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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-23253
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 Number)
1791 O.G. Skinner Drive, West Point, GA 31833
- -------------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 385-8000
----------------------------
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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Outstanding at August 5, 2002
-----------------------------
Common Stock, $.01 par value 62,364,768 shares
ITC/\DeltaCom, Inc.
Index
-----
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2002 (unaudited) and December 31, 2001 ................. 3
Unaudited Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2002 and 2001 ............... 5
Unaudited Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001 ......................... 6
Notes to Unaudited Condensed Consolidated Financial
Statements ...................................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...... 36
Part II. Other Information
Item 1. Legal Proceedings ............................................... 37
Item 3. Defaults Upon Senior Securities ................................. 38
Item 6. Exhibits and Reports on Form 8-K ................................ 39
Signatures ........................................................................... 40
2
Part I
Financial Information
Item 1. Financial Statements
ITC^DELTACOM, INC. AND SUBSIDIARIES
(Debtor-in-Possession)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2002 2001
---------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 20,703 $ 41,043
Accounts receivable:
Customer, net of allowance for uncollectible accounts of
$5,838 and $5,689 in 2002 and 2001, respectively .......... 59,005 62,099
Affiliate .................................................... 5,213 4,889
Inventory ....................................................... 5,478 6,301
Prepaid expenses ................................................ 6,083 4,193
-------------- --------------
Total current assets ................................... 96,482 118,525
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net .............................. 645,123 691,037
-------------- --------------
OTHER LONG-TERM ASSETS:
Intangible assets, net of accumulated amortization of
$15,009 and $14,596 in 2002 and 2001, respectively ........... 55,533 55,946
Other long-term assets .......................................... 11,618 12,824
-------------- --------------
Total other long-term assets ..................... 67,151 68,770
-------------- --------------
Total assets ........................................... $ 808,756 $ 878,332
============== ==============
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
ITC/\DELTACOM, INC. AND SUBSIDIARIES
(Debtor-in-Possession)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2002 2001
------------------ ------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE:
Current Liabilities:
Accounts payable:
Trade ........................................................ $ 36,961 $ 38,779
Construction ................................................. 3,611 8,613
Accrued interest ................................................ 1,059 8,844
Accrued compensation ............................................ 5,085 6,554
Unearned revenue ................................................ 24,533 35,851
Other accrued liabilities ....................................... 17,611 19,914
Current portion of long-term debt and capital lease
obligations .................................................. 11,172 6,711
Long-term debt classified as current (Note 4) ................... 185,758 --
----------------- ------------------
Total current liabilities .............................. 285,790 125,266
----------------- ------------------
Long-term Debt and Capital Lease Obligations .................... 10,799 717,163
----------------- ------------------
LIABILITIES SUBJECT TO COMPROMISE ............................... 538,056 --
----------------- ------------------
CONVERTIBLE REDEEMABLE PREFERRED STOCK (Returned
to equity on June 25, 2002) (Note 5):
Series B-1; par value $.01; 67,000 shares authorized; 30,673
shares issued and outstanding in 2001; ....................... -- 24,121
Series B-2; par value $.01; 90,000 shares authorized; 40,000
shares issued and outstanding in 2001; ....................... -- 33,712
----------------- ------------------
Total convertible redeemable preferred stock .......... -- 57,833
----------------- ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 5,000,000 shares authorized;
Series A - liquidation preference of $7.40; 1,480,771 shares
issued and outstanding .................................... 15 15
Convertible Redeemable Preferred Stock; $.01 par value (Note 5);
Series B-1; 67,000 authorized; 31,905 shares
issued and outstanding in 2002; ........................... 26,708 --
Series B-2; 90,000 authorized; 41,837 shares
issued and outstanding in 2002; ........................... 36,983 --
Common Stock, $.01 par value; 200,000,000 shares authorized;
62,364,768 shares issued and outstanding ..................... 624 624
Additional paid-in-capital ...................................... 356,839 356,839
Warrants outstanding ............................................ 11,441 11,441
Accumulated deficit ............................................. (458,499) (390,849)
----------------- ------------------
Total stockholders' equity ............................. (25,889) (21,930)
----------------- ------------------
Total liabilities and stockholders' equity ............. $ 808,756 $ 878,332
================= ==================
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
4
ITC/\DELTACOM, INC. AND SUBSIDIARIES
(Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share data)
Three Months Ended June 30, Six Months Ended June 30,
------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ -------------
Operating revenues ............................... $ 108,611 $ 106,034 $ 217,959 $ 208,241
Cost of services (exclusive of items shown
separately below) ............................. 50,247 46,096 101,236 89,534
------------- ------------ ------------- -------------
Gross margin ..................................... 58,364 59,938 116,723 118,707
------------- ------------ ------------- -------------
Operating expenses:
Selling, operations and administration ........ 40,083 47,522 82,339 94,232
Depreciation and amortization ................. 31,032 29,517 63,015 57,517
Special charges ............................... 2,065 -- 2,065 --
------------- ------------ ------------ --------------
Total operating expenses ................... 73,180 77,039 147,419 151,749
------------- ------------ ------------ --------------
Operating loss ................................... (14,816) (17,101) (30,696) (33,042)
------------- ------------- ------------ --------------
Other income (expense):
Interest expense (contractual interest was
$15.1 million and $30.1 million for the three
and six months ended June 30, 2002) ......... (14,474) (14,280) (29,480) (29,183)
Interest income ............................... 104 526 227 1,803
Other expense, net ............................ (291) (40) (274) (293)
------------- ------------ ------------- --------------
Total other expense, net ................... (14,661) (13,794) (29,527) (27,673)
------------- ------------ ------------- --------------
Loss before reorganization items and
income taxes .................................. (29,477) (30,895) (60,223) (60,715)
Reorganization items (Note 2) .................... 3,217 -- 3,217 --
------------- ------------ ------------- --------------
Loss before income taxes ......................... (32,694) (30,895) (63,440) (60,715)
Income tax expense ............................... -- -- -- --
------------- ------------ ------------- --------------
Net loss ......................................... (32,694) (30,895) (63,440) (60,715)
Preferred stock dividends and accretion
(contractual dividend was $1.5 million and
$2.9 million for the three and six months ended
June 30, 2002, respectively) (Note 5) ......... 2,060 208 4,210 208
------------- ------------ ------------- --------------
Net loss applicable to common
stockholders ............................... $ (34,754) $ (31,103) $ (67,650) $ (60,923)
============= ============ ============= ==============
Basic and diluted net loss per common share ...... $ (0.56) $ (0.50) $ (1.08) $ (0.98)
============= ============ ============= ==============
Basic and diluted weighted average common
shares outstanding ............................ 62,364,768 62,275,846 62,364,768 62,218,173
============= ============ ============= =============
The accompanying notes are an integral part of these
condensed consolidated statements.
5
ITC/\DELTACOM, INC. AND SUBSIDIARIES
(Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended June 30,
-------------------------------------------
2002 2001
---------------- ---------------
Cash flows from operating activities:
Net loss ........................................................ $ (63,440) $ (60,715)
---------------- ----------------
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization ................................. 63,015 57,517
Special charges ............................................... 223 --
Amortization of bond issue costs .............................. 1,165 1,130
Changes in current operating assets and liabilities:
Accounts receivable, net .................................... 2,770 (1,749)
Inventory ................................................... 823 (757)
Prepaid expenses ............................................ (1,890) 123
Accounts payable ............................................ (1,818) 4,305
Accrued interest ............................................ 15,361 (230)
Unearned revenue ............................................ (11,318) (14,347)
Accrued compensation and other accrued liabilities .......... (2,124) 732
---------------- ----------------
Total adjustments ..................................... 66,207 46,724
---------------- ----------------
Net cash provided by (used in) operating activities ... 2,767 (13,991)
---------------- ----------------
Cash flows from investing activities:
Capital expenditures ............................................ (16,876) (77,938)
Change in accrued construction costs ............................ (5,002) (19,549)
Release of restricted assets .................................... -- 6,892
Other ........................................................... 11 171
---------------- ----------------
Net cash used in investing activities .............................. (21,867) (90,334)
---------------- ----------------
Cash flows from financing activities:
Repayments of long-term debt and capital lease obligations ...... (1,236) (578)
Proceeds from issuance of Series B-1 preferred stock and
common stock warrants, net of issuance costs ................ -- 26,795
Proceeds from exercise of common stock options .................. -- 1,100
Other ........................................................... (4) (437)
---------------- ----------------
Net cash (used in) provided by financing activities ... (1,240) 26,880
---------------- ----------------
Decrease in cash and cash equivalents .............................. (20,340) (77,445)
Cash and cash equivalents at beginning of period ................... 41,043 141,140
---------------- ----------------
Cash and cash equivalents at end of period ......................... $ 20,703 $ 63,695
================ ================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest ............................................. $ 12,950 $ 31,573
================ ===============
Cash paid (refunds received) for income taxes, net ................. $ 3 $ (1)
================ ================
Cash paid for reorganization items ................................. $ 4,222 $ --
================ ================
NONCASH TRANSACTIONS:
Capital lease obligations issued for network equipment ............. $ -- $ 4,343
================ ===============
Preferred stock dividends and accretion ............................ $ 4,210 $ 208
================ ===============
The accompanying notes are an integral part of these
condensed consolidated statements.
6
ITC^DELTACOM, INC. AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Basis of Presentation
Nature of Business
ITC^DeltaCom, Inc. ("ITC^DeltaCom" and, together with its wholly-owned
subsidiaries, the "Company") provides integrated 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 access and
colocation services and customer premise equipment sales, installation and
repair. The Company also provides colocation, Web server hosting and other
services integral to operating important business applications over the Internet
through its e^deltacom business. In connection with these services, the Company
owns, operates or manages an extensive fiber optic network, which extends
throughout ten southern states.
Segment Disclosure
Beginning in 2002, the Company has revised its segment reporting to align
its financial presentation more closely with its basic retail and wholesale
customer businesses and to reflect more accurately the trends in those customer
bases (Note 8). One segment consists of the Company's retail services business
and the second segment consists of its broadband transport services business.
Beginning in 2002, results of the Company's e^deltacom business are no longer
being reported as a separate business segment, but instead are included as part
of the Company's retail services business segment.
Basis of Presentation
The accompanying interim condensed consolidated financial statements are
unaudited and have been prepared by the Company's management in accordance with
the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, all adjustments considered necessary for the fair
presentation of the unaudited condensed consolidated financial statements have
been included, and the unaudited condensed consolidated financial statements
present fairly the financial position and results of operations for the interim
periods presented. These unaudited, condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and related footnotes included in the Company's Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission on April 1, 2002.
Liquidity
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 ITC^DeltaCom, has a $160 million senior secured
credit facility with Morgan Stanley Senior Funding, Inc., Bank of America, N.A.
and other lenders, and the Company has also raised funds from sales of senior
notes, convertible subordinated notes, convertible redeemable preferred stock
and common stock
7
and is subject to operating and capital lease commitments.
To conserve liquidity for its business, ITC/\DeltaCom did not pay the
scheduled May 15, 2002 interest payments due on its 9-3/4% senior notes due 2008
and on its 4-1/2% convertible subordinated notes due 2006 or the scheduled June
1, 2002 interest payment due on its 11% senior notes due 2007. The scheduled May
15, 2002 payments totaled approximately $6.1 million on the 9-3/4% senior notes
and approximately $2.3 million on the 4-1/2% convertible subordinated notes. The
scheduled June 1, 2002 payment totaled approximately $7.2 million.
2. Chapter 11 Bankruptcy Proceedings
Beginning in the third quarter of 2001, the Company initiated a strategic
and operational restructuring intended to accelerate positive cash flow from
operations by emphasizing the Company's core retail services and reducing
operating costs. In addition to de-emphasizing certain non-core services, the
key elements of this plan include reduction of the employee base, consolidation
of facilities and operations and the reduction of capital expenditures. The
Company also seeks, by eliminating a substantial portion of its existing
indebtedness, to reduce its fixed interest costs so that it is able to achieve
and maintain positive cash flow from operations beginning immediately after
completion of the planned restructuring and continuing through the current
period of uncertainty affecting the telecommunications industry and competitive
telecommunications companies.
