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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission File Number: 0-23252
ITC/\DELTACOM, INC.
(Exact name of registrant as specified in its
charter)
Delaware 58-2301135
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ITC/\DeltaCom, Inc.
1241 O.G. Skinner Drive
West Point, Georgia 31833
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 645-3880
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Title of Class
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the registrant's common stock as
of March 16, 1998, is $766,393,944. */
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date is:
Common Stock, par value $.01 per share, outstanding as of March 16, 1998:
25,335,337
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated:
(1) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders to be held on June 4, 1998, to be filed within 120 days after
the end of the registrant's fiscal year, are incorporated by reference into
Part III, Items 10 - 13 of this Form 10-K.
- ----------
*/ Solely for the purposes of this calculation, all directors and executive
officers of the registrant and all stockholders beneficially owning more
than 5% of the registrant's common stock are considered to be affiliates.
TABLE OF CONTENTS
Page
PART I
Item 1. Business.............................................. 1
Item 2. Properties............................................ 37
Item 3. Legal Proceedings..................................... 37
Item 4. Submission of Matters to a Vote of Security Holders... 37
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters........................... 38
Item 6. Selected Financial Data............................... 40
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 42
Item 8. Financial Statements and Supplementary Data........... 55
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 55
PART III
Item 10. Directors and Executive Officers of the Registrant.... 56
Item 11. Executive Compensation................................ 56
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................ 56
Item 13. Certain Relationships and Related Transactions........ 56
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K .......................................... 57
GLOSSARY................................................................. 69
SIGNATURES............................................................... 73
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................... F-1
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION, MEMBERS OF THE COMPANY'S
SENIOR MANAGEMENT MAY, FROM TIME TO TIME, MAKE CERTAIN FORWARD-LOOKING
STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, PERFORMANCE AND OTHER
DEVELOPMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING THOSE SET FORTH UNDER THE CAPTION "BUSINESS--RISK FACTORS" AND
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K, AS WELL AS FACTORS WHICH MAY BE
IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION.
UNLESS THE CONTEXT SUGGESTS OTHERWISE, REFERENCES IN THIS ANNUAL REPORT ON
FORM 10-K TO THE "COMPANY" MEAN ITC/\DELTACOM, INC. AND ITS SUBSIDIARIES AND
PREDECESSORS. UNLESS OTHERWISE INDICATED, DOLLAR AMOUNTS OVER $1 MILLION HAVE
BEEN ROUNDED TO ONE DECIMAL PLACE AND DOLLAR AMOUNTS LESS THAN $1 MILLION HAVE
BEEN ROUNDED TO THE NEAREST THOUSAND. SEE THE "GLOSSARY" APPEARING ELSEWHERE
HEREIN FOR DEFINITIONS OF CERTAIN TERMS USED IN THIS FORM 10-K.
PART I
ITEM 1. BUSINESS
OVERVIEW
The Company provides retail long distance services to mid-sized and major
regional businesses in the southern United States and is a leading regional
provider of wholesale long-haul services to other telecommunications companies
using the Company's owned, operated and managed fiber optic network (the
"Carriers' Carrier Services"). The Company intends to become a leading regional
provider of integrated telecommunications services to mid-sized and major
regional businesses in the southern United States by offering such customers a
broad range of telecommunications services, including local exchange and long
distance data and voice, Internet and operator services, and the sale and
servicing of customer premise equipment (collectively, the "Retail Services") in
a single package tailored to the business customer's specific needs. The Company
had revenues of approximately $66.5 million for the year ended December 31, 1996
and revenues of approximately $114.6 million for the year ended December 31,
1997.
