 190 -- --
-------- --------
Operating loss .......................... $(79,711) (523) $(16,062) (155) -- --
======== ========
EBITDA, as adjusted ..................... $(70,422) (462) $(12,719) (123) -- --
======== ========
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
Operating Revenues. Total operating revenues increased $51.7 million, or
14.2%, from $363.6 million for 2000 to $415.3 million for 2001.
Revenues from our retail services increased $35.1 million, or 13.0%, from
$269.9 million for 2000 to $305.1 million for 2001. The change in these revenues
was primarily attributable to the following factors:
. an increase of $37.6 million in revenues generated by our local
telephone services and local dial-up services provided to Internet
service providers, which were affected by an increase in the average
number of installed lines;
. an increase of $10.3 million in revenues generated by our sales of
enhanced data and Internet access services, which resulted primarily
from an increase of 27.1% in our revenues from sales of private line
services and an increase of 168.2% in our revenues from sales of
Internet access services;
. an increase of $11.4 million in access-related revenues, which
resulted from an increase in the minutes used;
36
. a decrease of $6.3 million in our long distance revenues, which was
attributable to a 19.3% decrease in the average rate we charge per
minute and was partially offset by an 13.0% increase in average actual
minutes used;
. a decrease of $15.4 million in our reciprocal compensation revenues,
which reflected a decrease of $14.6 million in one-time net benefits
for interconnection agreement settlements recognized in 2000 compared
to 2001 and a 75.6% decrease in the average rate per minute charged
for such service, the effect of which decreases was partially offset
by an increase of 85.1% in average actual minutes used; and
. a decrease of $1.5 million in the nonrecurring sales of equipment and
software as a result of reduced demand.
We expect continued growth in 2002 in our retail services revenues as we
continue to sell additional local, data and Internet services, especially
through our T-1-based products, and as our long distance revenues stabilize. We
do not expect significant, if any, growth in our nonrecurring sales of telephone
systems, software and related equipment.
Revenues from our broadband transport services increased $11.7 million, or
14.0%, from $83.3 million for 2000 to $95.0 million for 2001. The change in
these revenues was primarily attributable to the following factors:
. an increase of $8.5 million in revenues generated using our owned and
operated network, which resulted primarily from a 66.9% increase in
the average capacity of our fiber optic transmission facilities and
was partially offset by a 28.7% decrease in the average rate we
charge;
. an increase of $1.1 million in commissions we generate from the
management and marketing of transmission services provided by other
communications services; and
. an increase of $2.1 million in revenues we generate from providing
directory and operator assistance, which was primarily attributable to
an increase in the number of calls served.
We expect that revenues from our broadband transport services will not
experience any growth, and may decline slightly, during 2002. We will reduce the
amount of capital we invest in this segment and expect that the broadband
transport business generally will experience less favorable market conditions.
Our e/\deltacom segment began generating revenue in May 2000. Revenues from
our e/\deltacom segment were $15.2 million in 2001 and $10.4 million in 2000. We
derived these revenues primarily from professional services, including the sale
of maintenance and related services and, to a lesser extent, from our provision
of secure space for servers and other computer equipment and Internet
connections.
No single customer of our retail services, broadband transport services or
e/\deltacom services segments represented over 10% of our total operating
revenues for 2001.
Cost of Services. Total cost of services increased $31.1 million from
$155.0 million for 2000 to $186.1 million for 2001.
Cost of services for our retail services increased $24.9 million from
$138.8 million for 2000 to $163.7 million for 2001. Cost of services as a
percentage of revenues from our retail services increased to 53% for 2001 from
51% for 2000. The increase in our cost of services as a percentage of revenues
for 2001 was primarily attributable to our recognition during 2000 of an
additional $14.6 million in one-time revenues from prior-period interconnection
agreement settlements, which had little, if any, associated costs. The increase
in cost of services also reflected an increase of $45.4 million, or 62.9%, in
costs associated with the sale of facilities-based services, which became a
significantly greater component of our retail services in 2001 as a result of
our increased use of our network, including an increase of 76.9% in our
facilities-based local exchange costs and an increase of 47.6% in our
facilities-based long distance costs. This increase was partially offset by the
following:
37
. a decrease of $3.3 million, or 8.3%, in our costs to use the networks
of other carriers to provide long distance services, which resulted
primarily from rate decreases;
. a decrease of $15.1 million, or 56.3%, in our costs to provide local
services as a result of the decrease in the amount of resale services
we purchased; and
. a decrease of $1.9 million, or 23.8%, in our costs to provide
satellite services, which resulted primarily from decreased demand.
Inventory Write-Down. During 2001, we incurred a charge for the write-down
of approximately $1.7 million of inventory of telephone systems and related
equipment used to provide retail services as the result of a decline in demand
for this equipment. See Note 9 to our consolidated financial statements included
elsewhere in this report for additional information about this inventory
write-down.
Selling, Operations and Administration Expenses. Total selling, operations
and administration expenses increased $37.4 million from $151.1 million, or 42%
of revenue, for 2000 to $188.7 million, or 45% of revenue, for 2001.
Selling, operations and administration expenses attributable to our retail
services increased $23.6 million from $101.7 million, or 38% of revenue, for
2000 to $125.3 million, or 41% of revenue, for 2001. These increases were
primarily attributable to the following factors:
. an increase of $17.6 million in sales, other personnel and related
expenses related to an increase in average number of employees;
. an increase of $4.8 million in maintenance and related costs, which
resulted primarily from an increase in the number of switch sites;
. an increase of $2.9 million in taxes and insurance, and in consulting
and associated expenses, which was related primarily to an increase in
our property, plant and equipment; and
. $4.8 million in employee severance and occupancy costs we incurred in
connection with our restructuring in September 2001.
The increases were partially offset by a decrease of $1.2 million in
occupancy-related expenses as a result of office closures and a decrease of $4.9
million in costs of information systems and research and development activity.
Selling, operations and administration expenses attributable to our
broadband transport services increased $1.0 million from $33.0 million, or 40%
of revenue, for 2000 to $34.0 million, or 36% of revenue, for 2001. This
increase resulted primarily from increases in bad debt expense, taxes and
licenses, and maintenance expenses.
Selling, operations and administration expenses attributable to our
e/\deltacom segment increased $13.1 million from $16.3 million, or 158% of
revenue, for 2000 to $29.4 million, or 193% of revenue, for 2001. These
increases primarily related to the realization of a full year of expenses for
2001 compared to a partial year of expenses for 2000.
Depreciation and Amortization. Total depreciation and amortization
increased $32.4 million from $86.5 million for 2000 to $118.9 million for 2001.
Of the increase, our retail services accounted for $15.3 million, our broadband
transport services accounted for $11.2 million and our e/\deltacom business
accounted for $5.9 million. The increase attributable to retail services was
primarily related to a full year of depreciation on new central office and
telecommunications equipment added to our network during 2000 and to
depreciation of telecommunications
38
equipment added to our network during 2001. The increase attributable to
broadband transport services primarily reflected a full year of depreciation on
fiber and telecommunications equipment installed in 2000 and to depreciation on
fiber and telecommunications equipment installed in 2001. The increase
attributable to e/\deltacom primarily related to a full year of depreciation on
the data center we placed in service in 2000 and to depreciation on our data
center and other equipment we installed in 2001. We expect depreciation and
amortization to increase in 2002 as we add equipment to our network and realize
a full year of depreciation on equipment installed in 2001.
Special Charges. Total special charges were $74.4 million in 2001. We did
not incur similar special charges in 2000. The special charges we incurred in
2001 were as follows (in thousands):
Broadband
Transport Retail
Services Services e/\deltacom
--------- -------- ----------
Impaired property and equipment ...................... $55 $ 1,793 $21,174
Impaired goodwill and other
intangible assets ................................. -- 27,565 23,850
--- ------- -------
Total ............................................. $55 $29,358 $45,024
=== ======= =======
The special charges were incurred in connection with our restructuring in
September 2001, which included the evaluation and subsequent write-down of some
assets to their respective values. See Note 9 to our consolidated financial
statements included elsewhere in this report for additional information on these
special charges.
Interest Expense. Total interest expense increased $3.3 million from $55.5
million for 2000 to $58.8 million for 2001. The increase was primarily
attributable to an increase in our average outstanding debt balances as a result
of our drawdown in April 2000 of $160 million in borrowings under our senior
secured credit facility and our closing in December 2000 on $28.5 million of
capital lease financing.
Interest Income. Total interest income from the temporary investment of
available cash balances decreased $12.7 million from $14.8 million for 2000 to
$2.1 million for 2001.
Other Income (Expense). In connection with the mark-to-market of an
interest rate swap, we recognized expense of approximately $632,000 for 2001 and
$426,000 for 2000.
EBITDA, as adjusted. Total EBITDA, as adjusted, decreased $93.2 million
from $57.6 million for 2000 to $(35.6) million for 2001. EBITDA, as adjusted,
net of restructuring charges, inventory write-down, special charges and
prior-period amounts for interconnection agreement settlements, was $45.3
million for 2001 and $41.5 million for 2000.
EBITDA, as adjusted, attributable to our retail services for 2001 was
$(15.0) million, which represented a decrease of $44.4 million from EDITDA, as
adjusted, of $29.4 million for 2000. Net of restructuring charges, inventory
write-down, special charges and prior-period amounts for interconnection
agreement settlements, EBITDA, as adjusted, attributable to our retail services
was $18.6 million for 2001. The decrease in EBITDA, as adjusted, for our retail
services was primarily attributable to the following factors:
. a $1.7 million write-down of telephone systems and related equipment
inventory;
. a $14.6 decrease in prior-period amounts for interconnection agreement
settlements, which had resulted primarily from settlements of
reciprocal compensation issues; and
. a $29.4 million write-down of impaired property and equipment and
goodwill and other intangible assets.
EBITDA, as adjusted, attributable to our broadband transport services
increased $8.8 million to $49.8 million for 2001 from $41.0 million for 2000.
This increase was primarily attributable to a 66.9%
39
increase in the average efficiency of our fiber optic facilities providing
transmission services, which allowed us to provide more capacity over existing
lines. The effects of the increase were partially offset by a 28.7% decrease in
the average rates we charge for our broadband transport services.
EBITDA, as adjusted, attributable to our e/\deltacom segment decreased
$57.7 million to $(70.4) million for 2001 from $(12.7) million for 2000. The
effects of this decrease were primarily attributable to the following factors:
. a $45.0 million decrease resulting from the write-down of impaired
property and equipment and goodwill and other intangible assets;
. a $1.3 million decrease resulting from the sale of lower-margin
products;
. a $3.1 million decrease resulting from an increase in the cost of
equipment and services incurred to support increased sales; and
. a $5.4 decrease resulting from increased selling, operations and
administration expenses attributable to increased operating costs for
the e/\deltacom data center and $2.1 million relating to the
restructuring in September 2001.
Year Ended December 31, 2000 Compared with Year Ended December 31, 1999
Operating Revenues. Total operating revenues increased $118.8 million, or
48.5%, from $244.8 million for 1999 to $363.6 million for 2000.
Revenues from our retail services increased $97.9 million, or 56.9%, from
$172.0 million for 1999 to $269.9 million for 2000. The increase was primarily
attributable to the following factors:
. an increase of $67.8 million in revenues, excluding the effects of
one-time net benefits from prior-period amounts of interconnection
agreements, generated by our local, data and Internet products, which
accounted for 42% of total operating revenues compared to 26% of total
operating revenues in 1999;
. receipt of a one-time net benefit of approximately $14.3 million for
2000 related to the prior-period amounts of interconnection agreement
settlements with BellSouth and $1.8 million related to an
interconnection agreement settlement with Sprint;
. an increase of $14.4 million in nonrecurring revenues from our sales
and service of telephone systems and related equipment and sales of
computer and related equipment and services, which resulted primarily
from an increased demand for such products and services and increased
sales resulting from an agency agreement we entered into in May 2000;
and
. continued stability in the rate of revenue loss from former customers
from period to period.
The growth of our retail services revenues in 2000 was adversely affected
by a continued decrease in the rates per minute of use we charge for the
services we price per minute of use, including the rates we charge some of our
large customers. The effect of the rate decrease per minute of use we charge our
customers was partially offset by an increase in the minutes used by our
customers and decreases in our cost of services.
Revenues from our broadband transport services increased $10.4 million, or
14.3%, from $72.9 million for 1999 to $83.3 million for 2000. The increase in
these revenues was primarily attributable to an increased demand for bandwidth.
40
Revenues from our e/\deltacom segment for 2000 totaled $10.4 million and
were primarily related to $9.9 million in revenues generated by the sale of
professional services, including the sale of maintenance contracts and services.
No single customer of our retail services, broadband transport services or
e/\deltacom services segments represented over 10% of our total operating
revenues for 2000.
Cost of Services. Total cost of services increased $36.3 million from
$118.7 million for 1999 to $155.0 million for 2000.
Cost of services for our retail services increased $30.9 million from
$107.9 million for 1999 to $138.8 million for 2000. Cost of services as a
percentage of retail services revenues decreased to 51% for 2000 from 63% for
1999. The decrease in our cost of services as a percentage of revenues for 2000
was primarily attributable to the following factors:
. a continued increase in sales of facilities-based services as a
percentage of our total sales;
. a continued increase in the sales of higher gross margin services,
particularly sales of our data services;
. the continued migration of resale services to the portion of our
network and facilities we own and operate; and
. continued reductions in access costs, primarily access costs we incur
for the services we price per minute of use.
Cost of services for our broadband transport services decreased $1.4
million from $10.8 million for 1999 to $9.4 million for 2000. Cost of services
as a percentage of revenues from our broadband transport services decreased to
11% for 2000 from 15% for 1999. These decreases were primarily attributable to
the continued migration of traffic to the portion of our network and facilities
we own and operate and to a reduction in rates we were charged for off-network
usage.
Cost of services attributable to our e/\deltacom segment was $6.8 million,
or 65% of revenues, for 2000.
Selling, Operations and Administration Expenses. Total selling, operations
and administration expenses increased $54.2 million from $96.9 million, or 40%
of revenue, for 1999 to $151.1 million, or 42% of revenue, for 2000.
Selling, operations and administration expenses attributable to our retail
services increased $29.0 million from $72.7 million, or 42% of revenue, for 1999
to $101.7 million, or 38% of revenue, for 2000. These increases were primarily
attributable to increased costs of $25.5 million associated with an increase in
the number of our employees and $5.6 million associated with our continued
geographic expansion and the further expansion of our service offerings.
Selling, operations and administration expenses attributable to our
broadband transport services increased $8.8 million from $24.2 million, or 33%
of revenue, for 1999 to $33.0 million, or 40% of revenue, for 2000. This
increase resulted primarily from an increase of $4.0 million in expenses for
additional personnel to support the geographic expansion of our network and the
development of the infrastructure required to support our Internet
protocol-based network backbone, an increase of $2.7 million related to
additional information systems and to increased research and development
activity, and an increase of $962,000 in taxes and licenses relating to
additional property and equipment.
Selling, operations and administration expenses attributable to our
e/\deltacom segment was $16.3 million, or 158% of revenue, for 2000.
41
Depreciation and Amortization. Total depreciation and amortization
increased $32.7 million from $53.8 million for 1999 to $86.5 million for 2000.
Of the increase, our retail services accounted for $20.3 million, our broadband
transport services accounted for $9.1 million and our e/\deltacom business
accounted for $3.3 million. The increase attributable to our retail services was
primarily related to a full year of depreciation on new central office equipment
and telecommunications equipment added to our network during 1999 and to
depreciation on new central office equipment and other telecommunications
equipment added to our network during 2000. The increase attributable to our
broadband transport services primarily reflected a full year of depreciation on
fiber and telecommunications equipment installed in 1999 and to depreciation on
fiber and telecommunications equipment installed in 2000.
Interest Expense. Total interest expense increased $10.2 million from $45.3
million for 1999 to $55.5 million for 2000. The increase in interest expense in
2000 was primarily attributable to an increase in our average outstanding debt
balances as a result of our issuance in May 1999 of $100 million principal
amount of convertible subordinated notes and our drawdown in April 2000 of $160
million of borrowings under our senior secured credit facility.
Interest Income. Total interest income from the temporary investment of
available cash balances increased $600,000 from $14.2 million for 1999 to $14.8
million for 2000.
Other Income (Expense). In connection with the mark-to-market of an
interest rate swap, we recognized expense of approximately $426,000 for 2000 and
income of approximately $754,000 for 1999.
Extraordinary Item. We incurred an extraordinary loss of $1.3 million
during 2000 as a result of the write-off of debt-issuance costs related to the
early termination of our $50 million revolving credit facility. We did not
borrow any amounts under this credit facility.
EBITDA, as adjusted. Total EBITDA, as adjusted, increased $28.3 million
from $29.3 million for 1999 to $57.6 million for 2000. EBITDA, as adjusted, net
of prior-period amounts for our interconnection agreement settlements, was $41.5
million for 2000.
EBITDA, as adjusted, attributable to our retail services for 2000 was $29.4
million, which represented an increase of $38.1 million from EDITDA, as
adjusted, of $(8.7) million for 1999. Net of prior-period amounts for our
interconnection agreement settlements, EBITDA, as adjusted, attributable to
retail services was $13.3 million for 2000. The increase in EBITDA, as adjusted,
for our retail services was primarily attributable to the following factors:
. an increase of $20.5 million related to continued growth in sales of
higher gross margin services, especially our data services, and
increased cost efficiencies resulting from the continued migration of
customers from our resale services to services we provide over the
portion of our network we own and operate;
. maturation of older markets; and
. the recognition of $16.1 million in nonrecurring revenue from
prior-period interconnection agreement settlements.
EBITDA, as adjusted, attributable to our broadband transport services
increased $3.1 million to $41.0 million for 2000 from $37.9 million for 1999.
The effects of this increase, which was primarily attributable to the increasing
demand for bandwidth, were partially offset by the competitive pricing of our
broadband transport services.
EBITDA, as adjusted, attributable to our e/\deltacom segment was $(12.7)
million for 2000.
42
Liquidity and Capital Resources
Our current liquidity is insufficient to cover our operating expenses and
capital needs and jeopardizes our ability to continue as a going concern. As of
February 28, 2002, we had $31.1 million of cash and cash equivalents. If we are
unable to obtain additional funds under our outstanding equity financing
commitment or from other sources, or if we are unable to complete one of the
potential restructuring alternatives described below, we estimate that our cash
flows from operations and our other available sources of funds will be
sufficient to enable us to conduct our business and to service our indebtedness
only through August 2002.
We are actively considering various alternatives to alleviate the
significant constraints on our liquidity. We have engaged a financial adviser to
assist us in our evaluation of potential alternatives. These alternatives
include seeking to raise additional equity capital and/or pursuing an exchange
offer whereby we would make an offer to holders of our outstanding public notes
to exchange the notes for new debt or equity securities or for a combination of
cash and securities. There can be no assurance that we will successfully raise
additional capital or that an exchange offer on terms acceptable to us can be
implemented and accepted by our existing noteholders. To conserve cash while we
seek to complete one of these alternatives, we plan to further reduce our
capital expenditures and operating expenses. Our ability to continue as a going
concern is contingent upon our success in achieving a significant improvement in
our liquidity position by August 2002 through one or more of these alternatives.
We depend on BellSouth for the provision of wholesale telecommunications
services under our interconnection agreements with BellSouth and pursuant to
various access tariffs which BellSouth has filed with federal and state
regulatory agencies. By letter dated March 8, 2002, BellSouth had requested that
we provide a $10 million security deposit by March 29, 2002 in connection with
BellSouth's provision of services to us. We are contesting both the requirement
for, and the amount of, the requested deposit. If we are unsuccessful in either
eliminating or substantially reducing the amount of the requested security
deposit, our cash reserves may be insufficient to fund the deposit, which could
have a material adverse affect on our ability to provide services to our
customers.
Some of our customers, especially government entities, require that we
obtain surety bonds as a condition to our provision of service to them. In
February 2002, because of our financial condition, our surety cancelled all
outstanding surety bonds that contained cancellation clauses. At the time the
surety bonds were cancelled, our surety bond portfolio had a face value of
approximately $1.9 million in outstanding obligations, of which approximately
$1.2 million were cancelled. As of March 29, 2002, these bonds had not been
replaced. The surety plans to cancel all remaining bonds that may be cancelled
upon renewal as they renew. These bonds renew at various dates in 2002 and have
a face value of $405,000. The remaining bonds, valued at $282,000, are
noncancellable, unless we no longer need them or we do not perform our
obligations under the bonds. The surety also refuses to underwrite any new
surety bonds unless we provide 100% collateral for such bonds. We are actively
working with the existing obligees of the bonds to provide the security they
require, and another surety has offered to underwrite new bonds or replace
cancelled bonds for us if we provide 100% collateral for each bond. Our
inability to provide surety bonds to replace the cancelled surety bonds or issue
new surety bonds will have an adverse impact on our ability to provide service
to some customers, especially government entities or other entities that
generally require surety bonds. In addition, the necessity to provide 100%
collateral for any bond issued may have an adverse impact on the funds available
for capital expenditures or other uses if we choose to purchase the surety bond
and provide the collateral. To maintain our existing surety obligations would
require approximately $1.6 million of available funds and, depending on the
perception of our financial condition, could increase the demand on us for
additional surety bonds and therefore further restrict our available funds.
We are subject to restrictions under the indentures pursuant to which we
issued our publicly traded senior notes, under our $160 million senior secured
credit facility and under our $40 million capital lease facility. These
restrictions affect and, in some cases, significantly limit or prohibit, among
other things, our ability to incur additional indebtedness. In order to incur
additional indebtedness under the foregoing agreements, we must meet minimum
specified leverage and interest coverage ratios based on our operating cash
flow. As of February 28, 2002, we had not met, and we do not expect that we will
be able to meet in the foreseeable future, the measurement criteria under these
ratios that would allow us to incur additional indebtedness.
43
We are currently assessing the conditions to funding under the outstanding
$150 million equity financing commitment made by ITC Holding Company, Inc.,
SCANA Corporation and HBK Master Fund L.P. to determine whether we would be able
to obtain additional funds from this source. Through the date of this report, we
have obtained gross proceeds of $70 million from sales to these investors of the
Series B preferred stock and common stock purchase warrants described below. The
purchase commitments of these investors pursuant to our investment agreement
will expire on June 20, 2002. Our ability to acquire additional funds in the
equity financing is subject to our compliance with conditions that include a
requirement that, immediately after each closing, no purchaser of our Series B
preferred stock (with specified exceptions), together with all other members, if
any, of the same group for federal securities law purposes, beneficially own
more than 30% of the total voting power of our voting securities, as calculated
under change of control provisions in our debt agreements. As a result of this
requirement, among others, we cannot provide any assurance that we will be able
to obtain additional funds under the investment agreement in an amount that
would provide us with significant liquidity.
During 2001, we funded our operating and capital requirements and other
cash needs principally through cash from operations, cash on hand, proceeds from
our sale of Series B preferred stock, and capital lease financing. In the latter
half of 2001, in large part to address our liquidity constraints, we
restructured some of our business operations, reduced our workforce, reduced our
planned capital expenditures and implemented other cost-cutting measures.
We (used) generated net cash from operating activities of $(10.5) million
in 2001, $45.9 million in 2000 and $(5.3) million in 1999. Changes in working
capital were $2.8 million in 2001, $27.3 million in 2000 and $(6.4) million in
1999.
. The change in 2001 was primarily attributable to a decrease in
accounts receivable and other current assets, and an increase in
accrued compensation and other accrued liabilities, the effect of
which was partially offset by a decrease in accounts payable, accrued
interest and unearned revenue. The decrease in unearned revenue
primarily resulted from a decrease from $24 million for 2001 to $17.6
million for 2002 in the amount prepaid by BellSouth for reciprocal
compensation.
. The change in 2000 was primarily attributable to an increase in
accounts payable, accrued interest, unearned revenue, accrued
compensation and other accrued liabilities, the effect of which was
partially offset by an increase in accounts receivable. The increase
in unearned revenue was primarily related to a $24 million prepayment
by BellSouth for forecasted reciprocal compensation during 2001.
. The change in 1999 was primarily attributable to an increase in
accounts receivable and other current assets, the effect of which was
partially offset by an increase in accounts payable, unearned revenue,
accrued compensation and other accrued liabilities.
Cash used for investing activities was $154.8 million in 2001, $305.2
million in 2000 and $150.0 million in 1999. The cash used in these years was
primarily applied to fund capital expenditures.
We made capital expenditures of $162.0 million in 2001, $309.8 million in
2000 and $165.5 million in 1999.
. Of the $162.0 million of capital expenditures in 2001, $61.2 million
related to our retail services segment, $44.3 million related to our
broadband transport services segment and $56.5 million related to our
e/\deltacom segment.
. Of the $309.8 million of capital expenditures in 2000, $131.1 million
related to our retail services segment, $121.6 million related to our
broadband transport services segment and $57.1 million related to our
e/\deltacom segment.
. Of the $165.5 million of capital expenditures in 1999, $98.7 million
related to our retail services segment and $66.8 million related to
our broadband transport services segment.
44
Cash provided by financing activities was $65.2 million in 2001, $152.0
million in 2000 and $219.6 million in 1999.
. Net cash provided by financing activities in 2001 consisted primarily
of net proceeds of $67.2 million from the issuance of our Series B-1
preferred stock and Series B-2 preferred stock and of $1.1 million
from the exercise of options to purchase common stock, reduced by a
net repayment of other long-term debt and capital lease obligations of
$2.4 million.
. Net cash provided by financing activities in 2000 consisted primarily
of net proceeds of $157.4 million from our $160 million senior secured
credit facility, of which $7.0 million was restricted for capital
expenditures at December 31, 2000, and $3.1 million from the exercise
of options to purchase common stock, reduced by $1.5 million from the
net repayment of other long-term debt and capital lease obligations.
. Net cash provided by financing activities in 1999 consisted primarily
of net proceeds of $97.0 million from the sale of our 4 1/2%
convertible subordinated notes, $120.9 million from the sale of common
stock in a public offering and $2.7 million from the exercise of
options to purchase common stock, reduced by $1.1 million from the net
repayment of other long-term debt and capital lease obligations.
We have various contractual obligations and commercial commitments. These
obligations and commitments are more fully described in Notes 5 and 10 to our
consolidated financial statements included elsewhere in this report. The
following table sets forth, in thousands, the annual payments, exclusive of
interest payments, we are required to make under contractual cash obligations
and other commercial commitments at December 31, 2001 (in thousands):
Payments Due by Period
--------------------------------------------
Total 2002 2003-2004 2005-2006 After 2006
-------- ------- --------- --------- ----------
Long-term debt - Notes .............. $515,000 $ -- $ -- $100,000 $415,000
Long-term debt - Credit facility .... 157,200 1,600 3,200 40,200 112,200
Capital lease obligations ........... 71,278 9,709 29,675 18,129 13,765
Operating leases .................... 67,357 13,281 22,770 14,927 16,379
Unconditional purchase obligations .. 8,771 8,771 -- -- --
-------- ------- ------- -------- --------
Totals ........................... $819,606 $33,361 $55,645 $173,256 $557,344
======== ======= ======= ======== ========
We do not have off-balance sheet financing arrangements other than our
operating leases. See Note 5 to our consolidated financial statements included
elsewhere in this report for additional information regarding our financing
arrangements.
In November 2000, we entered a purchase agreement with Nortel Networks,
Inc. for the purchase of telecommunications equipment and services. The
agreement provides that we will receive specified volume discounts if we
purchase at least $250 million of equipment and services from Nortel Networks
between November 1, 1999 and December 31, 2002. If we do not purchase at least
$250 million of equipment and services, we will be required to pay Nortel
Networks an amount equal to 3% of the difference between $250 million and the
amount of equipment we purchase. If we purchase equipment in excess of the
original $250 million commitment amount, we may be able to obtain additional
volume discounts based on additional purchase thresholds. As of December 31,
2001, we had purchased $113.1 million of equipment under the Nortel Networks
purchase agreement.
On June 20, 2001, we issued 30,000 shares of Series B-1 cumulative
convertible preferred stock with a redemption value of $30 million, yielding
proceeds, net of issuance costs, of approximately $27.4 million. The Series B-1
preferred stock is convertible into common stock at any time and from time to
time at an initial conversion price of $5.70 per share of common stock. As part
of the issuance of the Series B-1 preferred stock, we issued warrants to
purchase an aggregate of 1,578,948 shares of common stock at an initial exercise
price of $5.70 per share of common stock. The initial conversion price of the
Series B-1 preferred stock and the initial exercise price of the warrants are
subject to adjustment in specified circumstances. The warrants are exercisable
at any time
45
and from time to time for a period of ten years from the date of issuance. The
Series B-1 preferred stock will be subject to mandatory redemption by us on June
20, 2011.
On September 5, 2001, we issued 40,000 shares of Series B-2 cumulative
convertible preferred stock with a redemption value of $40 million, yielding
proceeds, net of issuance costs, of approximately $39.8 million. The Series B-2
preferred stock is convertible into common stock at any time and from time to
time at an initial conversion price of $2.56 per share of common stock. As part
of the issuance of the Series B-2 preferred stock, we issued warrants to
purchase an aggregate of 4,687,500 shares of common stock at an initial exercise
price of $2.56 per share of common stock. The initial conversion price of the
Series B-2 preferred stock and the initial exercise price of the warrants are
subject to adjustment in specified circumstances. The warrants are exercisable
at any time and from time to time for a period of ten years from the date of
issuance. The Series B-2 preferred stock will be subject to mandatory redemption
by us on September 5, 2011.
At December 31, 2001, we had entered into agreements with vendors to
purchase approximately $8.8 million of property, plant and equipment and
services in 2002 related primarily to the improvement and installation of
telecommunications facilities and information technology equipment and services.
In 2001, we made net capital expenditures of approximately $162.0 million. We
currently estimate that our aggregate capital requirements for 2002 will total
approximately $50.0 million to $65.0 million, including the $8.8 million in
commitments as of December 31, 2001.