In order to complete the Company's restructuring plan as expeditiously as
possible, with the support of holders of approximately 62% of the principal
amount of its senior notes and 74% of the principal amount of its convertible
subordinated notes, and certain of its preferred stockholders, on June 25, 2002,
ITC/\DeltaCom filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The
Company adopted the provisions of Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,"
upon commencement of these proceedings (the "Bankruptcy Proceedings"). In
accordance with SOP 90-7, liabilities subject to compromise under the Bankruptcy
Proceedings have been segregated on the condensed consolidated balance sheets.
Liabilities subject to compromise are recorded for the amounts the Company
expects to be allowed on known claims rather than estimates of the amounts for
which those claims may be settled as a result of a plan of reorganization
approved by the Bankruptcy Court. The condensed consolidated statements of
operations for the three and six months ended June 30, 2002 set forth in Note 9
separately disclose expenses related to the Bankruptcy Proceedings. Under the
Bankruptcy Code, interest on the outstanding senior notes and convertible
subordinated notes, and the preferred stock dividends on the Series B-1
preferred stock and Series B-2 preferred stock, does not accrue during the
Bankruptcy Proceedings.
On July 26, 2002, ITC/\DeltaCom filed with the Bankruptcy Court a proposed
plan of reorganization to implement the restructuring. The Company believes that
the proposed plan of reorganization filed with the Bankruptcy Court reflects the
terms of the plan of reorganization supported by the members of the unofficial
committee of noteholders. The plan is subject to approval by holders of certain
claims and equity interests in ITC/\DeltaCom and to confirmation by the
Bankruptcy Court, and is subject to possible modification during the
reorganization process.
Under the proposed plan of reorganization:
o All of ITC/\DeltaCom's outstanding senior notes, having a total principal
amount of $415 million, will be cancelled and the former holders of
those notes will receive in exchange a total of 81.5% of the common
stock of the reorganized ITC/\DeltaCom.
o All of ITC/\DeltaCom's outstanding convertible subordinated notes, having
a total principal amount of $100 million, will be cancelled and the
former holders of those notes will receive in exchange a total of 5%
of the common stock of the reorganized ITC/\DeltaCom.
8
o All of ITC/\DeltaCom's outstanding common stock, Series A preferred stock
and Series B preferred stock will be cancelled and the former holders
of those securities collectively will receive a total of 1% of the
common stock of the reorganized ITC/\DeltaCom.
o Campbell B. Lanier, III, a director and current stockholder, and SCANA
Corporation ("SCANA"), a current stockholder, each will purchase up to
$15 million of a new issue of convertible redeemable preferred stock
of the reorganized ITC/\DeltaCom, which will be convertible into a
total of 10.5% of the common stock of the reorganized ITC/\DeltaCom.
The purchasers also will receive warrants to purchase up to an
additional 2% of the common stock of the reorganized ITC/\DeltaCom.
Mr. Lanier has the right to assign any portion of his purchase
commitment to other qualified investors, subject to certain
conditions. In consideration for making this financing commitment, Mr.
Lanier and SCANA will receive shares of common stock representing a
total of 2% of the common stock of the reorganized ITC/\DeltaCom.
o The Company will make a rights offering to its existing common and
preferred stockholders, entitling these holders to purchase on a pro
rata basis, up to a specified amount, the convertible redeemable
preferred stock and warrants that Mr. Lanier and SCANA have agreed to
purchase. The purchase commitments of Mr. Lanier and SCANA will be
proportionately reduced by any purchases made in the rights offering.
The foregoing ownership percentages give effect to the conversion of the
convertible redeemable preferred stock referred to above.
At such time as our proposed plan of reorganization becomes effective
following approval by holders of certain claims and interests in ITC/\DeltaCom
and confirmation by the Bankruptcy Court, we expect to implement fresh start
reporting under the provision of SOP 90-7. The provisions of fresh start
reporting require that we revalue our assets and liabilities to fair value,
reestablish stockholders' equity using the reorganized value established in
connection with the plan and record any applicable reorganization value in
excess of amounts allocable to identifiable assets as goodwill. As a result of
our adoption of SOP 90-7, we are reviewing the fair value of our assets and
liabilities, and we expect we will be required to write-down the value of some
of our assets and liabilities. We expect that the implementation of fresh start
reporting under SOP 90-7 will have a material effect on our financial
statements.
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis of accounting and do not reflect adjustments
that might result if the Company is unable to continue as a going concern. The
Company's recent losses and the Bankruptcy Proceedings raise substantial doubt
about the Company's ability to continue as a going concern. The ability of the
Company to continue as a going concern and the appropriateness of using the
going concern basis is dependent upon, among other things, (i) confirmation of
the Company's plan of reorganization by the Bankruptcy Court, (ii) the Company's
ability to achieve profitable operations after reorganization under the
Bankruptcy Code and (iii) the Company's ability to generate sufficient cash from
operations to meet its obligations. There can be no assurance that the Company
will be successful in obtaining confirmation of its plan of reorganization. The
accompanying condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amount and classification of liabilities that might be necessary
should the Company not be able to continue as a going concern.
Liabilities for which payment is subject to the Bankruptcy Proceedings have
been classified as liabilities subject to compromise in the condensed
consolidated balance sheets. As of June 30, 2002, liabilities of ITC/\DeltaCom
subject to compromise consisted of the following (in thousands):
Notes:
11% Senior Notes due 2007 $ 130,000
8-7/8% Senior Notes due 2008, net 159,909
9-3/4% Senior Notes due 2008 125,000
4-1/2% Convertible Subordinated Notes due 2006 100,000
Accrued interest 23,147
------------
$ 538,056
============
9
Reorganization items are composed of items of expense that were realized or
incurred by ITC^DeltaCom as a result of reorganization under Chapter 11 of the
Bankruptcy Code. Reorganization items for the three and six-month periods ended
June 30, 2002 consisted of the following (in thousands):
Professional fees and related expenses $ 3,217
Professional fees represent legal and financial advisory expenses directly
related to the Bankruptcy Proceedings.
3. Recent Accounting Pronouncements
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 requires companies to cease
amortizing goodwill that existed at June 30, 2001. The amortization of existing
goodwill ceased on December 31, 2001. Included in the accompanying consolidated
statements of operations is amortization expense related to goodwill of
approximately $1.5 million for the three months ended June 30, 2001 and $3.1
million for the six-months ended June 30, 2001. 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
completed the transitional test as of January 1, 2002 during the three months
ended June 30, 2002 and determined that goodwill has not been impaired. 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.
Asset Retirement Obligations
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.
Impairment or Disposal of Long-Lived Assets
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued in August 2001. SFAS No.144 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
business segment. 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 for interim
periods within those fiscal years. We adopted SFAS No. 144 on January 1, 2002,
with no material effect on our consolidated financial statements.
10
Other Pronouncement
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, an amendment
of FASB Statement No. 13, and Technical Corrections," was issued in April 2002.
This statement, among other things, significantly limits the instances where the
extinguishment of debt can be treated as an extraordinary item in the statement
of operations. This statement also requires reclassification of all prior period
extraordinary items related to the extinguishment of debt. We will implement
this statement, as required by SOP 90-7, as part of our fresh start reporting
upon completion of the Bankruptcy Proceedings.
Costs Associated with Exit or Disposal Activities
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in July 2002. This statement requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002 or the Company's emergence from the Bankruptcy
Proceedings, whichever occurs earlier.
4. Long-term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations at June 30, 2002 and
December 31, 2001 consisted of the following (in thousands):
June 30, December 31,
2002 2001
---- ----
11% Senior Notes due 2007.................................................... $130,000 $130,000
8-7/8% Senior Notes due 2008, net of unamortized discount of $91 and
$99 in 2002 and 2001, respectively ..................................... 159,909 159,901
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 .............................................. 156,400 157,200
Capital lease obligations at varying interest rates, maturing through
July 2020 .............................................................. 51,329 51,773
--------- ---------
Total long-term debt and capital lease obligations .......................... 722,638 723,874
Less liabilities subject to compromise ...................................... (514,909) --
--------- ---------
Total long-term debt and capital lease obligations not subject to
compromise ............................................................. 207,729 723,874
Less current maturities ..................................................... (11,172) (6,711)
Less long-term debt reclassified as current ................................. (185,758) --
--------- ---------
Total. ...................................................................... $ 10,799 $ 717,163
========= =========
Pursuant to SOP 90-7, the Company has reclassified all of the senior notes
and convertible subordinated notes as liabilities subject to compromise.
As a result of ITC/\DeltaCom's failure to pay interest on the senior notes
and convertible subordinated notes on May 15 and June 1, 2002 and its filing of
a voluntary petition under Chapter 11 of the Bankruptcy Code on June 25, 2002,
the Company is in default under its $160 million senior secured credit facility
and $40 million capital lease facility. For so long as the Company remains in
default, interest under the senior credit facility is payable at a default rate
of 2% in excess of an annual rate of 1.875% plus a base rate, which was 4.75% at
June 30, 2002. In connection with these defaults, the Company has reclassified
$154.8 million of its senior credit facility and $31.0 million of its $40
million capital lease facility as current liabilities in accordance with SFAS
No. 78, "Classification of Obligations that are Callable by a Creditor."
11
5. 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 expired on June 20, 2002. The investment agreement provided for the
issuance and sale by the Company of up to $150 million of multiple series of its
Series B cumulative convertible preferred stock and related common stock
purchase warrants. The Company completed the sale of $30 million of Series B-1
preferred stock in June 2001 and the sale of $40 million of Series B-2 preferred
stock in September 2001. In April 2002, the Company issued a draw down notice to
the investors under its investment agreement, as amended, with ITC Holding
Company, SCANA and HBK Master Fund L.P. stating that the Company had exercised
its right to require these investors to purchase additional securities from the
Company under the agreement. The investors asserted that they were not obligated
to purchase additional securities because the Company allegedly failed to
satisfy specified closing conditions under the investment agreement.
As a result of the Bankruptcy Proceedings, the outstanding shares of Series
B preferred stock are considered equity interests in the Company. Accordingly,
the Series B preferred stock was returned to stockholders' equity in the
condensed consolidated balance sheets as of June 25, 2002, which was the date of
commencement of the Bankruptcy Proceedings.
As of June 25, 2002, ITC/\DeltaCom had accrued dividends on the Series B
preferred stock of $1.4 million and $2.8 million for the three and six months
ended June 30, 2002, respectively. Contractual dividends were $1.5 million and
$2.9 million for the three and six months ended June 30, 2002, respectively.
Under the Bankruptcy Code, dividends on the Series B preferred stock do not
accrue during the Bankruptcy Proceedings.
6. Restructuring 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 were included
as components of selling, operations and administration expenses. Restructuring
charges included 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 included 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 certain departments and did not specifically
identify the termination of an entire function or department.
In April 2002, the Company further restructured its operations to implement
additional reductions to its workforce, non-personnel operating expenses and
planned capital expenditures. As a result of this restructuring, the Company in
April 2002 recorded approximately $2.1 million in restructuring costs, which
were included as components of special charges. Restructuring charges included
the Company's estimate of employee severance and related costs for employees
terminated. The restructuring charges also included estimates of termination
payments for cancelled service contracts and the write-off of abandoned assets.
Restructuring costs were accrued in accordance with EITF 94-3. The Company
terminated approximately 50 employees from its former e/\deltacom business, but
it did not specifically identify the termination of an entire function or
department.
All restructuring costs recorded in April 2002 related to the Company's
retail services segment. Following is a summary of the restructuring and
impairment charges that were recorded in April 2002 (in thousands):
Employee severance ............................ $ 1,382
Contract termination costs .................... 460
Write-off of assets ........................... 223
--------
Total ...................................... $ 2,065
========
12
The following table reflects activity associated with accrued restructuring
costs from January 1, 2002 through June 30, 2002, which are recorded in accrued
liabilities (in thousands):
Balance at Write-offs/ Balance at
December 31, 2001 Accruals Payments June 30, 2002
----------------- -------- ---------- -------------
Restructuring charges:
Employee severance ................... $ 216 $ 1,382 $ 1,311 $ 287
Office space leases .................. 1,067 0 319 748
Contract termination costs ........... 0 460 105 355
----------- ---------- ----------- -----------
Total ..................................... $ 1,283 $ 1,842 $ 1,735 $ 1,390
=========== ========== ============ ===========
Management expects to use the remaining restructuring accruals during the
remainder of 2002 and in 2003 as additional payments are made under the terms of
employee severance and office space lease agreements. Contract termination and
office space leases may be renegotiated, which could result in reductions in
accruals and future payments.