The Company provides Carriers' Carrier Services to other telecommunications
carriers, including AT&T, MCI, Sprint, WorldCom, Cable & Wireless, LCI, Frontier
and IXC. The Company's fiber optic network reaches over 60 points of presence
("POPs") in ten southern states (Alabama, Arkansas, Florida, Georgia, Louisiana,
Mississippi, North Carolina, South Carolina, Tennessee and Texas) and extends
approximately 6,300 route miles, of which approximately 3,300 miles are
Company-owned and approximately 3,000 miles are owned and operated principally
by three public utilities (Duke Power Company, Florida Power & Light Company and
Entergy Technology Company) and managed and marketed by the Company. For the
year ended December 31, 1997, revenue for the Company's Carriers' Carrier
Services was $31.0 million and EBITDA as a percentage of revenue ("EBITDA
Margin") for the Company's Carriers' Carrier Services was 60%. As of December
31, 1997, the Company had remaining future long-term contract commitments for
Carriers' Carrier Services totaling approximately $77.9 million. These contracts
expire on various dates through 2006 and are expected to generate approximately
$58.2 million in revenues to the Company through 2001, of which approximately
$18.0 million are expected to be realized in 1998.
1
The Company currently provides a variety of Retail Services, including
retail long distance services such as traditional switched and dedicated long
distance, 800/888 calling, calling card and operator services, Asynchronous
Transfer Mode ("ATM"), frame relay, high capacity broadband private line
services, as well as Internet, Intranet and Web page hosting and development
services, and customer premise equipment installation and repair. The Company
also offers local exchange services as part of its Retail Services in a majority
of its markets. As of December 31, 1997, the Company provided Retail Services to
over 7,700 business customers. The Company currently offers Retail Services in
15 metropolitan areas (including local exchange services in 11 markets) in
Alabama, Florida, Georgia, Louisiana, North Carolina and South Carolina. The
Company intends to provide a full range of Retail Services in a total of
approximately 35 metropolitan areas throughout the southern United States over
the next five years. For the year ended December 31, 1997, revenue for the
Company's Retail Services was $83.6 million and EBITDA Margin for the Company's
Retail Services was 4%.
In connection with offering local exchange services, the Company has
entered into an Interconnection Agreement (the "Interconnection Agreement") with
BellSouth Telecommunications, Inc. ("BellSouth") to (i) resell BellSouth's local
exchange services and (ii) interconnect the Company's network with BellSouth's
network for the purpose of immediately gaining access to all of BellSouth's
unbundled network elements. This agreement allows the Company to enter new
markets with minimal capital expenditures and to offer local exchange services
to its current customer base. The Interconnection Agreement currently allows the
Company to provide local service on a resale basis or by purchasing all
unbundled network elements required to provide local service on a facilities
basis, without using Company-owned facilities. The terms of the Interconnection
Agreement, including interim pricing terms agreed to by the Company and
BellSouth, have been approved by state regulatory authorities in all states in
which BellSouth operates, although they remain subject to review and
modification by such authorities. In addition, the Interconnection Agreement
does not resolve all operational issues, which issues the Company and BellSouth
are continuing to negotiate to resolve. The Company believes that the
Interconnection Agreement provides a foundation for it to provide local services
on a reasonable commercial basis, but there can be no assurance in this regard
and important issues remain unsettled as a result of legal and regulatory
developments and related matters. The Interconnection Agreement expires in July
1999, and there can be no assurance that the Company will be able to renew it
under favorable terms, or at all.
ITC/\DeltaCom was incorporated in Delaware. The Company's principal
executive offices are located at 1241 O.G. Skinner Drive, West Point, Georgia
31833, and its telephone number is (706) 645-3880.
2
HISTORY OF THE COMPANY
ITC/\DeltaCom was incorporated in March 1997 as a wholly owned subsidiary
of ITC Holding Company, Inc. ("ITC Holding"), to acquire and operate ITC
Holding's Retail Services and Carriers' Carrier Services businesses. The Company
acquired such businesses on July 25, 1997 in the Reorganization described below.
Background. ITC Holding began providing operator and directory assistance
services in March 1992 through its subsidiary, Eastern Telecom, Inc., which does
business as InterQuest ("InterQuest"). Carriers' Carrier Services have been
offered since April 1992 through Interstate FiberNet, a partnership originally
formed by ITC Holding (with a 49% interest) and SCANA Communications, Inc.