We currently plan that capital expenditures in 2002 will be primarily for
the following:
. continued addition of telecommunications equipment in connection with
our local and data telecommunications services; and
. infrastructure enhancements, principally for information systems.
The actual amount and timing of our capital requirements may differ
materially from the foregoing estimate as a result of regulatory, technological,
economic and competitive developments, including market developments and new
opportunities, or in the event we decide to make acquisitions or enter into
joint ventures or strategic alliances, in our industry. To conserve cash while
we seek to complete a potential restructuring to alleviate the significant
constraints on our liquidity, we plan to further restrict our capital
expenditures. Such a reduction could have a material negative effect on our
expected revenue growth.
46
Effects of New Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and for Hedging Activities," establishes accounting and
reporting standards that require every derivative instrument, including certain
derivative instruments embedded in other contracts, to be recorded in the
balance sheet as either an asset or a liability equal to the fair value of the
derivative instrument. SFAS No. 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement and requires that a company formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. SFAS No. 133
was originally effective for fiscal years beginning after June 15, 1999. SFAS
No. 133 may not be applied retroactively. SFAS No. 133 must be applied to
derivative instruments and certain derivative instruments embedded in hybrid
contracts that were issued, acquired or substantively modified after December
31, 1997. In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133," and in June 2000, the FASB issued
SFAS No. 138, "Accounting for Certain Derivatives and Certain Hedging
Activities-an Amendment to SFAS No. 133." SFAS No. 137 amends SFAS No. 133 to be
effective for all fiscal years beginning after June 15, 2000 or, for companies
having a fiscal year which is a calendar year, on January 1, 2001. We adopted
SFAS Nos. 133, 137 and 138 for the fiscal year beginning January 1, 2001, with
no material effect on our consolidated financial statements.
SFAS No. 142, "Goodwill and Other Intangible Assets," establishes
accounting and reporting standards for goodwill and other intangible assets.
SFAS No. 142 requires that amortization of goodwill cease on January 1, 2002 and
that goodwill be assessed for impairment at least annually by applying a fair
value-based test. If the fair value of the goodwill is less than the amount of
goodwill recorded in the financial statements, then the goodwill is to be
reduced in the financial statements to the fair value. In addition, SFAS No. 142
requires that intangible assets be separately recognized in the financial
statements if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented or exchanged, regardless of the acquirer's intent
to do so. We recorded amortization expense related to goodwill for the year
ended December 31, 2001 of $5.1 million. We adopted SFAS No. 142 on January 1,
2002, upon which we ceased amortization of goodwill. We expect to complete our
initial review by June 30, 2002. Until we complete the review, we will not be
able to determine the amount of impairment loss, if any.
SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in
June 2001. SFAS No. 143 applies to legal obligations associated with the
retirement of certain tangible long-lived assets. This statement is effective
for fiscal years beginning after June 15, 2002. Accordingly, we will adopt this
statement on January 1, 2003. We believe the adoption of SFAS No. 143 will not
have a material impact on our consolidated financial statements.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued in August 2001. It supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
SFAS No. 144 also amended Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years. We adopted SFAS No. 144 on January 1, 2002,
and are currently evaluating the impact of its adoption on our consolidated
financial statements.
47
Inflation
Inflation did not have a significant impact on our consolidated operations
in any of the three years ended December 31, 2001.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to minimal market risks. We manage the sensitivity of our
results of operations to these risks by maintaining an investment portfolio
consisting primarily of short-term, interest-bearing securities and by entering
into long-term debt obligations with appropriate pricing and terms. We do not
hold or issue derivative, derivative commodity or other financial instruments
for trading purposes. We do not have any material foreign currency exposure.
Our major market risk exposure is to changing interest rates on borrowings
we use to fund our business, including $157.2 million of borrowings outstanding
under our senior secured credit facility as of December 31, 2001. Interest is
payable on our senior secured credit facility at our option at either 1.875%
plus a base rate, which was 6.0% at December 31, 2001, or 2.875% plus the
Eurodollar rate, which was 2.6% at December 31, 2001. The interest rates that we
are able to obtain on our debt financing depend on current market conditions. We
are also exposed to fair value risk related to our fixed-rate, long-term debt.
As of December 31, 2001, the principal amount of our fixed-rate, long-term debt
and capital lease obligations totaled $566.7 million. The fair value of our
fixed-rate, long-term debt totaled $183.8 million at December 31, 2001.
Our policy is to manage interest rates through a combination of fixed-rate
and variable-rate debt and through the use of interest rate swap contracts to
manage our exposure to fluctuations in interest rates on our variable-rate debt.
At December 31, 2001, $157.2 million of our long-term debt consisted of
variable-rate instruments that accrue interest at floating rates. A change of
one percentage point in the interest rate applicable to our $157.2 million of
variable-rate debt at December 31, 2001 would result in a fluctuation of
approximately $1.6 million in our annual interest expense.
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements listed in Item 14 are filed as part
of this report and appear on pages F-2 through F-31.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Non-Employee Directors
The following presents information about our directors who are not
executive officers:
James H. Black, Jr. has served on our board of directors since 1999. Mr.
Black has worked independently as an entrepreneur and consultant since July
2000. Mr. Black was Senior Vice President of ITC/\DeltaCom from July 1999
through July 2000. He was Chairman and Chief Executive Officer of AvData
Systems, Inc., a provider of wide area data networks, from 1990 until that
company was acquired by ITC/\DeltaCom in July 1999. Mr. Black serves as a
director of several privately held corporations including Learn.net, Inc., Air
Quality Sciences, Inc., an indoor environmental testing and product
certification business, and Norelli & Company, a strategic consulting firm.
48
Donald W. Burton has served on our board of directors since 1997. Mr.
Burton has served as the Managing General Partner of South Atlantic Venture
Funds since 1983 and as the General Partner of The Burton Partnership, Limited
Partnership since 1979. Since 1981, he has served as President of South Atlantic
Capital Corporation. Mr. Burton serves as a director of ITC Holding Company, an
investor in and operator of service businesses in the southeastern United
States, KNOLOGY Broadband, Inc., a broadband telecommunications services company
formerly known as KNOLOGY Holdings, Inc., the Heritage Group of Mutual Funds
and several privately held companies.
Robert A. Dolson has served on our board of directors since 1997. Mr.
Dolson has served as President and Chief Executive Officer of United States
Sugar Corporation, an integrated family of agribusiness companies, since July
2000. He served as Vice President of the Charles Stewart Mott Foundation, a
private philanthropy, from October 1999 to July 2000. Mr. Dolson served as
President and Chairman of Continental Water Company, a holding company for
regulated water utilities, from 1982 and 1989, respectively, until 1999. He
served as President and Chairman of National Enterprises, Inc., the parent
company of Continental Water Company, from 1984 and 1989, respectively, until
1999. Mr. Dolson has served as a director of ITC Holding Company, or its
predecessor company, since December 1993.
Campbell B. Lanier, III has served on our board of directors since 1997 and
as Vice Chairman since July 2001. Mr. Lanier also served as our Chairman from
March 1997 through July 2001. Mr. Lanier has served as Chairman of the Board and
Chief Executive Officer of ITC Holding Company, or its predecessor company,
since its inception in 1985. Mr. Lanier is an officer and director of several
ITC Holding Company subsidiaries and a director of KNOLOGY Broadband, Inc. Mr.
Lanier also has served as a Managing Director of South Atlantic Private Equity
Fund IV, Limited Partnership since 1997.
James V. Martin has served on our board of directors since 2000. Mr. Martin
has served as Chief Operating Officer of Sayers Group, LLC, a value-added
technology provider and integrator, since 1993. Before joining Sayers Group,
LLC, Mr. Martin served as President of RTO Enterprises, a household consumer
product rental enterprise with more than 150 locations. Mr. Martin previously
worked in Business Development at GE Capital Corporation and as an accountant
with the accounting firm of Coopers & Lybrand.
R. Gerald McCarley has served on our board of directors since January 2002.
Mr. McCarley is a retired partner of the accounting firm of Deloitte & Touche
LLP. He retired from that firm in June 1999 after having served as a accounting
and audit partner since 1980. Mr. McCarley joined a predecessor of Deloitte &
Touche in 1967 and served in various positions before he was appointed a partner
in 1980.
William T. Parr has served on our board of directors since 1997. Mr. Parr
has served as Vice Chairman of J. Smith Lanier & Co., an insurance placement
company, since 1980. He has served as a director of ITC Holding Company, or its
predecessor company, since 1989. Mr. Parr serves as a director of J. Smith
Lanier & Co. and Industrial Distribution Group, Inc., a supplier of maintenance,
repair, operating and production products.
William H. Scott, III has served on our board of directors since 1997. Mr.
Scott has served as President of ITC Holding Company, or its predecessor
company, since December 1991 and as a director of ITC Holding Company, or its
predecessor company, since May 1989. He is also an officer and director of
several ITC Holding Company subsidiaries. Mr. Scott is a director of KNOLOGY
Broadband, Inc. and Innotrac Corporation, a provider of marketing support
services.
William B. Timmerman has served on our board of directors since 1997. Mr.
Timmerman has served since 1978 in a variety of management positions at SCANA
Corporation, a diversified utility company, including Chief Executive Officer
and President. Mr. Timmerman is also a director of SCANA Corporation and Liberty
Corporation, a broadcasting company, and has served as a director of ITC Holding
Company, or its predecessor company, since 1996.
49
Executive Officers
The following presents information about our executive officers:
Name Age Positions with Company
---- --- ----------------------
Larry F. Williams............ 59 Chairman, Chief Executive Officer and Director
Andrew M. Walker............. 60 President, Chief Operating Officer and Director
Douglas A. Shumate........... 36 Senior Vice President-Chief Financial Officer
Steven D. Moses.............. 52 Senior Vice President-Network Services
J. Thomas Mullis............. 58 Senior Vice President-Legal and Regulatory, General
Counsel and Secretary
Roger F. Woodward............ 49 Senior Vice President-Sales and Account Services
Thomas P. Schroeder.......... 54 Senior Vice President-Large Account Sales
Sara L. Plunkett............. 52 Vice President-Finance
Larry F. Williams has served as our Chairman and Chief Executive Officer
since July 2001 and was appointed to our board of directors in February 2001.
From September 2000 to January 2002, Mr. Williams acted as a consultant to
telecommunications companies. From December 1994 to September 2000, Mr. Williams
served as Chief Executive Officer of AAPT Ltd., a publicly traded
telecommunications carrier in Australia. From January 1992 to December 1994, he
served as Chief Financial Officer and Chief Operating Officer of AAPT Ltd. Mr.
Williams was Executive Vice President, Vice President and Chief Financial
Officer of Telecom*USA (SouthernNet) from October 1987 to August 1990, when that
company was acquired by MCI Communications Corporation. From August 1990 to
January 1992, Mr. Williams served as Vice President of Finance and
Administration of MCI Communications Southern division. From November 1980 to
October 1987, Mr. Williams served as Vice President, Treasurer and Chief
Financial Officer of John H. Harland Co. Mr. Williams currently serves as a
director of Learn.net, Inc., a hosted e-learning service
provider.
Andrew M. Walker has served as our Chief Operating Officer since July 2001,
our President since April 2000 and our Vice Chairman from April 1998 through
July 2001. From March 1997 to July 2001, Mr. Walker served as our Chief
Executive Officer. He served as President and Chief Executive Officer of the
managing partner of each of Interstate FiberNet and Gulf States FiberNet,
predecessors to Interstate FiberNet, Inc., a wholly-owned subsidiary of
ITC/\DeltaCom, from November 1994 until March 1997, and as Chief Executive
Officer and President of KNOLOGY Broadband, Inc. from July 1996 to February
1997.
Douglas A. Shumate has served as our Senior Vice President-Chief Financial
Officer since March 1997. He served as Chief Financial Officer of the Managing
Partners of each of Interstate FiberNet and Gulf States FiberNet from January
1995 until March 1997. From May 1991 to January 1995, he served as Vice
President-Finance and Chief Financial Officer of Interstate Telephone Company, a
local telephone service provider and wholly-owned subsidiary of ITC Holding
Company. From December 1986 through April 1991, Mr. Shumate was employed as a
C.P.A. at the accounting firm of Arthur Andersen LLP.
Steven D. Moses has served as our Senior Vice President-Network Services
since March 1997. He served as Vice President of Interstate FiberNet from
January 1992 until April 1995 and Chief Operating Officer of Interstate FiberNet
from April 1995 until March 1997. From May 1991 to January 1992, Mr. Moses was
Director-Special Projects of Interstate Telephone and Valley Telephone Company,
a local telephone service provider and a wholly owned-subsidiary of ITC Holding
Company.
J. Thomas Mullis has served as our Senior Vice President-Legal and
Regulatory, General Counsel and Secretary since March 1997. Mr. Mullis served as
General Counsel and Secretary of DeltaCom, Inc., the predecessor of
ITC/\DeltaCom Communications, Inc. that was a provider of long distance
telecommunications services, from May 1985 to March 1997 and as Executive Vice
President of DeltaCom from January 1994 to November 1996. From November 1996 to
March 1997, he also served as Senior Vice President of DeltaCom. From January
1990 to
50
December 1993, Mr. Mullis was President, General Counsel and Secretary of
Southern Interexchange Services, Inc., a switched services carrier, and Southern
Interexchange Facilities, Inc., a private line carriers' carrier.
Roger F. Woodward has served as our Senior Vice President-Sales and Account
Services since July 2000. He also served as our Senior Vice President-Sales,
Marketing and Customer Support from March 1997 to July 2000. Mr. Woodward was
Senior Vice President-Sales of DeltaCom, Inc. from October 1996 until March
1997. From March 1990 until July 1996, Mr. Woodward served in a variety of
positions, including Regional Sales Director and Vice President-Sales, with
Allnet Communications, Inc., which was acquired by Frontier Communications
Corporation in August 1995.
Thomas P. Schroeder has served as our Senior Vice President-Large Account
Sales since April 2000. He served as Senior Vice President-Carrier Sales of
ITC/\DeltaCom from April 1999 until April 2000 and as Vice President-Carrier
Sales of ITC/\DeltaCom from March 1997 until April 1999. From June 1995 until
March 1997, Mr. Schroeder served as Vice President-Sales and Marketing of
Interstate FiberNet and, from April 1994 to June 1995, as the Director of Sales
and Marketing of Interstate FiberNet.
Sara L. Plunkett has served as our Vice President-Finance since March 1997.
She also served as our Treasurer from March 1997 through March 2000. Ms.
Plunkett was Vice President-Finance of DeltaCom, Inc. from October 1996 until
March 1997. From May 1989 through October 1996, she served as Chief Financial
Officer of DeltaCom.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and executive officers and persons who own more than 10% of a registered class
of our equity securities to file with the SEC initial reports of ownership and
reports of changes in ownership of our common stock and other equity securities.
The reporting persons are required by rules of the SEC to furnish us with copies
of all Section 16(a) reports they file. Donald W. Burton did not file one report
with respect to one transaction on a timely basis. Based solely upon a review of
Section 16(a) reports furnished to us for fiscal 2001 or written representations
that no other reports were required, we believe that our Section 16(a) reporting
persons otherwise complied with all filing requirements for fiscal 2001.
Item 11. Executive Compensation.
Director Compensation
Fees. Directors who are not employees of ITC/\DeltaCom receive $750 for
each board meeting attended in person, $200 for each board meeting attended by
conference telephone and $200 for each committee meeting attended, whether in
person or by conference telephone. Directors who are also employees receive no
directors' fees. All directors are entitled to reimbursement for their
reasonable out-of-pocket travel expenditures.
Stock Option Grants. The ITC/\DeltaCom, Inc. Director Stock Option Plan
generally provides that each non-employee director will receive options to
purchase 32,100 shares of common stock upon the director's initial election or
appointment to the board of directors. The option exercise price for options
granted under the Director Stock Option Plan will be 100% of the fair market
value of the shares of common stock at the close of business on the date of
grant of the option. Options granted will generally become exercisable with
respect to 50% of the shares subject to the options on the second anniversary of
the date of grant and with respect to 25% of the shares subject to the options
on each of the third and fourth anniversaries of the date of grant. The options
will expire ten years and 30 days after the date of grant. The board of
directors may amend or terminate the Director Stock Option Plan with respect to
shares of common stock as to which options have not been granted.
In July 2001, the Company made an annual option award to each non-employee
director to purchase 7,500 shares of common stock under the ITC/\DeltaCom, Inc.
1997 Stock Option Plan. The terms of the options granted to non-employee
directors under this plan generally have substantially the same terms as options
granted under the
51
Director Stock Option Plan.
Executive Compensation
The following table sets forth the compensation paid to our Chief Executive
Officer and to each of our four other most highly compensated executive officers
for fiscal 2001, who are referred to collectively as the "named executive
officers":
Long Term
Compensation
Annual ------------
Compensation Securities
------------ Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#)(4) Compensation($)(5)
- --------------------------- ---- ---------------------- -------------- ------------------
Larry F. Williams(1)........................ 2001 100,000 110,274 1,000,000 7,543
Chairman and Chief Executive Officer 2000 -- -- -- --
1999 -- -- -- --
Andrew M. Walker(2)......................... 2001 230,000 94,010 148,472 21,451
President and Chief Operating Officer 2000 212,601 136,510 6,652 20,245
1999 163,255 85,334 14,073 15,200
Douglas A. Shumate.......................... 2001 184,923 53,862 64,236 18,929
Senior Vice President-Chief Financial 2000 152,688 59,422 3,562 19,310
Officer 1999 129,383 63,468 6,462 22,861
Steven D. Moses............................. 2001 163,157 36,401 64,236 9,053
Senior Vice President-Network Services 2000 149,574 51,392 3,252 13,589
1999 119,720 57,943 6,863 8,981
J. Stephen Johnson(3)....................... 2001 250,000 69,125 216,223 22,024
Senior Vice President 2000 158,654 83,333 200,000 10,015
1999 -- -- -- --
- ----------
(1) Mr. Williams was appointed Chairman and Chief Executive Officer on July 24,
2001.
(2) Mr. Walker served as President and Chief Executive Officer until July 24,
2001. Upon Mr. Walker's resignation as Chief Executive Officer, he was
appointed to the additional position of Chief Operating Officer.
(3) Mr. Johnson became an employee on May 1, 2000 in connection with our
acquisition of Bay Data Consultants, Inc.
(4) The options were granted under the ITC/\DeltaCom, Inc. 1997 Stock Option
Plan, which permits non-qualified options to be transferred to members of
an optionee's immediate family and related trusts and similar entities,
provided that the plan's administrator must approve any non-donative
transfers.
(5) The amounts shown in the "All Other Compensation" column consist of the
following: (a) for Mr. Williams $982 in fiscal 2001 in life insurance
premiums; a travel allowance of $4,641 in fiscal 2001; and an automobile
allowance of $1,920 in fiscal 2001; (b) for Mr. Walker, $4,404 in fiscal
2001, $2,529 in fiscal 2000 and $1,951 in fiscal 1999 in life insurance
premiums; $7,000 in fiscal 2001, $6,800 in fiscal 2000 and $6,400 in fiscal
1999 in matching contributions to our 401(k) retirement savings plan,
referred to below as the "401(k) Plan"; a travel allowance of $247 in
fiscal 2001, $6,116 in fiscal 2000 and $2,049 in fiscal 1999; an automobile
allowance of $4,800 in fiscal 2001, $4,800 in
52
fiscal 2000 and $4,800 in fiscal 1999; and an executive benefit for estate
planning assistance of $5,000 in fiscal 2001; (c) for Mr. Shumate, $432 in
fiscal 2001, $348 in fiscal 2000 and $213 in fiscal 1999 in life insurance
premiums; $7,000 in fiscal 2001, $6,800 in fiscal 2000 and $6,400 in fiscal
1999 in matching contributions to the 401(k) Plan; a travel allowance of
$5,507 in fiscal 2001, $3,552 in fiscal 2000 and $11,448 in fiscal 1999; an
automobile allowance of $4,800 in fiscal 2001, $4,800 in fiscal 2000 and
$4,800 in fiscal 1999; and an executive benefit for estate planning
assistance of $1,190 in fiscal 2001 and $3,810 in fiscal 2000; (d) for Mr.
Moses, $1,038 in fiscal 2001, $905 in fiscal 2000 and $498 in fiscal 1999
in life insurance premiums; $5,250 in fiscal 2001, $5,250 in fiscal 2000
and $5,000 in fiscal 1999 in matching contributions to the 401(k) Plan; a
travel allowance of $2,497 in fiscal 2001, $2,291 in fiscal 2000 and $3,356
in fiscal 1999; the value of the personal use of a Company vehicle, as
calculated under Internal Revenue Service Regulations of $268 in fiscal
2001, $143 in fiscal 2000 and $127 in fiscal 1999; and a $5,000 executive
benefit for estate planning assistance in 2000; (e) for Mr. Johnson, $667
in fiscal 2001 and $353 in fiscal 2000 for life insurance premiums; $5,250
in fiscal 2001 and $577 in fiscal 2000 in matching contributions to the
401(k) Plan; a travel allowance of $4,441 in fiscal 2001; an automobile
allowance of $11,666 in fiscal 2001 and $7,420 in fiscal 2000; and a $1,665
executive benefit for estate planning assistance in fiscal 2000.
Stock Option Grants in Fiscal 2001
The following table sets forth information concerning all stock options
granted during fiscal 2001 to the named executive officers:
Option Grants in Last Fiscal Year
Individual Grants
---------------------------------------------------
Potential Realizable
Value at
Assumed Annual
Number of Percent of Rates of Stock
Shares Total Options Price Appreciation
Underlying Granted to Exercise for Option Term (3)
Options Employees in Price Expiration ---------------------
Name Granted(1) Fiscal Year ($/Share) Date (2) 5%($) 10%($)
---- ---------- ------------- --------- ---------- ---------------------
Larry F. Williams ... 1,000,000 17.5 3.45 7/24/11 2,169,670 5,498,403
Andrew M. Walker .... 48,472 .8 9.00 1/30/11 274,352 695,266
100,000 1.8 3.45 7/24/11 216,967 549,840
Douglas A. Shumate .. 24,236 .4 9.00 1/30/11 137,176 347,633
40,000 .7 3.45 7/24/11 86,787 219,936
Steven D. Moses ..... 24,236 .4 9.00 1/30/11 137,176 347,633
40,000 .7 3.45 7/24/11 86,787 219,936
J. Stephen Johnson .. 16,223 .3 9.00 1/30/11 91,822 232,697
200,000 3.5 3.45 7/24/11 433,934 1,099,681
- ----------
(1) All options granted to the named executive officers were granted under the
ITC/\DeltaCom, Inc. 1997 Stock Option Plan and are exercisable for shares
of common stock. These options will generally become exercisable with
respect to 50% of the shares subject to such options on the second
anniversary of the date of grant and with respect to 25% of the shares
subject to such options on each of the third and fourth anniversaries of
the date of grant. The 1997 Stock Option Plan permits non-qualified options
to be transferred to members of an optionee's immediate family and related
trusts and similar entities, provided that the plan's administrator must
approve any non-donative transfers.
(2) The term of each option generally may not exceed ten years.
(3) The potential realizable value is calculated based on the fair market value
on the date of grant, which is equal to the exercise price of the option,
assuming that the shares appreciate in value from the option grant date
compounded annually until the end of the option term at the rate specified,
5% or 10%, and that the option is exercised and sold on the last day of the
option term for the appreciated share price. The assumed rates of
appreciation are specified in the rules and regulations of the SEC and do
not represent our estimate or projection of future prices of the shares.
There is no assurance provided to any named executive officer or any other
holder of common stock that the actual stock price appreciation over the
term of the applicable options will be at the assumed 5% and 10% levels or
at any other defined level.
Stock Option Exercises in Fiscal 2001
The following table sets forth information concerning all stock options
exercised during fiscal 2001 and unexercised stock options held at the end of
that fiscal year by the named executive officers:
53
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at Fiscal Year-End(#) at Fiscal Year-End($)(1)
Acquired on Value ----------------------------- ---------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
----------- ----------- ----------- ------------- ----------- -------------
Larry F. Williams .............. -- -- -- 1,032,100 -- --
Andrew M. Walker ............... -- -- 500,444 171,029 -- --
Douglas A. Shumate ............. -- -- 245,577 74,937 -- --
Steven D. Moses ................ 12,000 80,810 184,281 75,674 -- --
J. Stephen Johnson ............. -- -- -- 416,223 -- --
- ----------
(1) Represents the difference between the exercise price and the closing price
of the common stock on the Nasdaq National Market on December 31, 2001, the
last trading day in fiscal 2001.
Report of the Compensation Committee of the Board of Directors on Executive
Compensation
The compensation committee of the board of directors has prepared the
following report on our policies with respect to the compensation of executive
officers for the fiscal year ended December 31, 2001. The compensation committee
is charged with making decisions with respect to the compensation of the our
executive officers and administering our stock option plans. No member of the
compensation committee is an employee of ITC/\DeltaCom or its subsidiaries.
During 2001, the Compensation Committee consisted of James H. Black, Jr., O.
Gene Gabbard, William T. Parr and William H. Scott, III. Mr. Gabbard resigned
from the compensation committee in January 2002.
Compensation Policies for Executive Officers
The compensation policies of the Company are designed to attract, motivate
and retain experienced and qualified executives, increase the overall
performance of the Company, increase stockholder value and improve the
performance of individual executives.
The compensation committee seeks to provide competitive salaries based upon
individual performance together with annual cash bonuses based on the Company's
overall performance relative to corporate objectives, taking into account
individual contributions, teamwork and performance levels. In addition, it is
the Company's policy to grant stock options to executives upon their
commencement of employment with the Company and annually thereafter in order to
strengthen the alliance of interest between the executives and the Company's
stockholders and to give executives the opportunity to reach top compensation
levels of the competitive market based on the Company's performance, as
reflected in the market price of the common stock.
The following describes the elements of compensation generally available to
executives under the compensation committee's compensation policies, with
specific reference to compensation reported for 2001.
Base Salaries. Base salaries of executives are initially determined by
evaluating the responsibilities of the executive's position, the experience and
knowledge of the individual, and the competitive marketplace for executive
talent. This evaluation includes a comparison of the Company's executive base
salaries to base salaries for comparable positions at peer public companies in
the Company's geographic region. Base salaries for executive officers are
reviewed annually by the compensation committee based upon, among other things,
individual performance and responsibilities.
Annual salary adjustments are recommended by the chief executive officer
after evaluating the previous year's performance of each executive officer and
considering the new responsibilities of such officers. The compensation
committee performs the same review of the performance of the chief executive
officer. Individual performance ratings take into account such factors as the
achievement of specific goals that are defined by reference to the Company's
strategic plan and the attainment of specific individual objectives. The factors
affecting base salary levels are not assigned specific weights, but are subject
to adjustment by the compensation committee.
54
Bonuses. The Company's annual bonuses to its executive officers are based
on both corporate and individual performance, as measured by reference to
factors that reflect objective performance criteria over which management
generally has the ability to exert some degree of control. These corporate
performance factors include revenue and earnings targets established in the
Company's annual budget as well as various operational objectives of the
Company. Bonuses for 2001, which were paid in 2002, were based upon the
achievement of such financial and operating factors.
Stock Options. A third component of an executive officer's compensation
consists of awards under the ITC/\DeltaCom, Inc. 1997 Stock Option Plan,
pursuant to which the Company grants executive officers and other key employees
options to purchase shares of common stock.
The compensation committee grants stock options to the Company's executives
in order to align their interests with the interests of the stockholders. Stock
options are considered by the compensation committee to be an effective
long-term incentive because an executive's gains are linked to increases in the
value of the common stock, which in turn provides stockholder gains. The
compensation committee generally grants options to new executive officers and
other key employees upon their commencement of employment with the Company and
on an annual basis thereafter. The options generally are granted at an exercise
price equal to the closing market price of the common stock at the date of the
grant. Options granted to executive officers typically vest over a period of two
to four years following the date of grant. The maximum option term is ten years.
The full benefit of the options is realized upon appreciation of the stock price
in future periods, thus providing an incentive to create value for the Company's
stockholders through appreciation of stock price. The Company's management
believes that stock options have been helpful in attracting and retaining
skilled executive personnel.
Stock option grants made to executive officers in 2001 reflect significant
individual contributions relating to the Company's operations and implementation
of the Company's objectives. Certain newly hired executive officers, including
the chief executive officer, also received stock option grants at the time of
their employment with the Company. During 2001, the Company granted stock
options to purchase an aggregate of 1,493,167 shares of common stock to the
Company's five most highly compensated executive officers. The per share option
exercise prices of options granted to these executive officers during 2001
ranged from $3.45 to $9.00, which equaled the fair market value of a share of
common stock on the dates of grant.
Other. The Company has adopted a contributory 401(k) retirement plan for
all of its employees, including executive officers who are age 21 and over and
have at least six months and 500 hours of service with the Company. The 401(k)
plan provides that each participant may contribute up to 15% of the
participant's salary, but not to exceed the annual statutory limit. The Company
generally makes matching contributions to each participant's account equal to
100% of the first 2% and 50% of the next 4% of such participant's annual
contribution by salary and/or bonus deferral to the 401(k) plan.
Chief Executive Officer Compensation
The executive compensation policy described above was applied in setting
the compensation of Mr. Walker, who served as chief executive officer until July
24, 2001, and the compensation of Mr. Williams, who has served as chief
executive officer beginning on July 24, 2001. The chief executive officer
generally participates in the same executive compensation plans and arrangements
available to the other senior executives. Accordingly, the compensation of the
chief executive officer also consists of annual base salary, annual bonus and
long-term equity-linked compensation. The compensation committee's general
approach in establishing the chief executive officer's compensation is to be
competitive with peer companies, but to have a large percentage of his target
compensation based upon the long-term performance of the Company, as reflected
in part in the market price of the common stock.