7. Commitments and Contingencies
At June 30, 2002, the Company had entered into agreements with vendors to
purchase approximately $3.0 million of property, plant, equipment and services
during 2002 related to the improvement and installation of switches, other
network expansion efforts and certain services.
Non-Payment of Interest on Senior Notes and Convertible Subordinated Notes
To conserve liquidity for its business, ITC/\DeltaCom did not pay its
scheduled May 15, 2002 interest payments due on its 9 3/4% senior notes due 2008
and on its 4 1/2% convertible subordinated notes due 2006 or the scheduled
June 1, 2002 interest payment due on its 11% senior notes due 2007. The
indentures under which ITC/\DeltaCom has issued its senior notes and convertible
subordinated notes provide that an event of default will occur if it does not
pay interest on any note within 30 days after the date on which the interest
first became due and payable. The senior notes and convertible subordinated
notes are solely obligations of ITC/\DeltaCom, which is a holding company with
no direct operations. ITC/\DeltaCom's operating subsidiaries, Interstate
FiberNet, Inc. and ITC/\DeltaCom Communications, Inc., have no obligation to pay
any amounts due pursuant to the senior notes and convertible subordinated notes.
ITC/\DeltaCom and members of an unofficial committee of certain holders of the
senior notes and convertible subordinated notes agreed to support an arrangement
to implement a reorganization of the Company. On June 25, 2002, ITC/\DeltaCom
filed a voluntary petition under Chapter 11 of the Bankruptcy Code. That filing
resulted in an "automatic stay" of legal and collection proceedings against
ITC/\DeltaCom, including a stay of the exercise of any remedies for non-payment
that would have otherwise been exercisable by the trustee or noteholders under
the applicable note indentures.
The Company does not have agreements from the creditors under its senior
credit and capital lease facilities to forbear from exercising their rights to
declare a default or pursue remedies under those facilities based solely on
ITC/\DeltaCom's failure to pay interest on the senior notes and convertible
subordinated notes and its subsequent filing of a voluntary petition under
Chapter 11 of the Bankruptcy Code. Although the Company continues discussions
with its senior secured creditors in an effort to negotiate an agreement to
forbear from exercising their rights to declare default, the Company's senior
secured creditors have the right to enforce their claims against the Company to
the extent provided by the applicable agreements and applicable law. The
Company's senior credit obligations are secured by liens on substantially all of
its assets. The Company is engaged in discussions with lenders under its senior
credit facility concerning possible amendments to the facility that would, among
other changes, accelerate the schedule for repayment of principal, increase the
interest rates applicable to outstanding borrowings, add financial maintenance
covenants, and modify existing affirmative and negative covenants. If the
Company and its senior lenders are unable to reach agreement on amendments to
the credit facility, or if the Company's senior creditors seek to exercise their
remedies under their agreements and applicable law, ITC/\DeltaCom's operating
subsidiaries, Interstate FiberNet, Inc. and
13
ITC/\DeltaCom Communications, Inc., who are parties to the senior credit and
capital lease facilities, may be compelled to file for protection under the
Bankruptcy Code.
Surety Bonds
Some of the Company's customers, especially governmental entities, and some
governmental entities from which the Company has acquired a franchise or
rights-of-way agreement, require the Company to obtain surety bonds as a
condition to its provision of service to them or other entities within their
control. 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. The surety did
not renew an additional $405,000 of bonds, which it could not cancel
immediately, that were scheduled for renewal in the second quarter of 2002. As
of July 31, 2002, the cancelled and unrenewed bonds had not been replaced. 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 and 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 to secure additional surety
bonds and, therefore, further restrict the Company's available funds.
Nortel Contingency
In November 2000, the Company entered a purchase agreement with Nortel
Networks, Inc. for the purchase of telecommunications equipment and services.
The agreement provides for specified volume discounts if the Company purchases
at least $250 million of equipment and services from Nortel Networks between
November 1, 1999 and December 31, 2002. If the Company purchases less than $250
million of equipment and services, the agreement provides that the Company will
be required to pay to Nortel a commitment violation fee. Based on the Company's
actual and forecasted purchases under the agreement, it currently estimates that
it may be required to pay a commitment violation fee of approximately $3.5
million to $3.8 million in the first quarter of 2003. In addition, Nortel
Networks has deployed approximately $7.0 million of equipment under terms
providing that payment is due when the Company places the deployed equipment
into service. Based on its current schedule for placing this equipment into
service, the Company expects that these terms will require it to pay $2.8
million in the third quarter of 2002 and $4.2 million in the fourth quarter of
2002 or the first quarter 2003, depending on its need for capacity. Under other
terms of this agreement, the Company is required to purchase, or pay for, an
additional $10 million of equipment by the fourth quarter of 2003. Although the
Company expects that all of the estimated payment obligations under the
agreement that are described above will be subject to modification as a result
of a specified contract renewal process beginning in the fourth quarter of 2002,
it is unable to predict the outcome of those negotiations.
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.
14
BellSouth Deposit Contingency
The Company depends on BellSouth for the provision of wholesale
telecommunications services under its interconnection agreements with BellSouth
and pursuant to various access tariffs that BellSouth has filed with federal and
state regulatory agencies. As previously reported, BellSouth has requested by
letter dated March 8, 2002 that the Company provide a $10 million security
deposit by March 29, 2002 in connection with BellSouth's provision of services
to the Company. On March 28, 2002, the Company filed a petition for declaratory
judgment in Georgia state court seeking a ruling from the court that, based upon
the terms of the Company's interconnection agreements with BellSouth, BellSouth
may not require the Company to place a $10 million deposit with BellSouth as
security for future payment for services to be rendered to the Company by
BellSouth. BellSouth has responded to the Company's petition by seeking to have
the matter heard before the Georgia Public Service Commission, rather than in
Georgia state court. BellSouth has filed a petition with the Georgia Public
Service Commission seeking a determination that the Company should be required
to place a $17 million security deposit with BellSouth. The Company is
contesting both the requirement for, and the amount of, the requested deposit.
BellSouth also has requested the Federal Communications Commission to approve
new deposit language in its access tariff. The FCC has suspended BellSouth's new
tariff and is investigating BellSouth's proposed deposit language. If the FCC
were to adopt BellSouth's proposed deposit language and if BellSouth were
authorized to require a substantial deposit, the Company's cash reserves may be
insufficient to fund the deposit, which could have a material adverse effect on
the Company's ability to provide services to its customers.
BellSouth Interconnection Agreement
The Company's interconnection agreement with BellSouth expires at the end
of 2002. The Company is currently negotiating terms of a new agreement with
BellSouth, but it is unlikely to resolve all issues before the current agreement
expires. The Company will continue to operate under terms of the existing
agreement until a new agreement is reached. The terms of the new agreement will
be retroactive to January 1, 2003. Any unresolved issues will be settled through
binding arbitration before the various state public service commissions. The
Company is unable to determine the impact, if any, these negotiations will have
on its results of operations and financial condition.
Proceedings Affecting Rights-of-Way
A portion of the Company's network runs through fiber optic cables owned by
Mississippi Power Company over its rights-of-way located in Jasper County,
Mississippi. A proceeding involving Mississippi Power Company and several
landowners who have granted Mississippi Power Company rights-of-way in Jasper
County resulted in a January 1999 order of the Mississippi Supreme Court holding
that Mississippi Power Company 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 Company. 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
Company'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 its network so that it 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 believes its potential liability for damages may be limited to the value
of a permanent easement for that use. The Company cannot make assurances 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 trial of this matter was scheduled for the week of
August 5, 2002, but has since been continued. No future trial date has been set
by the court to date. The Company cannot reasonably estimate the amount of any
potential loss arising from this pending litigation.
The Company initiated civil suits in August 2001 and May 2002 in the U.S.
District Court for the Southern District of Mississippi in which it seeks a
declaratory judgment confirming its continued use of cables in
15
Mississippi Power Company's rights-of-way on 37 parcels of land and 63 parcels
of land, respectively, or, alternatively, condemnation of the right to use the
cables upon payment of just compensation to the landowners. Some of the
defendants in the August 2001 proceeding have filed counterclaims against
Mississippi Power Company 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 either of these proceedings. The August 2001
proceeding has been consolidated with another pending civil suit in the U.S.
District Court for the Southern District of Mississippi, in which the Company
was recently made a defendant, 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 cannot reasonably estimate the amount of any potential loss arising from
this pending litigation.
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, among others, that 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 has
permitted 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 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. 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
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 its 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 and, subsequently, the defendants have filed a motion for summary
judgment, but the court has not ruled on these motions. The defendants also 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.
In April and May 2002, 190 lawsuits were filed by a single counsel in the
Circuit Court for Harrison County, Mississippi, against Mississippi Power
Company, the Company and WorldCom, Inc. d/b/a MCI Group. Each plaintiff claims
to be the owner of property over which Mississippi Power Company has an easement
and that WorldCom and/or the Company have benefited by using the easement to
provide telecommunications services. As a result of these allegations, each of
the plaintiffs claim trespass, unjust enrichment, fraud and deceit, and civil
conspiracy against each of the defendants. Each of the plaintiffs also seek $5
million in compensatory damages, $50 million in punitive damages, disgorgement
of the gross revenues derived from the use by WorldCom and the Company of the
cable over the easements, a percentage of gross profits obtained from the use of
the cable, and the plaintiffs' costs to prosecute the action. Mississippi Power
Company, WorldCom and the
16
Company have denied all of the plaintiffs' allegations. These actions are
substantially similar to the other actions that the Company is defending in
state and federal courts in Mississippi. Of the 190 lawsuits, the Company
believes only approximately 11 involve parcels of land across which the optical
fiber of Mississippi Power Company run are used by the Company in the provision
of telecommunications services. On August 5, 2002, Mississippi Power Company
removed all actions involving WorldCom's use of Mississippi Power Company's
rights-of-way to the United States District Court for the Southern District of
Mississippi and requested the actions to be transferred to the United States
Bankruptcy Court for the Southern District of New York, where WorldCom's
bankruptcy proceeding is pending. The Company cannot reasonably estimate the
amount of any potential loss.
On April 19, 2002, a civil action was filed by an individual property owner
in the Chancery Court of Harrison County, Mississippi against Mississippi Power
Company, Southern Company Services and the Company. The plaintiff seeks to
permanently enjoin Mississippi Power Company and Southern Company from
continuing to permit their rights-of-way across the plaintiff's property to be
used by third parties in any manner that is not related to the transmission of
electric power. The plaintiff also seeks proof of cancellation of all leases and
contracts between third parties and Mississippi Power Company and Southern
regarding the use of the fiber optic cable on the right-of-way across the
plaintiff's property, proof that the use of the right-of-way is for purposes
associated with providing electricity, an accounting of revenues of third
parties from the use of the right-of-way, punitive damages of $1 million, and
costs and expenses. Mississippi Power Company, Southern Company and the Company
have denied all of the plaintiff's allegations.
On July 8, 2002, nine lawsuits on behalf of 101 property owners were filed
against Mississippi Power Company, Southern Company and the Company in the
Chancery Court of Jones County, Mississippi. All nine complaints are identical
in seeking relief for trespass, nuisance, conversion, unjust enrichment and
accounting, fraudulent concealment, fraud, fraudulent misrepresentation and
fraudulent concealment, and rescission and equitable reformation arising from
the alleged unauthorized use of the subject rights of way in violation of the
terms of the easements held by Mississippi Power Company. The landowners are
seeking unspecified monetary damages and certain equitable relief. Mississippi
Power Company, Southern Company and the Company deny all the allegations.
On August 8, 2002, the Company was served with a complaint filed in the
Circuit Court of Hinds County, Mississippi, in which four owners of property
located in Hancock County, Mississippi allege Mississippi Power Company and the
Company have violated the plaintiffs' rights with regard to the use of
Mississippi Power Company's easement across the plaintiffs' property. The
plaintiffs allege trespass, unjust enrichment, negligence, breach of contract
and tortuous breach of contract, fraudulent concealment, fraudulent
misrepresentation, conspiracy, accounting and seeks an unspecified amount of
damages. The Company denies all such allegations.
Other Rights-of-Way Contingency
The Company has obtained a portion of its rights-of-way under an agreement
that provides for significant annual fixed payments by the Company through 2020.
If the Company's proposed plan of reorganization is completed during 2002 and
the consummation of the proposed plan were deemed to constitute a change in
control, as defined in the agreement, these annual payments would terminate and
the Company would be obligated to make a one-time payment totaling approximately
$19.7 million.