("SCANA") (with a 51% interest). In August 1994, ITC Holding acquired SCANA's
interest in Interstate FiberNet through ITC Transmission Systems II, Inc., a
wholly owned subsidiary of ITC Holding ("Transmission II"). Also in August 1994,
ITC Holding and SCANA formed a second partnership, Gulf States FiberNet, to
construct and operate a fiber optic route primarily between Atlanta, Georgia and
Shreveport, Louisiana with several supplemental spur routes. In a transaction
consummated in March 1997 (the "Gulf States Acquisition"), ITC Holding acquired
SCANA's 64% partnership interest in Gulf States FiberNet and certain fiber and
fiber-related assets, including a significant customer contract for network
services in Georgia (the "Georgia Fiber Assets"). Following the Gulf States
Acquisition, ITC Holding contributed the remaining 64% interest in Gulf States
FiberNet to Gulf States Transmission Systems, Inc., a wholly owned subsidiary of
ITC Holding ("Gulf States Transmission"), and the Georgia Fiber Assets to ITC
Transmission Systems, Inc., a wholly owned subsidiary of ITC Holding
("Transmission"). Members of the Company's management have been managing the
businesses of both Interstate FiberNet and Gulf States FiberNet since their
inception.
In January 1996, through its acquisition (the "DeltaCom Acquisition") of
DeltaCom, Inc., which has been renamed ITC/\DeltaCom Communications, Inc.
("DeltaCom"), ITC Holding entered the retail long distance business and acquired
several fiber optic routes within the state of Alabama that complemented the
existing networks operated by Interstate FiberNet (including a fiber optic route
from Atlanta, Georgia to Columbus, Georgia) and Gulf States FiberNet. DeltaCom,
a provider of telecommunications services since its inception in 1982, provides
long distance services to mid-sized businesses primarily in Alabama. In July
1996, DeltaCom purchased substantially all of the assets of Viper Computer
Systems, Inc. ("ViperNet"), which provides Internet access, Web-hosting and Web
page development services to business customers.
To finance the DeltaCom Acquisition and to refinance existing DeltaCom
debt, ITC Holding incurred approximately $74.0 million of indebtedness, which
was pushed down to the Company (the "DeltaCom Indebtedness"). The aggregate
consideration paid by ITC Holding in the Gulf States Acquisition was
approximately $27.9 million, of which $10.0 million consisted of an unsecured
note (the "SCANA Note") which was repaid in November 1997, and $17.9 million
consisted of ITC Holding preferred stock. In connection with the Gulf States
Acquisition, Gulf States Transmission borrowed $41.6 million under a credit
facility (the "Bridge Facility") with NationsBank, N.A., to refinance a project
loan incurred by Gulf States FiberNet.
1997 Notes Offering; Planned Redemption. On June 3, 1997, the Company
completed the sale (the "1997 Notes Offering") of $200.0 million principal
amount of its 11% Senior Notes due 2007 (the "1997 Notes"). The net proceeds
from the sale of the 1997 Notes, other than the portion of such proceeds
invested in U.S. government securities pledged to secure and fund the first six
scheduled interest payments on the 1997 Notes, were released to the Company upon
consummation of the Reorganization described below. The Company has issued
notice that on April 2, 1998 it intends to redeem $70.0 million principal amount
of the 1997 Notes (the "Planned Redemption") with proceeds
3
remaining from the Equity Offering described below, at an aggregate redemption
price of 111% of such principal amount, plus accrued and unpaid interest to
April 2, 1998.
Reorganization. On July 25, 1997, ITC Holding contributed to the Company in
a series of transactions the businesses of Interstate FiberNet, Gulf States
FiberNet, DeltaCom and InterQuest. In connection with such transactions,
approximately $31.0 million of the $74.0 million of the DeltaCom Indebtedness
was forgiven by ITC Holding and contributed to the Company as additional equity.
Following the Reorganization, the Company repaid the remaining $43.0 million of
the DeltaCom Indebtedness, accrued interest on all $74.0 million of such
indebtedness and the $41.6 million of indebtedness outstanding under the Bridge
Facility and accrued interest thereon with a portion of the net proceeds from
the 1997 Notes Offering. On October 20, 1997, as part of a reorganization of
the ITC Holding group of companies, ITC Holding transferred all of its assets
(other than its stock in the Company) and all of its liabilities to another
entity (which is now called ITC Holding Company, Inc.) and then merged with and
into the Company, which was the surviving corporation in the merger. On December
31, 1997, Gulf States Transmission merged with and into Interstate FiberNet,
Inc. a wholly owned subsidiary of the Company. The foregoing transactions are
collectively referred to herein as the "Reorganization."