A base salary of $230,000 was established for Mr. Walker's service as chief
executive officer for the year ended December 31, 2001. Mr. Walker also received
a cash bonus of $94,010 relating to his service as an executive officer during
fiscal 2001, including the portion of fiscal 2001 during which he
55
served as chief executive officer. These amounts were based on, among other
factors, the Company's 2000 performance and the 2000 compensation of chief
executive officers of comparable companies, although Mr. Walker's compensation
was not linked to any particular group of these companies. Mr. Walker was also
granted options to purchase 148,472 shares of common stock in 2001 under the
ITC/\DeltaCom, Inc. 1997 Stock Option Plan.
Mr. Williams's compensation for the portion of the year ended December 31,
2001 during which he served as chief executive officer included $100,000 in base
salary and a $110,274 cash bonus. Mr. Williams's salary and bonus payments for
2001 were based on, among other factors, the 2000 compensation of chief
executive officers of comparable companies, although his compensation was not
linked to any particular group of these companies. Mr. Williams was also granted
options to purchase 1,000,000 shares of common stock in 2001 under the
ITC/\DeltaCom, Inc. 1997 Stock Option Plan upon his appointment as chief
executive officer. The compensation committee believed that the size of this
grant was justified in light of Mr. Williams's expertise and qualifications and
the current circumstances affecting the Company and its industry.
Compensation Deductibility Policy
Under Section 162(m) of the Internal Revenue Code and applicable Treasury
regulations, no tax deduction is allowed for annual compensation in excess of $1
million paid to any of the Company's five most highly compensated executive
officers. However, performance-based compensation that has been approved by
stockholders is excluded from the $1 million limit if, among other requirements,
the compensation is payable only upon attainment of pre-established, objective
performance goals. The compensation committee intends to maximize the extent of
tax deductibility of executive compensation under the provisions of Section
162(m) so long as doing so is compatible with its determinations as to the most
appropriate methods and approaches for the design and delivery of compensation
to the Company's executive officers.
Respectfully submitted,
Compensation Committee
James H. Black, Jr.
William T. Parr
William H. Scott, III
Compensation Committee Interlocks and Insider Participation
James H. Black, Jr., William T. Parr, William H. Scott, III and O. Gene
Gabbard served as members of the compensation committee during fiscal 2001. Mr.
Gabbard resigned as a member of the board of directors and the compensation
committee in January 2002. Before his appointment to the board of directors in
July 2000, Mr. Black served as a Senior Vice President of ITC/\DeltaCom from
July 1999 through July 2000. For a description of transactions between our
company and entities with which members of the compensation committee in fiscal
2001 are affiliated or associated, see "Certain Relationships and Related
Transactions."
Stockholder Return Performance Graph
The following graph and table show the cumulative total stockholder return
on our common stock compared to the Standard & Poor's 500 Stock Index and the
Nasdaq Telecommunications Index, which is composed of stocks of publicly traded
companies which are principally in the telecommunications business, for the
periods between October 24, 1997, the date the common stock began trading on the
Nasdaq National Market, and December 31, 2001, the last trading day in fiscal
2001. The graph assumes $100 was invested (1) on October 24, 1997 in our common
stock, (2) on September 30, 1997 in the Standard & Poor's 500 Stock Index and
(3) on September 30, 1997 in the Nasdaq Telecommunications Index. Total
stockholder return is measured by dividing total dividends, assuming dividend
reinvestment, plus share price change for a period, by the share price at the
beginning of the measurement period.
56
Total Stockholder Returns
[CHART APPEARS HERE]
Indexed Returns
Years Ended December 31,
------------------------
Base Period
Company/Index October 24, 1997* 1997 1998 1999 2000 2001
----------------- ------ ------ ------ ------ ----
ITC/\DeltaCom, Inc. .................... 100 83.02 153.46 277.99 54.25 8.75
S&P 500 Stock Index ................... 100 102.87 132.27 160.10 145.52 128.23
Nasdaq Telecom Index .................. 100 108.47 179.52 320.28 136.41 91.33
- ------------
* The Base Period with respect to the S&P 500 Index and the Nasdaq Telecom
Index is September 30, 1997.
57
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information presented below regarding beneficial ownership of our
capital stock has been presented in accordance with the rules of the SEC and is
not necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership of shares of capital stock includes any shares
as to which a person, directly or indirectly, has or shares voting power or
investment power and also any shares as to which a person has the right to
acquire such voting or investment power within 60 days through the exercise of
any stock option or other right. Beneficial ownership also includes any
additional shares of capital stock which a person has the right to acquire
during such 60-day period as a result of the accrual of dividends payable in
shares of capital stock.
The percentage of beneficial ownership as to any person as of a particular
date is calculated by dividing the number of shares beneficially owned by such
person (which includes the number of shares as to which such person has the
right to acquire voting or investment power within 60 days) by the sum of the
number of shares outstanding as of such date and the number of shares as to
which such person has the right to acquire voting or investment power within 60
days. As used in this report, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or direct the
disposition of shares. Unless otherwise indicated below, each of the
stockholders listed has sole voting and dispositive power with respect to the
shares shown as beneficially owned.
Principal Stockholders
Beneficial Ownership of Common Stock. As of January 31, 2002, there were
62,364,768 shares of common stock outstanding. The following table presents, as
of January 31, 2002, information based upon our records and filings with the SEC
regarding each person, other than a director or executive officer of
ITC/\DeltaCom, known to us to be the beneficial owner of more than 5% of the
common stock:
Amount of
Name and Address of Beneficial Percent
Beneficial Owner Ownership of Class (%)
---------------- ---------- ------------
ITC Holding Company, Inc........................ 19,114,827 23.5
3300 20th Avenue
Valley, Alabama 36854
SCANA Corporation............................... 12,776,085 18.2
1426 Main Street
Columbia, South Carolina 29201
HBK Investments L.P............................. 5,598,955 8.3
300 Crescent Court, Suite 700
Dallas, Texas 75201
American Water Works Company, Inc............... 4,017,264 6.4
1025 Laurel Oak Road
Vorhees, New Jersey 08043
J. Smith Lanier, II............................. 3,200,492 5.1
J. Smith Lanier & Co.
P.O. Box 70
300 West Tenth Street
West Point, Georgia 31833
The information concerning ITC Holding Company, Inc. above is based upon
our records and a Schedule 13D/A filed with the SEC on September 6, 2001. ITC
Holding Company shares voting power and dispositive power with respect to
18,808,844 of the shares shown with its indirect wholly-owned subsidiary, ITC
Telecom Ventures, Inc., and with respect to 305,983 of the shares shown with its
direct wholly owned subsidiary, ITC Service Company, Inc. The shares shown are
composed of the following: 305,983 shares of common stock outstanding as of
January 31, 2002; 3,732,906 shares of common stock issuable as of, and within 60
days after, January 31, 2002 upon conversion of 20,859.802 shares of Series B-1
preferred stock beneficially owned as of January 31, 2002;
58
10,898,306 shares of common stock issuable as of, and within 60 days after,
January 31, 2002 upon conversion of 27,353.343 shares of Series B-2 preferred
stock beneficially owned as of January 31, 2002; and 4,177,632 shares of common
stock issuable as of January 31, 2002 upon exercise of outstanding common stock
purchase warrants. The outstanding shares of common stock are held of record by
ITC Service Company. The Series B-1 preferred stock, Series B-2 preferred stock
and common stock purchase warrants are held of record by ITC Telecom Ventures.
The information concerning SCANA Corporation above is based upon our
records and a Schedule 13G/A filed with the SEC on April 10, 2001. SCANA
Corporation has sole voting and dispositive power with respect to 4,702,416 of
the shares shown and shares voting power and dispositive power with respect to
8,073,669 of the shares shown with its subsidiaries, SCANA Communications, Inc.
and SCANA Communications Holdings, Inc. The shares shown are composed of the
following: 5,112,127 shares of common stock outstanding as of January 31, 2002;
2,961,542 shares of common stock issuable as of, and within 60 days after,
January 31, 2002 upon conversion of 1,480,771 outstanding shares of Series A
convertible preferred stock beneficially owned as of January 31, 2002; 933,227
shares of common stock issuable as of, and within 60 days after, January 31,
2002 upon conversion of 5,214.95 shares of Series B-1 preferred stock
beneficially owned as of January 31, 2002; 2,724,781 shares of common stock
issuable as of, and within 60 days after, January 31, 2002 upon conversion of
6,838.849 shares of Series B-2 preferred stock beneficially owned as of January
31, 2002; and 1,044,408 shares of outstanding common stock issuable as of
January 31, 2002 upon exercise of common stock purchase warrants. The
outstanding shares of common stock and the shares of Series A preferred stock
are held of record by SCANA Communications Holdings, Inc. The Series B-1
preferred stock, Series B-2 preferred stock and common stock purchase warrants
are held of record by SCANA Corporation.
The information concerning HBK Investments L.P. above is based upon our
records and a Schedule 13G filed with the SEC on February 14, 2002. HBK
Investments has sole voting power and dispositive power with respect to all of
the shares shown pursuant to an investment management agreement with HBK Master
Fund L.P. The shares shown are composed of the following: 810,000 shares of
common stock outstanding as of January 31, 2002; 933,227 shares of common stock
issuable as of, and within 60 days after, January 31, 2002 upon conversion of
5,214.95 shares of Series B-1 preferred stock beneficially owned as of January
31, 2002; 2,724,781 shares of common stock issuable as of, within 60 days after,
January 31, 2002 upon conversion of 6,838.849 shares of Series B-2 preferred
stock shares beneficially owned as of January 31, 2002; 1,044,408 shares of
common stock issuable as of January 31, 2002 upon exercise of common stock
purchase warrants; and 86,539 shares of common stock issuable as of January 31,
2002 upon conversion of $2,308,000 aggregate principal amount of our 4 1/2%
convertible subordinated notes due 2006. All of these securities are held of
record by HBK Master Fund L.P.
The information concerning J. Smith Lanier, II is based upon a Schedule
13G/A filed with the SEC on February 11, 2002, in which Mr. Lanier reported that
he has sole voting power and sole dispositive power with respect to 1,951,694 of
the shares shown and that he shares voting power and dispositive power with
respect to 1,248,798 of the shares shown. Shares for which Mr. Lanier has sole
voting and dispositive power include 45,904 shares that Mr. Lanier has the right
to purchase within 60 days after January 31, 2002 and 27,542 shares held in Mr.
Lanier's Individual Retirement Account. Shares for which Mr. Lanier shares
voting and dispositive power include 648,798 shares held of record by Mr.
Lanier's wife and 600,000 shares held of record by the J. Smith Lanier
Charitable Remainder Trust.
59
Beneficial Ownership of Series B Preferred Stock. As of January 31, 2002,
there were 31,289.702 shares of Series B-1 preferred stock and 41,031.041 shares
of Series B-2 preferred stock outstanding. The following table presents, as of
January 31, 2002, information based upon our records and filings with the SEC
regarding each person known to us to be the beneficial owner of more than 5% of
the Series B-1 preferred stock or Series B-2 preferred stock:
Series B-1 Preferred Stock Series B-2 Preferred Stock
-------------------------- --------------------------
Amount of Amount of
Name and Address of Beneficial Percent Beneficial Percent
Beneficial Owner Ownership of Class(%) Ownership of Class(%)
---------------- ---------- ----------- ---------- -----------
ITC Holding Company, Inc ....................... 20,859.802 66.7 27,353.343 66.7
3300 20th Avenue
Valley, Alabama 36854
SCANA Corporation .............................. 5,214.95 16.7 6,838.849 16.7
1426 Main Street
Columbia, South Carolina 29201
HBK Investments L.P. ........................... 5,214.95 16.7 6,838.849 16.7
300 Crescent Court, Suite 700
Dallas, Texas 75201
The information concerning beneficial ownership of the Series B-1 preferred
stock and Series B-2 preferred stock does not include an aggregate of 615.395
shares of Series B-1 preferred stock and 806.303 shares of Series B-2 preferred
stock which will become payable on April 15, 2002 as dividends accrued on the
Series B preferred stock during the period from January 1, 2002 through March
31, 2002.
The information concerning ITC Holding Company, Inc. above is based upon
our records and a Schedule 13D/A filed with the SEC on September 6, 2001. ITC
Holding Company shares voting power and dispositive power with respect to all of
the shares shown with its indirect wholly owned subsidiary, ITC Telecom
Ventures, Inc. All of the shares shown are held of record by ITC Telecom
Ventures.
The information concerning SCANA Corporation above is based upon our
records and a Schedule 13G/A filed with the SEC on April 10, 2001. SCANA
Corporation has sole voting and dispositive power with respect to all of the
shares shown. All of the shares shown are held of record by SCANA Corporation.
The information concerning HBK Investments L.P. above is based on our
records and a Schedule 13G filed with the SEC on February 14, 2002. HBK
Investments has sole voting power and dispositive power with respect to all of
the shares shown pursuant to an investment management agreement with HBK Master
Fund L.P. All of the shares shown are held of record by HBK Master Fund L.P.
60
Security Ownership of Directors and Executive Officers
The following table presents, as of January 31, 2002, information regarding
the beneficial ownership of the common stock by the following persons:
. each director;
. our chief executive officer and the other executive officer named in
the summary compensation table under "Executive Compensation" above;
and
. all of our directors and executive officers as a group.
Amount and Nature of
Name of Beneficial Percent
Beneficial Owner Ownership (1) of Class (%)
---------------- -------------------- ------------
James H. Black, Jr. ........................................... 194,646 *
Donald W. Burton .............................................. 667,768 1.1
Robert A. Dolson............................................... 80,004 *
J. Stephen Johnson ............................................ - -
Campbell B. Lanier, III ....................................... 6,640,593 10.5
James V. Martin ............................................... 5,000 *
R. Gerald McCarley............................................. - -
Steven D. Moses................................................ 280,742 *
William T. Parr ............................................... 336,920 *
William H. Scott, III ......................................... 822,879 1.3
Douglas A. Shumate ............................................ 339,115 *
William B. Timmerman .......................................... 12,856,089 18.3
Andrew M. Walker .............................................. 722,057 1.1
Larry F. Williams ............................................. 50,037 *
All executive officers and directors as a group (18 persons)... 23,869,837 32.5
- ----------
* Less than one percent.
Unless otherwise indicated below, the address of each person included in
the foregoing table is c/o ITC/\DeltaCom, Inc., 1791 O.G. Skinner Drive, West
Point, Georgia 31833.
Shares beneficially owned by Mr. Black include 50,000 shares that Mr.
Black has the right to purchase within 60 days of January 31, 2002 pursuant to
the exercise of options. Shares beneficially owned by Mr. Black for which he
shares voting and dispositive power include 55,175 shares owned jointly with Mr.
Black's wife, 355 shares held of record by Mr. Black's minor daughter and 355
shares held of record by Mr. Black's son.
Shares beneficially owned by Mr. Burton include 77,872 shares that Mr.
Burton has the right to purchase within 60 days of January 31, 2002 pursuant to
the exercise of options, 364,174 shares held of record by Snake River Partners,
167,878 shares and 55,960 shares held of record by two different limited
partnerships, 804 shares held of record by South Atlantic Capital Corporation,
of which Mr. Burton is a director and sole shareholder, and 80 shares held of
record by Mr. Burton's son. Mr. Burton either is or controls the general partner
of each of the partnerships identified in the preceding sentence.
Shares beneficially owned by Mr. Dolson include 78,004 shares that Mr.
Dolson has the right to purchase within 60 days of January 31, 2002 pursuant to
the exercise of options.
61
The information concerning Mr. Lanier above is based upon our records and a
Schedule 13D/A filed with the SEC on October 17, 2000. Shares beneficially owned
by Mr. Lanier include 810,818 shares that Mr. Lanier has the right to purchase
within 60 days of January 31, 2002 pursuant to the exercise of options. Shares
beneficially owned by Mr. Lanier for which he shares voting and dispositive
power include 2,412 shares held of record by Mr. Lanier's wife, 114,760 shares
held of record by the Campbell Lanier, Jr. Irrevocable Life Insurance Trust, of
which Mr. Lanier is co-trustee, and 9,911 shares held of record by the C. B.
Lanier, Jr., Marital Trust, of which Mr. Lanier is co-trustee. Mr. Lanier's
address is c/o ITC/\DeltaCom, Inc., 1791 O.G. Skinner Drive, West Point,
Georgia 31833.
Shares beneficially owned by Mr. Moses include 192,014 shares that Mr.
Moses has the right to purchase within 60 days after January 31, 2002 pursuant
to the exercise of options. Shares beneficially owned by Mr. Moses for which he
shares voting and dispositive power include 275 shares held of record by Mr.
Moses's wife and 3,203 shares held of record by Mr. Moses's minor son. Shares
beneficially owned by Mr. Moses for which he holds dispositive power include
1,853 shares credited to his participant account in our 401(k) retirement
savings plan, which are voted by the plan's trustees.
Shares beneficially owned by Mr. Parr include 78,004 shares that Mr. Parr
has the right to purchase within 60 days of January 31, 2002 pursuant to the
exercise of options. Shares beneficially owned by Mr. Parr for which he shares
voting and dispositive power include 2,000 shares held of record by Mr. Parr's
wife.
Shares beneficially owned by Mr. Scott include 497,472 shares that Mr.
Scott has the right to purchase within 60 days of January 31, 2002 pursuant to
the exercise of options. Shares beneficially owned by Mr. Scott for which he
shares voting and dispositive power include 2,524 shares held of record by Mr.
Scott's wife, 458 shares held of record by Mr. Scott's minor daughter, and
47,162 shares held in a trust for Mr. Scott's minor daughter, of which Mr.
Scott's wife is co-trustee.
Shares beneficially owned by Mr. Shumate include 252,531 shares that Mr.
Shumate has the right to purchase within 60 days of January 31, 2002 pursuant to
the exercise of options. Shares beneficially owned by Mr. Shumate for which he
shares voting and dispositive power include 2,422 shares held of record by Mr.
Shumate's wife, 10 shares held of record by Mr. Shumate's minor daughter and 54
shares held of record by Mr. Shumate's minor son. Shares beneficially owned by
Mr. Shumate for which he holds dispositive power include 1,756 shares credited
to his participant account in our 401(k) retirement savings plan, which are
voted by the plan's trustees.
Shares beneficially owned by Mr. Timmerman include 78,004 shares that Mr.
Timmerman has the right to purchase within 60 days of January 31, 2002 pursuant
to the exercise of options. Shares beneficially owned by Mr. Timmerman for which
he shares voting power include the shares of common stock shown as beneficially
owned by SCANA Corporation under "Principal Stockholders." Mr. Timmerman is the
Chief Executive Officer of SCANA Corporation. Mr. Timmerman disclaims beneficial
ownership of all such shares. Mr. Timmerman's address is c/o SCANA Corporation,
1426 Main Street, Columbia, South Carolina 29201.
Shares beneficially owned by Mr. Walker include 515,406 shares that Mr.
Walker has the right to purchase within 60 days of January 31, 2002 pursuant to
the exercise of options. Shares beneficially owned by Mr. Walker for which he
shares voting and dispositive power include 228 shares held of record by Mr.
Walker's wife. Shares beneficially owned by Mr. Walker for which he holds
dispositive power include 11,945 shares credited to his participant account in
our 401(k) retirement savings plan, which are voted by the plan's trustees.
The shares beneficially owned by all directors and executive officers as a
group include 3,410,887 shares which all directors and executive officers as a
group have the right to purchase within 60 days of January 31, 2002 pursuant to
the exercise of options.
62
Item 13. Certain Relationships and Related Transactions.
We have adopted a policy requiring that any material transactions between
ITC/\DeltaCom and persons or entities affiliated with our officers, directors or
principal stockholders be on terms no less favorable to us than reasonably could
have been obtained in arm's-length transactions with independent third parties.
The following is a summary of certain transactions from January 1, 2001
through February 28, 2002 among ITC/\DeltaCom and our directors, executive
officers, beneficial owners of more than 5% of the common stock or either series
of the Series B preferred stock, and certain entities with which the foregoing
persons are affiliated or associated.
Transactions with ITC Holding Company and Affiliates
We entered into the transactions with ITC Holding Company, its subsidiaries
and its affiliates described below. Except as described below, the following
seven of our 11 directors were also directors of ITC Holding Company from
January 1, 2001 through February 28, 2002: Campbell B. Lanier, III, Donald W.
Burton, Robert A. Dolson, O. Gene Gabbard, William T. Parr, William H. Scott,
III and William B. Timmerman. Mr. Gabbard resigned from our board of directors
in January 2002. Two of our directors are also executive officers of ITC Holding
Company. One of our directors, Campbell B. Lanier, III, has served as Chairman
and Chief Executive Officer of ITC Holding Company, or its predecessor company,
since 1985. The second director, William H. Scott, III, has served as President
of ITC Holding Company, or its predecessor company, since 1991. As a result of
its purchase of the Series B-1 preferred stock and Series B-2 preferred stock in
fiscal 2001, ITC Holding Company became the beneficial owner of more than 5% of
the common stock and of each series of the Series B preferred stock. See
"Principal Stockholders" for information about ITC Holding Company's beneficial
ownership of these securities.
Series B Preferred Stock Investment. Under an investment agreement, dated
as of February 27, 2001, as amended, among ITC/\DeltaCom, ITC Holding Company,
SCANA Corporation and HBK Master Fund L.P., ITC Holding Company committed to
purchase up to $150 million in Series B preferred stock and related common stock
purchase warrants in multiple closings. On May 29, 2001, ITC Holding Company
reduced its purchase commitment to $100 million by assigning $25 million of its
$150 million purchase commitment to SCANA Corporation and $25 million of its
purchase commitment to HBK Master Fund L.P.
At an initial closing under the investment agreement held on June 20, 2001,
ITC Holding Company purchased, for a total purchase price of $20 million, 20,000
shares of Series B-1 preferred stock and warrants having a total exercise price
of $6 million. The initial conversion price of the Series B-1 preferred stock
and the initial exercise price of the warrants issued on that date was $5.70 per
share. At a second closing under the investment agreement held on September 5,
2001, ITC Holding Company purchased, for a total purchase price of $26.7
million, 26,666 shares of Series B-2 preferred stock and warrants having a total
exercise price of $8 million. The initial conversion price of the Series B-2
preferred stock and the initial exercise price of the warrants issued on that
date was $2.56 per share. On October 15, 2001, we issued to ITC Holding Company
448.960 shares of Series B-1 preferred stock as payment-in-kind dividends on the
Series B-1 preferred stock for the dividend period from June 20, 2001 through
September 30, 2001. On January 15, 2002, we issued to ITC Holding Company
410.842 shares of Series B-1 preferred stock as payment-in-kind dividends on the
Series B-1 preferred stock for the quarterly dividend period ended on December
31, 2001 and 687.343 shares of Series B-2 preferred stock as payment-in-kind
dividends on the Series B-2 preferred stock for the dividend period from
September 5, 2001 through December 31, 2001. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity" and Note 7
to our consolidated financial statements included elsewhere in this report for
information about the terms of the outstanding Series B preferred stock and
warrants.
Under the investment agreement, we have agreed to pay ITC Holding Company's
reasonable fees and expenses, including up to $75,000 of the fees and expenses
of ITC Holding Company's financial adviser, which ITC Holding Company incurs in
connection with the negotiation, preparation, execution, delivery and
performance of the investment agreement and to pay up to a total of $150,000 of
the reasonable fees and expenses incurred by other investors in
63
connection with any assignment by ITC Holding Company to such investors of any
portion of its purchase commitment under the investment agreement. In fiscal
2001, we made total payments of $120,000 on behalf of ITC Holding Company under
this provision.
Under the investment agreement, we have agreed to pay the legal fees and
other expenses that may be incurred by ITC Holding Company or its officers,
directors or controlling persons as a result of any lawsuit or other legal
proceeding in connection with the investment agreement. In fiscal 2001, we made
total payments of $141,000 on behalf of ITC Holding Company under this provision
in connection with a lawsuit that was filed in April 2001 and settled in August
2001.
Telecommunications Services Transactions. We sell or have sold capacity on
our fiber optic network to several entities which are or, during 2001, were
subsidiaries or affiliates of ITC Holding Company, including Powertel, Inc.,
Powertel PCS, Inc., KNOLOGY Broadband, Inc. and Earthlink, Inc. Together, these
entities paid us approximately $2.9 million for such capacity for fiscal 2001
and approximately $63,000 for such capacity for the period from January 1, 2002
through February 28, 2002.
We provide long distance and carrier switched long distance service to
several subsidiaries and affiliates of ITC Holding Company, including KNOLOGY,
InterCall, Inc., Interstate Telephone Company, Valley Telephone Company, InView
and Powertel. Together, these entities paid us approximately $4.8 million for
fiscal 2001. We also earn commissions by serving as agent for certain
interexchange carriers doing business with InterCall. Under these agreements, we
contract with the interexchange carrier and rebill the appropriate access
charges plus a margin to InterCall. InterCall paid us commissions totaling
approximately $1.8 million for fiscal 2001 and $249,000 for the period from
January 1, 2002 through February 28, 2002.
We provide directory assistance and operator service to Powertel,
Interstate Telephone, Valley Telephone, Globe Telecommunications, Inc. and
KNOLOGY. Revenues recorded by us for these services were approximately $1.6
million for fiscal 2001 and $62,000 for the period from January 1, 2002 through
February 28, 2002.
We purchased feature group access and other services from Interstate
Telephone, Valley Telephone, Globe Telecommunications and KNOLOGY totaling
approximately $809,000 for fiscal 2001 and $116,000 for the period from January
1, 2002 through February 28, 2002.
InterCall provides conference calling services to us. We paid approximately
$285,000 for such services for fiscal 2001 and $20,000 for such services for the
period from January 1, 2002 through February 28, 2002.
ITC Service Company, a subsidiary of ITC Holding Company, provides us and
our subsidiaries with air travel services. We paid $390,000 to ITC Service
Company for air travel services during fiscal 2001 and $18,000 for the period
from January 1, 2002 through February 28, 2002.
Transactions with SCANA and Affiliates
We entered into the transactions with SCANA Corporation and its
subsidiaries described below. Mr. Timmerman, a director and stockholder of
ITC/\DeltaCom, is also Chairman, President and Chief Executive Officer of SCANA.
SCANA is the beneficial owner of more than 5% of the common stock and of each
series of the Series B preferred stock. See "Principal Stockholders" for
information about SCANA's beneficial ownership of these securities.
Series B Preferred Stock Investment. On May 29, 2001, ITC Holding Company
assigned $25 million of its $150 million purchase commitment under the Series B
preferred stock investment agreement to SCANA Corporation. At the initial
closing under the investment agreement held on June 20, 2001, SCANA purchased,
for a total purchase price of $5 million, 5,000 shares of Series B-1 preferred
stock and warrants having a total exercise
64
price of $1.5 million. The initial conversion price of the Series B-1 preferred
stock and the initial exercise price of the warrants issued on that date was
$5.70 per share. At a second closing under the investment agreement held on
September 5, 2001, SCANA purchased, for a total purchase price of $6.7 million,
6,667 shares of Series B-2 preferred stock and warrants having a total exercise
price of $2 million. The initial conversion price of the Series B-2 preferred
stock and the initial exercise price of the warrants issued on that date was
$2.56 per share. On October 15, 2001, we issued to SCANA 112.240 shares of
Series B-1 preferred stock as payment-in-kind dividends on the Series B-1
preferred for the dividend period from June 20, 2001 through September 30, 2001.
On January 15, 2002, we issued to SCANA 102.710 shares of Series B-1 preferred
stock as payment-in-kind dividends on the Series B-1 preferred stock for the
quarterly dividend period ended on December 31, 2001 and 171.849 shares of
Series B-2 preferred stock as payment-in-kind dividends on the Series B-2
preferred stock for the dividend period from September 5, 2001 through December
31, 2001.
Under the investment agreement, we have agreed to pay up to a total of
$150,000 of the reasonable fees and expenses of investors other than ITC Holding
Company in connection with any assignment by ITC Holding Company to such
investors of any portion of its purchase commitment under the investment
agreement.
Retail Services. We provide retail services, including local and long
distance telephone services, data services and Internet access, to SCANA and
some of SCANA's subsidiaries. We billed those entities a total of approximately
$1.5 million for such services in fiscal 2001 and approximately $256,000 for
such services from January 1, 2002 through February 28, 2002.
Leases. We lease office space and space for telecommunications switching
equipment at various locations in Columbia, South Carolina from a subsidiary of
SCANA. Under the lease agreements, we paid approximately $157,000 in fiscal 2001
and approximately $118,000 for such services from January 1, 2002 through
February 28, 2002.
Transaction with Affiliates of HBK Investments
We entered into the Series B preferred stock investment transaction with
HBK Master Fund L.P., an affiliate of HBK Investments L.P. In connection with
the transaction, HBK Investments became the beneficial owner of more than 5% of
the common stock and of each series of the Series B preferred stock. See
"Principal Stockholders" for information about the beneficial ownership of these
securities by HBK Investments.
On May 29, 2001, ITC Holding Company assigned $25 million of its $150
million purchase commitment under the Series B preferred stock investment
agreement to HBK Master Fund L.P. At the initial closing under the investment
agreement held on June 20, 2001, HBK Master Fund purchased, for a total purchase
price of $5 million, 5,000 shares of Series B-1 preferred stock and warrants
having a total exercise price of $1.5 million. The initial conversion price of
the Series B-1 preferred stock and the initial exercise price of the warrants
issued on that date was $5.70 per share. At a second closing under the
investment agreement held on September 5, 2001, HBK Master Fund purchased, for a
total purchase price of $6.7 million, 6,667 shares of Series B-2 preferred stock
and warrants having a total exercise price of $2 million. The initial conversion
price of the Series B-2 preferred stock and the initial exercise price of the
warrants issued on that date was $2.56 per share. On October 15, 2001, we issued
to HBK Master Fund 112.240 shares of Series B-1 preferred stock as
payment-in-kind dividends on the Series B-1 preferred for the dividend period
from June 20, 2001 through September 30, 2001. On January 15, 2002, we issued to
HBK Master Fund 102.710 shares of Series B-1 preferred stock as payment-in-kind
dividends on the Series B-1 preferred stock for the quarterly dividend period
ended on December 31, 2001 and 171.849 shares of Series B-2 preferred stock as
payment-in-kind dividends on the Series B-2 preferred stock for the dividend
period from September 5, 2001 through December 31, 2001.