17
8. Segment Reporting
As discussed in Note 1, the Company operates in two business segments:
retail services and broadband transport services. The Company also has a
corporate segment, which has no operations. In the first quarter of 2002, as a
result of its restructuring in 2001 discussed in Note 6, the Company changed its
approach to making operating decisions and assessing performance with respect to
its business. As a result, the Company no longer manages the e/\deltacom
business as a separate segment, but instead manages that business as a component
of its retail services segment. The Company has restated the 2001 segment
information to include the results of the former e/\deltacom segment as part of
the results of the retail services segment. The Company evaluates segment
performance based on operating revenues, gross margin, selling, operations and
administration expense and depreciation and amortization expense. All
intercompany transactions between segments have been eliminated. Summarized
financial data by business segment for the six months ended June 30, 2002 and
2001 are as follows (in thousands):
2002
----
Broadband
Retail Transport Corporate
Segment Segment Segment Consolidated
------- ------- ------- ------------
Operating revenues ....................... $ 173,765 $ 44,194 $ - $ 217,959
Gross margin ............................. 77,139 39,584 - 116,723
Selling, operations, and
administration ........................... 64,827 17,512 - 82,339
Depreciation and amortization ............ 35,928 27,046 41 63,015
Special charges .......................... 2,065 - - 2,065
Interest expense ......................... - - - (29,480)
Other income (expense), net .............. - - - (47)
-
Reorganization items ..................... - - - (3,217)
----------
Loss before income taxes ................. - - - $ (63,440)
==========
Identifiable assets ...................... $ 471,673 $ 326,889 $ 10,194 $ 808,756
========= ========= ======== ==========
Capital expenditures, net ................ $ 18,902 $ 2,976 $ - $ 21,878
========= ========= ======== ==========
2001
----
Broadband
Retail Transport Corporate
Segment Segment Segment Consolidated
------- ------- ------- ------------
Operating revenues ....................... $ 160,557 $ 47,684 $ - $ 208,241
Gross margin ............................. 76,653 42,054 - 118,707
Selling, operations, and administration .. 77,375 16,857 - 94,232
Depreciation and amortization ............ 33,802 23,674 41 57,517
Interest expense ......................... - - - (29,183)
Other income (expense), net .............. - - - 1,510
----------
Loss before income taxes ................. $ (60,715)
==========
Identifiable assets ...................... $ 553,088 421,861 $ 15,505 990,454
========= ========= ======== ==========
Capital expenditures, net ................ $ 42,372 $ 55,115 $ - $ 97,487
========= ========= ======== ==========
18
9. Condensed Financial Statements of Entity in Bankruptcy
The condensed balance sheets for the parent company, ITC/\DeltaCom, as of
June 30, 2002 and December 31, 2001 and other financial information for the
three and six months ended June 30, 2002 is as follows:
Condensed Balance Sheets
(Unaudited)
(In thousands)
June 30, December 31,
2002 2001
----- -----
ASSETS
Current Assets:
Cash and cash equivalents ............................................ $ 1,045 $ 1,028
---------- -----------
Total current assets ............................................... 1,045 1,028
Other long-term assets .................................................. 9,149 10,070
Investments in and net advances to wholly-owned subsidiaries ............ 501,973 550,382
---------- -----------
$ 512,167 $ 561,480
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accrued interest ..................................................... $ -- $ 8,281
Other accrued liabilities............................................. -- 2,395
---------- -----------
Total current liabilities ......................................... -- 10,676
---------- -----------
Long-term debt .......................................................... -- 514,901
---------- -----------
Liabilities subject to compromise ....................................... 538,056 --
---------- -----------
Convertible Redeemable Preferred Stock (Returned
to equity on June 25, 2002); par value $.01; Series B-1;
67,000 shares authorized; 30,673 shares issued and
outstanding in 2001
Series B-2; 90,000 shares authorized; 40,000 shares issued and
outstanding in 2001 ............................................... -- 57,833
---------- -----------
Stockholders' Equity:
Preferred Stock - $.01 par value; 5,000,000 shares authorized
Preferred stock, Series A - liquidation preference of $7.40;
1,480,771 shares issued and outstanding ........................ 15 15
Preferred stock, Series B-1 and B-2
Series B-1; 67,000 shares authorized; 31,905 shares issued and
outstanding in 2002
Series B-2; 90,000 shares authorized; 41,837 shares issued and
outstanding in 2002 ........................................ 63,691 --
Common stock - $.01 par value; 200,000,000 shares
authorized; 62,364,768 shares issued and outstanding .............. 624 624
Additional paid-in-capital ........................................... 356,839 356,839
Warrants outstanding ................................................. 11,441 11,441
Accumulated deficit .................................................. (458,499) (390,849)
---------- -----------
Total stockholders' equity ........................................ (25,889) (21,930)
---------- -----------
$ 512,167 $ 561,480
========== ===========
19
Condensed Statements of Operations
(Unaudited)
(In thousands)
Three Months Six Months
Ended Ended
June 30, 2002 June 30, 2002
------------- -------------
Operating expenses:
Depreciation and amortization ......................................... $ 20 $ 41
---------- -----------
Total operating expenses ........................................... 20 41
---------- -----------
Other income (expense):
Interest income - intercompany ........................................ 9,242 18,484
Interest income - external ............................................ 3 17
Interest expense (contractual interest was $11.7 million and
$23.5 million for the three and six months ended June 30,
2002, respectively) ................................................ (11,113) (22,854)
---------- -----------
Total other expense, net ........................................... (1,868) (4,353)
---------- -----------
Loss before reorganization items and equity in losses of
Subsidiaries .......................................................... (1,888) (4,394)
Reorganization items ..................................................... 3,217 3,217
Equity in losses of subsidiaries ......................................... 27,589 55,829
---------- -----------
Net loss ........................................................... (32,694) (63,440)
Preferred stock dividends and accretion (contractual dividend was
$1.5 million and $2.9 million for the three and six months
ended June 30, 2002, respectively)(Note 5) ............................ 2,060 4,210
---------- -----------
Net loss applicable to common shares ............................... $ (34,754) $ (67,650)
========== ============
Condensed Statement of Cash Flows
(Unaudited)
(In thousands)
Six Months
Ended
June 30, 2002
---------------
Net loss ................................................................. $ (63,440)
----------
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation and amortization ............................................ 41
Amortization of bond issue costs ......................................... 888
Equity in losses of subsidiaries ......................................... 55,829
Changes in current assets and liabilities:
Accounts receivable - affiliate ....................................... (8,165)
Accounts payable ...................................................... 2
Accrued interest ...................................................... 14,866
----------
Total adjustments ........................................................ 63,457
----------
Net increase in cash and cash equivalents ................................ 17
Cash and cash equivalents at beginning of period ......................... 1,028
----------
Cash and cash equivalents at end of period ............................... $ 1,045
==========
20
10. Subsequent Events
As described Note 2, in June 2002, ITC^DeltaCom and members of an
unofficial committee of holders of its senior notes and subordinated convertible
notes reached an agreement in principle to implement a reorganization of
ITC^DeltaCom. In order to complete the reorganization as expeditiously as
possible, ITC^DeltaCom filed a voluntary petition under Chapter 11 of the
Bankruptcy Code on June 25, 2002.
On July 26, 2002, ITC^DeltaCom filed with the Bankruptcy Court a proposed
Plan of Reorganization Under Chapter 11 of the Bankruptcy Code and a proposed
Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code. The
Company believes that the proposed plan and proposed disclosure statement
reflect the terms of the plan of reorganization supported by the members of the
unofficial committee of noteholders. A hearing by the Bankruptcy Court to
approve the proposed disclosure statement is currently scheduled to be held on
August 22, 2002. The plan is subject to approval by holders of certain claims
and equity interests in ITC^DeltaCom and to confirmation by the Bankruptcy
Court, and is subject to possible modification during the reorganization
process.
21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This quarterly report on Form 10-Q 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" and "plan" as they
relate to the Company or our management are intended to identify these
forward-looking statements. All statements by the Company 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. The following analysis should be read in conjunction
with our Annual Report on Form 10-K for the year ended December 31, 2001 and the
financial statements and related notes thereto.
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 other income and other expenses, net
interest, 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 flows as a measure of liquidity.
EBITDA, as adjusted, is not necessarily comparable with similarly titled
measures for other companies.
Unless we indicate otherwise, references in this report to "we," "us,"
"our" and "the Company" mean ITC^DeltaCom, Inc. and its subsidiaries. Unless we
indicate otherwise, we have rounded dollar amounts over $1 million to one
decimal place and dollar amounts of less than $1 million to the nearest
thousand.
Proposed Plan of Reorganization
Beginning in the third quarter of 2001, we initiated a strategic and
operational restructuring intended to accelerate positive cash flow from
operations by emphasizing our core retail services and reducing operating costs.
In addition to de-emphasizing certain non-core services, the key elements of
this plan include reduction of the employee base, consolidation of facilities
and operations and the reduction of capital expenditures. We also seek, by
eliminating a substantial portion of our existing indebtedness, to reduce our
fixed interest costs so that we are able to achieve and maintain positive cash
flow from operations beginning immediately after completion of the planned
restructuring and continuing through the current period of uncertainty affecting
the telecommunications industry and competitive telecommunications companies.
In order to complete our restructuring plan as expeditiously as possible,
with the support of holders of approximately 62% of the principal amount of our
senior notes and 74% of the principal amount of our convertible subordinated
notes, and certain of our preferred stockholders, ITC^DeltaCom filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware on June 25, 2002. On
July 26, 2002, ITC^DeltaCom, Inc. filed with the Bankruptcy Court a plan of
reorganization to implement the restructuring. The plan is subject to approval
by holders of certain claims and equity interests in ITC^DeltaCom and to
confirmation by the Bankruptcy Court, and is subject to possible modification
during the reorganization process.
Under the proposed plan of reorganization:
o All of our outstanding senior notes, having a total principal amount of
$415 million, will be cancelled and the former holders of those notes
will receive in exchange a total of 81.5% of the common stock of the
reorganized ITC^DeltaCom.
o All of our outstanding convertible subordinated notes, having a total
principal amount of $100 million, will be cancelled and the former
holders of those notes will receive in exchange a total of 5% of the
common stock of the reorganized ITC^DeltaCom.
22
o All of our outstanding common stock, Series A preferred stock and Series
B preferred stock will be cancelled and the former holders of those
securities collectively will receive a total of 1% of the common stock of
the reorganized ITC^DeltaCom.
o Campbell B. Lanier, III, a director and current stockholder, and SCANA
Corporation, a current stockholder, each will purchase up to $15 million
of a new issue of convertible redeemable preferred stock of the
reorganized ITC^DeltaCom, which will be convertible into a total of 10.5%
of the common stock of the reorganized ITC^DeltaCom. The purchasers also
will receive warrants to purchase up to an additional 2% of the common
stock of the reorganized ITC^DeltaCom. Mr. Lanier has the right to assign
any portion of his purchase commitment to other qualified investors,
subject to certain conditions. In consideration for making this financing
commitment, Mr. Lanier and SCANA will receive shares of common stock
representing a total of 2% of the common stock of the reorganized
ITC^DeltaCom.
o We will make a rights offering to our existing common and preferred
stockholders, entitling these holders to purchase on a pro rata basis, up
to a specified amount, the convertible redeemable preferred stock and
warrants that Mr. Lanier and SCANA have agreed to purchase. The purchase
commitments of Mr. Lanier and SCANA will be proportionately reduced by
any purchases made in the rights offering.
The foregoing ownership percentages give effect to the conversion of the
convertible redeemable preferred stock referred to above.
We adopted the provisions of Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," upon
commencement of the bankruptcy proceedings. In accordance with SOP 90-7,
liabilities subject to compromise under the bankruptcy proceedings have been
segregated on the condensed consolidated balance sheets. Liabilities subject to
compromise are recorded for the amounts we expect to be allowed on known claims
rather than estimates of the amounts for which those claims may be settled as a
result of the plan of reorganization approved by the Bankruptcy Court.
At such time as our proposed plan of reorganization becomes effective, we
expect to implement fresh start reporting under the provision of SOP 90-7. As a
result of our adoption of SOP 90-7, we are reviewing the fair value our assets
and liabilities, and we expect we will be required to write down the value of
some of our assets and liabilities. We expect that the implementation of fresh
start reporting under SOP 90-7 will have a material effect on our financial
statements. For more information regarding fresh start reporting, see note 1 to
our condensed consolidated financial statements appearing elsewhere in this
report.