Initial Public Offering. On October 29, 1997, the Company completed an
initial public offering of common stock, par value $.01 per share, in which it
issued 5,750,000 shares at a price of $16.50 per share (the "Equity Offering").
Up to $77.7 million of the net proceeds of the Equity Offering are to be used to
fund the Planned Redemption. See "--1997 Notes Offering; Planned Redemption."
1998 Notes Offering; Modification of Credit Facility. On March 3, 1998, the
Company completed the sale (the "1998 Notes Offering") at a price of 99.9% of
$160.0 million principal amount of its 8-7/8% Senior Notes due 2008 (the "1998
Notes," together with the 1997 Notes, collectively, the "Notes"). Additionally,
the Company has modified its secured revolving credit facility (the "Credit
Facility") to, among other things, reduce available borrowings from $100.0
million to $50.0 million. See "--Description of Certain Indebtedness."
INDUSTRY OVERVIEW
The long distance and local telecommunications markets are currently
undergoing substantial changes, including fundamental changes resulting from the
February 8, 1996 enactment of the Telecommunications Act of 1996 (the
"Telecommunications Act"), and the Company believes that it is well positioned
to take advantage of these developments.
Long Distance Services. Until 1984, AT&T largely monopolized local and long
distance telephone services in the United States. Technological developments
gradually enabled others to compete with AT&T in the long distance market. In
1984, largely as the result of a court decree, AT&T was required to divest its
local telephone systems but was permitted to retain its long distance
operations. Since 1984, competition in the long distance market has increased,
service levels have improved, product offerings have increased and prices for
long distance services have generally declined, all of which has resulted in
increased consumer demand and significant market growth for long distance
services. The increase in competition among long distance providers has also
resulted in a growing trend toward industry consolidation.
Local Services. The market for local exchange services consists of a number
of distinct service components. These service components are defined by specific
regulatory tariff classifications including: (i) local network services, which
generally include basic dial tone, enhanced calling features and data services
(dedicated point-to-point and frame relay service); (ii) network access
4
services, which consist of access provided by local exchange carriers to long
distance network carriers; (iii) short-haul long distance network services,
which include intraLATA long distance calls; and (iv) other varied services,
including the publication of "white page" and "yellow page" telephone
directories. Industry sources have estimated that the 1995 aggregate revenues of
all local exchange carriers approximated $95 billion. Until recently, there was
virtually no competition in the local exchange markets.
Since 1984, several factors have served to promote competition in the local
exchange market, including: (i) rapidly growing customer demand for an
alternative to the local exchange carrier monopoly, spurred partly by the
development of competitive activities in the long distance market; (ii) advances
in the technology for transmission of data and video, which require significant
capacity and reliability levels; (iii) the development of fiber optics and
digital electronic technology, which reduced network construction costs while
increasing transmission speeds, capacity and reliability as compared to
copper-based networks; (iv) the significant access charges interexchange
carriers are required to pay to local exchange carriers to access the local
exchange carriers' networks; and (v) a willingness on the part of legislators to
enact and regulators to enforce legislation and regulations permitting and
promoting competition in the local exchange market. In particular, the
Telecommunications Act requires all local exchange carriers to "unbundle" their
local network offerings and allow other providers of telecommunications services
to interconnect with their facilities and equipment. Most significantly, the
incumbent local exchange carriers will be required to complete local calls
originated by the Company's customers and switched by the Company and to deliver
inbound local calls to the Company for termination to its customers, assuring
customers of unimpaired local calling ability. The Company expects to obtain
access to incumbent carrier local "loop" facilities (the transmission lines
connecting customers' premises to the public telephone network) on an unbundled
basis at reasonable rates. In addition, local exchange carriers are obligated to
provide local number portability and dialing parity upon request and make their
local services available for resale by competitors. Local exchange carriers also
are required to allow competitors non-discriminatory access to local exchange
carrier pole attachments, conduit space and other rights-of-way. Moreover,
states may not erect "barriers to entry" of local competition, although they may
regulate such competition. The Company believes that, as a result of continued
regulatory and technological changes and competitive trends, competitive local
telecommunications companies have substantial opportunities for growth.