Under the investment agreement, we have agreed to pay up to a total of
$150,000 of the reasonable fees and expenses of investors other than ITC Holding
65
Company in connection with any assignment by ITC Holding Company to such
investors of any portion of its purchase commitment under the investment
agreement.
Transactions with Affiliates of J. Smith Lanier and William T. Parr
J. Smith Lanier & Co., an insurance placement company, has provided us with
insurance brokerage services, including the negotiation and acquisition on our
behalf of various insurance policies with third-party insurers. J. Smith Lanier
& Co. also has performed risk management services for us. We paid $767,000 to J.
Smith Lanier & Co. for these services during fiscal 2001 and $917,000 for these
services from January 1, 2002 through February 28, 2002. J. Smith Lanier, II is
the beneficial owner of more than 5% of our common stock. Mr. Lanier also is the
Chairman and a significant stockholder of J. Smith Lanier & Co. William T. Parr,
a director of ITC/\DeltaCom, serves as Vice Chairman of J. Smith Lanier & Co.
66
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) The following consolidated financial statements of ITC/\DeltaCom
appear on pages F-2 through F-31 of this report and are incorporated by
reference in Part II, Item 8:
Report of Independent Public Accountants.
Consolidated Balance Sheets--December 31, 2001 and 2000.
Consolidated Statements of Operations for the Years Ended December 31,
2001, 2000 and 1999.
Consolidated Statements of Stockholders' (Deficit) Equity for the
Years Ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999.
Notes to Consolidated Financial Statements.
(a)(2) The following financial statement schedule is filed as part of this
report and is attached hereto as pages S-1 and S-2:
Report of Independent Public Accountants as to Schedule.
Schedule II--Valuation and Qualification Accounts.
All other schedules for which provision is made in the applicable
accounting regulations of the SEC either have been included in the consolidated
financial statements of ITC/\DeltaCom or the notes thereto, are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(a)(3) The following exhibits are either filed with this Form 10-K or are
incorporated herein by reference. Our Securities Exchange Act file number is
0-23253.
Exhibit
Number Exhibit Description
- ------- -------------------
3.1 Restated Certificate of Incorporation of ITC/\DeltaCom, Inc.(including
the Certificate of Designations of the Powers, Preferences and
Relative, Participating or Other Rights, and the Qualifications,
Limitations or Restrictions Thereof, of Series A Convertible Preferred
Stock, the Certificate of Designation of the Powers, Preferences and
Relative, Participating, Optional and Other Special Rights of Series
B-1 Cumulative Convertible Preferred Stock and Qualifications,
Limitations and Restrictions Thereof and the Certificate of
Designation of the Powers, Preferences and Relative, Participating,
Optional and Other Special Rights of Series B-2 Cumulative Convertible
Preferred Stock and Qualifications, Limitations and Restrictions
Thereof). Filed as Exhibit 3.1 to Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001 and incorporated herein by
reference.
3.2 Amended and Restated Bylaws of ITC/\DeltaCom, Inc. Filed herewith.
67
Exhibit
Number Exhibit Description
- ------- -------------------
4.1 Specimen representing the Common Stock of ITC/\DeltaCom, Inc. Filed as
Exhibit 4.1 to Registration Statement on Form S-1, as amended (File
No. 333-36683) ( "Form S-1 "), and incorporated herein by reference.
4.2 Specimen representing the Series B-1 Cumulative Convertible Preferred
Stock, par value $0.01 per share, of ITC/\DeltaCom, Inc. Filed as
Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001 and incorporated herein by reference.
4.3 Specimen representing the Series B-2 Cumulative Convertible Preferred
Stock, par value $0.01 per share, of ITC/\DeltaCom, Inc. Filed as
Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 and incorporated herein by reference.
10.1 Capacity Agreement dated as of February 1, 1997 between Interstate
FiberNet, Inc. and Entergy Technology Company. Filed as Exhibit 10.1
to Registration Statement on Form S-4, as amended (File No. 333-31361)
(the "1997 Form S-4 "), and incorporated herein by reference.
10.2 License Agreement dated February 1, 1997 between Interstate FiberNet,
Inc. and Metropolitan Atlanta Rapid Transit Authority. Filed as
Exhibit 10.2 to 1997 Form S-4 and incorporated herein by reference.
10.3.1 Master Capacity Lease dated July 22, 1996 between Interstate FiberNet,
Inc. and InterCel PCS Services, Inc. Filed as Exhibit 10.8 to 1997
Form S-4 and incorporated herein by reference.
10.3.2 First Amendment to Master Capacity Lease dated as of August 22, 1996
between Interstate FiberNet, Inc. and InterCel PCS Services, Inc.
Filed as Exhibit 10.9 to 1997 Form S-4 and incorporated herein by
reference.
10.4 Term Agreement dated as of August 11, 1994 between Gulf States
FiberNet and Illinois Central Railroad Company. Filed as Exhibit 10.14
to 1997 Form S-4 and incorporated herein by reference.
10.5.1 Revised and Restated Fiber Optic Facilities and Services Agreement
dated as of June 9, 1995 among Southern Development and Investment
Group, Inc., on behalf of itself and as agent for Alabama Power
Company, Georgia Power Company, Gulf Power Company, Mississippi Power
Company, Savannah Electric and Power Company, Southern Electric
Generating Company and Southern Company Services, Inc. and MPX
Systems, Inc., which was assigned in part by MPX Systems, Inc. to Gulf
States FiberNet pursuant to an Assignment dated as of July 25, 1995.
Filed as Exhibit 10.15 to 1997 Form S-4 and incorporated herein by
reference.
10.5.2 Release, Waiver, and Assumption Agreement, dated as of December 31,
1997, between Southern Development Investment Group, Inc., on behalf
of itself and as agent for Alabama Power Company, Georgia Power
Company, Gulf Power Company, Mississippi Power Company, Savannah
Electric and Power Company, Southern Electric Generating Company and
Southern Company Services, Inc. and Interstate FiberNet, Inc. and Gulf
States Transmission Systems, Inc. Filed as Exhibit 10.15.1 to 1997
Form 10-K and incorporated herein by reference.
68
Exhibit
Number Exhibit Description
- ------- -------------------
10.5.3 Amendment to the Revised and Restated Fiber Optic Facilities and
Services Agreement, dated as of January 1, 1998, by and among Southern
Company Energy Solutions, Inc. (f/k/a Southern Development Group,
Inc.), on behalf of itself and as agent for Alabama Power Company,
Georgia Power Company, Gulf Power Company, Mississippi Power Company,
Savannah Electric and Power Company, Southern Electric Generating
Company and Southern Company Services, Inc. and Interstate FiberNet,
Inc. Filed as Exhibit 10.15.2 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (the "September 1998 Form 10-Q ") and
incorporated herein by reference.
10.5.4 First Amendment to Revised and Restated Fiber Optic Facilities and
Services Agreement dated as of July 24, 1995 between Southern
Development and Investment Group, Inc. on behalf of itself and as
agent for others and MPX Systems, Inc. Filed as Exhibit 10.16 to 1997
Form S-4 and incorporated herein by reference.
10.5.5 Partial Assignment and Assumption of Revised and Restated Fiber Optic
Facilities and Services Agreement dated July 25, 1995 between MPX
Systems, Inc. and Gulf States FiberNet. Filed as Exhibit 10.17 to 1997
Form S-4 and incorporated herein by reference.
+10.5.6 Amendment to Revised and Restated Fiber Optic Facilities and Services
Agreement, dated July 15, 1997, by and among Southern Development and
Investment Group, Inc., on behalf of itself and its agent for Alabama
Power Company, Georgia Power Company, Gulf Power Company, Mississippi
Power Company, Savannah Electric and Power Company, Southern Electric
Generating Company and Southern Company Services, Inc. (collectively
"SES"), ITC Transmission Systems, Inc. (as managing partner of
Interstate Fibernet) and Gulf States Transmission Systems, Inc. Filed
as Exhibit 10.17.1 to 1997 Form S-4 and incorporated herein by
reference.
10.5.7 Consent for Assignment of Interest dated February 20, 1997 among SCANA
Communications, Inc., Gulf States FiberNet, Gulf States Transmission
Systems, Inc. and Southern Development and Investment Groups, Inc.
Filed as Exhibit 10.18 to 1997 Form S-4 and incorporated herein by
reference.
10.5.8 Second Partial Assignment and Assumption of Revised and Restated Fiber
Optic Facilities and Services Agreement dated March 27, 1997 between
SCANA Communications, Inc. and ITC Holding Company, Inc. Filed as
Exhibit 10.19 to 1997 Form S-4 and incorporated herein by reference.
+10.5.9 Amendment, effective as of August 1, 2000, between Southern Telecom,
Inc., on behalf of itself and as agent for the other parties specified
therein, and Interstate FiberNet, Inc. to the Revised and Restated
Fiber Optics Facilities and Services Agreement made as of June 9,
1995. Filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 and incorporated herein by reference.
10.6.1 Fiber System Lease Agreement dated January 30, 1996 between CSW
Communications, Inc. and Gulf States FiberNet. Filed as Exhibit 10.20
to 1997 Form S-4 and incorporated herein by reference.
10.6.2 Consent for Acquisition and Assignment dated January 13, 1997 between
CSW Communications, Inc. and Gulf States FiberNet. Filed as Exhibit
10.21 to 1997 Form S-4 and incorporated herein by reference.
69
Exhibit
Number Exhibit Description
- ------- -------------------
10.7 Network Operating Agreement dated March 25, 1996 among Gulf States
FiberNet, TriNet, Inc., Hart Communications, Inc. and SCANA
Communications, Inc. (f/k/a MPX Systems, Inc.). Filed as Exhibit 10.25
to 1997 Form S-4 and incorporated herein by reference.
10.8.1 Agreement for the Provision of Fiber Optic Facilities and Services
dated March 29, 1990 between Alabama Power Company and Southern
Interexchange Facilities, Inc. Filed as Exhibit 10.26 to 1997 Form S-4
and incorporated herein by reference.
10.8.2 Amendment to the Agreement for Provision of Fiber Optic Facilities and
Services dated March 29, 1990 between Alabama Power Company and
Southern Interexchange Facilities, Inc. Filed as Exhibit 10.27 to 1997
Form S-4 and incorporated herein by reference.
10.8.3 First Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated March 22, 1991 between Alabama Power
Company and Southern Interexchange Facilities, Inc. Filed as Exhibit
10.28 to 1997 Form S-4 and incorporated herein by reference.
10.8.4 Second Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated December 1, 1991 between Alabama Power
Company and Southern Interexchange Facilities, Inc. Filed as Exhibit
10.29 to 1997 Form S-4 and incorporated herein by reference.
10.8.5 Third Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated September 23, 1992 between Alabama Power
Company and Southern Interexchange Facilities, Inc. Filed as Exhibit
10.30 to 1997 Form S-4 and incorporated herein by reference.
10.8.6 Fourth Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated January 1, 1994 between Alabama Power
Company and Southern Interexchange Facilities, Inc. Filed as Exhibit
10.31 to 1997 Form S-4 and incorporated herein by reference.
10.9.1 Agreement dated March 6, 1990 between Tennessee Valley Authority and
Consolidated Communications Corporation (predecessor to DeltaCom,
Inc.). Filed as Exhibit 10.32 to 1997 Form S-4 and incorporated herein
by reference.
10.9.2 Supplement Agreement; Leased Fiber Pathways, dated as of September 26,
1997, by and between Tennessee Valley Authority and DeltaCom, Inc.
Filed as Exhibit 10.32.1 to 1997 Form 10-K and incorporated herein by
reference.
10.10 Master Equipment Lease Agreement dated October 30, 1995 between AT&T
Systems Leasing Co. and DeltaCom, Inc. Filed as Exhibit 10.36 to 1997
Form S-4 and incorporated herein by reference.
10.11 Agreement dated January 14, 1997 between DeltaCom, Inc. and SCANA
Communications, Inc., for switch location in Columbia, South Carolina.
Filed as Exhibit 10.41 to 1997 Form S-4 and incorporated herein by
reference.
+10.12.1 Network Products Purchase Agreement No. ITC 2000NPPA between Nortel
Networks Inc. and Interstate FiberNet, Inc. and its subsidiary
ITC/\DeltaCom Communications, Inc., effective as of November 8, 2000
(the "Nortel Purchase Agreement"). Filed as Exhibit 10.18 to Annual
Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference.
70
Exhibit
Number Exhibit Description
- ------- -------------------
++10.12.2 Schedule D: Data and Internet Products: Ethernet Port Commitment and
Services Payment Program to the Nortel Purchase Agreement. Filed
herewith.
+10.12.3 Professional Services Attachment, Exhibit P, to the Nortel Purchase
Agreement. Filed as Exhibit 10.8.2 to Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 and incorporated herein by
reference.
+10.12.4 Product Attachment, Exhibit Q, eBusiness Solutions Products, to the
Nortel Purchase Agreement. Filed as Exhibit 10.8.3 to Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001 and incorporated
herein by reference.
+10.13 Fiber Optic Facilities Agreement, dated November 15, 1996, by and
between Interstate FiberNet and Florida Power Corporation. Filed as
Exhibit 10.45 to 1997 Form S-4 and incorporated herein by reference.
+10.14.1 Fiber Optic Capacity Marketing and Operating Agreement, dated March
21, 1996, by and between Interstate FiberNet and Florida Power & Light
Company. Filed as Exhibit 10.46 to 1997 Form S-4 and incorporated
herein by reference.
+10.14.2 Addendum to Fiber Optic Capacity Marketing and Operating Agreement,
dated July 10, 1997, by and between Interstate FiberNet and Florida
Power & Light Company. Filed as Exhibit 10.47 to 1997 Form S-4 and
incorporated herein by reference.
+10.15 Master Service Agreement, dated May 6, 1996, by and between Interstate
FiberNet and MCI Telecommunications Corporation. Filed as Exhibit
10.48 to 1997 Form S-4 and incorporated herein by reference.
+10.16 Telecommunications System Maintenance Agreement, dated as of January
26, 1995, by and between Interstate FiberNet and Sprint Communications
Company L.P. Filed as Exhibit 10.49 to 1997 Form S-4 and incorporated
herein by reference.
+10.17 Sprint Communications Company Facilities and Services Agreement, dated
January 26, 1995, by and between Interstate FiberNet and Sprint
Communications Company L.P. Filed as Exhibit 10.50 to 1997 Form S-4
and incorporated herein by reference.
+10.18 Fiber Optic Facility Lease Agreement, dated as of January 31, 1997, by
and between Interstate FiberNet, Inc. and Southern Telecom 1, Inc.
Filed as Exhibit 10.51 to 1997 Form S-4 and incorporated herein by
reference.
10.19 First Assignment and Assumption of Fiber Optic Facility Lease
Agreement, dated February 1, 1997, by and between Interstate FiberNet,
Inc. and Gulf States FiberNet. Filed as Exhibit 10.52 to 1997 Form S-4
and incorporated herein by reference.
+10.20.1 Telecommunications System Agreement, dated January 26, 1995, by and
between Interstate FiberNet, Inc. and Sprint Communications Company
L.P. Filed as Exhibit 10.53 to 1997 Form S- 4 and incorporated herein
by reference.
10.20.2 Amendment to Telecommunications System Agreement, dated July 25, 1995,
by and between Gulf States FiberNet and Sprint Communications Company
L.P. Filed as Exhibit 10.54 to 1997 Form S-4 and incorporated herein
by reference.
71
Exhibit
Number Exhibit Description
- ------- -------------------
+10.20.3 Amendment No. 2 to Telecommunications System Agreement, dated August
8, 1996, by and between Gulf States FiberNet and Sprint Communications
Company L.P. Filed as Exhibit 10.55 to 1997 Form S-4 and incorporated
herein by reference.
+10.20.4 Assignment of the Telecommunications System Agreement, dated July 25,
1995, between Interstate FiberNet, Inc., Gulf States FiberNet and
Sprint Communications Company L.P. Filed as Exhibit 10.56 to 1997 Form
S-4 and incorporated herein by reference.
+10.20.5 Assignment of the Telecommunications System Agreement, dated February
27, 1997, between Sprint Communications Company L.P., Gulf States
FiberNet and Gulf States Transmission Systems, Inc. Filed as Exhibit
10.57 to 1997 Form S-4 and incorporated herein by reference.
10.21 Fixed Fee Agreement for Exchange of Use and Maintenance of Six (6)
Fiber Optic Fibers with an Option of Two (2) Additional Fiber Optic
Fibers, dated July 25, 1997, by and between Interstate FiberNet, Inc.,
Gulf States Transmission Systems, Inc. and ALLTEL Telephone Services
Corporation. Filed as Exhibit 10.58 to 1997 Form S-4 and incorporated
herein by reference.
+10.22 Marketing and Operating Agreement, dated as of October 6, 1994, by and
between Interstate FiberNet, Inc. and DukeNet Communications, Inc.
Filed as Exhibit 10.74 to 1997 Form S-4 and incorporated herein by
reference.
10.23.1 Credit Agreement (the "Credit Agreement "), dated as of April 5, 2000,
among ITC/\DeltaCom, Inc., Interstate FiberNet, Inc., the subsidiary
guarantors listed on the signature pages thereto, the banks, financial
institutions and other institutional lenders listed on the signature
pages thereto as the Initial Lenders, Morgan Stanley Senior Funding,
Inc. ( "Morgan Stanley "), as administrative agent for the Lender
Parties (as defined therein), Morgan Stanley & Co. Incorporated, as
collateral agent, Bank of America Securities LLC and Morgan Stanley,
as joint lead arrangers and joint book runners, and Bank of America,
N.A., as syndication agent. Filed as Exhibit 10.1 to Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000 and incorporated
herein by reference.
10.23.2 Amendment No. 1, dated as of June 1, 2001, to the Credit Agreement.
Filed as Exhibit 10.7 to Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001 and incorporated herein by reference.
10.23.3 Amendment No. 2, dated as of June 1, 2001, to the Credit Agreement.
Filed herewith.
10.23.4 Security Agreement, dated April 5, 2000, made by Interstate FiberNet,
Inc., ITC/\DeltaCom, Inc., and the other Persons listed on the
signature pages thereof and the Additional Grantors (as defined in
Section 23(b) thereof) to Morgan Stanley & Co. Incorporated, as
collateral agent for the Secured Parties (as defined in the Credit
Agreement). Filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000 and incorporated herein by reference.
10.24.1 Indenture, dated as of June 3, 1997, between ITC/\DeltaCom, Inc. and
United States Trust Company of New York, as Trustee, relating to the
11% Senior Notes due 2007 of ITC/\DeltaCom, Inc. Filed as Exhibit 4.1
to 1997 Form S-4 and incorporated herein by reference.
10.24.2 Supplemental Indenture, dated as of October 17, 1997, between
ITC/\DeltaCom, Inc. and United States Trust Company of New York, as
Trustee. Filed as Exhibit 82.2 to Form S-1 and incorporated herein by
reference.
72
Exhibit
Number Exhibit Description
- ------- -------------------
10.24.3 Pledge and Security Agreement dated as of June 3, 1997 from
ITC/\DeltaCom, Inc. as Pledgor to United States Trust Company of New
York as Trustee. Filed as Exhibit 4.3 to 1997 Form S-4 and
incorporated herein by reference.
10.24.4 Form of Exchange Note (contained in Indenture filed as Exhibit
10.34.1).
10.25 Assignment and Contribution Agreement Pursuant to Pledge and Security
Agreement dated as of July 25, 1997, by and among ITC/\DeltaCom, Inc.,
Interstate FiberNet, Inc. and United States Trust Company of New York,
as Trustee filed herewith. Filed as Exhibit 4.5 to 1997 Form S-4 and
incorporated herein by reference.
+10.26.1 MCI Carrier Agreement, effective September 1, 1997, by and between MCI
Telecommunications Corporation and Associated Communications Companies
of America (ACCA). Filed as Exhibit 10.87 to Form S-1 and incorporated
herein by reference.
+10.26.2 First Amendment to the MCI Carrier Agreement, dated as of November 21,
1997, by and between MCI Telecommunications Corporation and Associated
Communication Companies of America (ACCA). Filed as Exhibit 10.87.1 to
1997 Form 10-K and incorporated herein by reference.
10.27.1 Amended and Restated ITC/\DeltaCom, Inc. 1997 Stock Option Plan. Filed
herewith.
10.27.2 Form of Stock Option Agreement under the Amended and Restated
ITC/\DeltaCom, Inc. 1997 Stock Option Plan. Filed as Exhibit 10.37.2
to Annual Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference.
10.28.1 ITC/\DeltaCom, Inc. Director Stock Option Plan. Filed as Exhibit 10.89
to Form S-1 and incorporated herein by reference.
10.28.2 Form of Non-Qualified Stock Option Agreement under the ITC/\DeltaCom,
Inc. Director Stock Option Plan. Filed as Exhibit 10.38.2 to Annual
Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference.
10.29.1 ITC Holding Company, Inc. Amended and Restated Stock Option Plan.
Filed as Exhibit 10.90 to Form S-1 and incorporated herein by
reference.
10.29.2 Amendment No. 1 to ITC Holding Company, Inc. Amended and Restated
Stock Option Plan. Filed as Exhibit 10.2 to Quarterly Report on Form
10-Q for the quarter ended June 30, 2000 and incorporated herein by
reference.
10.30.1 ITC Holding Company, Inc. Nonemployee Director Stock Option Plan.
Filed as Exhibit 10.91 to Form S-1 and incorporated herein by
reference.
10.30.2 Amendment No. 1 to ITC Holding Company, Inc. Nonemployee Director
Stock Option Plan. Filed as Exhibit 10.3 to Quarterly Report on Form
10-Q for the quarter ended June 30, 2000 and incorporated herein by
reference.
10.31 Description of ITC/\DeltaCom, Inc. Bonus Plan. Filed as Exhibit 10.92
to Form S-1 and incorporated herein by reference.
73
Exhibit
Number Exhibit Description
- ------- -------------------
10.32 Form of Indemnity Agreement between ITC/\DeltaCom, Inc. and certain of
its Directors and Officers. Filed as Exhibit 10.93 to Form S-1 and
incorporated herein by reference.
10.33.1 Sale and Purchase Agreement, dated as of March 11, 1997, by and
between SCANA Corporation and ITC Holding Company, Inc. Filed as
Exhibit 10.94 to Form S-1 and incorporated herein by reference.
10.33.2 First Amendment to Sale and Purchase Agreement. Among SCANA
Corporation, SCANA Communications, Inc., and ITC Holding Company,
Inc., dated as of October 16, 1997, among SCANA Corporation, SCANA
Communications, Inc., ITC Holding Company, Inc. and ITC/\DeltaCom,
Filed as Exhibit 10.95 to Form S-1 and incorporated herein by
reference.
10.34.1 Indenture dated March 3, 1998 between ITC/\DeltaCom, Inc. and United
States Trust Company of New York, as Trustee, relating to the 8 7/8%
Senior Notes due 2008 of ITC/\DeltaCom, Inc. Filed as Exhibit 4.2 to
Inc.1997 Form 10-K and incorporated herein by reference.
10.34.2 Form of Global 8 7/8% Note due 2008 (contained in Indenture filed as
Exhibit 10.44.1).
10.35.1 Indenture dated as of November 5, 1998 between ITC/\DeltaCom, Inc. and
United States Trust Company of New York, as Trustee, relating to the 9
3/4% Senior Notes due 2008 of ITC/\DeltaCom, Inc. Filed as Exhibit 4.2
to Registration Statement on Form S-4, as amended (File No. 333-71735)
(the "February 1999 Form S-4"), and incorporated herein by reference.
10.35.2 Form of Global 9 3/4% Note due 2008 (contained in Indenture filed as
Exhibit 10.45.1).
10.36.1 Registration Rights Agreement, dated as of May 12, 1999, by and among
ITC/\DeltaCom, Inc. and Morgan Stanley & Co. Incorporated, Credit
Suisse First Boston Corporation, First Union Capital Markets Corp. and
NationsBanc Montgomery Securities LLC. Filed as Exhibit 4.1 to the May
1999 Form 10-Q and incorporated herein by reference.
10.36.2 Indenture dated as of May 12, 1999, between ITC/\DeltaCom, Inc.
ITC/\DeltaCom, Inc. and U.S. Trust, Company of Texas, N.A., a national
banking corporation, as trustee. Filed as Exhibit 4.1 to the May 1999
Form 10-Q and incorporated herein by reference.
10.36.3 Form of Global Note relating to the 4 1/2% Convertible Subordinated
Notes due 2006 (contained in Indenture filed as Exhibit 10.46.2).
10.36.4 Form of Registered 4 1/2% Convertible Subordinated Note due 2006.
Filed as Exhibit 4.5 to Registration Statement on Form S-3, as amended
(File No. 333-84661), and incorporated herein by reference.
10.37.1 Master Lease Agreement, dated as of December 29, 2000, between NTFC
Capital Corporation, as Lessor, and ITC/\DeltaCom Communications, Inc.
and Interstate FiberNet, Inc., as Lessees (the "Master Lease Agreement
"). Filed as Exhibit 10.47.1 to Annual Report on Form 10-K for the
year ended December 31, 2000 and incorporated herein by reference.
10.37.2 Form of Equipment Schedule to the Master Lease Agreement. Filed as
Exhibit 10.47.2 to Annual Report on Form 10-K for the year ended
December 31, 2000 and incorporated herein by reference.
74
Exhibit
Number Exhibit Description
- ------- -------------------
10.37.3 Guaranty, dated as of December 29, 2000, between Interstate FiberNet,
Inc. and NTFC Capital Corporation. Filed as Exhibit 10.47.3 to Annual
Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference.
10.37.4 Amendment No. 1, dated as of June 18, 2001, to the Financial Covenants
and Reporting Requirements Annex to the Master Lease Agreement. Filed
as Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001 and incorporated herein by reference.
10.37.5 Amendment No. 2, dated as of June 18, 2001, to the Financial Covenants
and Reporting Requirements Annex to the Master Lease Agreement. Filed
herewith.
10.38 Interconnection Agreement, dated February 9, 2001, by and between
BellSouth Telecommunications, Inc. and ITC/\DeltaCom Communications,
Inc. d/b/a/ ITC/\DeltaCom. Filed as Exhibit 10.48 to Annual Report on
Form 10-K for the year ended December 31, 2000 and incorporated herein
by reference.
10.39.1 Interconnection Agreement, dated as of June 5, 2000, by and between
BellSouth Telecommunications, Inc. and ITC/\DeltaCom Communications,
Inc. d/b/a/ ITC/\DeltaCom. Filed as Exhibit 10.49.1 to Annual Report
on Form 10-K for the year ended December 31, 2000 and incorporated
herein by reference.
10.39.2 First Amendment to the Interconnection Agreement by and between
BellSouth Telecommunications, Inc. and ITC/\DeltaCom Communications,
Inc., dated as of August 21, 2000, between ITC/\DeltaCom
Communications, Inc. and BellSouth Telecommunications, Inc. Filed as
Exhibit 10.49.2 to Annual Report on Form 10-K for the year ended
December 31, 2000 and incorporated herein by reference.
10.39.3 Amendment to the Interconnection Agreement by and between BellSouth
Telecommunications, Inc. and ITC/\DeltaCom Communications, Inc., dated
as of February 14, 2001, by and between ITC/\DeltaCom Communications,
Inc. and BellSouth Telecommunications, Inc. Filed as Exhibit 10.49.3
to Annual Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference.
10.40 Interconnection Agreement, effective as of July 1, 1999, by and
between ITC/\DeltaCom Communications, Inc. and BellSouth
Telecommunications, Inc. Filed as Exhibit 10.50 to Annual Report on
Form 10-K for the year ended December 31, 2000 and incorporated herein
by reference.
10.41.1 Investment Agreement, dated as of February 27, 2001, between
ITC/\DeltaCom, Inc. and ITC Holding Company, Inc. Filed as Exhibit
10.1 to Report on Form 10-Q for the period ended March 31, 2001, and
incorporated herein by reference.
10.41.2 Amendment No. 1 to Investment Agreement, dated as of May 29, 2001, by
and among ITC/\DeltaCom, Inc., ITC Holding Company, Inc., SCANA
Corporation and HBK Master Fund L.P. Filed as Exhibit 10.1 to
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and
incorporated herein by reference.
10.41.3 Registration Rights Agreement, dated as of June 20, 2001, among
ITC/\DeltaCom, Inc., ITC Holding Company, Inc., SCANA Corporation, HBK
Master Fund L.P. and the other Holders from time to time thereunder.
Filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001 and incorporated herein by reference.
75
Exhibit
Number Exhibit Description
- ------- -------------------
10.41.4 ITC/\DeltaCom, Inc. Common Stock Purchase Warrant, dated June 20,
2001, issued to ITC Telecom Ventures, Inc. Filed as Exhibit 10.3 to
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and
incorporated herein by reference.
10.41.5 ITC/\DeltaCom, Inc. Common Stock Purchase Warrant, dated June 20,
2001, issued to SCANA Corporation. Filed as Exhibit 10.4 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001 and
incorporated herein by reference.
10.41.6 ITC/\DeltaCom, Inc. Common Stock Purchase Warrant, dated June 20,
2001, issued to HBK Master Fund L.P. Filed as Exhibit 10.5 to
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and
incorporated herein by reference.
10.41.7 ITC/\DeltaCom, Inc. Common Stock Purchase Warrant, dated September 5,
2001, issued to ITC Telecom Ventures, Inc. Filed as Exhibit 10.1 to
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
and incorporated herein by reference.
10.41.8 ITC/\DeltaCom, Inc. Common Stock Purchase Warrant, dated September 5,
2001, issued to SCANA Corporation. Filed as Exhibit 10.2 to Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001 and
incorporated herein by reference.
10.41.9 ITC/\DeltaCom, Inc. Common Stock Purchase Warrant, dated September 5,
2001, issued to HBK Master Fund L.P. Filed as Exhibit 10.3 to
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
and incorporated herein by reference.