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:
o sales of integrated telecommunications services, including local
exchange, long distance, enhanced data and Internet services, to end-user
customers;
o sales of local dial-up services to Internet service providers for use in
their provision of services to their customers;
o sales of nonrecurring equipment and professional services to end-user
customers; and
23
o sales of wholesale long distance services for resale by other
telecommunications carriers.
As of June 30, 2002, we provided retail services to approximately 18,870
business customers, which were served by 35 branch offices. As of June 30, 2002,
we had sold approximately 247,040 access lines, excluding lines that had been
disconnected or cancelled. Of these access lines, approximately 234,260 had been
installed as of June 30, 2002. The following table presents, for the periods
indicated, selected operating data, in thousands, for our retail services
segment.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Operating revenues .............. $ 87,144 $ 81,293 $ 173,765 $ 160,557
EBITDA, as adjusted ............. 5,678 (780) 10,247 (722)
Operating loss .................. (12,126) (18,090) (25,681) (34,524)
Pro forma EBITDA, as adjusted ... $ 4,243 $ (780) $ 8,812 $ (2,222)
Pro forma EBITDA, as adjusted, for our retail services excludes $3.5
million of revenues for the three and six months ended June 30, 2002 related to
a non-recurring fee received from a local interconnection customer for the early
termination of a contract and $1.5 million of revenues for the six months ended
June 30, 2001 related to prior-period interconnection agreement settlements. Pro
forma EBITDA, as adjusted, for retail services also excludes $2.1 million of
special charges for the three and six months ended June 30, 2002, including
employee severance expenses of $1.4 million, contract cancellation fees of
$460,000 and a write-down of $223,000 of impaired assets.
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. The following table presents, for the periods
indicated, selected operating data, in thousands, for our broadband transport
services segment.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Operating revenues .............. $ 21,467 $ 24,741 $ 44,194 $ 47,684
EBITDA, as adjusted ............. 10,538 13,196 22,072 25,197
Operating (loss) income ......... (2,669) 1,010 (4,974) 1,523
WorldCom, Inc and certain of its subsidiaries accounted for approximately
21% of our revenues from broadband transport services in the three and six
months ended June 30, 2002. WorldCom filed for protection under Chapter 11 of
the Bankruptcy Code on July 21, 2002. The Company does not have any material
exposure for nonpayment of WorldCom revenues recognized through June 30, 2002.
Before WorldCom's Chapter 11 filing, we had not received payment of
approximately $1.5 million of the WorldCom revenues we had recognized. We are
currently unable to determine the impact that the WorldCom filing and other
developments affecting WorldCom will have on our revenues from broadband
transport services for future periods.
As of June 30, 2002, 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, including Alabama, Arkansas, Florida, Georgia, Louisiana,
Mississippi, North Carolina, South Carolina, Tennessee and Texas. As of the same
date, our network extended to approximately 188 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 local telephone company.
As of June 30, 2002, we owned approximately 6,180 route miles of our fiber
optic network, which we have built or acquired through long-term dark fiber
leases or indefeasible rights-of-use agreements. In addition, we have strategic
relationships principally with three public utilities, Duke Power Company,
Florida Power & Light
24
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.
Segment Disclosure
Beginning in 2002, we revised 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 consists of our retail services business and the second segment
consists of our broadband transport business. Beginning in 2002, results of our
e/\deltacom business are no longer being reported as a separate segment, but
instead are included in our retail services business segment. We have restated
the 2001 segment information in this report to include the results of the former
e/\deltacom segment as part of the results of the retail services segment.
Although sales to retail customers account for a substantial amount of the
revenues of the retail services segment, the retail services segment also
accounts for sales of a significant amount of services on a wholesale basis.
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.
June 30, March 31, December 31, September 30, June 30,
2002 2002 2001 2001 2001
------------ ------------- -------------------- ------------------- ------------
Branch offices ............................... 35 35 35 35 37
Business customers served-retail services(1).. 18,870 16,560 15,400 14,720 14,420
Route miles .................................. 9,980 9,980 9,980 9,980 9,840
Colocations .................................. 179 178 177 177 177
Voice switches ............................... 12 12 12 12 13
Frame relay/ATM switches (2) ................. 46 88 80 80 80
"Next generation" voice switches (3) ......... 48 48 42 41 39
Number of employees .......................... 1,910 2,000 2,030 1,960 2,360
- -----------------
(1) Reflects the combination of certain customers' multiple accounts into a
single customer account.
(2) Reflects the combination of previously reported ATM, Frame relay and
Passport switches. The decrease in the number of such switches from
March 31, 2002 to June 30, 2002 resulted primarily from the removal of 36
Passport switching facilities from our network during the second quarter of
2002.
(3) Formerly referred to as Unisphere SMX-2100 switches. Excludes Nortel DMS500
voice switches reported under "Voice switches."
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 and broadband transport services segments, which are discussed
below under "-Results of Operations." The dollar amounts are shown in thousands.
25
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Retail customer revenues: (1)
Local (3) ................................... $ 26,858 $ 19,465 $ 51,598 $ 38,470
Long distance (3) ........................... 16,092 16,027 32,355 33,139
Enhanced data (3) ........................... 14,927 10,304 29,355 19,821
-------- ------ -------- --------
Integrated telecom revenue ............... 57,877 45,796 113,308 91,430
Equipment and other (3) ..................... 10,539 15,291 22,613 29,003
-------- ------ -------- --------
Total retail revenues .................... $ 68,416 $ 61,087 $135,921 $120,433
======== ======== ======== ========
Wholesale customer revenues: (1) (2)
Broadband revenues (4) ...................... $ 21,467 $ 24,741 $ 44,194 $ 47,683
Local/interconnection revenues (2) (3) ...... 10,771 14,107 25,470 27,049
Long distance and data (3) .................. 3,218 4,490 6,486 9,285
Other (3) ................................... 1,239 1,609 2,388 2,291
-------- -------- -------- --------
Total wholesale revenues ................. $ 36,695 $ 44,947 $ 78,538 $ 86,308
======== ======== ======== ========
Retail lines sold (5) .......................... 167,342 125,106 167,342 125,106
Wholesales lines sold (5) ...................... 79,695 135,424 79,695 135,424
-------- ------- -------- --------
Total lines sold (5) ........................ 247,037 260,530 247,037 260,530
Retail lines installed ......................... 156,865 113,202 156,865 113,202
Wholesales lines installed ..................... 77,395 129,237 77,395 129,237
-------- ------- -------- --------
Total lines installed ....................... 234,260 242,439 234,260 242,439
Lines installed/sold percentage:
Retail customers ............................ 94% 90% 94% 90%
Wholesale customers ......................... 97% 95% 97% 95%
- ----------------
(1) Excludes $1.5 million of prior-period interconnection agreement settlements
in the six months ended June 30, 2001.
(2) Excludes a non-recurring fee of $3.5 million received by the Company in
April 2002 for the early termination of a wholesale customer contract.
(3) Reported in retail services segment revenues.
(4) Reported in broadband transport services segment revenues.
(5) Reported net of lines disconnected or cancelled.
The declines in wholesale customer revenues are attributable to adverse
trends affecting our wholesale business and resulted primarily from service
disconnections in our local interconnection business and from general pricing
pressure due to overcapacity in the broadband services business. Based on known
or forecasted disconnections, we expect a further decline in these revenues and
in EBITDA, as adjusted, related to our wholesale revenue stream in the third
quarter of 2002. We presently expect revenues and EBITDA, as adjusted, from our
wholesale customers to stabilize no earlier than the fourth quarter of 2002. As
a result of general market conditions, we have decreased the amount of capital
we invest in our wholesale business and expect that wholesale services will
continue to experience less favorable market conditions and minimal revenue
growth, if not a decline in revenues, at least through the end of 2003.
26
Results of Operations
The following tables present, for the periods indicated, selected statement
of operations data in dollars and as a percentage of operating revenues for our
retail services and broadband transport services. The dollar amounts are shown
in thousands.
Retail Services
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
2002 % 2001 % 2002 % 2001 %
-------- --- ---------- --- --------- --- --------- ---
Operating revenues ........................ $ 87,144 100 $ 81,293 100 $ 173,765 100 $ 160,557 100
Cost of services .......................... 48,138 55 43,300 53 96,627 56 83,904 52
-------- --------- --------- ---------
Gross margin .............................. 39,006 45 37,993 47 77,138 44 76,653 48
-------- --------- --------- ---------
Selling, operations and administration .... 31,263 36 38,773 48 64,826 37 77,375 48
Depreciation and amortization ............. 17,804 20 17,310 21 35,928 21 21
33,802
Special charges ........................... 2,065 2 -- -- 2,065 1 -- --
-------- --------- --------- ---------
Total operating expenses .................. 51,132 59 56,083 69 102,819 59 111,177 69
-------- --------- --------- ---------
Operating loss ............................ $(12,126) (14) $ (18,090) (22) $ (25,681) (15) $ (34,524) (21)
-------- --------- --------- ---------
EBITDA, as adjusted ....................... $ 5,678 7 $ (780) (1) $ 10,247 6 $ (722) --
======== ========= ========= =========
Broadband Transport Services
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
2002 % 2001 % 2002 % 2001 %
-------- --- --------- --- --------- --- --------- ---
Operating revenues ........................ $ 21,467 100 $ 24,741 100 $ 44,194 100 $ 47,684 100
Cost of services .......................... 2,109 10 2,796 11 4,610 10 5,630 12
-------- --------- --------- ---------
Gross margin .............................. 19,358 90 21,945 89 39,584 90 42,054 88
-------- --------- --------- ---------
Selling, operations and administration .... 8,820 41 8,749 36 17,512 40 16,857 35
Depreciation and amortization ............. 13,207 62 12,186 49 27,046 61 23,674 50
-------- --------- --------- ---------
Total operating expenses .................. 22,027 103 20,935 85 44,558 101 40,531 85
-------- --------- --------- ---------
Operating (loss) income ................... $ (2,669) (13) 1,010 4 $ (4,974) (11) 1,523 3
-------- --------- --------- ---------
EBITDA, as adjusted ....................... $ 10,538 49 $ 13,196 53 $ 22,072 50 $ 25,197 53
======== ========= ========= =========
Three Months and Six Months Ended June 30, 2002 Compared to Three Months and Six
Months Ended June 30, 2001
Operating Revenues. Total operating revenues increased $2.6 million, or
2.4%, from $106.0 million for the three months ended June 30, 2001 to $108.6
million for the three months ended June 30, 2002. Total operating revenues for
the six months ended June 30, 2002 increased $9.7 million, or 4.7%, to $218.0
million from total operating revenues of $208.2 million for the six months ended
June 30, 2002.
Operating revenues from our retail services increased $5.9 million, or
7.2%, from $81.3 million for the 2001 fiscal quarter to $87.1 million for the
2002 fiscal quarter. Operating revenues from our retail services for the 2002
fiscal six-month period increased $13.2 million, or 8.2%, to $173.8 million from
$160.6 million for the 2001 fiscal six-month period. Our retail services
operating revenues for the 2002 fiscal quarter and 2002 fiscal six-month period
included a one-time net benefit of $3.5 million received by us in April 2002 for
the early termination of a local interconnection customer contract. Our retail
services operating revenues for the 2001 fiscal six-month period included a
one-time net benefit of $1.5 million related to an interconnection agreement
settlement. Excluding these one-time benefits, our retail services revenues
increased $3.8 million, or 4.8%, for the 2002 fiscal quarter and $11.2 million,
or 7.0%, for the 2002 fiscal six-month period. The increases in our retail
services operating revenues were primarily attributable to:
o an increase in revenues generated by our local telephone services of
$5.8 million for the 2002 fiscal quarter and $11.1 million for the
2002 fiscal six-month period, which was due to increases of 42% for
the 2002 fiscal quarter and 44% for the 2002 fiscal six-month period
in the average number of installed lines for the same periods;
27
o a net increase in revenues generated by our enhanced data and
Internet access services of $2.5 million for the 2002 fiscal quarter
and $5.6 million for the 2002 fiscal six-month period, which resulted
primarily from increases of 21% for the 2002 fiscal quarter and 24%
for the 2002 six-month period in our revenues from private lines
services and from increases of 88% for the 2002 fiscal quarter and
112% for the 2002 six-month period in our revenues from Internet
access services for the same periods; and
o a decrease in revenues generated by our provision of local dial-up
service to Internet service providers of $3.4 million for the 2002
fiscal quarter and $4.8 million for the 2002 fiscal six-month period,
which resulted primarily from decreases of 27% for the 2002 fiscal
quarter and 23% for the 2002 six-month period in the average number
of installed lines for the same periods, excluding $3.5 million
received by us in April 2002 for the early termination of a wholesale
customer contract.