5
BUSINESS STRATEGY
The Company's objectives are to maintain its leadership position in the
provision of Carriers' Carrier Services and to become a leading provider of
Retail Services in the southern United States. The Company intends to increase
its market share in existing markets and expand into new markets. The principal
elements of the Company's business strategy include the following:
Providing Integrated Telecommunications Services to Its Existing Base of
Mid-sized and Major Regional Business Customers. By providing additional
telecommunications services such as local telephone service to its existing,
well-established base of long distance customers, the Company expects to be able
to increase revenues at relatively low incremental cost. The Company believes
that bundling a variety of telecommunications services and presenting customers
with one fully integrated monthly billing statement for all of those services
will allow it to penetrate its target markets rapidly and build customer
loyalty. The Company believes that there is substantial demand in its target
markets among mid-sized and major regional business customers for an integrated
package of telecommunications services that meets all of their
telecommunications needs.
Leveraging Its Extensive Fiber Optic Network. The Company intends to
leverage its extensive fiber optic network, which currently reaches over 60
POPs, by (i) continuing to provide switched and transport services to other
communications carriers throughout its region to enable such carriers to
diversify their routes and expand their networks; (ii) targeting customers that
need to transmit large amounts of data within the Company's service region, such
as banks and local and state governments; and (iii) offering local exchange
services to its business customers as part of its integrated package of
telecommunications services. The Company intends initially to provide local
exchange services by reselling the services of incumbent local exchange carriers
and, in some established markets, using its own local switching facilities. Over
time, the Company expects to provide local services primarily using the
Company's own switching facilities and existing regional fiber optic network,
supplemented by unbundled facilities of incumbent local exchange carriers or
other competitive local exchange carriers. The configuration of the Company's
network enables the Company to expand its network by installing additional
remote local switches, which operate in conjunction with the Company's DMS-500
switches to provide facilities-based local services. Because remote local
switches are less expensive to purchase and install than DMS-500 switches, and
can be installed more quickly than DMS-500 switches, the Company believes that
it will be able to enter new markets at less expense than many of its
competitors. At present, the Company does not plan to construct intra-city local
loop facilities.
Focusing on the Southern United States. The Company intends to continue to
focus on the southern United States in order to leverage its extensive
telecommunications network in the region. The Company believes that its regional
focus will enable it to take advantage of economies of scale in management,
network operations and sales and marketing. The regional concentration of the
Company's network also provides an opportunity for improved margins because a
high portion of the Company's customers' telecommunications traffic originates
and terminates within the region. The Company also believes that its regional
focus will enable it to build on its long-standing customer and business
relationships in the region.
Building Market Share Through Personalized Customer Service. The Company
believes that the key to revenue growth in its target markets is capturing and
retaining customers by emphasizing marketing, sales and customer service.
Management believes that customers prefer one company to be accountable for
their telecommunications services, and that a consultative, face-to-face sales
and service strategy is the most effective method of acquiring and maintaining a
high quality customer base. The Company seeks to obtain long-term commitments
from its business customers by responding rapidly and creatively to their
telecommunications needs. The Company
6
currently operates 16 branch offices in 15 markets in Alabama, Florida, Georgia,
Louisiana, North Carolina and South Carolina. Each branch office is staffed by
personnel capable of marketing all of the Company's products and providing
comprehensive support to the Company's customers. In the future, the Company
expects to expand significantly its direct sales force and open branch offices
in additional major and secondary population centers in the southern United
States.
Expanding Its Fiber Optic Network and Switching Facilities. The Company
expects to expand its fiber optic telecommunications network and switching
facilities to include additional markets within the southern United States. The
Company currently owns and operates approximately 3,300 route miles of fiber
optic network extending from Georgia to Texas. The Company also markets and
manages capacity on 3,000 additional network route miles through its strategic
relationships principally with public utilities. In addition, the Company has a
buy-sell agreement with Carolinas Fibernet, LLC, which manages fiber optic
facilities in North Carolina and South Carolina. This agreement enables the
parties to buy and sell capacity on each other's networks and allows the Company
to provide customers with access to POPs throughout those states. The Company
believes that, by continuing to combine its owned network with the networks of
public utilities and by adding switching facilities throughout its network, it
will be able to achieve capital efficiencies and rapidly expand its network in a
cost-effective manner.