10.42.1 Master Lease Agreement, dated as of December 31, 2001, between General
Electric Capital Corporation, as Lessor, and ITC/\DeltaCom
Communications, Inc., as Lessee (the "GECC Master Lease Agreement").
Filed herewith.
10.42.2 Form of Equipment Schedule to the GECC Master Lease Agreement. Filed
herewith.
12.1 Statement regarding Computation of Ratios. Filed herewith.
21.1 Subsidiaries of ITC/\DeltaCom, Inc. Filed herewith.
23.1 Consent of Arthur Andersen LLP. Filed herewith.
99.1 Representation letter concerning Arthur Andersen LLP. Filed herewith.
- ----------
+ Confidential treatment has been granted for this exhibit. The copy filed as an
exhibit omits the information subject to the confidential treatment request.
++ Certain confidential portions of this exhibit were omitted by means of
redacting a portion of the text. This exhibit has been filed separately with the
Secretary of the SEC without such text pursuant to our Application Requesting
Confidential Treatment under Rule 24b-2 under the Securities Exchange Act.
(b) Reports on Form 8-K.
We did not file any Current Reports of Form 8-K during the fourth
quarter of 2001.
76
Index to Consolidated Financial Statements
Report of Independent Public Accountants............................................................... F-2
Consolidated Balance Sheets--December 31, 2001 and 2000................................................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999............. F-5
Consolidated Statements of Stockholders' (Deficit) Equity for the Years Ended December 31, 2001, 2000
and 1999............................................................................................ F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999............. F-7
Notes to Consolidated Financial Statements............................................................. F-8
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ITC/\DeltaCom, Inc.:
We have audited the accompanying consolidated balance sheets of
ITC/\DELTACOM, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' (deficit) equity, and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements (pages F-3 - F-31) referred to
above present fairly, in all material respects, the financial position of
ITC/\DeltaCom, Inc. and subsidiaries as of December 31, 2001 and 2000 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses and negative
cash flows from operations and has limited access to additional capital, which
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts, or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
/S/ Arthur Andersen LLP
Atlanta, Georgia
February 15, 2002
F-2
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
---------------------
2001 2000
-------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 41,043 $ 141,140
Restricted assets ......................................... 0 6,982
Accounts receivable:
Customer, net of allowance for uncollectible accounts of
$5,689 and $3,003 in 2001 and 2000, respectively .... 62,099 71,428
Affiliates (Note 12) ................................... 4,889 6,638
Inventory ................................................. 6,301 9,249
Prepaid expenses .......................................... 4,193 5,359
-------- ----------
Total current assets ................................ 118,525 240,796
-------- ----------
PROPERTY, PLANT AND EQUIPMENT, net (Note 3) ................. 691,037 680,021
-------- ----------
OTHER LONG-TERM ASSETS:
Intangible assets, net (Note 4) ........................... 55,946 113,338
Other long-term assets .................................... 12,824 14,371
-------- ----------
Total other long-term assets ........................ 68,770 127,709
-------- ----------
Total assets ........................................ $878,332 $1,048,526
======== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
-----------------------
2001 2000
--------- ----------
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade ..................................................................... $ 38,779 $ 40,813
Construction .............................................................. 8,613 35,808
Accrued interest ............................................................. 8,844 12,620
Accrued compensation ......................................................... 6,554 7,026
Unearned revenue (Note 10) ................................................... 35,851 44,339
Other accrued liabilities .................................................... 19,914 12,998
Current portion of long-term debt and capital lease obligations (Note 5) ..... 6,711 2,098
--------- ----------
Total current liabilities .............................................. 125,266 155,702
--------- ----------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (Note 5) .......................... 717,163 711,771
--------- ----------
CONVERTIBLE REDEEMABLE PREFERRED STOCK (Note 7):
Par value $.01; 67,000 shares designated Series B-1 in
2001 and 0 shares designated Series B-1 in 2000; 30,673 and 0 shares
issued
and outstanding in 2001 and 2000, respectively; entitled to liquidation
preference
and redemption value of $1,000 per share, plus accrued and unpaid
dividends ................................................................. 24,121 0
Par value $.01; 90,000 shares designated Series B-2 in
2001 and 0 shares designated Series B-2 in 2000; 40,000 and 0 shares
issued
and outstanding in 2001 and 2000, respectively; entitled to liquidation
preference
and redemption value of $1,000 per share, plus accrued and unpaid
dividends ................................................................. 33,712 0
--------- ----------
Total convertible redeemable preferred stock ........................... 57,833 0
--------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 1, 5 and 10)
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized Series A
Preferred Stock, $7.40 liquidation preference per share;
1,480,771 shares issued and outstanding in 2001 and 2000 ............... 15 15
Common stock, $.01 par value; 200,000,000 shares authorized; 62,364,768 and
61,639,672 shares issued and outstanding in 2001 and 2000, respectively ... 624 616
Additional paid-in capital ................................................... 356,839 355,627
Warrants outstanding ......................................................... 11,441 0
Accumulated deficit .......................................................... (390,849) (175,205)
--------- ----------
Total stockholders' (deficit) equity ................................... (21,930) 181,053
--------- ----------
Total liabilities and stockholders' (deficit) equity ................... $ 878,332 $1,048,526
========= ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
Years ended December 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
OPERATING REVENUES ............................................ $ 415,339 $ 363,648 $ 244,844
COST OF SERVICES (exclusive of items shown separately below) .. 186,121 155,000 118,721
INVENTORY WRITE-DOWN .......................................... 1,663 0 0
----------- ----------- -----------
GROSS MARGIN .................................................. 227,555 208,648 126,123
----------- ----------- -----------
OPERATING EXPENSES:
Selling, operations, and administration .................. 188,712 151,050 96,854
Depreciation and amortization ............................ 118,938 86,519 53,810
Special charges .......................................... 74,437 0 0
----------- ----------- -----------
Total operating expenses ............................ 382,087 237,569 150,664
----------- ----------- -----------
OPERATING LOSS ................................................ (154,532) (28,921) (24,541)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ......................................... (58,833) (55,482) (45,293)
Interest income .......................................... 2,066 14,763 14,195
Other (expense) income ................................... (632) (426) 754
----------- ----------- -----------
Total other expense, net ............................ (57,399) (41,145) (30,344)
----------- ----------- -----------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM ............... (211,931) (70,066) (54,885)
INCOME TAX EXPENSE (BENEFIT) .................................. 0 (512) 94
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM ................................ (211,931) (69,554) (54,979)
EXTRAORDINARY ITEM--LOSS ON EARLY
TERMINATION OF CREDIT FACILITY ........................... 0 (1,321) 0
----------- ----------- -----------
NET LOSS ...................................................... (211,931) (70,875) (54,979)
PREFERRED STOCK DIVIDENDS AND ACCRETION ....................... (3,713) 0 0
----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS .................... $ (215,644) $ (70,875) $ (54,979)
=========== =========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Before extraordinary loss ................................ $ (3.46) $ (1.14) $ (0.98)
Extraordinary loss ....................................... 0.00 (0.02) 0.00
----------- ----------- -----------
Net loss applicable to common stockholders ............... $ (3.46) $ (1.16) $ (0.98)
=========== =========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING .. 62,292,085 60,928,387 56,370,269
=========== =========== ===========
The accompanying notes are an integral part of these consolidated
statements.
F-5
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(In thousands, except share data)
Preferred Stock Common Stock Additional
------------------ ------------------- Paid-in
Shares Amount Shares Amount Capital
--------- ------ ---------- ------ ----------
BALANCE, December 31, 1998 ................ 1,480,771 $15 51,339,838 $513 $167,023
Sale of common stock, net of
offering expenses of $5.9 million ..... 0 0 6,037,500 60 120,869
Issuance of common stock for AvData
acquisition ........................... 0 0 983,511 10 29,180
Issuance of common stock for SciTel
acquisition ........................... 0 0 83,117 1 1,999
Retirement of common shares ............. 0 0 (3,473) 0 (55)
Deferred compensation ................... 0 0 0 0 145
Exercise of common stock options ........ 0 0 1,116,282 11 2,721
Net loss .............................. 0 0 0 0 0
--------- --- ---------- ---- --------
BALANCE, December 31, 1999 ................ 1,480,771 15 59,556,775 595 321,882
Issuance of common stock under
AvData earn-out provisions
(Note 13) ............................. 0 0 123,757 1 4,282
Issuance of common stock for Bay
Data Acquisition ...................... 0 0 837,942 8 26,209
Deferred compensation ................... 0 0 0 0 145
Exercise of common stock options ........ 0 0 1,121,198 12 3,109
Net loss .............................. 0 0 0 0 0
--------- --- ---------- ---- --------
BALANCE, December 31, 2000 ................ 1,480,771 15 61,639,672 616 355,627
Issuance of common stock under
AvData earn-out provisions
(Note 13) ........................... 0 0 121 0 0
Retirement of common shares ............. 0 0 (22,629) 0 (175)
Deferred compensation ................... 0 0 0 0 120
Exercise of common stock options ........ 0 0 747,604 8 1,267
Issuance of warrants for common stock
(Note 7) .............................. 0 0 0 0 0
Accretion of differences between
carrying value and redemption
value of Series B preferred stock ..... 0 0 0 0 0
Stock dividends declared and accrued
on Series B preferred stock ........... 0 0 0 0 0
Net loss .............................. 0 0 0 0 0
--------- --- ---------- ---- --------
BALANCE, December 31, 2001 ................ 1,480,771 $15 62,364,768 $624 $356,839
========= === ========== ==== ========
Total
Stockholders'
Warrants Accumulated (Deficit)
Outstanding Deficit Equity
----------- ----------- -------------
BALANCE, December 31, 1998 ................ $ 0 $ (49,351) $ 118,200
Sale of common stock, net of
offering expenses of $5.9 million ..... 0 0 120,929
Issuance of common stock for AvData
acquisition ........................... 0 0 29,190
Issuance of common stock for SciTel
acquisition ........................... 0 0 2,000
Retirement of common shares ............. 0 0 (55)
Deferred compensation ................... 0 0 145
Exercise of common stock options ........ 0 0 2,732
Net loss .............................. 0 (54,979) (54,979)
------- --------- ---------
BALANCE, December 31, 1999 ................ 0 (104,330) 218,162
Issuance of common stock under
AvData earn-out provisions
(Note 13) ............................. 0 0 4,283
Issuance of common stock for Bay
Data Acquisition ...................... 0 0 26,217
Deferred compensation ................... 0 0 145
Exercise of common stock options ........ 0 0 3,121
Net loss .............................. 0 (70,875) (70,875)
------- --------- ---------
BALANCE, December 31, 2000 ................ 0 (175,205) 181,053
Issuance of common stock under
AvData earn-out provisions
(Note 13) ........................... 0 0 0
Retirement of common shares ............. 0 0 (175)
Deferred compensation ................... 0 0 120
Exercise of common stock options ........ 0 0 1,275
Issuance of warrants for common stock
(Note 7) .............................. 11,441 0 11,441
Accretion of differences between
carrying value and redemption
value of Series B preferred stock ..... 0 (1,392) (1,392)
Stock dividends declared and accrued
on Series B preferred stock ........... 0 (2,321) (2,321)
Net loss .............................. 0 (211,931) (211,931)
------- --------- ---------
BALANCE, December 31, 2001 ................ $11,441 $(390,849) $ (21,930)
======= ========= =========
The accompanying notes are an integral part of these consolidated
statements.
F-6
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $(211,931) $ (70,875) $ (54,979)
--------- --------- ---------
Adjustments to reconcile net loss to net cash provided by
operating activities (excluding the effects of
acquisitions): ........................................
Depreciation and amortization ............................ 118,938 86,519 53,810
Amortization of bond issuance costs ...................... 2,341 2,221 2,112
Special charges and other ................................ 77,301 0 0
Deferred income taxes .................................... 0 (512) 94
Extraordinary item--loss on early termination of credit
facility ................................................. 0 1,321 0
Changes in current operating assets and liabilities:
Accounts receivable, net .............................. 9,351 (26,127) (12,725)
Other current assets .................................. 2,452 (3,321) (3,322)
Accounts payable ...................................... (2,332) 18,270 6,968
Accrued interest ...................................... (3,776) 4,339 232
Unearned revenue ...................................... (7,659) 29,287 985
Accrued compensation and other accrued liabilities .... 4,791 4,809 1,491
--------- --------- ---------
Total adjustments .................................. 201,407 116,806 49,645
--------- --------- ---------
Net cash (used in) provided by operating activities (10,524) 45,931 (5,334)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................................ (134,770) (337,123) (166,823)
Change in accounts payable-construction ..................... (27,195) 27,292 1,283
Change in restricted assets, net ............................ 6,982 6,741 13,294
Payment for acquisitions, net of cash received (Note 13) .... 0 (2,218) 2,881
Other ....................................................... 185 100 (630)
--------- --------- ---------
Net cash used in investing activities .............. (154,798) (305,208) (149,995)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from $160 million senior secured credit facility,
net of issuance costs .................................... 0 157,434 0
Cash from $160 million senior secured credit facility,
restricted for capital expenditures ...................... 0 (6,982) 0
Proceeds from issuance of 4-1/2% Notes, net of issuance costs 0 0 96,954
Repayment of other long-term debt and capital lease
obligations .............................................. (2,368) (1,535) (1,102)
Proceeds from issuance of common stock, net of offering
expenses ................................................. 0 0 120,929
Proceeds from issuance of Series B preferred stock and
common stock warrants, net of issuance costs ............. 67,208 0 0
Proceeds from exercise of common stock options .............. 1,275 3,121 2,732
Retirement of common shares ................................. (175) 0 (55)
Other ....................................................... (715) (52) 135
--------- --------- ---------
Net cash provided by financing activities ................ 65,225 151,986 219,593
--------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............... (100,097) (107,291) 64,264
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................. 141,140 248,431 184,167
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ....................... $ 41,043 $ 141,140 $ 248,431
========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest (net of amount capitalized) .......... $ 65,063 $ 53,264 $ 43,973
========= ========= =========
Cash paid (refunds received) for income taxes, net .......... $ 3 $ (143) $ (3,949)
========= ========= =========
NONCASH TRANSACTIONS:
Network equipment and property rights acquired under
capital lease obligations ................................ $ 12,751 $ 38,496 $ 0
========= ========= =========
Preferred stock dividends and accretion ..................... $ 3,713 $ 0 $ 0
========= ========= =========
Acquisitions:
Note payable and capital lease obligation assumed ........ $ 0 $ 0 $ 63
========= ========= =========
Issuance of common stock ................................. $ 0 $ 30,500 $ 31,190
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-7
ITC/\DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Basis of Presentation
Nature of Business
ITC/\DeltaCom, Inc. (together with its wholly-owned subsidiaries,
"ITC/\DeltaCom" or the "Company") provides voice and data telecommunications
services on a retail basis to businesses in the southern United States (referred
to as "retail services") and regional telecommunications transmission services
over its network on a wholesale basis to other telecommunications companies
(referred to as "broadband transport services"). Retail services include local
exchange services, long distance services, calling card and operator services,
asynchronous transfer mode, frame relay, and high capacity broadband private
line services, as well as Internet and Web page hosting services and customer
premise equipment sales, installation and repair. In connection with these
services, the Company owns, operates or manages an extensive fiber optic
network, which extends throughout ten southern states.
The Company also provides colocation and Web server hosting services
integral to operating important business applications over the Internet through
its e/\deltacom business. In addition, e/\deltacom provides a wide range of
optional configurations and services, including cabinet, caged and suite space,
metered power, network management, firewall management, disaster recovery and
circuits from customer premises to the Company's network. As a result of its
September 2001 restructuring (Note 9), beginning in 2002, the Company will no
longer manage this segment separately and will begin reporting financial
information for this segment with its retail services segment.
The Company has experienced operating losses as a result of efforts to
build its network infrastructure, hire personnel, develop its systems and expand
into new markets. Assuming it obtains sufficient financing, the Company expects
to continue to focus on increasing its customer base and expanding its network
operations, although at a slower rate than in previous years. Accordingly, the
Company expects that its cost of services will continue to increase and that its
capital expenditures, although expected to decrease, will be significant. In
addition, the Company may reduce some of its prices to respond to a changing
competitive environment. These factors will have a negative impact on the
Company's short-term operating results. Interstate FiberNet, Inc., a
wholly-owned subsidiary of the Company, has a $160 million senior secured credit
facility with Morgan Stanley Senior Funding, Inc., Bank of America, N.A. and
other lenders (Note 5), and the Company has also raised funds from sales of
senior notes, subordinated convertible notes, redeemable convertible preferred
stock and common stock and is subject to operating and capital lease commitments
(Notes 5, 7 and 8).
In the opinion of management, the Company's existing sources of funds will
not be sufficient to meet the operating and capital needs of the Company. If the
Company is unable to obtain additional funds under its outstanding equity
financing commitment (Note 7) or from other sources, or if it is unable to
complete one of the potential restructuring alternatives described below, the
Company estimates that its cash flows from operations and its other available
sources of funds will be sufficient to enable it to conduct its business and to
service its indebtedness only through August 2002.
The Company is actively considering various alternatives to alleviate the
significant constraints on its liquidity. The Company has engaged a financial
adviser to assist it in its evaluation of potential alternatives. These
alternatives include seeking to raise additional equity capital and/or pursuing
an exchange offer whereby the Company would make an offer to holders of its
outstanding public notes to exchange the notes for new debt or equity securities
or a combination of cash and securities. There can be no assurance that the
Company will successfully
F-8
raise additional capital or that an exchange offer on terms acceptable to the
Company can be implemented and accepted by its existing noteholders. To conserve
cash while the Company seeks to complete one of these alternatives, the Company
plans to further reduce its capital expenditures and operating expenses. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts, or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.
Basis of Presentation
The accompanying consolidated financial statements are prepared on the accrual
basis of accounting in accordance with accounting principles generally accepted
in the United States. All material intercompany accounts and transactions have
been eliminated in consolidation.
2. Summary of Significant Accounting Policies
Sources of Supplies
The Company primarily uses two vendors for transmission equipment used in
its network. However, if these vendors were unable to meet the Company's needs,
management believes that the Company could obtain this equipment from other
vendors on comparable terms and that its operating results would not be
materially adversely affected.
Credit Risk and Significant Customers
The Company's accounts receivable subject the Company to credit risk, as
collateral is generally not required. The Company limits its risk of loss by
billing some customers in advance for services and by terminating access on
delinquent accounts. The large number of customers mitigates the concentration
of credit risk. In 2001, 2000 and 1999, no customer represented more than 10% of
the Company's consolidated operating revenues.
Regulation
The Company is subject to certain regulations and requirements of the
Federal Communications Commission and various state public service commissions.
Reclassifications
Reclassifications have been made to amounts previously reported to conform
to the current year presentation.
Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all short-term highly liquid investments with an
original maturity date of three months or less to be cash equivalents.
F-9
Inventory
Inventory consists primarily of customer premise equipment held for resale
and is valued at the lower of cost or market, using the first-in, first-out
method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, except for assets
determined to be impaired under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121. Depreciation begins when property, plant
and equipment is placed in service. The cost of maintenance, repairs and
replacement of minor items of property, plant and equipment is charged to
selling, operations and administration expenses. Depreciation of property, plant
and equipment is provided using the composite or straight-line method over the
following estimated useful lives:
Years
--------
Buildings and towers ................................ 40
Furniture, fixtures and office equipment ............ 3 to 10
Vehicles ............................................ 5
Fiber optic network .............................. 15 to 20
Transmission equipment and electronics .............. 5 to 10
Applicable interest charges incurred during the construction of new
facilities are capitalized as elements of cost and are depreciated over the
assets' estimated useful lives. Interest capitalized during the years ended
December 31, 2001, 2000 and 1999 was $4.8 million, $4.1 million and $1.1
million, respectively.
Intangible Assets
Intangible assets include the excess of the purchase price of acquisitions
over the fair value of identifiable net assets acquired as well as various other
acquired intangibles. Intangible assets are amortized over the following
estimated useful lives:
Years
--------
Goodwill ............................................ 10 to 40
Trademark ........................................... 40
Customer base ....................................... 5 to 12
Noncompete agreements ............................... 2 to 3
See the discussion below under "Recent Accounting Pronouncements" regarding
the adoption of SFAS No. 141, "Business Combinations," and No. 142, "Goodwill
and Other Intangible Assets."
Restricted Assets
At December 31, 2000, restricted assets include cash designated for capital
expenditures. This cash represents the portion of the proceeds from the $160
million senior secured credit facility obtained in April 2000 (Note 5) required
by the lenders to be used for capital expenditures.
Other Long-Term Assets
Other long-term assets primarily consist of debt issuance costs that are
amortized using the effective interest rate method over the lives of the related
debt.
Long-Lived Assets
The Company reviews its long-lived assets, such as property, plant and
equipment and intangible assets, for impairment at each balance sheet date and
whenever events or changes in circumstances indicate that the carrying
F-10
amount of an asset should be assessed. Management evaluates the intangible
assets related to each acquisition individually to determine whether an
impairment has occurred. To determine if an impairment exists, the Company
estimates the future undiscounted cash flows expected to result from the use of
the asset being reviewed for impairment. If the sum of these expected future
cash flows is less than the carrying amount of the asset, the Company recognizes
an impairment loss in accordance with SFAS No. 121. The amount of the impairment
recognized is determined by estimating the fair value of the assets and
recording a loss for the excess of the carrying value over the fair value.
Management believes its long-lived assets, after the impairment charges recorded
in September 2001 (Note 9), in the accompanying balance sheets are appropriately
valued. However, asset values in the industry segments in which the Company
operates are subject to rapid change. There can be no assurance that future
impairment charges will not be necessary due to changes in industry conditions,
deterioration in the Company's operating results or alterations to the Company's
business plan.
Unearned Revenue
Unearned revenue includes the liability for advance billings to customers
for use of the Company's fiber-optic network, recurring monthly charges for
local and data services and estimated reciprocal compensation billings to
BellSouth for 2002 (Note 10).
Unbilled Revenue
ITC/\DeltaCom Communications, Inc., a wholly-owned subsidiary of the
Company, records revenue for long-distance services provided, but not yet
billed, to customers. Approximately $6.8 million, $8.0 million and $7.3 million
in unbilled revenue is included in accounts receivable in the accompanying
consolidated balance sheets at December 31, 2001, 2000 and 1999, respectively.
Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred taxes are determined based on the
difference between the financial and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse.
Revenue Recognition
Revenues from telecommunications and related services are recognized as
services are provided and consist primarily of recurring charges for local, long
distance, data and Internet services and for use of the Company's fiber-optic
network. Revenues from sales of customer premise equipment, other equipment and
software are recognized upon installation. These nonrecurring revenues as a
percentage of total revenue were approximately 6% in 2001, 7% in 2000 and 5% in
1999.
The Company generates recurring revenues from its offering of local
exchange services, long distance services, data and Internet services, which
includes Internet access, Web hosting and colocation services, and the sale of
transmission capacity to other telecommunications carriers. Revenues from these
sources, which generally consist of recurring monthly charges for such services,
are recognized as services are provided. Advance billings or cash received in
advance of services performed are recorded as deferred revenue.
The Company generates nonrecurring revenues from the sale of telephone
systems, other equipment, software and professional services. Revenues from
these sources are recognized upon installation or as services are performed.
Nonrecurring revenues, such as the sale of telephone systems, may be part of
multiple element arrangements. The Company estimates the fair value of the
separate elements and recognizes revenues for a delivered element only when the
undelivered element is delivered.
In accordance with the guidance provided in EITF 99-19, "Reporting Revenue
Gross as Principal Versus Net as an Agent," the Company recognizes some revenue
net as an agent and other revenue gross as a principal. For each
F-11
revenue source, the Company has analyzed the features of the applicable
arrangements and the presence or absence of indicators of net versus gross
reporting in those arrangements.
Under an agency agreement, the Company receives an equipment order from its
customer and arranges for the delivery of the equipment to the customer and
earns a margin. Revenue equal to the net margin is recognized when the equipment
is delivered. Under this agreement, the Company recorded revenues of $3.2
million, $5.6 million and $0 for the years ended December 31, 2001, 2000 and
1999, respectively.
The Company procures certain telecommunications services for other
telecommunications carriers from, and administers contracts on their behalf
with, major interexchange carriers. Revenue equal to the net margin earned under
this arrangement is recognized as services are provided by the third-party
carriers. For these services, the Company recorded revenues of $1.8 million,
$847,000 and $1.2 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
The Company sells customers broadband transport capacity on facilities
owned by utilities under marketing and management agreements with the utilities.
As compensation for these services, the Company receives a percentage of the
gross revenue generated by the traffic of these customers on the facilities of
the utilities. Revenue equal to this margin is recognized as services are
provided. For these services, the Company recorded revenues of $11.3 million,
$10.2 million and $8.4 million for the years ended December 31, 2001, 2000 and
1999, respectively.
Fair Value of Financial Instruments
The carrying values of the Company's financial instruments, including cash
and cash equivalents, accounts receivable and investments held-to-maturity,
approximate their fair values as of December 31, 2001 and 2000, except for the
outstanding notes (Note 5). Based on their quoted market prices, such notes have
fair values at December 31, 2001 and 2000 as follows (in thousands):
2001 2001 2000 2000
Fair Value Carrying Value Fair Value Carrying Value
---------- -------------- ---------- --------------
Instrument
- ----------
11% Senior Notes due 2007......................... $ 54,600 $130,000 $101,400 $130,000
8-7/8% Senior Notes due 2008...................... 59,200 159,901 115,200 159,885
9-3/4% Senior Notes due 2008...................... 46,250 125,000 93,750 125,000
4-1/2% Convertible Subordinated Notes due 2006.... 23,750 100,000 44,125 100,000
-------- -------- -------- --------
Totals....................................... $183,800 $514,901 $354,475 $514,885
======== ======== ======== ========
Advertising Costs
The Company expenses all advertising costs as incurred.
Recent Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," establishes accounting and reporting standards that require every
derivative instrument, including certain derivative instruments embedded in
other contracts, to be recorded in the balance sheet as either an asset or a
liability equal to the fair value of the derivative instrument. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The Company adopted
SFAS No. 133, as amended, on January 1, 2001, with no material effect on its
consolidated financial statements.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 prospectively prohibits the pooling of interests method of
accounting for business combinations initiated after June 30, 2001. SFAS No. 142
requires
F-12
companies to cease amortizing goodwill that existed at June 30, 2001. The
amortization of existing goodwill will cease on December 31, 2001. Included in
the accompanying consolidated statement of operations is amortization expense
related to goodwill of approximately $5.1 million, $5.2 million and $2.5 million
for the years ended December 31, 2001, 2000 and 1999, respectively. SFAS No. 142
also establishes a new method of testing goodwill for impairment on an annual
basis or on an interim basis if an event occurs or circumstances change that
would reduce the fair value of a reporting unit below its carrying value. In
accordance with SFAS No. 142, the Company has six months after adoption of the
statement to complete the first step of the transitional goodwill impairment
test. Pursuant to the adoption of SFAS No. 142, the Company has established its
reporting units based on its reporting structure in a reasonable and supportable
manner. The Company expects to complete the transitional test within the
six-month period and to report the results of that testing subsequent to its
completion. Pursuant to the adoption of SFAS No. 142, the Company will annually
test goodwill for impairment on the anniversary of the transitional goodwill
impairment test.
SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in
June 2001. SFAS No. 143 applies to legal obligations associated with the
retirement of certain tangible long-lived assets. This statement is effective
for fiscal years beginning after June 15, 2002. Accordingly, the Company will
adopt this statement on January 1, 2003. The Company believes the adoption of
SFAS No. 143 will not have a material impact on its consolidated financial
statements.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued in August 2001. It supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
SFAS No. 144 also amended Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years. The Company adopted SFAS No. 144 on January
1, 2002, and the Company is currently evaluating the impact of this statement's
adoption on its consolidated financial statements. The Company believes that its
adoption of SFAS No. 144 will not have a material impact on its consolidated
financial statements.
3. Property, Plant and Equipment
Balances of major classes of property, plant and equipment and the related
accumulated depreciation as of December 31, 2001 and 2000 are as follows (in
thousands):
2001 2000
--------- ---------
Land ............................................. $ 6,744 $ 5,375
Buildings and towers ............................. 127,412 84,525
Furniture, fixtures and office equipment ......... 63,460 49,298
Vehicles ......................................... 6,166 6,194
Fiber optic network .............................. 190,778 129,684
Transmission equipment and electronics ........... 568,716 470,909
--------- ---------
963,276 745,985
Less accumulated depreciation .................... (295,746) (183,443)
--------- ---------
Net property, plant and equipment in service ..... 667,530 562,542
Assets under construction ........................ 23,507 117,479
--------- ---------
Property, plant and equipment, net ............... $ 691,037 $ 680,021
========= =========
See Note 9 for a discussion related to the write-down of certain property,
plant and equipment during the year ended December 31, 2001. Depreciation
expense was $112.9 million, $80.2 million and $50.3 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
F-13
4. Intangible Assets
Intangible assets and the related accumulated amortization as of December
31, 2001 and 2000 are as follows (in thousands):
2001 2000
-------- --------
Goodwill ................................... $ 59,700 $115,188
Customer base .............................. 9,644 12,839
Noncompete agreements ...................... 727 727
Trademark .................................. 40 40
Other ...................................... 431 432
-------- --------
70,542 129,226
Less accumulated amortization .............. (14,596) (15,888)
-------- --------
Intangible assets, net ..................... $ 55,946 $113,338
======== ========
See Note 13 for a discussion of intangible assets recorded in 2000 related
to the acquisition of Bay Data Consultants, Inc. ("Bay Data") and for a
discussion of intangible assets recorded in 1999 related to the acquisition of
AvData Systems, Inc. ("AvData") and Scientific Telecommunications, Inc.
("SciTel"). See Note 9 for a discussion related to the write-down of certain
intangible assets during the year ended December 31, 2001.