Although the average rate per minute of use we receive for our long
distance service in the 2002 fiscal quarter and the 2002 fiscal six-month period
decreased from the corresponding periods in 2001, our revenues from this service
remained relatively flat, as we experienced a continued increase in the number
of minutes used. We expect that this service will continue to experience growth
in minutes used, but the effect of this growth may be offset in whole or in part
by any rate reductions we may implement as a result of competitive requirements.
As previously reported, our local interconnection revenues were negatively
affected by the cancellation of approximately 26,300 access lines by a large
Internet service provider customer. We expect this cancellation and overall
instability in the local interconnection market to have a continuing negative
effect on our local interconnection revenues for at least the remainder of 2002
as we seek new customers.
We expect that revenues from our local, data and Internet services will
continue to grow during the remainder of 2002. We do not expect significant
growth, if any, from our sales of nonrecurring equipment and services during the
remainder of 2002 based on current economic conditions.
Operating revenues from our broadband transport services decreased $3.3
million, or 13.2%, from $24.7 million for the 2001 fiscal quarter to $21.5
million for the 2002 fiscal quarter. Operating revenues from these services for
the 2002 fiscal six-month period decreased $3.5 million, or 7.3%, to $44.2
million from $47.7 million for the 2001 fiscal six-month period. The decreases
in these revenues were primarily attributable to a 37% decrease in the rate we
charge for our transmission services for both the 2002 fiscal quarter and the
2002 fiscal six-month period, which resulted because of pricing pressures due to
industry overcapacity, and the cancellation of services by some customers.
Based on known or forecasted disconnections, we expect a further decline in
our broadband transport services revenues in the third quarter of 2002. We
presently expect revenues from these services to stabilize no earlier than the
fourth quarter of 2002. As a result of general market conditions, we expect that
our broadband transport services will continue to experience less favorable
market conditions and minimal revenue growth, if not a decline in revenues, at
least through the end of 2003.
Cost of Services. Total cost of services increased $4.2 million, from $46.1
million, or 43.5% of total operating revenues, for the 2001 fiscal quarter to
$50.2 million, or 46.3% of total operating revenues, for the 2002 fiscal
quarter. Total cost of services of $101.2 million, or 46.4% of total operating
revenues, for the 2002 fiscal six-month period represented an increase of $11.7
million over total cost of services of $89.5 million, or 43.0% of total
operating revenues, for the 2001 fiscal six-month period.
Cost of services for our retail services increased $4.8 million from $43.3
million for the 2001 fiscal quarter to $48.1 million for the 2002 fiscal
quarter. Cost of services of $96.6 million for retail services for the 2002
fiscal six-month period represented an increase of $12.7 million over cost of
services of $83.9 million for the 2001 fiscal six-month period. Cost of services
as a percentage of operating revenues from retail services increased to 55% for
28
the 2002 fiscal quarter from 53% for the 2001 fiscal quarter and to 56% for the
2002 fiscal six-month period from 52% for the 2001 fiscal six-month period.
These increases were primarily attributable to the following factors:
o an increase of $4.7 million, or 30.7%, for the 2002 fiscal quarter
and $11.7 million, or 41%, for the 2002 fiscal six-month period in
our facilities-based costs incurred to support our local service
offering, which resulted from an increase in the average number of
installed lines; and
o an increase of $2.1 million, or 26.2%, for the 2002 fiscal quarter
and $2.0 million, or 11.0%, for the 2002 fiscal six-month period in
our switched access costs, which resulted from an increase in the
number of minutes used.
Cost of services for our broadband transport services decreased $687,000
from $2.8 million for the 2001 fiscal quarter to $2.1 million for the 2002
fiscal quarter. Cost of services of $4.6 million for these services during the
2002 fiscal six-month period decreased $1.0 million from cost of services of
$5.6 million for the 2001 fiscal six-month period. Cost of services as a
percentage of operating revenues from broadband transport services decreased to
10% for the 2002 fiscal quarter from 11% for the 2001 fiscal quarter and to 10%
for the 2002 fiscal six-month period from 12% for the 2001 fiscal six-month
period. These decreases were primarily attributable to a decrease in the rates
we were charged for such services and the reduction in our use of networks of
other providers.
Selling, Operations and Administration Expense. Total selling, operations
and administration expense decreased $7.4 million from $47.5 million, or 45% of
total operating revenues, for the 2001 fiscal quarter to $40.1 million, or 37%
of total operating revenues, for the 2002 fiscal quarter. Total selling,
operations and administration expense decreased $11.9 million from $94.2
million, or 45% of total operating revenues, for the 2001 fiscal six-month
period to $82.3 million, or 38% of total operating revenues, for the 2002 fiscal
six-month period.
Selling, operations and administration expense attributable to our retail
services decreased $7.5 million from $38.8 million, or 48% of retail services
operating revenues, for the 2001 fiscal quarter to $31.3 million, or 36% of
retail services operating revenues, for the 2002 fiscal quarter. Selling,
operations and administration expense attributable to retail services during the
2002 fiscal six-month period decreased $12.5 million to $64.8 million, or 37% of
retail services operating revenues, from $77.4 million, or 48% of retail
services operating revenues, for the 2001 fiscal six-month period. These
decreases were primarily attributable to a decrease in personnel and occupancy
expenses resulting from a reduction in the number of employees and the closing
of some facilities as part of our restructuring efforts implemented in September
2001 and April 2002. We expect that our selling, operations and administration
expenses will continue to improve as the effects of our restructurings are
realized.
Selling, operations and administration expense attributable to our
broadband transport services increased $71,000 from $8.7 million, or 36% of
broadband transport services operating revenues, for the 2001 fiscal quarter to
$8.8 million, or 41% of broadband transport services operating revenues, for the
2002 fiscal quarter. Selling, operations and administration expense attributable
to broadband transport services during the 2002 fiscal six-month period
increased $655,000 to $17.5 million, or 40% of broadband transport services
operating revenues, from $16.9 million, or 35% of broadband transport services
operating revenues, for the 2001 fiscal six-month period. These increases
resulted primarily from increases in taxes and licenses expense and information
system expenses.
Special charges. We incurred total special charges of $2.1 million during
the 2002 fiscal quarter and the 2002 fiscal six-month period. These charges were
primarily attributable to employee termination benefits and contract termination
fees related to our retail services.
Depreciation and Amortization. Total depreciation and amortization expense
increased $1.5 million from $29.5 million for the 2001 fiscal quarter to $31.0
million for the 2002 fiscal quarter. Total depreciation and amortization expense
of $63.0 million for the 2002 fiscal six-month period represented an increase of
$5.5million over total depreciation and amortization expense of $57.5 million
for the 2001 fiscal six-month period. Our retail
29
services accounted for $494,000 of the increase in the 2002 fiscal quarter and
$2.1 million of the increase in the 2002 fiscal six-month period. These
increases were primarily related to depreciation of telecommunications equipment
added to our network during 2001 and the 2002 fiscal six-month period. Our
broadband transport services operations accounted for $1.0 million of the
increase in the 2002 fiscal quarter and $3.4 million of the increase in the 2002
fiscal six-month period. The increases associated with these operations were
primarily attributable to depreciation of network fiber and optical
telecommunications equipment installed during 2001 and to depreciation of
telecommunications equipment installed in the 2002 fiscal six-month period.
Interest Expense. Total interest expense increased $194,000, from $14.3
million for the 2001 fiscal quarter to $14.5 million for the 2002 fiscal
quarter. Total interest expense of $29.5 million for the 2002 fiscal six-month
period represented an increase of $297,000 over total interest expense of $29.2
million for the 2001 fiscal six-month period.
Interest Income. Total interest income from the temporary investment of
available cash balances decreased from $526,000 for the 2001 fiscal quarter to
$104,000 for the 2002 fiscal quarter and from $1.8 million for the 2001
six-month period to $227,000 for the 2002 six-month period.
EBITDA, as adjusted. Total EBITDA, as adjusted, increased $3.8 million from
$12.4 million for the 2001 fiscal quarter to $16.2 million for the 2002 fiscal
quarter. Total EBITDA, as adjusted, of $32.3 million for the 2002 fiscal
six-month period represented an increase of $7.8 million from EBITDA, as
adjusted, of $24.5 million for the 2001 fiscal six-month period. EBITDA, as
adjusted, net of (1) a non-recurring fee of $3.5 million received by us in April
2002 for the early termination of a local interconnection contract, (2) $2.1
million in special charges related primarily to employee termination benefits
for the Company's retail services business and (3) prior-period amounts for
interconnection agreement settlements of $1.5 million in the 2001 fiscal
six-month period, increased $2.4 million for the 2002 fiscal quarter and $7.9
million for the 2002 fiscal six-month period over the corresponding periods in
2001.
EBITDA, as adjusted, attributable to our retail services for the 2002
fiscal quarter was $5.7 million, which represented an increase of $6.5 million
from EBITDA, as adjusted, of $(780,000) for the 2001 fiscal quarter. EBITDA, as
adjusted, attributable to these services for the 2002 fiscal six-month period
was $10.2 million compared to EBITDA, as adjusted, of $(722,000) for the 2001
fiscal six-month period. EBITDA, as adjusted, net of (1) a non-recurring fee of
$3.5 million received by us in April 2002 for the early termination of a local
interconnection contract, (2) $2.1 million in special charges related primarily
to employee termination benefits for the Company's retail services business and
(3) prior-period amounts for interconnection agreement settlements of $1.5
million in the 2001 fiscal six-month period, increased $5.0 million for the 2002
fiscal quarter and $11.0 million for the 2002 fiscal six-month period over the
corresponding periods in 2001. These increases in EBITDA, as adjusted, for our
retail services were primarily attributable to the following factors:
o an increase of $8.3 million for the 2002 fiscal quarter and $16.7 million
for the 2002 fiscal six-month period resulting from increased revenues
generated by our local, data and Internet services, the effect of which
was partially offset by a decrease in our local dial-up services we
provide to Internet service providers; and
o an increase of $7.5 million for the 2002 fiscal quarter and $12.5 million
for the 2002 fiscal six-month period resulting primarily from a decrease
in personnel and occupancy costs realized from our restructuring efforts.
The effect of the foregoing increases was partially offset by a decrease of $4.2
million for the 2002 fiscal quarter and $11.7 million for the 2002 fiscal
six-month period resulting form an increase in our cost of services.
EBITDA, as adjusted, attributable to our broadband transport services
decreased $2.7 million from $13.2 million for the 2001 fiscal quarter to $10.5
million for the 2002 fiscal quarter. EBITDA, as adjusted, of $22.1
million attributable to these services for the 2002 fiscal six-month period
represented a decrease of $3.1 million from EBITDA, as adjusted, from $25.2
million for the 2001 fiscal six-month period. These decreases in EBITDA, as
adjusted, for our broadband transport services were primarily attributable to a
decline in the revenues
30
generated by this business, which resulted from a reduction in rates charged to
our customers due to industry overcapacity.
Liquidity and Capital Resources
As of July 31, 2002, we had $25.1 million of cash and cash equivalents.
Based on such cash availability and our ability to continue to generate positive
cash flows from operations, we do not expect we will require or obtain
debtor-in-possession financing during the bankruptcy proceedings. We believe
that our existing cash resources are sufficient to fund our business operations
and currently anticipated capital expenditures at least until 2003.
We are seeking to reorganize under Chapter 11 of the Bankruptcy Code
because we believe our existing sources of liquidity are insufficient to support
the growth of our business and to satisfy all of our debt service requirements.
Our proposed plan of reorganization, which is summarized above under
"-Overview," would result in the elimination of $515 million principal amount of
our indebtedness through the cancellation of all of our outstanding senior notes
and convertible subordinated notes and the issuance of common stock in our
reorganized company to the former holders of the notes. We expect that the
decrease in our fixed interest costs resulting from the reduction in our total
indebtedness from approximately $722.6 million at June 30, 2002 to approximately
$207.7 million would enable us to maintain positive cash flow from operations
beginning immediately after completion of our restructuring and continuing
through the current period of uncertainty affecting the telecommunications
industry and competitive telecommunications companies. Our liquidity position
would be further strengthened by our receipt of $30 million of gross proceeds
from the sale of a new issue of convertible redeemable preferred stock and
common stock purchase warrants as part of our reorganization. Our proposed plan
of reorganization must be approved by the holders of certain claims and
interests in ITC/\DeltaCom and confirmed by the Bankruptcy Court, and is subject
to possible modification during this process.