Leveraging Proven Management Team. The Company's management team consists
of experienced telecommunications managers who in the past have successfully
implemented a customer-focused long distance telecommunications strategy in the
southern United States. Members of the team include Andrew Walker, Chief
Executive Officer of the Company, Foster McDonald, President of the Company, and
Douglas Shumate, Chief Financial Officer of the Company.
SERVICES AND FACILITIES
Services. The Company currently provides two basic services: (i) Retail
Services and (ii) Carriers' Carrier Services.
Retail Services. Retail Services involve the provision of voice, data or
video telecommunications services to end users or resellers. The Company
currently provides several types of Retail Services, including basic long
distance services (switched, dedicated, and calling card), dedicated Internet
access, data network solutions (frame relay, ATM, point-to-point), local
exchange services and the sale and installation of customer premise equipment.
The Company intends to provide additional types of Retail Services in the future
and expand the markets in which it offers local services as part of a bundled
"one-stop" integrated telecommunications service which will offer customers a
wide range of switch-based value-added services. The Company's customer-focused
software and network architecture permits the Company to present its customers
with one fully integrated monthly billing statement for the entire package of
Retail Services.
Set forth below are brief descriptions of the Company's Retail Services:
Local Services. The Company currently provides local exchange services
by reselling the services of incumbent local exchange carriers. Over time,
the Company expects to provide local services primarily using the Company's
own switching facilities and existing regional fiber optic network,
supplemented by unbundled facilities of incumbent local exchange carriers
or other competitive local exchange carriers. The Company offers local
exchange services in 11 of the 15 markets in which it currently provides
Retail Services and expects to offer local services in a total of 21
markets by the end of 1998.
7
In connection with offering local services, the Company has entered
into the Interconnection Agreement with BellSouth to (i) resell BellSouth's
local exchange services and (ii) interconnect the Company's network with
BellSouth's network for the purpose of immediately gaining access to the
unbundled network elements necessary to provide local exchange services.
The Interconnection Agreement contains "most favored nation" provisions
which grant the Company the right to obtain the benefit of any arrangements
entered into during the term of the Interconnection Agreement between
BellSouth and any other carrier that materially differ from the rates,
terms or conditions of the Interconnection Agreement. Under the
Interconnection Agreement, each party may resell one or more unbundled
network elements of the other party at agreed upon prices set forth in the
Interconnection Agreement. In addition, each party is required to pay for
the interconnection trunks needed to terminate traffic into the other
party's local network, with the costs of certain two-way interconnection
trunks and ports to be shared by the Company and BellSouth.
The Interconnection Agreement has a term of two years beginning July
1, 1997, and requires the parties to begin to negotiate renewal terms by
July 1, 1998 for interconnection commencing July 1, 1999. The Company and
BellSouth have begun negotiations to renew the terms of the Interconnection
Agreement. In the event the parties fail to agree on such renewal terms,
they have agreed to operate under the existing terms, pending a
determination of new terms by a state commission.
Long Distance. The Company offers a full range of retail long distance
services, including traditional switched and dedicated long distance,
800/888 calling, international, calling card and operator services.
Data Services. The Company provides high quality data services to its
customers primarily using frame relay switches distributed strategically
throughout the Company's network, which enables customers to use a single
network connection to communicate with multiple sites throughout the
Company's fiber optic network. The Company currently provides ATM services
on a resale basis. Beginning in the third quarter of 1998, the Company
intends to offer ATM services on its own network, providing data services
to customers that need to transmit large amounts of data within the
Company's service region, such as banks and local and state governments.
The Company will continue to seek, through strategic business relationships
with other providers, to interconnect its fiber optic network with the
fiber optic networks of other companies. The Company anticipates increased
demand for data services in the future, and expects that in the future a
larger percentage of its revenues will be derived from the sale of
dedicated data services.