5. Financing Obligations
Long-Term Debt
Long-term debt at December 31, 2001 and 2000 consists of the following (in
thousands):
2001 2000
-------- --------
11% Senior Notes due 2007.................................................... $130,000 $130,000
8-7/8% Senior Notes due 2008, net of unamortized discount of $99 and $115 in
2001 and 2000, respectively .............................................. 159,901 159,885
9-3/4% Senior Notes due 2008 ................................................ 125,000 125,000
4-1/2% Convertible Subordinated Notes due 2006............................... 100,000 100,000
Senior Secured Credit Facility............................................... 157,200 159,200
-------- --------
672,101 674,085
Less current maturities...................................................... (1,600) (1,600)
-------- --------
Long-term debt, net of current portion....................................... $670,501 $672,485
======== ========
Maturities of long-term debt at December 31, 2001 are as follows:
2002 ....................................................................... 1,600
2003 ....................................................................... 1,600
2004 ....................................................................... 1,600
2005 ....................................................................... 1,600
2006 ....................................................................... 138,600
Thereafter .................................................................. 527,101
--------
$672,101
========
Lease Obligations
The Company has entered into various operating and capital leases for
facilities and equipment used in its operations. Aggregate future minimum rental
commitments under noncancelable operating leases with original or remaining
periods in excess of one year and maturities of capital lease obligations as of
December 31, 2001 are as follows (in thousands):
F-14
Operating Capital
Leases Leases
--------- -------
2002 ...................................................... 13,281 9,709
2003 ...................................................... 12,547 14,884
2004 ...................................................... 10,223 14,791
2005 ...................................................... 8,075 14,728
2006 ...................................................... 6,852 3,401
Thereafter.................................................. 16,379 13,765
------- -------
$67,357 71,278
=======
Less amounts representing interest............................. (19,505)
-------
Present value of net minimum lease payments.................... 51,773
Less current portion........................................... (5,111)
-------
Obligations under capital leases, net of current portion....... $46,662
=======
Rental expense charged to operations for the years ended December 31, 2001,
2000 and 1999 was $15.7 million, $13.0 million and $10.0 million, respectively.
The Company's assets under capital lease had a gross book value of $54.4
million and $42.0 million as of December 31, 2001 and 2000, respectively.
Notes Offerings
On June 3, 1997, the Company completed the issuance of $200 million
principal amount of 11% Senior Notes due 2007 (the "1997 Notes"). Interest on
the 1997 Notes is payable semiannually on June 1 and December 1. On March 3,
1998, the Company completed the issuance of $160 million principal amount of
8-7/8% Senior Notes due 2008 at a price of 99.9% (the "March 1998 Notes") for an
effective yield of 8.88%. Interest on the March 1998 Notes is payable
semiannually on March 1 and September 1. On November 5, 1998, the Company
completed the issuance of $125 million principal amount of 9-3/4% Senior Notes
due 2008 (the "November 1998 Notes"). Interest on the November 1998 Notes is
payable semiannually on May 15 and November 15. On May 12, 1999, the Company
completed the issuance of $100 million principal amount of 4-1/2% Convertible
Subordinated Notes due 2006 (the "1999 Notes"). Interest on the 1999 Notes is
payable semiannually on May 15 and November 15.
A portion of the proceeds from the 1997 Notes was held by a trustee as
security for, and to fund, the first six interest payments on these notes. The
sixth payment was made during 2000.
On April 2, 1998, the Company used proceeds from its initial public
offering of common stock to redeem $70 million principal amount of its 1997
Notes at a redemption price of 111% of the principal amount thereof, plus
accrued and unpaid interest. In conjunction with this redemption, the Company
recorded a pre-tax extraordinary loss of $10.6 million (approximately $8.4
million after tax), consisting of a $7.7 million redemption premium and a $2.9
million write-off of unamortized debt issuance costs.
The 1997 Notes, the March 1998 Notes and the November 1998 Notes
(collectively, the "Senior Notes") are general, unsubordinated and unsecured
senior obligations of the Company. The Company's subsidiaries have no obligation
to pay amounts due on the Senior Notes and do not guarantee the Senior Notes;
therefore, the Senior Notes are effectively subordinated to all liabilities of
the Company's subsidiaries, including trade payables. Any rights of the Company
and its creditors, including holders of the Senior Notes, to participate in the
assets of any subsidiary of the Company upon any liquidation or reorganization
of any such subsidiary will be subject to the prior claims of that subsidiary's
creditors. The Senior Notes are subject to negative covenants that, among other
things, restrict the ability of the Company and its subsidiaries to incur
additional indebtedness, pay dividends or make distributions.
The 1999 Notes are unsecured general obligations of the Company and are
convertible into common stock any time after August 10, 1999 at a conversion
price of $26.67 per share, subject to adjustment in specified events. The
F-15
Company may redeem the 1999 Notes or make the 1999 Notes nonconvertible under
specified circumstances before May 17, 2002.
Senior Secured Credit Facility
In April 2000, the Company entered into two senior secured credit
facilities, which are referred to collectively as the "senior secured credit
facility," totaling $160 million with Morgan Stanley Senior Funding, Inc., Bank
of America, N.A. and other lenders. The senior secured credit facility includes
a $100 million Tranche 1 Term Loan B facility, or "Tranche 1," to be used to
finance working capital, capital expenditures and other general corporate
purposes, and a $60 million Tranche 2 Term Loan B facility, or "Tranche 2," to
be used to finance the purchase of equipment. All amounts available under
Tranche 1 and Tranche 2 were drawn by the Company at the closing of the senior
secured credit facility. Tranche 1 is secured by substantially all of the
Company's assets, except for the equipment purchased with proceeds from Tranche
2. The senior secured credit facility is senior to the $415 million principal
amount of the Company's outstanding Senior Notes and $100 million principal
amount of the Company's outstanding 1999 Notes. Interest per annum, as defined
in the credit agreement, is payable on the senior secured credit facility at the
option of the Company at 1.875% plus the Base Rate or 2.875% plus the Eurodollar
Rate. The Base Rate at December 31, 2001 was 6.0% and the Eurodollar Rate at
December 31, 2001 was 2.6%. The combined terms of repayment for the Tranche 1
and Tranche 2 advances are $400,000 quarterly from June 2000 through September
2006, $37.4 million in December 2006, $37.4 million in March 2007, $37.4 million
in June 2007 and $37.4 million on the termination date as defined by the credit
agreement. The termination date may be accelerated and any remaining balance on
the advances will become immediately due in the event (i) the Company's 1999
Notes are not converted or refinanced in full on terms and conditions reasonably
satisfactory to the lenders on or prior to April 15, 2006, in which event all
outstanding balances will be due on April 15, 2006, or (ii) the Company's 1997
Notes are not refinanced in full on terms and conditions reasonably satisfactory
to the lenders on or prior to April 15, 2007, in which event all outstanding
balances will be due on April 15, 2007.
The senior secured credit facility is subject to affirmative and negative
covenants customarily found in similar secured financings, including
restrictions on the Company's ability to incur additional indebtedness, pay
dividends and make distributions.
In connection with the completion of the senior secured credit facility,
the Company terminated its $50 million credit facility with Bank of America,
N.A, as administrative lender, and certain other lenders. In connection with the
termination of the $50 million credit facility, the Company expensed $1.3
million of unamortized debt issuance costs, which is reflected in the
accompanying consolidated statements of operations as an extraordinary loss on
early termination of credit facility. No amounts were borrowed under the $50
million credit facility.
Interest Rate Swap Agreement
Prior to 1997, the Company held a 36% ownership interest in, and was the
managing partner of, Gulf States FiberNet ("Gulf States"), a Georgia general
partnership. In connection with the acquisition of the remaining 64% interest in
Gulf States in March 1997, the Company refinanced Gulf States' outstanding
indebtedness of approximately $41.6 million with a bridge facility (the "Bridge
Facility"). The Bridge Facility, which bore interest at LIBOR plus 2.25%,
matured on July 25, 1997, the date the proceeds from the Company's offering of
the 1997 Notes were released. The Company did not retire a forward-starting
interest rate swap agreement (the "Swap"), which swapped the variable interest
rate with a fixed rate of 8.25%, held by Gulf States in connection with this
refinancing. At December 31, 2001, the Swap had a notional amount of
approximately $14.8 million. At December 31, 2001, the Company would have been
required to pay approximately $785,000 to terminate the Swap. The Company made
payments totaling approximately $622,000, $404,000 and $851,000 during 2001,
2000 and 1999, respectively, in connection with the Swap, which are included in
other (expense) income in the accompanying consolidated statements of
operations. The Swap expires in December 2002.
Upon receipt of the proceeds from the March 1998 Notes, the Company ceased
accounting for the Swap as a hedge of an anticipated transaction and began
accounting for the Swap as a trading security. The Swap is marked to
F-16
market at each balance sheet date and the related (loss) gain is included in
other (expense) income. For the years ended December 31, 2001, 2000 and 1999,
the Company recorded other (expense) income in the accompanying consolidated
statements of income of approximately $(632,000), $(426,000) and $754,000,
respectively, related to the Swap. Because the Company has recorded this
derivative on the balance sheet at fair value and recorded the changes in fair
value as earnings, adoption of SFAS No. 133 had no effect on the Company's
accounting for the Swap.
Leases
In August 2000, the Company amended an agreement with a significant
provider of rights-of-way to replace future variable payments with specified
future fixed payments annually through 2020 and to modify certain rights under
the agreement. The present value of the future payments (consisting of annual
payments of $750,000 through 2015 and annual payments of $500,000 through 2020)
is included in the accompanying consolidated balance sheets as a capital lease
obligation in the amount of approximately $10.0 million. In the event of a
change in control of the Company, as defined in the amended agreement, the
future annual payment obligations of the Company will terminate and the Company
will be required to pay any remaining present value of the $750,000 annual
payment obligation and a one-time payment ranging from $12 million in 2002 to
$20 million in 2005 and thereafter during the term of the agreement. Upon
expiration in 2020, this agreement is renewable for up to two ten-year terms.
In December 2000, the Company obtained a $40 million capital lease facility
with NTFC Capital Corporation. The facility will be used to finance equipment
for expansion of the Company's network. The initial funding of this facility,
which occurred in December 2000, was for approximately $28.5 million. Each
funding under the facility has a five-year term. The Company funded an
additional $10.5 million of equipment in 2001 under this facility.
The Company is subject to restrictions under the indentures pursuant to
which the Company issued the Senior Notes, under the senior secured credit
facility and under the $40 million capital lease facility. These restrictions
affect and, in some cases, significantly limit or prohibit, among other things,
the Company's ability to incur additional indebtedness. In order to incur
additional indebtedness under the foregoing agreements, the Company must meet
minimum specified leverage and interest coverage ratios based on its operating
cash flow. As of February 28, 2002, the Company had not met, and the Company
does not expect that it will be able to meet in the foreseeable future, the
measurement criteria under these ratios that would allow the Company to incur
additional indebtedness.
6. Income Taxes
Details of the income tax (benefit) expense for the years ended December
31, 2001, 2000 and 1999 are as follows (in thousands):
2001 2000 1999
-------- -------- --------
Current:
Federal ........................... $ 0 $ 0 $ 0
State ............................. 0 0 0
-------- -------- --------
Total current .............. 0 0 0
-------- -------- --------
Deferred:
Federal ........................... (51,428) (24,335) (20,125)
State ............................. (6,050) (2,352) (2,273)
Increase in valuation allowance ...... 57,478 26,175 22,492
-------- -------- --------
Total deferred ................. 0 (512) 94
-------- -------- --------
Total (benefit) expense ........ $ 0 $ (512) $ 94
======== ======== ========
The tax effects of temporary differences between the carrying amounts of
assets and liabilities in the consolidated financial statements and their
respective tax bases, which give rise to deferred tax assets and liabilities, as
of December 31, 2001 and 2000 are as follows (in thousands):
F-17
2001 2000
--------- --------
Deferred tax assets:
Net operating loss carryforwards ................. $ 150,484 $ 91,346
Alternative minimum tax credit carryforward ...... 350 350
Interest rate swap ............................... 855 710
Other ............................................ 2,216 2,100
--------- --------
153,905 94,506
--------- --------
Deferred tax liabilities:
Property ......................................... (38,690) (36,782)
Other ............................................ (375) (362)
--------- --------
(39,065) (37,144)
--------- --------
Net deferred tax assets ............................. 114,840 57,362
Valuation allowance ................................. (114,840) (57,362)
--------- --------
Net deferred tax liabilities ........................ $ 0 $ 0
========= ========
At December 31, 2001, the Company had federal and state net operating loss
carryforwards of approximately $388.0 million and $432.9 million, respectively.
The carryforwards expire primarily in the years 2018 through 2021. Because the
Company is unable to conclude that it is more likely than not that it will be
able to realize the benefit of its deferred tax assets, it has provided a 100%
valuation allowance against the net amount of such assets at December 31, 2001.
The Company realized the benefit of non-qualified stock compensation expense for
tax purposes in excess of stock compensation expense for book purposes of
approximately $2.3 million, $9.0 million and $2.7 million for the years ended
December 31, 2001, 2000 and 1999, respectively. These amounts have been credited
directly against additional paid-in capital, net of a full valuation allowance.
Section 382 of the Internal Revenue Code of 1986, as amended, limits the
utilization of net operating loss carryforwards when there are changes in
ownership greater than 50%, as defined under the Internal Revenue Code. If such
a change occurs, the timing of the Company's utilization of its U.S. net
operating loss carryforwards could be affected.
A reconciliation of the federal statutory income tax rate to the effective
income tax rate for the periods presented is as follows:
2001 2000 1999
---- ---- ----
Federal statutory rate ........................... (34)% (34)% (34)%
State income taxes, net of federal benefit ....... (4) (3) (4)
Permanent differences ............................ 11 (1) (3)
Increase in valuation allowance .................. 27 37 41
--- --- ---
Effective income tax rate ........................ 0% (1)% 0%
=== === ===
7. Convertible Redeemable Preferred Stock
In 2001, the Company secured a commitment for $150 million in equity
financing in an investment agreement with ITC Holding Company, Inc. ("ITC
Holding Company"). ITC Holding Company subsequently assigned an aggregate of $50
million of the purchase commitment to two other investors. The purchase
commitments expire on June 20, 2002. The investment agreement provides for the
issuance and sale by the Company of up to $150 million of multiple series of its
Series B cumulative convertible preferred stock (the "Series B preferred stock")
and related common stock purchase warrants. The Company completed the sale of
$30 million of the first series of the Series B preferred stock in June 2001 and
the sale of $40 million of the second series of Series B preferred stock in
September 2001. The investment agreement provides for funding at the Company's
option at future multiple closings in increments of a minimum of $10 million and
a maximum of $30 million. The Company's right to sell securities under the
investment agreement is subject to specified closing conditions, including the
condition that, immediately after each closing, no purchaser of the Series B
preferred stock (with specified exceptions), together with all other members, if
any, of the same group for federal securities law purposes, will beneficially
own more than 30% of the total voting power of the
F-18
Company's voting securities, as calculated under change of control provisions in
the Company's debt agreements. The Company is assessing the conditions to
funding under the investment agreement to determine whether it would be able to
obtain additional funds from this source. As a result of those conditions, the
Company cannot provide any assurance that it will be able to obtain additional
funds under the investment agreement in an amount that would provide it with
significant liquidity.
Each issue of the Series B preferred stock will have a stated purchase
price of $1,000 per share and accrue an 8% annual dividend payable quarterly,
when and if declared by the Company's Board of Directors, in shares of Series B
preferred stock or cash, at the Company's option. The Series B preferred stock
will be redeemable at the Company's option beginning five years after the issue
date and will be subject to mandatory redemption ten years after the issue date.
The Series B preferred stock will have a liquidation preference equal to the
greater of $1,000 per share plus accumulated and unpaid dividends or the amount
that would have been received with respect to the shares of common stock
issuable upon conversion of the shares of Series B preferred stock if such
shares had been converted immediately before the event of dissolution,
liquidation or winding-up. Holders of the Series B preferred stock will have
special voting rights and powers, which will include the right to vote the
Series B preferred stock on an as-converted basis subject to certain limitations
and the exclusive right to elect two members to the Company's board of directors
under specified circumstances. The Series B preferred stock will be convertible
into common stock at any time at a conversion price initially equal to an
average price per share of common stock over a specified pricing period, plus a
15% premium, but not to exceed $5.70. The conversion price will be subject to
antidilution adjustments and other adjustments in specified circumstances. The
Company also will be obligated to issue common stock purchase warrants at the
closing of each funding for no additional consideration. Each issue of warrants
will have an aggregate exercise price that is equal to 30% of the aggregate
purchase price of the Series B preferred stock issued at such closing. The
initial warrant exercise price per share of common stock will be the same as the
initial conversion price of the Series B preferred stock with which such
warrants are issued and will be subject to substantially similar adjustment
provisions.
On June 20, 2001, the Company issued 30,000 shares of Series B-1 Cumulative
Convertible Preferred Stock (the "Series B-1 preferred stock") with a redemption
value of $30 million, yielding proceeds, net of issuance costs, to the Company
of approximately $27.4 million. The Series B-1 preferred stock is convertible
into common stock at any time at an initial conversion price of $5.70 per share
of common stock. The difference between the redemption value and recorded value
of the Series B-1 preferred stock recorded in the financial statements is being
accreted over a five-year period from the date of issuance. In connection with
the issuance of the Series B-1 preferred stock, the Company issued warrants to
purchase an aggregate of 1,578,948 shares of common stock at an initial exercise
price of $5.70 per share. The warrants have an aggregate exercise price of $9
million. The warrants will be exercisable for common stock at any time for a
period of ten years from the date of issuance. The Company estimated the fair
value of the Series B-1 preferred stock and the warrants in accordance with EITF
00-27. The total fair value of the warrants issued was computed as approximately
$4.9 million, which was allocated from the original purchase price of the Series
B-1 preferred stock as warrants outstanding. The Company computed the value of
the warrants using the Black-Scholes option pricing model.
The Series B-1 preferred stock earned $1.3 million of dividends during
2001, of which the Company paid the $673,000 which became due and payable in
October 2001 through the issuance of 673 additional shares of Series B-1
preferred stock.
On September 5, 2001, the Company issued 40,000 shares of Series B-2
Cumulative Convertible Preferred Stock (the "Series B-2 preferred stock") with a
redemption value of $40 million, yielding proceeds, net of issuance costs, to
the Company of approximately $39.8 million. The Series B-2 preferred stock is
convertible into common stock at any time at an initial conversion price of
$2.56 per share of common stock. The difference between the redemption value and
recorded value of the Series B-2 preferred stock recorded in the financial
statements is being accreted over a five-year period from the date of issuance.
In connection with the issuance of the Series B-2 preferred stock, the Company
issued warrants to purchase an aggregate of 4,687,500 shares of common stock at
an initial exercise price of $2.56 per share. The warrants have an aggregate
exercise price of $12 million. The warrants will be exercisable for common stock
at any time for a period of ten years from the date of issuance. The Company
F-19
estimated the fair value of the Series B-2 preferred stock and the warrants in
accordance with EITF 00-27. The total fair value of the warrants issued was
computed as approximately $6.5 million, which was allocated from the original
purchase price of the Series B-2 preferred stock as warrants outstanding. The
Company computed the value of the warrants using the Black-Scholes option
pricing model.
The Series B-2 preferred stock accrued $1.0 million of dividends during
2001, none of which became due and payable in 2001.
8. Other Equity Interests
Series A Preferred Stock
The Company has 1,480,771 shares of Series A Convertible Preferred Stock
(the "Series A preferred stock") outstanding. Holders of the Series A preferred
stock are entitled to receive dividends, when and if declared by the Company's
Board of Directors, in an amount equal to the dividends payable on the number of
shares of common stock into which the Series A preferred stock is convertible.
Each share of the Series A preferred stock is convertible at the option of the
holders thereof into two shares of common stock on any date after March 14,
2002. The Series A preferred stock is not subject to mandatory or optional
redemption. Holders of the Series A preferred stock have no voting rights other
than the right to approve an increase in the authorized or issued amount of the
Series A preferred stock, the issuance of any class of stock ranking senior to
the Series A preferred stock as to dividends or rights on liquidation, or
changes to the Company's certificate of incorporation adversely affecting the
Series A preferred stock. The Series A preferred stock ranks senior to the
Company's common stock and equally with the Series B preferred stock as to
rights on liquidation. The Series A preferred stock has a liquidation preference
equal to $7.40 per share plus declared and unpaid dividends.
Employee Stock Option Plan
All employees of the Company are eligible to receive stock options under
the ITC/\DeltaCom, Inc. 1997 Stock Option Plan, as amended (the "Stock Option
Plan"), which was adopted by the Company on March 24, 1997. In June 2001, the
Company's stockholders approved an increase in the number of shares of common
stock authorized for issuance under the Stock Option Plan from 9,815,000 to
13,815,000 (subject to antidilution adjustments in the event of a stock split,
recapitalization or similar transaction). The Stock Option Plan provides for the
grant of options that are intended to qualify as "incentive stock options" under
Section 422 of the Internal Revenue Code to employees of the Company, as well as
the grant of non-qualifying options to any other individual whose participation
in the Stock Option Plan is determined to be in the best interests of the
Company. The exercise price per share of common stock of incentive stock options
granted under the Stock Option Plan may not be less than 100% of the fair market
value of the common stock on the date of grant of the option (or 110% in the
case of an incentive stock option granted to an optionee beneficially owning
more than 10% of the outstanding common stock). The option exercise price for
non-incentive stock options granted under the Stock Option Plan may not be less
than the par value of the common stock on the date of grant of the option. The
maximum option term is 10 years (or five years in the case of an incentive stock
option granted to an optionee beneficially owning more than 10% of the
outstanding common stock). Options granted under the Stock Option Plan generally
become exercisable with respect to 50% of the shares subject to the options on
the second anniversary of the date of grant and with respect to 25% of the
shares subject to the options on each of the third and fourth anniversaries of
the date of grant.
F-20
On December 12, 2000, the Company offered to exchange for new options those
options outstanding under the Stock Option Plan that had an exercise price of
$18.00 or more and were held by option holders who had not received options
after September 30, 2000. The offer expired on January 12, 2001 and the Company
accepted for exchange options to purchase 2,084,983 shares of the common stock.
On January 12, 2001, the Company cancelled all of the options that it had
accepted for exchange. On July 13, 2001, the Company issued new options to
purchase 1,900,071 shares of common stock to employees who had tendered options
in the exchange. The options issued on July 13, 2001 were issued with an
exercise price of $3.60 per share. The Company is accounting for the options
granted in July 2001 as a fixed plan stock option grant to employees under APB
No. 25 and FIN 44. No compensation expense was recorded, as the exercise price
of the new options was equal to the fair market value of the Company's common
stock at the date of grant.
Director Stock Option Plan
On March 24, 1997, the Company adopted and its stockholders approved the
ITC/\DeltaCom, Inc. Director Stock Option Plan (the "Director Plan"). The
Director Plan provides for the "formula" grant of options that are not intended
to qualify as "incentive stock options" under Section 422 of the Internal
Revenue Code to directors of the Company who are not officers or employees of
the Company (each an "Eligible Director"). The Director Plan authorizes the
issuance of up to 481,500 shares of common stock pursuant to options granted
under the Director Plan (subject to antidilution adjustments in the event of a
stock split, recapitalization or similar transaction). The option exercise price
for options granted under the Director Plan will be at least 100% of the fair
market value of the shares of common stock on the date of grant of the option.
Each Eligible Director will be granted an option to purchase 32,100 shares of
common stock upon such person's initial election or appointment to serve as a
director. Options granted will become exercisable with respect to 50% of the
shares subject to the options on the second anniversary of the date of grant and
with respect to 25% of the shares subject to the options on each of the third
and fourth anniversaries of the date of grant. The options will expire ten years
and 30 days after the date of grant.
Assumed ITC Holding Company Plans
The Company assumed the ITC Holding Company, Inc. Amended and Restated
Stock Option Plan and the ITC Holding Company, Inc. NonEmployee Director Stock
Option Plan (the "Assumed Plans") in connection with the merger of ITC Holding
Company and the Company in October 1997 for purposes of administering options
under the Assumed Plans which were outstanding as of the merger date. Options to
purchase shares of ITC Holding common stock that were outstanding under the
Assumed Plans prior to the merger were converted in the merger into options to
purchase shares of the Company's common stock and the common stock of another
entity, subject in each case to adjustment of the exercise prices and the number
of shares based on the exchange ratio for the merger. At December 31, 2001,
options to purchase 2,945,522 shares of the Company's common stock were
outstanding under the Assumed Plans.
Statement of Financial Accounting Standards (SFAS) No. 123
The Company accounts for its stock based compensation plans under APB No.
25, under which no compensation cost is recognized for options granted with a
per share exercise price equal to the fair market value of the Company's common
stock at the grant date. The Company has computed, for pro forma disclosure
purposes, the value of all options to purchase shares of common stock granted to
employees of the Company using the Black-Scholes option pricing model and the
following weighted average assumptions:
2001 2000 1999
---------- ----------- -----------
Risk-free interest rate..... 4.38% 6.20% 5.79%
Expected dividend yield..... 0% 0% 0%
Expected lives.............. Five years Seven years Seven years
Expected volatility......... 97.72% 190.90% 79.17%
F-21
The weighted average fair value of options granted under the Stock Option
Plan and the Director Plan in 2001, 2000 and 1999 was $2.96, $23.16 and $19.19
per share, respectively. The total fair value of options for common stock
granted to employees of the Company during 2001, 2000 and 1999 was computed as
approximately $5.2 million, $81.9 million and $35.4 million, respectively, which
would be amortized on a pro forma basis over the four-year vesting period of the
options. If the Company had accounted for these plans in accordance with SFAS
No. 123, "Accounting for Stock Based Compensation," the Company's net loss for
the years ended December 31, 2001, 2000 and 1999 would have increased as
follows:
Net loss (in thousands) 2001 2000 1999
----------------------- --------- --------- --------
As reported......................... $(215,644) $ (70,875) $(54,979)
Pro forma........................... $(219,032) $(100,871) $(69,301)
Basic and diluted net loss per share
- ------------------------------------
As reported......................... $ (3.46) $ (1.16) $ (0.98)
Pro forma........................... $ (3.52) $ (1.66) $ (1.23)
A summary of the status of options under the Stock Option Plan, the
Director Plan and the Assumed Plans as of December 31, 2001, 2000 and 1999 and
for the years then ended is as follows:
Weighted Average
Exercise Price
Shares Per Option
---------- ----------------
Outstanding at December 31, 1998....... 9,541,654 4.28
Granted........................... 2,014,750 25.42
Exercised......................... (1,116,282) 2.45
Forfeited......................... (565,109) 13.33
----------
Outstanding at December 31, 1999....... 9,875,013 8.28
Granted........................... 3,884,516 23.79
Exercised......................... (1,121,190) 2.78
Forfeited......................... (1,028,021) 20.13
----------
Outstanding at December 31, 2000....... 11,610,318 12.81
Granted........................... 5,750,022 4.28
Exercised......................... (747,971) 1.70
Forfeited......................... (3,577,725) 22.56
----------
Outstanding at December 31, 2001....... 13,034,644 7.02
==========
The following table sets forth the exercise price range, number of shares,
weighted average exercise price and remaining contractual lives by groups of
similar price and grant date:
Outstanding Weighted Average Exercisable
Range of as of Remaining Weighted Average as of Weighted Average
Exercise Prices Dec. 31, 2001 Contractual Life Exercise Price Dec. 31, 2001 Exercise Price
- --------------- ------------- ---------------- ---------------- ------------- ----------------
$ 0.16 - $ 0.93 2,704 1.5 $ 0.82 2,704 $ 0.82
$ 0.97 - $ 1.93 1,172,746 4.0 1.34 841,586 1.45
$ 2.16 - $ 3.03 3,027,088 4.8 2.38 3,027,088 2.38
$ 3.31 - $ 4.44 5,089,617 8.2 3.61 1,043,708 3.87
$ 5.45 - $ 6.38 215,286 8.1 5.68 51,600 6.35
$ 6.75 - $ 9.00 1,271,801 7.8 8.41 143,461 8.65
$ 9.78 - $14.75 386,773 6.3 13.32 271,923 13.26
$16.12 - $22.88 737,572 7.3 18.73 309,016 19.06
$23.90 - $28.25 351,067 7.8 26.21 95,199 24.29
$29.12 - $32.94 779,990 7.7 31.08 192,436 29.50
At December 31, 2001, options to purchase 5,978,721 shares of the Company's
common stock with a weighted average exercise price of $5.27 per share were
exercisable by employees of the Company. At December
F-22
31, 2000, options to purchase 4,793,243 shares of the Company's common stock
with a weighted average exercise price of $3.57 per share were exercisable by
employees of the Company. At December 31, 1999, options to purchase 4,133,109
shares of the Company's common stock with a weighted average exercise price of
$2.25 per share were exercisable by employees of the Company.
9. Restructuring and Special Charges
In September 2001, the Company announced changes to its business plan and
other actions intended to reduce its operating expenses through a 20% reduction
in its workforce and to reduce non-personnel operating expenses and planned
capital expenditures. As a result of this restructuring, the Company in
September 2001 recorded $4.8 million in restructuring costs, which are included
as components of selling, operations and administration expenses. Restructuring
charges include the Company's estimate of employee severance and related costs
for employees terminated as a result of the revised business plan. The
restructuring charges also include estimates of office space lease commitments
where the Company closed offices, net of any sublease rentals, and other exit
costs. In connection with the restructuring, the Company closed an
administrative office, retail services offices and an e/\deltacom office.
Restructuring costs were accrued in accordance with EITF 94-3. The Company
terminated some employees in each department and did not specifically identify
the termination of an entire function or department.
The Company recorded impairment charges of $74.4 million in accordance with
SFAS No. 121 related to net book value of property and equipment removed from
service less expected salvage totaling $1.8 million, $21.2 million of impaired
assets relating to the e/\deltacom data center, and $51.4 million of intangible
assets consisting of goodwill and customer lists related to e/\deltacom, the
AvData network solutions business and IT Group Communications. These impairment
charges are recorded as special charges in the accompanying statements of
operations.