As previously reported, to conserve liquidity for our business while we
pursued restructuring negotiations during the second quarter of 2002, we did not
pay the scheduled May 15, 2002 interest payments due on our 9 3/4% senior notes
due 2008 and on our 4 1/2% convertible subordinated notes due 2006 or the
scheduled June 1, 2002 interest payment due on our 11% senior notes due 2007.
The scheduled May 15, 2002 payments totaled approximately $6.1 million on our
9 3/4% senior notes and approximately $2.3 million on our 4 1/2% convertible
subordinated notes. The scheduled June 1, 2002 payment totaled approximately
$7.2 million.
We do not have agreements from the creditors under our $160 million senior
secured credit facility and $40 million capital lease facility to forbear from
exercising their rights to declare a default or pursue remedies under those
facilities based solely on our failure to pay interest on the senior notes and
convertible subordinated notes and our subsequent filing of a voluntary petition
under Chapter 11 of the Bankruptcy Code. Although we continue discussions with
our senior secured creditors in an effort to negotiate an agreement to forbear
from exercising their rights to declare default, our senior secured creditors
have the right to enforce their claims against us to the extent provided by the
applicable agreements and applicable law. Our senior credit obligations are
secured by liens on substantially all of our assets. We are engaged in
discussions with lenders under our senior credit facility concerning possible
amendments to the facility that would, among other changes, accelerate the
schedule for repayment of principal, increase the interest rates applicable to
outstanding borrowings, add financial maintenance covenants, and modify existing
affirmative and negative covenants. If we and our senior lenders are unable to
reach agreement on amendments to the credit facility, or if our senior creditors
seek to exercise their remedies under their agreements and applicable law, our
operating subsidiaries, Interstate FiberNet, Inc. and ITC/\DeltaCom
Communications, Inc., who are parties to the senior credit and capital lease
facilities, may be compelled to file for protection under the Bankruptcy Code.
As a result of our failure to pay interest on the senior notes and
convertible subordinated notes on May 15 and June 1, 2002 and our filing of a
voluntary petition under Chapter 11 of the Bankruptcy Code on June 25, 2002, we
are in default under our senior credit and capital lease facilities. For so long
as we remain in default, interest under the facility is payable at a default
rate of 2% in excess of an annual rate of 1.875% plus a base
31
rate, which was 4.75% at June 30, 2002. In connection with these defaults, we
have reclassified $154.8 million of our senior credit facility and $31.0 million
of our $40 million capital lease facility as current liabilities.
We depend on BellSouth for the provision of wholesale telecommunications
services under its interconnection agreements with BellSouth and pursuant to
various access tariffs that 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. For more information about this proceeding, see note 7 to the
condensed consolidated financial statements appearing elsewhere in this report.
Some of our customers, especially governmental entities, and some
governmental entities from which we have acquired a franchise or rights-of-way
agreement, require us to obtain surety bonds as a condition to our provision of
service to them or other entities within their control. In February 2002,
because of our financial condition, our surety cancelled all outstanding surety
bonds that contained cancellation clauses. The surety also refuses to underwrite
any new surety bonds unless we provide 100% collateral for such bonds. 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 and other entities that
generally require surety bonds. 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. For
more information about our surety obligations, see note 7 to the consolidated
financial statements appearing elsewhere in this report.
During the 2002 fiscal six-month period, we funded our operating and
capital requirements and other cash needs principally through cash from
operations and cash on hand. In large part to address our liquidity constraints,
we reduced our planned capital expenditures and implemented other cost-cutting
measures.
Cash provided by (used for) operating activities was $2.8 million in the
2002 fiscal six-month period and $(14.0) million in the 2001 fiscal six-month
period. Changes in working capital were $1.8 million in the 2002 fiscal
six-month period and $(11.9) million in the 2001 fiscal six-month period.
o The change in the 2002 fiscal six-month period was primarily
attributable to a decrease in accounts receivable and inventory and an
increase in accrued interest, the effects of which were partially offset
by an increase in prepaid expenses and a decrease in accounts payable,
unearned revenue and accrued compensation and other accrued liabilities.
o The change in the 2001 fiscal six-month period was primarily
attributable to an increase in accounts receivable and inventory and a
decrease in unearned revenue, the effects of which were partially offset
by a decrease in prepaid expenses and an increase in accounts payable,
accrued interest and accrued compensation and other accrued liabilities.
Cash used for investing activities was $21.9 million in the 2002 fiscal
six-month period and $90.3 million in the 2001 fiscal six-month period. The cash
used in these periods was primarily applied to fund capital expenditures.
We made capital expenditures of $21.9 million in the 2002 fiscal six-month
period and $97.5 million in the 2001 fiscal six-month period.
o Of the $21.9 million of capital expenditures in the 2002 fiscal
six-month period, $18.9 million related to our retail services segment
and $3.0 million related to our broadband transport services segment.
o Of the $97.5 million of capital expenditures in the 2001 fiscal
six-month period, $42.4 million related to our retail services segment
and $55.1 million related to our broadband transport services segment.
32
Cash (used for) provided by financing activities was $(1.2) million in the
2002 fiscal six-month period and $26.9 in the 2001 fiscal six-month period.
o Net cash used for financing activities in the 2002 fiscal six-month
period consisted primarily of repayments of long-term debt and capital
lease obligations.
o Net cash provided by financing activities in the 2001 fiscal six-month
period consisted primarily of proceeds of $26.8 million, net of issuance
costs, from the issuance of our Series B-1 preferred stock and proceeds
of $1.1 million from the exercise of options to purchase common stock.
We have various contractual obligations and commercial commitments. 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 June 30, 2002 (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 ........... 156,400 800 3,200 40,200 112,200
Capital lease obligations .................. 51,329 4,667 23,125 15,535 8,002
Operating leases ........................... 65,846 6,125 24,098 15,729 19,894
Unconditional purchase obligations ......... 2,991 2,991 -- -- --
-------- --------- ------ -------- ---------
Subtotal ................................ 791,566 14,583 50,423 171,464 555,096
Liabilities subject to compromise .......... (515,000) -- -- (100,000) (415,000)
-------- -------- ------- --------- ---------
Totals .................................. $276,566 $ 14,583 $50,423 $ 71,464 $140,096
======== ======== ======= ========= ========
We expect that, as a result of our Chapter 11 filing, no post-petition
interest will be due on our senior notes or convertible subordinated notes and
that the notes and pre-petition interest on the notes will be an allowed claim
under the Bankruptcy Code. Under our proposed plan of reorganization, as
described above, all of these notes would be cancelled and the holders of the
notes would receive common stock of our reorganized company. Interest payments
that will become due and payable on our senior credit facility and capital lease
obligations during the remainder of 2002 total $7.4 million. As described
elsewhere in this report, we are engaged in discussions with lenders under our
senior credit facility concerning possible amendments to the facility that
would, among other changes, accelerate the schedule for repayment of principal
and increase the interest rates applicable to outstanding borrowings.
We currently are in discussions with NTFC Capital Corporation concerning
possible amendments to our $40 million capital lease facility that would, among
other changes, permit us to defer approximately $9.9 million of principal
payments due in 2003 until 2006. If this amendment is approved, we expect that
we would pay an additional $2.6 million in interest over the term of the
facility.
We have obtained a portion of our rights-of-way under an agreement that
provides for significant annual fixed payments by us through 2020. If our
proposed plan of reorganization is completed during 2002 and the consummation of
the proposed plan were deemed to constitute a change in control, as defined in
the agreement, these annual payments would terminate and we would be obligated
to make a one-time payment totaling approximately $19.7 million.
33
At June 30, 2002, we had entered into agreements with vendors to purchase
approximately $3.0 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 the 2002 fiscal
six-month period, we made net capital expenditures of approximately $21.9
million. We currently estimate that our aggregate capital requirements for 2002
will total approximately $35.0 million to $45.0 million, including the $3.0
million in commitments as of June 30, 2002.
In November 2000, we entered a purchase agreement with Nortel Networks,
Inc. for the purchase of telecommunications equipment and services. The
agreement provides for 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 purchase less than $250 million of equipment and
services, the agreement provides that we will be required to pay to Nortel a
commitment violation fee. Based on our actual and forecasted purchases under the
agreement, we currently estimate that we may be required to pay a commitment
violation fee of approximately $3.5 million to $3.8 million in the first quarter
of 2003. In addition, Nortel Networks has deployed approximately $7.0 million of
equipment under terms providing that payment is due when we place the deployed
equipment into service. Based on our current schedule for placing this equipment
into service, we expect that these terms will require us to pay $2.8 million in
the third quarter of 2002 and $4.2 million in the fourth quarter of 2002 or the
first quarter 2003, depending on our need for capacity. Under other terms of
this agreement, we are required to purchase, or pay for, an additional $10
million of equipment by the fourth quarter of 2003. Although we expect that all
of the estimated payment obligations under the agreement that are described
above will be subject to modification as a result of a specified contract
renewal process beginning in the fourth quarter of 2002, we are unable to
predict the outcome of those negotiations. The estimated payment obligations
under this agreement are in addition to the outstanding commitments of $3.0
million as of June 30, 2002 described above.
Our capital expenditures in the third and fourth quarter of 2002 will be
primarily for the continued addition of telecommunications equipment in
connection with our local and data telecommunications services, and for
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
our proposed restructuring, we plan to further restrict our capital
expenditures. Such a reduction could have a material negative effect on our
expected revenue growth.
Effects of New Accounting Standards
Statement of Financial Accounting Standards 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. Under SFAS No.142, 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. SFAS No. 142 also 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. Upon our adoption of SFAS No. 142
on January 1, 2002, we ceased amortization of goodwill. Goodwill amortization
was $1.5 million in the 2001 fiscal quarter and $3.1 million in the 2001 fiscal
six-month period. We completed a transitional test as of January 1, 2002 during
the 2002 fiscal six-month period and determined that goodwill has not been
impaired. Pursuant to our adoption of SFAS No. 142, we 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, we will adopt this
statement on January 1,
34
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. SFAS No.144 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
business segment. 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 for interim
periods within those fiscal years. We adopted SFAS No. 144 on January 1, 2002,
with no material effect on our consolidated financial statements.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, an amendment
of FASB Statement no. 13, and Technical Corrections," was issued in April 2002.
This statement, among other things, significantly limits the instances where the
extinguishment of debt can be treated as an extraordinary item in the statement
of operations. This statement also requires reclassification of all prior period
extraordinary items related to the extinguishment of debt. We will implement
this statement, as required by SOP 90-7, as part of our fresh start reporting
upon completion of our bankruptcy proceedings.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in July 2002. This statement requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002 or our emergence from the bankruptcy
proceedings, whichever occurs earlier.
Certifications Under Section 906 of Sarbanes-Oxley Act of 2002
Section 906 of the Sarbanes-Oxley Act of 2002, which was enacted into law
on July 30, 2002, requires our chief executive officer and chief financial
officer to certify that this Quarterly Report on Form 10-Q fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that the information contained in the report fairly presents, in all
material respects, our financial condition and results of operations. We believe
that, in order to make these certifications, our independent accountant must
conduct a review of the condensed consolidated financial statements appearing
elsewhere in this report under Statement of Auditing Standards No. 71, as
required by SEC rules.
As previously reported in a Current Report on Form 8-K we filed on August
9, 2002, our relationship with our former independent accountant, Arthur
Andersen LLP, has effectively been terminated as a result of the publicly
announced wind-down of Arthur Andersen's business. Accordingly, Arthur Andersen
has not undertaken the required SAS 71 review of the condensed consolidated
financial statements appearing elsewhere in this report. We are in the process
of completing a lengthy selection process and expect to engage an independent
accountant to succeed Arthur Andersen by the end of August 2002. Once we engage
a new independent accountant, we will have the new independent accountant
promptly undertake the SAS 71 review. Thereafter, we expect to file an amendment
to this report pursuant to which our chief executive officer and chief financial
officer will make the certifications required under Section 906 of the
Sarbanes-Oxley Act.