Internet Access, Intranet Services and Web Development. Since its
acquisition in 1996 of substantially all of the assets of ViperNet, an
Internet access provider and Web page developer for business customers, the
Company has provided dedicated (frame relay) Internet access and Intranet
services, electronic mail, Web page design and Web hosting services. The
Company expects that mid-sized and larger businesses will require faster
Internet access and larger bandwidth in the future, and intends to offer
products that will meet that demand.
Customer Premise Equipment. The Company sells and installs customer
premise equipment such as telephones, office switchboard systems and, to a
lesser extent, private branch exchanges (PBX) for customers in the
Huntsville, Mobile, Birmingham, Dothan and Montgomery, Alabama and
Greenville, South Carolina markets. The Company intends to offer customer
premise equipment sales and installation in additional markets in the
future, with the goals of (i) enhancing and supporting the Company's sale
of local and long distance services and (ii) enhancing customer retention.
The Company plans to form relationships with local customer premise
equipment installation companies in all of its markets for the purpose of
selling and installing customer premise equipment not otherwise provided by
the Company.
8
Carriers' Carrier Services. The Company's Carriers' Carrier Services are
used by customers, such as major telecommunications carriers and non-facilities
based carriers that have switches but do not own transmission facilities, to
transport their already-switched traffic between LATAs. Calls being transmitted
over a long-haul circuit for a customer are generally routed by the customer
through a switch to a receiving terminal in the Company's network. The Company
transmits the signals over a long-haul circuit to the terminal where the signals
are to exit the Company's network. The signals are then routed by the customer
through another switch and to the call recipient through a local exchange
carrier. The Company provides DS-1, DS-3 and OC-N services. OC-N services are
used by the Company's customers for very high capacity inter-city connectivity
and specialized high speed data networking. The interface between the Company's
network and the customer's facilities is by either local exchange carrier or a
direct connection between the Company's network and the facilities of the
customer. The Company typically bills the customers a fixed monthly rate
depending on the capacity and length of the circuit, regardless of the amount
the circuit is actually used.
Facilities. The Company owns or manages approximately 6,300 route miles of
a high quality fiber optic network which covers portions of ten states in the
southern United States and extends to over 60 POPs. These POPs are located in
almost all major population centers in the areas covered by the fiber optic
network and in a significant number of smaller cities where the Company's only
competitor is the incumbent local exchange carrier.
The Company owns approximately 3,300 route miles of its fiber optic
network, which the Company has built or acquired since 1992. In addition, the
Company has strategic relationships principally with three public utilities,
Duke Power Company, Florida Power & Light Company and Entergy Technology
Company, pursuant to which the Company markets, sells and manages capacity on
approximately 3,000 route miles of network owned and operated by the utilities.
In addition, the Company is able to purchase network capacity to certain
cities not covered by the Company's owned and managed network in North Carolina
and South Carolina pursuant to a buy-sell agreement with Carolinas Fibernet,
LLC, which manages fiber optic facilities in North Carolina and South Carolina.
This agreement enables the parties to buy and sell capacity on each other's
networks at pre-established prices which are generally favorable to the prices
for such capacity available in the open market. Under this agreement, neither
party is responsible for network maintenance charges relating to the other
party's network.
The Company expects to add approximately 800 owned and operated route miles
to its fiber optic network by the end of 1998 through long-term dark fiber
leases. In addition, as part of its strategy, the Company intends to continue to
evaluate the potential expansion of its network through a combination of new
construction, long-term dark fiber leases and fiber swap transactions, depending
on the extent of capital required over the economic life of the fiber assets to
be deployed.
The Company's decision to further expand its fiber optic network will be
based on various factors, including: (i) the number of its customers in a
market; (ii) the anticipated operating cost savings associated with such
construction; and (iii) any strategic relationships with owners of existing
infrastructure (e.g., utilities and cable operators). Through its strategic
relationships with public utility companies, the Company believes that it will
be able to achieve capital efficiencies in constructing and expanding its fiber
optic network in a rapid and cost-effective manner. The Company also believes
that its fiber optic network, in combination with its personalized approach to
customer service, will create an attractive customer-focused platform for the
provision of local, long distance and enhanced services.