The impairment of property and equipment removed from service relates to
assets that the Company no longer plans to use as a result of its restructuring.
Based on market conditions and operating results of e/\deltacom, the Company
tested its e/\deltacom assets for impairment. The Company determined that an
impairment existed and wrote the related assets down to estimated fair value.
The Company expensed goodwill of $23.9 million related to e/\deltacom and $21
million of e/\deltacom property and equipment. Fair value was determined based
on estimates of market values for comparable properties. In the opinion of
management, the e/\deltacom assets are appropriately valued at December 31,
2001. However, management continues to evaluate strategic alternatives for this
business segment, and additional impairment charges may be necessary based on
the results of these evaluations or future changes in market conditions.
Based on the Company's forecast for its AvData network solutions business
and the expected operating results from customers acquired in the acquisition of
IT Group Communications in 1998, the Company tested the related assets for
impairment. The Company determined that an impairment existed and expensed $24.4
million of goodwill and $1.6 million of customer base assets related to the
AvData network solutions business and $1.6 million of customer base assets
related to former customers of IT Group Communications. These charges are
reflected in the table below under "Retail Services."
In September 2001, the Company also recorded a total of $2.9 million of
other special charges, including a $1.7 million write-down of its retail
services inventory of telephone systems and related equipment as a result of a
decline in demand for those systems. These charges are included as a component
of cost of services. The Company also recorded additional bad debt expense of
$1.2 million, which is included in selling, operations and administration
expenses. Of this amount, $809,000 was associated with disputed access charge
revenues billed to interexchange carriers by the retail services segment and
$392,000 was associated with a discontinued service in the e/\deltacom business.
The following table summarizes restructuring and special charges the
Company recorded in connection with the September 2001 restructuring (in
thousands):
F-23
Broadband
Transport
Services Retail Services e/\deltacom Total
---------------------------------------------------
Cost of services:
Inventory writedown ................................... $ -- $ 1,663 $ -- $ 1,663
Selling, general and administration:
Restructuring charges:
Employee severance ................................. 120 2,048 1,638 3,806
Office space leases ................................ -- 1,114 88 1,202
Other exit costs ................................... -- 54 -- 54
Bad debts ............................................. -- 809 392 1,201
Special charges:
Impaired property and equipment ....................... 55 1,793 21,174 23,022
Impaired goodwill and other
intangible assets ....................................... -- 27,565 23,850 51,415
---- ------- ------- -------
Total ................................................... $175 $35,046 $47,142 $82,363
==== ======= ======= =======
The following table reflects activity associated with accrued restructuring
costs which are recorded in accrued liabilities for the year ended December 31,
2001 (in thousands):
Write-offs/ Balance at
Accruals Payments December 31, 2001
------------------------------------------
Restructuring charges:
Employee severance ........ $3,555 $3,339 $ 216
Office space leases ....... 1,202 135 1,067
Other exit costs .......... 54 54 0
------ ------ ------
Total .......................... $4,811 $3,528 $1,283
====== ====== ======
Management expects to use the remaining restructuring accruals in 2002 and
2003 as additional payments are made under the terms of employee severance and
office space lease agreements.
10. Commitments and Contingencies
Purchase Commitments
At December 31, 2001, the Company had entered into agreements with vendors
to purchase approximately $8.8 million of equipment during 2002 related to the
improvement and installation of switches, other network equipment and certain
services.
In November 2000, the Company entered a purchase agreement with Nortel
Networks, Inc. for the purchase of telecommunications equipment and services.
The agreement provides that the Company will receive specified volume discounts
if it purchases at least $250 million of equipment and services from Nortel
Networks between November 1, 1999 and December 31, 2002. If the Company does not
purchase at least $250 million of equipment and services, it will be required to
pay Nortel Networks an amount equal to three percent of the difference between
$250 million and the amount of equipment the Company purchases. If the Company
purchases equipment in excess of the original $250 million commitment amount, it
may be able to obtain additional volume discounts based on additional purchase
thresholds. As of December 31, 2001, the Company had purchased $113.1 million of
equipment pursuant to the Nortel Networks purchase agreement.
Surety bonds
Some of the Company's customers, especially government entities, require
that the Company obtain surety
F-24
bonds as a condition to its provision of service to them. In February 2002,
because of the Company's financial condition, its surety cancelled all
outstanding surety bonds that contained cancellation clauses. At the time the
surety bonds were cancelled, the Company's surety bond portfolio had a face
value of approximately $1.9 million in outstanding obligations, of which
approximately $1.2 million were cancelled. As of February 28, 2002, these bonds
had not been replaced. The surety plans to cancel all remaining bonds that may
be cancelled upon renewal as they renew. These bonds renew at various dates in
2002 and have a face value of $405,000. The remaining bonds, valued at $282,000,
are noncancellable, unless the Company no longer needs them or does not perform
its obligations under the bonds. The surety also refuses to underwrite any new
surety bonds unless the Company provides 100% collateral for such bonds. The
Company is actively working with the existing obligees of the bonds to provide
the security they require, and another surety has offered to underwrite new
bonds or replace cancelled bonds for the Company if the Company provides 100%
collateral for each bond. The Company's inability to provide surety bonds to
replace the cancelled surety bonds or issue new surety bonds will have an
adverse impact on its ability to provide service to some customers, especially
government entities or other entities that generally require surety bonds. In
addition, the requirement to provide 100% collateral for any bond issued may
have an adverse impact on the funds available for capital expenditures or other
uses if the Company chooses to purchase the surety bond and provide the
collateral. To maintain the Company's existing surety obligations would require
approximately $1.6 million of available funds and, depending on the perception
of the Company's financial condition, could increase the demand on the Company
of additional surety bonds and therefore further restrict the Company's
available funds.
Deposit contingency
The Company depends on BellSouth Telecommunications, Inc. ("BellSouth") for
the provision of wholesale telecommunications services under its interconnection
agreements with BellSouth and pursuant to various access tariffs which BellSouth
has filed with federal and state regulatory agencies. By letter dated March 8,
2002, BellSouth requested that the Company provide a $10 million security
deposit by March 29, 2002 in connection with BellSouth's provision of services
to the Company. The Company is contesting both the requirement for, and the
amount of, the requested deposit. If the Company is unsuccessful in either
eliminating or substantially reducing the amount of the requested security
deposit, the Company's cash reserves may be insufficient to fund the deposit,
which could have a material adverse affect on the Company's ability to provide
services to its customers.
Legal Proceedings
In the normal course of business, the Company is subject to various
litigation. In management's opinion, there are no legal proceedings, other than
those described below, pending against the Company that could have a material
adverse effect on the financial position, results of operations or liquidity of
the Company.
Proceedings Affecting Rights-of-Way. A portion of the Company's network
runs through fiber optic cables owned by the Mississippi Power Company over its
rights-of-way located in Jasper County, Mississippi. A proceeding involving
Mississippi Power and several landowners who have granted Mississippi Power
rights-of-way in Jasper County resulted in a January 1999 order of the
Mississippi Supreme Court holding that Mississippi Power could not permit third
parties to use its rights-of-way at issue for any purpose other than in
connection with providing electricity to customers of Mississippi Power. The
Company became a party to the proceeding after the January 1999 order. The
Circuit Court of the First Judicial District of Jasper County, Mississippi has
directed the Company not to use that portion of its fiber optic network located
on Mississippi Power's rights-of-way in Jasper County, except in an emergency,
pending the outcome of the trial. The Company has rerouted all of the circuits
on the affected portion of our network so that the Company may continue to
provide services to its customers along the affected route. If the courts
ultimately agree with the landowners that the existing easements do not permit
the Company's use, the Company believe its potential liability for damages may
be limited to the value of a permanent easement for that use. The Company cannot
provide assurance in this respect, however, since the landowners are seeking
damages equal to the profits or gross revenues received by the Company from its
use of Mississippi Power Company's rights-of-way in Jasper County and punitive
damages for the Company's use of the route. The Company cannot reasonably
estimate the amount of any potential loss.
F-25
The Company initiated a civil suit in August 2001 in the U.S. District
Court for the Southern District of Mississippi, Southern Division, in which the
Company seeks a declaratory judgment confirming its continued use of cables in
Mississippi Power Company's rights-of-way on 37 parcels of land or,
alternatively, condemnation of the right to use the cables upon payment of just
compensation to the landowners. Some of the defendants have filed a counterclaim
against Mississippi Power and the Company seeking a constructive trust upon the
revenues earned on those rights-of-way, together with compensatory and punitive
damages. Although the Company has resolved the issue of its use of the
rights-of-way with some of the defendants, the Company cannot provide assurance
that it will be successful in this proceeding. The Company cannot reasonably
estimate the amount of any potential loss. This civil suit has been consolidated
with another pending civil suit in the U.S. District Court for the Southern
District of Mississippi initiated by landowners claiming to represent a class of
landowners and seeking compensatory and punitive damages against Mississippi
Power Company arising from Mississippi Power Company's allowance of third
parties to use its rights-of-way for telecommunications purposes.
The Company uses the rights-of-way of Gulf Power Company in Florida for a
portion of its network. In the fourth quarter of 2000, Gulf Power was sued in
the Circuit Court of Gadsden County, Florida by two landowners that claim to
represent a class of all landowners over whose property Gulf Power has
facilities that are used by third parties. The landowners have alleged that Gulf
Power does not have the authority to permit the Company or other carriers to
transmit telecommunications services over the rights-of-way. The Company was
made a party to this litigation in August 2001. In March 2002, the court
dismissed this matter without prejudice on the basis that, among other things,
there was no additional burden on the property as a result of third-party use of
the rights-of-way for telecommunications purposes and that the easements were
broad enough in scope to permit such third-party use. However, the court also is
permitting the plaintiffs to amend their complaint to allege additional facts
regarding the use of the rights-of-way to support the landowners' contention
that there is additional burden on the property because of the maintenance
requirements of the fiber routes and the placement of buildings and other
physical telecommunications equipment on the rights-of-way. The Company cannot
reasonably estimate the amount of any potential loss.
The Company uses rights-of-way of Georgia Power Company in Georgia for a
portion of its network. In July 2001, a suit filed in the Superior Court of
Decatur County, Georgia by a group seeking compensatory and punitive damages and
claiming to represent a class of landowners alleged that Georgia Power and the
other entities do not have the right to grant third parties the use of the
rights-of-way for the transmission of telecommunications services of such third
parties. The Company was made a party to the suit in January 2002. The Company
cannot reasonably estimate the amount of any potential loss.
In August 2001, the Company filed suit in the Superior Court of Troup
County, Georgia against Southern Telecom, Inc., Alabama Power Company, Georgia
Power Company, Mississippi Power Company, Gulf Power Company and related
entities from which the Company has obtained use of rights-of-way for our fiber
optic telecommunications network. The Company seeks a declaratory judgment that
the defendants are legally required to use their best efforts to defend against
any claims that the Company does not have the right to use the rights-of-way
granted to these entities and to defend, indemnify and hold the Company harmless
against all such claims. In December 2001, the Company filed for summary
judgment, but the court has not ruled on this action. The defendants have filed
a counterclaim requesting, among other items, that the Company reimburse them
for the cost of perfecting the applicable rights-of-way. The Company cannot
reasonably estimate the amount of any potential loss.
Reciprocal Interconnection Charges
In September 2000, the Company reached a settlement with BellSouth
Telecommunications, Inc. ("BellSouth") related to the Company's long-standing
dispute over BellSouth's payment of reciprocal compensation for local calls
placed by customers of BellSouth and terminated to customers of the Company,
including calls terminated to the Company's Internet service provider customers
(the "Settlement Agreement"). The Settlement Agreement provides for the
settlement of all amounts claimed by the Company to be due for past reciprocal
compensation at rates consistent with or in excess of amounts previously
recognized by the Company as operating revenue, as well as establishes rates for
all reciprocal compensation traffic on the Company's network for 2001 and 2002.
The Company recognized a one-time net benefit of approximately $14.3 million for
the year ended December 31, 2000 related to prior-period amounts of reciprocal
compensation.
The Settlement Agreement provided for a cash payment of approximately $53
million, which BellSouth made in October 2000. This payment represented payment
for reciprocal compensation amounts previously billed to BellSouth and for
estimated reciprocal compensation billings for the period from the date of the
Settlement Agreement through December 31, 2000 and for 2001. The portion of the
payment related to 2001 is subject to
F-26
reconciliation procedures. Under the initial reconciliation procedure that
occurred in July 2001, the Company repaid $5.5 million to BellSouth, which
represented the difference between the forecasted amount of reciprocal
compensation upon which the prepayment was based and the actual amount of
reciprocal compensation generated by BellSouth during the first six months of
2001 and a revised forecasted amount for the last six months of 2001. This
repayment had no effect on the Company's recorded revenues for 2001, because the
Company recognizes reciprocal compensation revenue as it is earned. The
repayment was recorded as a reduction to deferred revenue. The portion of the
prepayment related to 2001 reciprocal compensation is subject to additional
reconciliation procedures covering the last six months of 2001. The Company does
not expect that it will be required to repay additional amounts to BellSouth as
a result of the additional 2001 reconciliation procedures.
The Settlement Agreement also provided for the prepayment by BellSouth of
an additional amount to the Company in December 2001 related to expected
reciprocal compensation traffic levels in 2002. The Company received a
prepayment from BellSouth of $17.6 million in December 2001 related to this
provision of the Settlement Agreement. This additional amount is subject to
quarterly reconciliation procedures based upon the actual amount of reciprocal
compensation traffic during 2002. These procedures may require the Company to
repay a portion of the 2002 reciprocal compensation prepayment. The accompanying
consolidated balance sheets include $17.6 million in unearned revenue related to
the prepayment for 2002.
The Company agreed to limit reciprocal compensation payments by BellSouth
to $27.5 million in 2001 and $29.5 million in 2002.
11. Employee Benefit Plans
Employees of the Company participate in the Company's 401(k) defined
contribution plan. The Company offers matching of employee contributions at a
rate of 100% of up to the first 2% of employee contributions and 50% of up to
the next 4% of employee contributions. Total matching contributions made to the
Company's plan and charged to expense by the Company for the years ended
December 31, 2001, 2000 and 1999 were $2.4 million, $1.8 million and $946,000,
respectively. No discretionary contributions were made for 2001, 2000 and 1999.
12. Related Party Transactions
As described below, certain affiliates of the Company and other related
parties have provided the Company with various services, and the Company has
provided some of these entities with telecommunications and related services. In
management's opinion, the Company's transactions with the entities described
below are generally representative of arm's-length transactions.
ITC Holding Company and Affiliates
Each of the companies described below is, or during one or more of the
years ended December 31, 2001, 2000 and 1999 was, a subsidiary or affiliate of
ITC Holding Company. During the years ended December 31, 2001, 2000 and 1999,
directors of ITC Holding Company constituted a majority of the Company's Board
of Directors and certain of such directors of the Company also served as
directors or executive officers of certain of the companies described below. In
2001, as a result of its investment in the Series B preferred stock and common
stock purchase warrants (Note 7), ITC Holding Company acquired beneficial
ownership of securities of the Company representing over 20% of the total voting
power of the Company's voting securities.
The current or former subsidiaries or affiliates of ITC Holding Company
that provided the Company with various services and/or received services
provided by the Company include KNOLOGY Broadband, Inc. ("KNOLOGY"), which
provides local exchange and long-distance telephone services and cable
television services; InterCall, Inc. ("InterCall"), which provides conference
calling services; InterServ Services Corporation ("InterServ"), which provides
operator services for "800" customer service numbers and full-service marketing
research in the telecommunications industry and other industries; Powertel,
Inc., which provides cellular services;
F-27
and MindSpring Enterprises, Inc. and its successor, Earthlink, Inc.
(collectively, "Earthlink"), which is a provider of Internet access.
For the years ended December 31, 2001, 2000 and 1999, the Company received
services from these affiliated entities in the amounts of $820,000, $781,000,
and $877,000, respectively, which are reflected in selling, operations and
administration expenses in the accompanying consolidated statements of
operations. In addition, in 2001, 2000 and 1999, the Company received services
from these affiliated entities in the amount of $663,000, $780,000 and $610,000,
respectively, which are reflected in cost of services in the accompanying
consolidated statements of operations.
The Company provides operator and directory assistance services and lease
capacity on certain of its fiber routes to affiliated entities. The Company also
provides long-distance and related services to ITC Holding Company and some of
the foregoing affiliated entities and acts as an agent for InterCall and
Earthlink in contracting with major interexchange carriers to provide
origination and termination services. Under these agreements, the Company
contracts with the interexchange carrier and rebills the appropriate access
charges plus a margin to InterCall and Earthlink, so that only the margin is
included in the Company's consolidated revenues. Total affiliated revenues
related to the foregoing entities included in the accompanying consolidated
statements of operations for the years ended December 31, 2001, 2000 and 1999
were $12.1 million, $21.4 million and $15.7 million, respectively.
SCANA Corporation and Affiliates
The Company entered into the transactions with SCANA Corporation ("SCANA")
and its subsidiaries described below. Mr. Timmerman, a director and stockholder
of the Company, is also Chairman, President and Chief Executive Officer of
SCANA. SCANA is the beneficial owner of securities of the Company representing
over 10% of the total voting power of the Company's voting securities.
The Company provides retail services, including local and long distance
telephone services, data services and Internet access, to SCANA and some of
SCANA's subsidiaries. Total revenues attributable to SCANA and its subsidiaries
included in the accompanying consolidated statements of operations for the years
ended December 31, 2001, 2000 and 1999 were $1.5 million, $1.7 million and
$826,000, respectively. The Company leases office space and space for
telecommunications switching equipment at various locations in Columbia, South
Carolina from a subsidiary of SCANA. Under the lease agreements, the Company
paid $157,000, $113,000 and $83,000 for the years ended December 31, 2001, 2000
and 1999, respectively.
J. Smith Lanier & Co.
J. Smith Lanier & Co., an insurance placement company, has provided the
Company with insurance brokerage services, including the negotiation and
acquisition on the Company's behalf of various insurance policies with
third-party insurers. J. Smith Lanier & Co. also has performed risk management
services for the Company. The Company paid $767,000, $624,000 and $532,000 for
such services for the years ended December 31, 2001, 2000 and 1999,
respectively. The Company provides retail services, including local and long
distance telephone services and data and Internet services, to J. Smith Lanier &
Co. Total revenues attributable to J. Smith Lanier & Co. included in the
accompanying consolidated statements of operations for the years ended December
31, 2001, 2000 and 1999 were $307,000, $166,000 and $73,000, respectively. J.
Smith Lanier, II is the beneficial owner of more than 5% of the Company's common
stock. Mr. Lanier also is the Chairman and a significant stockholder of J. Smith
Lanier & Co. William T. Parr, a director of the Company, serves as Vice Chairman
of J. Smith Lanier & Co.
Other
The Company leases real properties from a former stockholder and entities
controlled by the former stockholder. Total rental expense related to these
leases was approximately $184,000, $203,000 and $176,000 in 2001, 2000 and 1999,
respectively. The Company is obligated to pay rentals to the former stockholder
totaling approximately
F-28
$210,000 annually from 2002 through February 2004 under leases which are
cancelable by either of the parties with 24 months' notice.
In July 1999, the Company completed the acquisition, by merger, of AvData
Systems, Inc., an affiliated entity (Note 13). Prior to the acquisition, some of
the directors and officers of the Company were directors, officers and/or
stockholders of AvData.
13. Acquisitions
Acquisition of AvData
In July 1999, the Company completed its acquisition, by merger, of AvData,
a privately-owned data network management provider in Atlanta, Georgia. As the
merger consideration, the Company issued 983,511 shares of common stock
(including 171,898 shares which were held in a two-year escrow account to
protect against specified contingencies) and options to purchase 39,915 shares
of common stock valued at $29.2 million in the aggregate. The Company issued an
additional 123,757 shares of common stock and options to purchase 6,163 shares
of common stock in March 2000 valued at $4.3 million in the aggregate under
earn-out provisions based on specified performance objectives met as of December
31, 1999.
The purchase price of AvData was allocated to the underlying assets
purchased and liabilities assumed based on their estimated fair values at the
date of acquisition. The following table summarizes the net assets purchased in
connection with this acquisition and the amount attributable to costs in excess
of net assets acquired (in thousands):
Property, plant and equipment............. $ 4,446
Working capital........................... (148)
Noncurrent liabilities.................... (63)
Intangible assets......................... 29,240
-------
Purchase price............................ $33,475
=======
Acquisition of Scientific Telecommunications, Inc.
In August 1999, the Company completed its acquisition of certain assets of
SciTel, a privately-owned telecommunications equipment provider headquartered in
Greenwood, Mississippi. The Company issued 83,117 shares of common stock valued
at $2.0 million and paid $300,000 in cash to consummate the transaction.
The purchase price of SciTel was allocated to the underlying assets
purchased and liabilities assumed based on their estimated fair values at the
date of acquisition. The following table summarizes the net assets purchased in
connection with this acquisition and the amount attributable to costs in excess
of net assets acquired (in thousands):
Property, plant and equipment ............ $ 107
Working capital .......................... 498
Noncurrent liabilities ................... 0
Intangible assets ........................ 1,695
------
Purchase price ........................... $2,300
======
Acquisition of Bay Data
In May 2000, the Company completed its acquisition, by merger, of Bay Data,
a privately-owned information systems solutions company headquartered in
Atlanta, Georgia. The Company paid cash of $2.0 million and issued 837,942
shares of common stock valued at $26.2 million to consummate the transaction. Of
such shares, 111,725 shares are being held in escrow for two years to protect
against specified contingencies.
F-29
The purchase price of Bay Data was allocated to the underlying assets
purchased and liabilities assumed based on their estimated fair values at the
date of acquisition. The following table summarizes the net assets purchased in
connection with this acquisition and the amount attributable to costs in excess
of net assets acquired (in thousands):
Property, plant and equipment ............ $ 1,807
Working capital .......................... (1,375)
Noncurrent liabilities ................... 0
Intangible assets ........................ 27,785
-------
Purchase price ........................... $28,217
=======
Pro forma results
The following pro forma information has been prepared assuming the
acquisitions of AvData and Bay Data occurred on January 1, 1999. Pro forma
results reflecting the 1999 acquisition of SciTel are not presented, as the
acquisition was not material. This information includes pro forma adjustments
related to the amortization of intangible assets resulting from the excess of
the purchase price over the fair value of the net assets acquired. The pro forma
information is presented for informational purposes only and may not be
indicative of the results of operations as they would have been if these
acquisitions had actually occurred on January 1, 1999, nor is the information
necessarily indicative of the results of operations which may occur in the
future.
2000 1999
-------- --------
(in thousands,
except share data)
Operating revenues ............................... $367,923 $265,997
Net loss ......................................... (72,004) (61,058)
Basic and diluted net loss per common share ...... $ (1.18) $ (1.07)
14. Segment Reporting
As discussed in Note 1, the Company operates in three business segments:
broadband transport services, retail services and e/\deltacom. The Company also
has a corporate segment, which has no operations. The Company evaluates segment
performance based on operating revenue, gross margin, selling, operations and
administration expenses and depreciation and amortization expense. The
accounting policies of the business segments are the same as those described in
the summary of significant accounting policies (Note 2). All intercompany
transactions between segments have been eliminated. Summarized financial data by
business segment as of and for the years ended December 31, 2001, 2000 and 1999
are as follows (in thousands):
2001
------------------------------------------------------------
Broadband
Transport Retail e/\deltacom Corporate
Segment Segment Segment Segment Consolidated
------------------------------------------------------------
Operating revenues ...................... $ 95,034 $305,074 $15,231 $ -- $ 415,339
Gross margin ............................ 83,831 139,682 4,042 -- 227,555
Selling, operations and administration... 33,979 125,293 29,440 -- 188,712
Depreciation and amortization ........... 49,091 60,476 9,289 82 118,938
Special charges ......................... 55 29,358 45,024 -- 74,437
Other income (expense), net ............. 1,434
Interest expense ........................ (58,833)
---------
Loss before income taxes and
extraordinary item .................... $(211,931)
=========
Identifiable assets ..................... $347,729 $425,912 $93,593 $11,098 $ 878,332
======== ======== ======= ======= =========
Capital expenditures, net ............... $ 44,286 $ 61,190 $56,489 $ -- $ 161,965
======== ======== ======= ======= =========
2000
------------------------------------------------------------
Broadband
Transport Retail e/\deltacom Corporate
Segment Segment Segment Segment Consolidated
------------------------------------------------------------
Operating revenues ...................... $ 83,336 $269,947 $ 10,365 $ -- $ 363,648
F-30
2000
------------------------------------------------------------
Broadband
Transport Retail e/\deltacom Corporate
Segment Segment Segment Segment Consolidated
------------------------------------------------------------
Gross margin ............................ 73,949 131,097 3,602 -- 208,648
Selling, operations and administration... 32,986 101,743 16,321 -- 151,050
Depreciation and amortization ........... 37,930 45,164 3,343 82 86,519
Other income (expense), net ............. 14,337
Interest expense ........................ (55,482)
----------
Loss before income taxes and
extraordinary item .................... $ (70,066)
==========
Identifiable assets ..................... $457,637 $453,381 $101,630 $35,878 $1,048,526
======== ======== ======== ======= ==========
Capital expenditures, net ............... $121,588 $131,120 $ 57,123 $ -- $ 309,831
======== ======== ======== ======= ==========
1999
------------------------------------------------------------
Broadband
Transport Retail e/\deltacom Corporate
Segment Segment Segment Segment Consolidated
------------------------------------------------------------
Operating revenues ...................... $ 72,853 $171,991 $-- $ -- $244,844
Gross margin ............................ 62,082 64,041 -- -- 126,123
Selling, operations and administration... 24,151 72,703 -- -- 96,854
Depreciation and amortization ........... 28,857 24,871 -- 82 53,810
Other income (expense), net ............. 14,949
Interest expense ........................ (45,293)
--------
Loss before income taxes and
extraordinary item .................... $(54,885)
========
Identifiable assets ..................... $386,820 $334,368 $-- $86,410 $807,598
======== ======== === ======= ========
Capital expenditures, net ............... $ 66,806 $ 98,734 $-- $ -- $165,540
======== ======== === ======= ========
15. Quarterly Financial Data (Unaudited)
The following table has been prepared from the financial records of the
Company, without audit, and reflects all adjustments that are, in the opinion of
management, necessary for a fair presentation of the results of operations for
the interim periods presented (in thousands, except per share amounts). The sum
of the per share amounts does not equal the annual amounts because of the
changes in the weighted-average number of shares outstanding during the year.
2001 1st Qtr (a) 2nd Qtr 3rd Qtr 4th Qtr (b) Total
---- ----------- -------- --------- ----------- ---------
Operating revenues ........................... $102,207 $106,034 $ 102,482 $104,616 $ 415,339
Gross margin ................................. 58,769 59,938 53,418 55,430 227,555
Net loss applicable to common stockholders ... (29,820) (31,103) (119,942) (34,779) (215,644)
Basic and diluted net loss per common share .. (0.48) (0.50) (1.92) (0.56) (3.46)
2000 1st Qtr 2nd Qtr (a) 3rd Qtr (a) 4th Qtr (a)(b) Total
- ------ -------- ----------- ----------- -------------- --------
Operating revenues ........................... $ 75,707 $ 86,411 $102,875 $ 98,655 $363,648
Gross margin ................................. 41,071 48,492 63,540 55,545 208,648
Net loss ..................................... (15,847) (18,358) (10,731) (25,939) (70,875)
Basic and diluted net loss per common share .. (0.27) (0.30) (0.17) (0.42) (1.16)
(a) The Company recognized one time net benefits for interconnection agreement
settlements of approximately $1.5 million for the first quarter of 2001 and
$2.5 million, $11.8 million and $1.8 million for the second, third and
fourth quarters of 2000, respectively.
(b) The Company's weighted average outstanding shares for the fourth quarter of
2001 and 2000 was 62,364,768 and 61,611,576, respectively.
F-31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of ITC/\DELTACOM, INC.
and SUBSIDIARIES included in this Form 10-K and have issued our report thereon
dated February 15, 2002. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in the index is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/S/ Arthur Andersen LLP
Atlanta, Georgia
February 15, 2002
S-1
ITC/\DELTACOM, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFICATION ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(In thousands)
Balance at Balance
Beginning at End of
of Period Additions Deduction Period
---------- --------------------------- --------- ---------
Charged to Charged to
Description: Income Other Accounts
- ------------ ---------- --------------
Provision for uncollectible accounts
1999..................................... 1,260 753 494 (1) 983 (2) 1,524
2000..................................... 1,524 3,009 0 1,530 (2) 3,003
2001..................................... 3,003 5,230 0 2,544 (2) 5,689
Valuation allowance for deferred tax assets
1999..................................... 8,695 19,803 2,689 (3) 0 31,187
2000..................................... 31,187 17,176 8,999 (3) 0 57,362
2001..................................... 57,362 55,203 2,275 (3) 0 114,840
(1) Represents a purchase reserve related to the acquisition of AvData Systems,
Inc.
(2) Represents the write-off of accounts considered to be uncollectible, less
recoveries of amounts previously written off.
(3) Represents the increase in the valuation allowance related to stock option
compensation deductible for income tax purposes, but not for financial
accounting purposes, and charged to additional paid-in capital, net of a
full valuation allowance.
S-2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, as of the 1st day of
April 2002.
ITC/\DELTACOM, INC.
By: /s/ Larry F. Williams
----------------------------------------
Larry F. Williams
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
Signature Title Date
- --------------------------------- --------------------------------------------- -------------
/s/ Larry F. Williams Chairman and Chief Executive Officer April 1, 2002
- --------------------------------- (Principal Executive Officer)
Larry F. Williams
/s/ Andrew M. Walker President, Chief Operating Officer and April 1, 2002
- --------------------------------- Director
Andrew M. Walker
/s/ Douglas A. Shumate Senior Vice President-Chief Financial Officer April 1, 2002
- --------------------------------- (Principal Financial Officer and Principal
Douglas A. Shumate Accounting Officer)
/s/ Campbell B. Lanier, III Vice Chairman April 1, 2002
- ---------------------------------
Campbell B. Lanier, III
/s/ James H. Black, Jr. Director April 1, 2002
- ---------------------------------
James H. Black, Jr.