35
Item 3. 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 $156.4 million of borrowings outstanding
under our senior credit facility as of June 30, 2002. As described above, as a
result of our failure to pay interest on our senior notes and convertible
subordinated notes on May 15 and June 1, 2002 and our filing of a voluntary
petition under Chapter 11 of the Bankruptcy Code on June 25, 2002, we are in
default under our senior credit facility. For so long as we remain in default,
interest under the facility is payable at a default rate of 2% in excess of an
annual rate of 1.875% plus a base rate, which was 4.75% at June 30, 2002. The
interest rates that we are able to obtain on our debt financing depend on
then-current market conditions. We are also exposed to fair value risk related
to our fixed-rate, long-term debt. As a result of our filing under Chapter 11,
the fair value of our fixed-rate long-term debt has significantly decreased.
At June 30, 2002, $156.4 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 $156.4 million of
variable-rate debt at June 30, 2002 would result in a fluctuation of
approximately $1.6 million in our annual interest expense.
36
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Chapter 11 Proceedings
As reported in a Current Report on Form 8-K we filed on June 26, 2002,
in June 2002, ITC/\DeltaCom and members of an unofficial committee of holders of
our senior notes and subordinated convertible notes reached an agreement in
principle to implement a reorganization of ITC/\DeltaCom. The proposed plan of
reorganization will result in the elimination of approximately $515 million in
principal amount of ITC/\DeltaCom's senior and convertible subordinated notes.
In order to complete the reorganization as expeditiously as possible,
ITC/\DeltaCom, Inc. filed a Chapter 11 bankruptcy petition in the United States
Bankruptcy Court for the District of Delaware on June 25, 2002.
On July 26, 2002, ITC/\DeltaCom filed with the Bankruptcy Court a
proposed Plan of Reorganization Under Chapter 11 of the Bankruptcy Code and a
proposed Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code.
We believe that the proposed plan and proposed disclosure statement reflect the
terms of the plan of reorganization supported by members of the unofficial
committee of noteholders. A hearing by the Bankruptcy Court to approve the
proposed disclosure statement is currently scheduled to be held on August 22,
2002.
Copies of the proposed plan and proposed disclosure statement are filed
as Exhibits 99.1 and 99.2, respectively, to this Quarterly Report on Form 10-Q.
The proposed plan and proposed disclosure statement are preliminary in
form and the information in these documents is not complete and may be changed.
Neither the proposed plan nor the proposed disclosure statement has been
approved by the Bankruptcy Court for use in the solicitation of acceptances of
the proposed plan or for any other reason. This Quarterly Report on Form 10-Q,
including the exhibits hereto, is not, and should not be deemed to be,
soliciting acceptances of the proposed plan.
Proceedings Affecting Rights-of-Way
In April and May 2002, 190 lawsuits were filed by a single counsel in
the Circuit Court for Harrison County, Mississippi, against Mississippi Power
Company, us and WorldCom, Inc. d/b/a MCI Group. Each plaintiff claims to be the
owner of property over which Mississippi Power Company has an easement and that
WorldCom and/or we have benefited by using the easement to provide
telecommunications services. As a result of these allegations, each of the
plaintiffs claim trespass, unjust enrichment, fraud and deceit, and civil
conspiracy against each of the defendants. Each of the plaintiffs also seek $5
million in compensatory damages, $50 million in punitive damages, disgorgement
of the gross revenues derived from the use by WorldCom and us of the cable over
the easements, a percentage of gross profits obtained from the use of the cable,
and the plaintiffs' costs to prosecute the action. Mississippi Power Company,
WorldCom and we have denied all of the plaintiffs' allegations. These actions
are substantially similar to the other, previously reported actions that we are
defending in state and federal courts in Mississippi. Of the 190 lawsuits, we
believe only approximately 11 involve parcels of land across which the optical
fiber of Mississippi Power Company run are used by us in the provision of
telecommunications services. On August 5, 2002, Mississippi Power Company
removed all actions involving WorldCom's use of Mississippi Power Company's
rights-of-way to the United States District Court for the Southern District of
Mississippi and requested the actions to be transferred to the United States
Bankruptcy Court for the Southern District of New York, where WorldCom's
bankruptcy proceeding is pending.
On April 19, 2002, a civil action was filed by an individual property
owner in the Chancery Court of Harrison County, Mississippi against Mississippi
Power Company, Southern Company Services and us. The plaintiff seeks to
permanently enjoin Mississippi Power Company and Southern Company from
continuing to permit their rights-of-way across the plaintiff's property to be
used by third parties in any manner that is not related to the transmission of
electric power. The plaintiff also seeks proof of cancellation of all leases and
contracts between third parties and
37
Mississippi Power Company and Southern regarding the use of the fiber optic
cable on the right-of-way across the plaintiff's property, proof that the use of
the right-of-way is for purposes associated with providing electricity, an
accounting of revenues of third parties from the use of the right-of-way,
punitive damages of $1 million, and costs and expenses. Mississippi Power
Company, Southern Company and we have denied all of the plaintiff's allegations.
On July 8, 2002, nine lawsuits on behalf of 101 property owners were filed
against Mississippi Power Company, Southern Company and us in the Chancery Court
of Jones County, Mississippi. All nine complaints are identical in seeking
relief for trespass, nuisance, conversion, unjust enrichment and accounting,
fraudulent concealment, fraud, fraudulent misrepresentation and fraudulent
concealment, and rescission and equitable reformation arising from the alleged
unauthorized use of the subject rights of way in violation of the terms of the
easements held by Mississippi Power Company. The landowners are seeking
unspecified monetary damages and certain equitable relief. Mississippi Power
Company, Southern Company and we deny all the allegations.
On August 8, 2002, we were served with a complaint filed in the Circuit
Court of Hinds County, Mississippi, in which four owners of property located in
Hancock County, Mississippi allege Mississippi Power Company and we have
violated the plaintiffs' rights with regard to the use of Mississippi Power
Company's easement across the plaintiffs' property. The plaintiffs allege
trespass, unjust enrichment, negligence, breach of contract and tortuous breach
of contract, fraudulent concealment, fraudulent misrepresentation, conspiracy,
accounting and seeks an unspecified amount of damages. We deny all such
allegations.
BellSouth Deposit Contingency
We depend on BellSouth for the provision of wholesale telecommunications
services under our interconnection agreements with BellSouth and pursuant to
various access tariffs that BellSouth has filed with federal and state
regulatory agencies. As previously reported, BellSouth has requested by letter
dated March 8, 2002 that we provide a $10 million security deposit by March 29,
2002 in connection with BellSouth's provision of services to us. On March 28,
2002, we filed a petition for declaratory judgment in Georgia state court
seeking a ruling from the court that, based upon the terms of our
interconnection agreements with BellSouth, BellSouth may not require us to place
a $10 million deposit with BellSouth as security for future payment for services
to be rendered to us by BellSouth. BellSouth has responded to our petition by
seeking to have the matter heard before the Georgia Public Service Commission,
rather than in Georgia state court. BellSouth has filed a petition with the
Georgia Public Service Commission seeking a determination that we should be
required to place a $17 million security deposit with BellSouth. We are
contesting both the requirement for, and the amount of, the requested deposit.
BellSouth also has requested the Federal Communications Commission to approve
new deposit language in its access tariff relating to us and other carriers. The
FCC has suspended BellSouth's new tariff and is investigating BellSouth's
proposed deposit language. If the FCC were to adopt BellSouth's proposed deposit
language and if BellSouth were authorized to require a substantial 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.
Item 3. Defaults Upon Senior Securities
(a) As previously reported, to conserve liquidity for our business while we
pursued restructuring negotiations during the second quarter of 2002, we did not
pay the scheduled May 15, 2002 interest payments due on our 9 3/4% senior notes
due 2008 and on our 4 1/2% convertible subordinated notes due 2006 or the
scheduled June 1, 2002 interest payment due on our 11% senior notes due 2007.
The scheduled May 15, 2002 payments totaled approximately $6.1 million on our 9
3/4% senior notes and approximately $2.3 million on our 4 1/2% convertible
subordinated notes. The scheduled June 1, 2002 payment totaled approximately
$7.2 million. The indentures under which we issued our senior notes and
convertible subordinated notes provide that an event of default will occur if we
do not pay interest on any note within 30 days after the date on which the
interest first became due and payable. Accordingly, we are in default under each
of the foregoing note issues. As of August 14, 2002, the total amount of due but
unpaid interest on these note issues was $15.5 million.
38
(b) We did not make the scheduled July 15, 2002 dividend payments on the
outstanding shares of our Series B-1 preferred stock or Series B-2 preferred
stock. Under the Bankruptcy Code, dividends on the Series B preferred stock do
not accrue during our bankruptcy proceedings. The amount of dividends which
would otherwise have been payable on July 15, 2002 on the Series B-1 preferred
stock and the Series B-2 preferred stock was approximately $638,500 and
$831,900, respectively.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
ITC/\DeltaCom files herewith the following exhibits:
10.1 Form of Agreement Concerning Voting (including
ITC/\DeltaCom, Inc. Term Sheet and form of Executive
Employment and Retention Agreement) among the Company
and certain holders of ITC/\DeltaCom's senior notes
and convertible subordinated notes. Filed as Exhibit
10.1 to Current Report on Form 8-K filed on June 26,
2002 and incorporated herein by reference.
10.2 Subscription Agreement, dated as of June 25, 2002,
among ITC/\DeltaCom, Campbell B. Lanier, III and ITC
Holding Company, Inc. Filed as Exhibit 10.2 to
Current Report on Form 8-K filed on June 26, 2002 and
incorporated herein by reference.
10.3 Subscription Agreement, dated as of June 25, 2002,
between ITC/\DeltaCom and SCANA Corporation. Filed as
Exhibit 10.2 to Current Report on Form 8-K filed on
June 26, 2002 and incorporated herein by reference.
99.1 Proposed ITC/\DeltaCom, Inc. Plan of Reorganization
under Chapter 11 of the Bankruptcy Code, filed with
the United States Bankruptcy Court for the District
of Delaware on July 26, 2002. Filed herewith.
99.2 Proposed ITC/\DeltaCom, Inc. Disclosure Statement
pursuant to Section 1125 of the Bankruptcy Code,
filed with the United States Bankruptcy Court for the
District of Delaware on July 26, 2002. Filed
herewith.
(b) Reports on Form 8-K.
The following Current Reports on Form 8-K were filed by ITC/\DeltaCom
during the period covered by this report:
Filing Date of Report Item Reported
--------------------- -------------
May 3, 2002 Item 5 (draw down under Series B preferred stock
investment agreement)
May 15, 2002 Item 5 (non-payment of scheduled May 15, 2002
interest payments on certain senior notes and
convertible subordinated notes)
May 17, 2002 Item 5 (limited forbearance by senior creditors to
exercise remedies upon default)
June 26, 2002 Item 3 (filing by ITC/\DeltaCom, Inc. under Chapter
11 of the U.S. Bankruptcy Code)
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ITC^DeltaCom, Inc.
(Registrant)
Date: August 14, 2002 By: /s/ Douglas A. Shumate
------------------------------------
Douglas A. Shumate
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
40
Exhibit Index
Number Exhibit Description
------ -------------------
10.1 Form of Agreement Concerning Voting (including
ITC/\DeltaCom, Inc. Term Sheet and form of Executive
Employment and Retention Agreement) among the Company
and certain holders of ITC/\DeltaCom's senior notes
and convertible subordinated notes. Filed as Exhibit
10.1 to Current Report on Form 8-K filed on June 26,
2002 and incorporated herein by reference.
10.2 Subscription Agreement, dated as of June 25, 2002,
among ITC/\DeltaCom, Campbell B. Lanier, III and ITC
Holding Company, Inc. Filed as Exhibit 10.2 to
Current Report on Form 8-K filed on June 26, 2002 and
incorporated herein by reference.
10.3 Subscription Agreement, dated as of June 25, 2002,
between ITC/\DeltaCom and SCANA Corporation. Filed as
Exhibit 10.2 to Current Report on Form 8-K filed on
June 26, 2002 and incorporated herein by reference.
99.1 Proposed ITC/\DeltaCom, Inc. Plan of Reorganization
under Chapter 11 of the Bankruptcy Code, filed with
the United States Bankruptcy Court for the District
of Delaware on July 26, 2002. Filed herewith.
99.2 Proposed ITC/\DeltaCom, Inc. Disclosure Statement
pursuant to Section 1125 of the Bankruptcy Code,
filed with the United States Bankruptcy Court for the
District of Delaware on July 26, 2002. Filed
herewith.