/s/ Donald W. Burton Director April 1, 2002
- ---------------------------------
Donald W. Burton
/s/ Robert A. Dolson Director April 1, 2002
- ---------------------------------
Robert A. Dolson
/s/ James V. Martin Director April 1, 2002
- ---------------------------------
James V. Martin
/s/ R. Gerald McCarley Director April 1, 2002
- ---------------------------------
R. Gerald McCarley
Signature Title Date
- --------------------------------- --------------------------------------------- -------------
/s/ William T. Parr Director April 1, 2002
- ---------------------------------
William T. Parr
/s/ William H. Scott, III Director April 1, 2002
- ---------------------------------
William H. Scott, III
/s/ William B. Timmerman Director April 1, 2002
- ---------------------------------
William B. Timmerman
EXHIBIT INDEX
Exhibit
Number Exhibit Description
- ------- -------------------
3.1 Restated Certificate of Incorporation of ITC/\DeltaCom, Inc.(including
the Certificate of Designations of the Powers, Preferences and
Relative, Participating or Other Rights, and the Qualifications,
Limitations or Restrictions Thereof, of Series A Convertible Preferred
Stock, the Certificate of Designation of the Powers, Preferences and
Relative, Participating, Optional and Other Special Rights of Series
B-1 Cumulative Convertible Preferred Stock and Qualifications,
Limitations and Restrictions Thereof and the Certificate of
Designation of the Powers, Preferences and Relative, Participating,
Optional and Other Special Rights of Series B-2 Cumulative Convertible
Preferred Stock and Qualifications, Limitations and Restrictions
Thereof). Filed as Exhibit 3.1 to Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001 and incorporated herein by
reference.
3.2 Amended and Restated Bylaws of ITC/\DeltaCom, Inc. Filed herewith.
4.1 Specimen representing the Common Stock of ITC/\DeltaCom, Inc. Filed as
Exhibit 4.1 to Registration Statement on Form S-1, as amended (File
No. 333-36683) ( "Form S-1 "), and incorporated herein by reference.
4.2 Specimen representing the Series B-1 Cumulative Convertible Preferred
Stock, par value $0.01 per share, of ITC/\DeltaCom, Inc. Filed as
Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001 and incorporated herein by reference.
4.3 Specimen representing the Series B-2 Cumulative Convertible Preferred
Stock, par value $0.01 per share, of ITC/\DeltaCom, Inc. Filed as
Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 and incorporated herein by reference.
10.1 Capacity Agreement dated as of February 1, 1997 between Interstate
FiberNet, Inc. and Entergy Technology Company. Filed as Exhibit 10.1
to Registration Statement on Form S-4, as amended (File No. 333-31361)
(the "1997 Form S-4 "), and incorporated herein by reference.
10.2 License Agreement dated February 1, 1997 between Interstate FiberNet,
Inc. and Metropolitan Atlanta Rapid Transit Authority. Filed as
Exhibit 10.2 to 1997 Form S-4 and incorporated herein by reference.
10.3.1 Master Capacity Lease dated July 22, 1996 between Interstate FiberNet,
Inc. and InterCel PCS Services, Inc. Filed as Exhibit 10.8 to 1997
Form S-4 and incorporated herein by reference.
10.3.2 First Amendment to Master Capacity Lease dated as of August 22, 1996
between Interstate FiberNet, Inc. and InterCel PCS Services, Inc.
Filed as Exhibit 10.9 to 1997 Form S-4 and incorporated herein by
reference.
10.4 Term Agreement dated as of August 11, 1994 between Gulf States
FiberNet and Illinois Central Railroad Company. Filed as Exhibit 10.14
to 1997 Form S-4 and incorporated herein by reference.
10.5.1 Revised and Restated Fiber Optic Facilities and Services Agreement
dated as of June 9, 1995 among Southern Development and Investment
Group, Inc., on behalf of itself and as agent for Alabama Power
Company, Georgia Power Company, Gulf Power Company, Mississippi Power
Company, Savannah Electric and Power Company, Southern Electric
Generating Company and Southern Company Services, Inc. and MPX
Systems, Inc., which was assigned in part by MPX Systems, Inc. to Gulf
States FiberNet pursuant to an Assignment dated as of July 25, 1995.
Filed as Exhibit 10.15 to 1997 Form S-4 and incorporated herein by
reference.
10.5.2 Release, Waiver, and Assumption Agreement, dated as of December 31,
1997, between Southern Development Investment Group, Inc., on behalf
of itself and as agent for Alabama Power Company, Georgia Power
Company, Gulf Power Company, Mississippi Power Company, Savannah
Electric and Power Company, Southern Electric Generating Company and
Southern Company Services, Inc. and Interstate FiberNet, Inc. and Gulf
States Transmission Systems, Inc. Filed as Exhibit 10.15.1 to 1997
Form 10-K and incorporated herein by reference.
Exhibit
Number Exhibit Description
- ------- -------------------
10.5.3 Amendment to the Revised and Restated Fiber Optic Facilities and
Services Agreement, dated as of January 1, 1998, by and among Southern
Company Energy Solutions, Inc. (f/k/a Southern Development Group,
Inc.), on behalf of itself and as agent for Alabama Power Company,
Georgia Power Company, Gulf Power Company, Mississippi Power Company,
Savannah Electric and Power Company, Southern Electric Generating
Company and Southern Company Services, Inc. and Interstate FiberNet,
Inc. Filed as Exhibit 10.15.2 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (the "September 1998 Form 10-Q ") and
incorporated herein by reference.
10.5.4 First Amendment to Revised and Restated Fiber Optic Facilities and
Services Agreement dated as of July 24, 1995 between Southern
Development and Investment Group, Inc. on behalf of itself and as
agent for others and MPX Systems, Inc. Filed as Exhibit 10.16 to 1997
Form S-4 and incorporated herein by reference.
10.5.5 Partial Assignment and Assumption of Revised and Restated Fiber Optic
Facilities and Services Agreement dated July 25, 1995 between MPX
Systems, Inc. and Gulf States FiberNet. Filed as Exhibit 10.17 to 1997
Form S-4 and incorporated herein by reference.
+10.5.6 Amendment to Revised and Restated Fiber Optic Facilities and Services
Agreement, dated July 15, 1997, by and among Southern Development and
Investment Group, Inc., on behalf of itself and its agent for Alabama
Power Company, Georgia Power Company, Gulf Power Company, Mississippi
Power Company, Savannah Electric and Power Company, Southern Electric
Generating Company and Southern Company Services, Inc. (collectively
"SES"), ITC Transmission Systems, Inc. (as managing partner of
Interstate Fibernet) and Gulf States Transmission Systems, Inc. Filed
as Exhibit 10.17.1 to 1997 Form S-4 and incorporated herein by
reference.
10.5.7 Consent for Assignment of Interest dated February 20, 1997 among SCANA
Communications, Inc., Gulf States FiberNet, Gulf States Transmission
Systems, Inc. and Southern Development and Investment Groups, Inc.
Filed as Exhibit 10.18 to 1997 Form S-4 and incorporated herein by
reference.
10.5.8 Second Partial Assignment and Assumption of Revised and Restated Fiber
Optic Facilities and Services Agreement dated March 27, 1997 between
SCANA Communications, Inc. and ITC Holding Company, Inc. Filed as
Exhibit 10.19 to 1997 Form S-4 and incorporated herein by reference.
+10.5.9 Amendment, effective as of August 1, 2000, between Southern Telecom,
Inc., on behalf of itself and as agent for the other parties specified
therein, and Interstate FiberNet, Inc. to the Revised and Restated
Fiber Optics Facilities and Services Agreement made as of June 9,
1995. Filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 and incorporated herein by reference.
10.6.1 Fiber System Lease Agreement dated January 30, 1996 between CSW
Communications, Inc. and Gulf States FiberNet. Filed as Exhibit 10.20
to 1997 Form S-4 and incorporated herein by reference.
10.6.2 Consent for Acquisition and Assignment dated January 13, 1997 between
CSW Communications, Inc. and Gulf States FiberNet. Filed as Exhibit
10.21 to 1997 Form S-4 and incorporated herein by reference.
Exhibit
Number Exhibit Description
- ------- -------------------
10.7 Network Operating Agreement dated March 25, 1996 among Gulf States
FiberNet, TriNet, Inc., Hart Communications, Inc. and SCANA
Communications, Inc. (f/k/a MPX Systems, Inc.). Filed as Exhibit 10.25
to 1997 Form S-4 and incorporated herein by reference.
10.8.1 Agreement for the Provision of Fiber Optic Facilities and Services
dated March 29, 1990 between Alabama Power Company and Southern
Interexchange Facilities, Inc. Filed as Exhibit 10.26 to 1997 Form S-4
and incorporated herein by reference.
10.8.2 Amendment to the Agreement for Provision of Fiber Optic Facilities and
Services dated March 29, 1990 between Alabama Power Company and
Southern Interexchange Facilities, Inc. Filed as Exhibit 10.27 to 1997
Form S-4 and incorporated herein by reference.
10.8.3 First Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated March 22, 1991 between Alabama Power
Company and Southern Interexchange Facilities, Inc. Filed as Exhibit
10.28 to 1997 Form S-4 and incorporated herein by reference.
10.8.4 Second Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated December 1, 1991 between Alabama Power
Company and Southern Interexchange Facilities, Inc. Filed as Exhibit
10.29 to 1997 Form S-4 and incorporated herein by reference.
10.8.5 Third Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated September 23, 1992 between Alabama Power
Company and Southern Interexchange Facilities, Inc. Filed as Exhibit
10.30 to 1997 Form S-4 and incorporated herein by reference.
10.8.6 Fourth Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated January 1, 1994 between Alabama Power
Company and Southern Interexchange Facilities, Inc. Filed as Exhibit
10.31 to 1997 Form S-4 and incorporated herein by reference.
10.9.1 Agreement dated March 6, 1990 between Tennessee Valley Authority and
Consolidated Communications Corporation (predecessor to DeltaCom,
Inc.). Filed as Exhibit 10.32 to 1997 Form S-4 and incorporated herein
by reference.
10.9.2 Supplement Agreement; Leased Fiber Pathways, dated as of September 26,
1997, by and between Tennessee Valley Authority and DeltaCom, Inc.
Filed as Exhibit 10.32.1 to 1997 Form 10-K and incorporated herein by
reference.
10.10 Master Equipment Lease Agreement dated October 30, 1995 between AT&T
Systems Leasing Co. and DeltaCom, Inc. Filed as Exhibit 10.36 to 1997
Form S-4 and incorporated herein by reference.
10.11 Agreement dated January 14, 1997 between DeltaCom, Inc. and SCANA
Communications, Inc., for switch location in Columbia, South Carolina.
Filed as Exhibit 10.41 to 1997 Form S-4 and incorporated herein by
reference.
+10.12.1 Network Products Purchase Agreement No. ITC 2000NPPA between Nortel
Networks Inc. and Interstate FiberNet, Inc. and its subsidiary
ITC/\DeltaCom Communications, Inc., effective as of November 8, 2000
(the "Nortel Purchase Agreement"). Filed as Exhibit 10.18 to Annual
Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference.
Exhibit
Number Exhibit Description
- ------- -------------------
++10.12.2 Schedule D: Data and Internet Products: Ethernet Port Commitment and
Services Payment Program to the Nortel Purchase Agreement. Filed
herewith.
+10.12.3 Professional Services Attachment, Exhibit P, to the Nortel Purchase
Agreement. Filed as Exhibit 10.8.2 to Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 and incorporated herein by
reference.
+10.12.4 Product Attachment, Exhibit Q, eBusiness Solutions Products, to the
Nortel Purchase Agreement. Filed as Exhibit 10.8.3 to Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001 and incorporated
herein by reference.
+10.13 Fiber Optic Facilities Agreement, dated November 15, 1996, by and
between Interstate FiberNet and Florida Power Corporation. Filed as
Exhibit 10.45 to 1997 Form S-4 and incorporated herein by reference.
+10.14.1 Fiber Optic Capacity Marketing and Operating Agreement, dated March
21, 1996, by and between Interstate FiberNet and Florida Power & Light
Company. Filed as Exhibit 10.46 to 1997 Form S-4 and incorporated
herein by reference.
+10.14.2 Addendum to Fiber Optic Capacity Marketing and Operating Agreement,
dated July 10, 1997, by and between Interstate FiberNet and Florida
Power & Light Company. Filed as Exhibit 10.47 to 1997 Form S-4 and
incorporated herein by reference.
+10.15 Master Service Agreement, dated May 6, 1996, by and between Interstate
FiberNet and MCI Telecommunications Corporation. Filed as Exhibit
10.48 to 1997 Form S-4 and incorporated herein by reference.
+10.16 Telecommunications System Maintenance Agreement, dated as of January
26, 1995, by and between Interstate FiberNet and Sprint Communications
Company L.P. Filed as Exhibit 10.49 to 1997 Form S-4 and incorporated
herein by reference.
+10.17 Sprint Communications Company Facilities and Services Agreement, dated
January 26, 1995, by and between Interstate FiberNet and Sprint
Communications Company L.P. Filed as Exhibit 10.50 to 1997 Form S-4
and incorporated herein by reference.
+10.18 Fiber Optic Facility Lease Agreement, dated as of January 31, 1997, by
and between Interstate FiberNet, Inc. and Southern Telecom 1, Inc.
Filed as Exhibit 10.51 to 1997 Form S-4 and incorporated herein by
reference.
10.19 First Assignment and Assumption of Fiber Optic Facility Lease
Agreement, dated February 1, 1997, by and between Interstate FiberNet,
Inc. and Gulf States FiberNet. Filed as Exhibit 10.52 to 1997 Form S-4
and incorporated herein by reference.
+10.20.1 Telecommunications System Agreement, dated January 26, 1995, by and
between Interstate FiberNet, Inc. and Sprint Communications Company
L.P. Filed as Exhibit 10.53 to 1997 Form S- 4 and incorporated herein
by reference.
10.20.2 Amendment to Telecommunications System Agreement, dated July 25, 1995,
by and between Gulf States FiberNet and Sprint Communications Company
L.P. Filed as Exhibit 10.54 to 1997 Form S-4 and incorporated herein
by reference.
Exhibit
Number Exhibit Description
- ------- -------------------
+10.20.3 Amendment No. 2 to Telecommunications System Agreement, dated August
8, 1996, by and between Gulf States FiberNet and Sprint Communications
Company L.P. Filed as Exhibit 10.55 to 1997 Form S-4 and incorporated
herein by reference.
+10.20.4 Assignment of the Telecommunications System Agreement, dated July 25,
1995, between Interstate FiberNet, Inc., Gulf States FiberNet and
Sprint Communications Company L.P. Filed as Exhibit 10.56 to 1997 Form
S-4 and incorporated herein by reference.
+10.20.5 Assignment of the Telecommunications System Agreement, dated February
27, 1997, between Sprint Communications Company L.P., Gulf States
FiberNet and Gulf States Transmission Systems, Inc. Filed as Exhibit
10.57 to 1997 Form S-4 and incorporated herein by reference.
10.21 Fixed Fee Agreement for Exchange of Use and Maintenance of Six (6)
Fiber Optic Fibers with an Option of Two (2) Additional Fiber Optic
Fibers, dated July 25, 1997, by and between Interstate FiberNet, Inc.,
Gulf States Transmission Systems, Inc. and ALLTEL Telephone Services
Corporation. Filed as Exhibit 10.58 to 1997 Form S-4 and incorporated
herein by reference.
+10.22 Marketing and Operating Agreement, dated as of October 6, 1994, by and
between Interstate FiberNet, Inc. and DukeNet Communications, Inc.
Filed as Exhibit 10.74 to 1997 Form S-4 and incorporated herein by
reference.
10.23.1 Credit Agreement (the "Credit Agreement "), dated as of April 5, 2000,
among ITC/\DeltaCom, Inc., Interstate FiberNet, Inc., the subsidiary
guarantors listed on the signature pages thereto, the banks, financial
institutions and other institutional lenders listed on the signature
pages thereto as the Initial Lenders, Morgan Stanley Senior Funding,
Inc. ( "Morgan Stanley "), as administrative agent for the Lender
Parties (as defined therein), Morgan Stanley & Co. Incorporated, as
collateral agent, Bank of America Securities LLC and Morgan Stanley,
as joint lead arrangers and joint book runners, and Bank of America,
N.A., as syndication agent. Filed as Exhibit 10.1 to Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000 and incorporated
herein by reference.
10.23.2 Amendment No. 1, dated as of June 1, 2001, to the Credit Agreement.
Filed as Exhibit 10.7 to Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001 and incorporated herein by reference.
10.23.3 Amendment No. 2, dated as of June 1, 2001, to the Credit Agreement.
Filed herewith.
10.23.4 Security Agreement, dated April 5, 2000, made by Interstate FiberNet,
Inc., ITC/\DeltaCom, Inc., and the other Persons listed on the
signature pages thereof and the Additional Grantors (as defined in
Section 23(b) thereof) to Morgan Stanley & Co. Incorporated, as
collateral agent for the Secured Parties (as defined in the Credit
Agreement). Filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000 and incorporated herein by reference.
10.24.1 Indenture, dated as of June 3, 1997, between ITC/\DeltaCom, Inc. and
United States Trust Company of New York, as Trustee, relating to the
11% Senior Notes due 2007 of ITC/\DeltaCom, Inc. Filed as Exhibit 4.1
to 1997 Form S-4 and incorporated herein by reference.
10.24.2 Supplemental Indenture, dated as of October 17, 1997, between
ITC/\DeltaCom, Inc. and United States Trust Company of New York, as
Trustee. Filed as Exhibit 82.2 to Form S-1 and incorporated herein by
reference.
Exhibit
Number Exhibit Description
- ------- -------------------
10.24.3 Pledge and Security Agreement dated as of June 3, 1997 from
ITC/\DeltaCom, Inc. as Pledgor to United States Trust Company of New
York as Trustee. Filed as Exhibit 4.3 to 1997 Form S-4 and
incorporated herein by reference.
10.24.4 Form of Exchange Note (contained in Indenture filed as Exhibit
10.34.1).
10.25 Assignment and Contribution Agreement Pursuant to Pledge and Security
Agreement dated as of July 25, 1997, by and among ITC/\DeltaCom, Inc.,
Interstate FiberNet, Inc. and United States Trust Company of New York,
as Trustee filed herewith. Filed as Exhibit 4.5 to 1997 Form S-4 and
incorporated herein by reference.
+10.26.1 MCI Carrier Agreement, effective September 1, 1997, by and between MCI
Telecommunications Corporation and Associated Communications Companies
of America (ACCA). Filed as Exhibit 10.87 to Form S-1 and incorporated
herein by reference.
+10.26.2 First Amendment to the MCI Carrier Agreement, dated as of November 21,
1997, by and between MCI Telecommunications Corporation and Associated
Communication Companies of America (ACCA). Filed as Exhibit 10.87.1 to
1997 Form 10-K and incorporated herein by reference.
10.27.1 Amended and Restated ITC/\DeltaCom, Inc. 1997 Stock Option Plan. Filed
herewith.
10.27.2 Form of Stock Option Agreement under the Amended and Restated
ITC/\DeltaCom, Inc. 1997 Stock Option Plan. Filed as Exhibit 10.37.2
to Annual Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference.
10.28.1 ITC/\DeltaCom, Inc. Director Stock Option Plan. Filed as Exhibit 10.89
to Form S-1 and incorporated herein by reference.
10.28.2 Form of Non-Qualified Stock Option Agreement under the ITC/\DeltaCom,
Inc. Director Stock Option Plan. Filed as Exhibit 10.38.2 to Annual
Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference.
10.29.1 ITC Holding Company, Inc. Amended and Restated Stock Option Plan.
Filed as Exhibit 10.90 to Form S-1 and incorporated herein by
reference.
10.29.2 Amendment No. 1 to ITC Holding Company, Inc. Amended and Restated
Stock Option Plan. Filed as Exhibit 10.2 to Quarterly Report on Form
10-Q for the quarter ended June 30, 2000 and incorporated herein by
reference.
10.30.1 ITC Holding Company, Inc. Nonemployee Director Stock Option Plan.
Filed as Exhibit 10.91 to Form S-1 and incorporated herein by
reference.
10.30.2 Amendment No. 1 to ITC Holding Company, Inc. Nonemployee Director
Stock Option Plan. Filed as Exhibit 10.3 to Quarterly Report on Form
10-Q for the quarter ended June 30, 2000 and incorporated herein by
reference.
10.31 Description of ITC/\DeltaCom, Inc. Bonus Plan. Filed as Exhibit 10.92
to Form S-1 and incorporated herein by reference.
Exhibit
Number Exhibit Description
- ------- -------------------
10.32 Form of Indemnity Agreement between ITC/\DeltaCom, Inc. and certain of
its Directors and Officers. Filed as Exhibit 10.93 to Form S-1 and
incorporated herein by reference.
10.33.1 Sale and Purchase Agreement, dated as of March 11, 1997, by and
between SCANA Corporation and ITC Holding Company, Inc. Filed as
Exhibit 10.94 to Form S-1 and incorporated herein by reference.
10.33.2 First Amendment to Sale and Purchase Agreement. Among SCANA
Corporation, SCANA Communications, Inc., and ITC Holding Company,
Inc., dated as of October 16, 1997, among SCANA Corporation, SCANA
Communications, Inc., ITC Holding Company, Inc. and ITC/\DeltaCom,
Filed as Exhibit 10.95 to Form S-1 and incorporated herein by
reference.
10.34.1 Indenture dated March 3, 1998 between ITC/\DeltaCom, Inc. and United
States Trust Company of New York, as Trustee, relating to the 8 7/8%
Senior Notes due 2008 of ITC/\DeltaCom, Inc. Filed as Exhibit 4.2 to
Inc.1997 Form 10-K and incorporated herein by reference.
10.34.2 Form of Global 8 7/8% Note due 2008 (contained in Indenture filed as
Exhibit 10.44.1).
10.35.1 Indenture dated as of November 5, 1998 between ITC/\DeltaCom, Inc. and
United States Trust Company of New York, as Trustee, relating to the 9
3/4% Senior Notes due 2008 of ITC/\DeltaCom, Inc. Filed as Exhibit 4.2
to Registration Statement on Form S-4, as amended (File No. 333-71735)
(the "February 1999 Form S-4"), and incorporated herein by reference.
10.35.2 Form of Global 9 3/4% Note due 2008 (contained in Indenture filed as
Exhibit 10.45.1).
10.36.1 Registration Rights Agreement, dated as of May 12, 1999, by and among
ITC/\DeltaCom, Inc. and Morgan Stanley & Co. Incorporated, Credit
Suisse First Boston Corporation, First Union Capital Markets Corp. and
NationsBanc Montgomery Securities LLC. Filed as Exhibit 4.1 to the May
1999 Form 10-Q and incorporated herein by reference.
10.36.2 Indenture dated as of May 12, 1999, between ITC/\DeltaCom, Inc.
ITC/\DeltaCom, Inc. and U.S. Trust, Company of Texas, N.A., a national
banking corporation, as trustee. Filed as Exhibit 4.1 to the May 1999
Form 10-Q and incorporated herein by reference.
10.36.3 Form of Global Note relating to the 4 1/2% Convertible Subordinated
Notes due 2006 (contained in Indenture filed as Exhibit 10.46.2).
10.36.4 Form of Registered 4 1/2% Convertible Subordinated Note due 2006.
Filed as Exhibit 4.5 to Registration Statement on Form S-3, as amended
(File No. 333-84661), and incorporated herein by reference.
10.37.1 Master Lease Agreement, dated as of December 29, 2000, between NTFC
Capital Corporation, as Lessor, and ITC/\DeltaCom Communications, Inc.
and Interstate FiberNet, Inc., as Lessees (the "Master Lease Agreement
"). Filed as Exhibit 10.47.1 to Annual Report on Form 10-K for the
year ended December 31, 2000 and incorporated herein by reference.
10.37.2 Form of Equipment Schedule to the Master Lease Agreement. Filed as
Exhibit 10.47.2 to Annual Report on Form 10-K for the year ended
December 31, 2000 and incorporated herein by reference.
Exhibit
Number Exhibit Description
- ------- -------------------
10.37.3 Guaranty, dated as of December 29, 2000, between Interstate FiberNet,
Inc. and NTFC Capital Corporation. Filed as Exhibit 10.47.3 to Annual
Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference.
10.37.4 Amendment No. 1, dated as of June 18, 2001, to the Financial Covenants
and Reporting Requirements Annex to the Master Lease Agreement. Filed
as Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001 and incorporated herein by reference.
10.37.5 Amendment No. 2, dated as of June 18, 2001, to the Financial Covenants
and Reporting Requirements Annex to the Master Lease Agreement. Filed
herewith.
10.38 Interconnection Agreement, dated February 9, 2001, by and between
BellSouth Telecommunications, Inc. and ITC/\DeltaCom Communications,
Inc. d/b/a/ ITC/\DeltaCom. Filed as Exhibit 10.48 to Annual Report on
Form 10-K for the year ended December 31, 2000 and incorporated herein
by reference.
10.39.1 Interconnection Agreement, dated as of June 5, 2000, by and between
BellSouth Telecommunications, Inc. and ITC/\DeltaCom Communications,
Inc. d/b/a/ ITC/\DeltaCom. Filed as Exhibit 10.49.1 to Annual Report
on Form 10-K for the year ended December 31, 2000 and incorporated
herein by reference.
10.39.2 First Amendment to the Interconnection Agreement by and between
BellSouth Telecommunications, Inc. and ITC/\DeltaCom Communications,
Inc., dated as of August 21, 2000, between ITC/\DeltaCom
Communications, Inc. and BellSouth Telecommunications, Inc. Filed as
Exhibit 10.49.2 to Annual Report on Form 10-K for the year ended
December 31, 2000 and incorporated herein by reference.
10.39.3 Amendment to the Interconnection Agreement by and between BellSouth
Telecommunications, Inc. and ITC/\DeltaCom Communications, Inc., dated
as of February 14, 2001, by and between ITC/\DeltaCom Communications,
Inc. and BellSouth Telecommunications, Inc. Filed as Exhibit 10.49.3
to Annual Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference.
10.40 Interconnection Agreement, effective as of July 1, 1999, by and
between ITC/\DeltaCom Communications, Inc. and BellSouth
Telecommunications, Inc. Filed as Exhibit 10.50 to Annual Report on
Form 10-K for the year ended December 31, 2000 and incorporated herein
by reference.
10.41.1 Investment Agreement, dated as of February 27, 2001, between
ITC/\DeltaCom, Inc. and ITC Holding Company, Inc. Filed as Exhibit
10.1 to Report on Form 10-Q for the period ended March 31, 2001, and
incorporated herein by reference.
10.41.2 Amendment No. 1 to Investment Agreement, dated as of May 29, 2001, by
and among ITC/\DeltaCom, Inc., ITC Holding Company, Inc., SCANA
Corporation and HBK Master Fund L.P. Filed as Exhibit 10.1 to
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and
incorporated herein by reference.
10.41.3 Registration Rights Agreement, dated as of June 20, 2001, among
ITC/\DeltaCom, Inc., ITC Holding Company, Inc., SCANA Corporation, HBK
Master Fund L.P. and the other Holders from time to time thereunder.
Filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001 and incorporated herein by reference.
Exhibit
Number Exhibit Description
- ------- -------------------
10.41.4 ITC/\DeltaCom, Inc. Common Stock Purchase Warrant, dated June 20,
2001, issued to ITC Telecom Ventures, Inc. Filed as Exhibit 10.3 to
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and
incorporated herein by reference.
10.41.5 ITC/\DeltaCom, Inc. Common Stock Purchase Warrant, dated June 20,
2001, issued to SCANA Corporation. Filed as Exhibit 10.4 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001 and
incorporated herein by reference.
10.41.6 ITC/\DeltaCom, Inc. Common Stock Purchase Warrant, dated June 20,
2001, issued to HBK Master Fund L.P. Filed as Exhibit 10.5 to
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and
incorporated herein by reference.
10.41.7 ITC/\DeltaCom, Inc. Common Stock Purchase Warrant, dated September 5,
2001, issued to ITC Telecom Ventures, Inc. Filed as Exhibit 10.1 to
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
and incorporated herein by reference.
10.41.8 ITC/\DeltaCom, Inc. Common Stock Purchase Warrant, dated September 5,
2001, issued to SCANA Corporation. Filed as Exhibit 10.2 to Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001 and
incorporated herein by reference.
10.41.9 ITC/\DeltaCom, Inc. Common Stock Purchase Warrant, dated September 5,
2001, issued to HBK Master Fund L.P. Filed as Exhibit 10.3 to
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
and incorporated herein by reference.
10.42.1 Master Lease Agreement, dated as of December 31, 2001, between General
Electric Capital Corporation, as Lessor, and ITC/\DeltaCom
Communications, Inc., as Lessee (the "GECC Master Lease Agreement").
Filed herewith.
10.42.2 Form of Equipment Schedule to the GECC Master Lease Agreement. Filed
herewith.
12.1 Statement regarding Computation of Ratios. Filed herewith.
21.1 Subsidiaries of ITC/\DeltaCom, Inc. Filed herewith.
23.1 Consent of Arthur Andersen LLP. Filed herewith.
99.1 Representation letter concerning Arthur Andersen LLP. Filed herewith.
- ----------
+ Confidential treatment has been granted for this exhibit. The copy filed as an
exhibit omits the information subject to the confidential treatment request.
++ Certain confidential portions of this exhibit were omitted by means of
redacting a portion of the text. This exhibit has been filed separately with the
Secretary of the SEC without such text pursuant to our Application Requesting
Confidential Treatment under Rule 24b-2 under the Securities Exchange Act.