9
The Company has implemented electronic redundancy throughout its network,
which enables traffic to be rerouted to another fiber in the same fiber sheath
in the event of a partial fiber cut or electronic failure. Approximately 50% of
the Company's owned and operated fiber optic network is also protected by
geographically diverse routing, a network design (also called a "self healing
ring") which enables traffic to be rerouted to an entirely different fiber optic
cable (assuming capacity is available) in the event of a total cable cut. The
Company is continuing to increase the geographic diversity of its fiber optic
network, and expects to have 80% of its network protected in this manner by the
first quarter of 1999.
The Company's switching facilities currently consist of Nortel DMS 500
switches in Birmingham, Alabama and Columbia, South Carolina and a Nortel DMS
250 switch in Arab, Alabama. The Arab switch is capable of handling long
distance switching and the Birmingham and Columbia DMS 500 switches are capable
of handling both local and long distance switching. These installations enable
the Company to market its Retail Services, including local services, on a
switch-based facilities basis in, among other markets, Huntsville, Birmingham
and Montgomery, Alabama; Greenville, Columbia and Charleston, South Carolina;
Charlotte, North Carolina; and Atlanta, Georgia. The Company expects to place
Nortel DMS 500 switches into service in Ocala, Florida and Atlanta, Georgia by
the third quarter of 1998. The Company intends to place additional switches
strategically along its fiber optic network over the next five years. The
Company also intends to deploy a significant number of Nortel Access Nodes in
the majority of the markets which the Company intends to serve. The additional
switches and nodes will allow the Company to perform local and long distance
switching in its markets on a host/remote type relationship to the applicable
DMS 500 switch. The Nortel Access Nodes will be connected to the Company's DMS
500 switching platform, utilizing the Company's fiber optic network wherever
possible. This networking design, together with the Interconnection Agreement,
will enable the Company to be a facilities-based provider of local and long
distance services in all of the markets that it intends to enter. For those
markets in which the Company intends to resell the services of incumbent local
exchange carriers, the Company's platform will be BellSouth's Centrex product,
known as MultiServ, which provides full feature functionality, such as caller
identification, call waiting, remote call forwarding, call blocking, anonymous
call rejection and conference calling.
The Company is a member of the Associated Communications Companies of
America (the "ACCA"), a 12-member trade association that negotiates with
carriers for wholesale telecommunications services for its members. The
collective buying power of its members enables the ACCA to negotiate as if it
were one of the larger long distance providers in the United States.
The Company's data network currently consists of six Cascade 9000 frame
relay switches located in Atlanta and West Point, Georgia; Birmingham,
Montgomery and Arab, Alabama; and Columbia, South Carolina. The Company's data
network connects with BellSouth's and Intermedia Communications' frame relay
networks to provide nationwide connectivity for the Company's customers. The
data network currently serves over 105 customers connected to approximately
1,200 customer locations. The Company's Cascade frame relay switches have the
capability to provide ATM connectivity, and the Company has one ATM connection
to the Internet. The Company intends to strategically locate additional frame
relay and ATM switch sites over the next five years, with approximately 13 frame
relay switches and eight ATM switches being added in 1998. These frame relay and
ATM switches will be collocated with the Company's DMS-500 switches at strategic
network facility locations where possible, and will create a data backbone which
will support the Company's data services.
10
SALES AND MARKETING
Retail Services. The Company focuses its sales efforts on mid-sized and
major regional businesses in the southern United States. The Company believes
that it can effectively compete for business customers based upon service,
product diversity, price and reliability. The Company's sales force, composed of
direct sales personnel, technical consultants and technicians, markets the
Company's long distance and local communications services. The Company's
management believes that high quality employee training is a prerequisite for
superior customer service, and as a result each member of the Company's sales
force is required to complete the Company's intensive training program. The
Company's marketing strategy is built upon the belief that customers prefer to
hold one company accountable for all of their telecommunications services. Each
branch office provides technical assistance for its voice, data, Internet and
customer premise equipment as required. Customers are assured a single point of
contact, 24 hours a day, seven days a week.
Marketing to mid-sized and major regional businesses is currently conducted
by over 85 direct sales personnel (and over 120 other field personnel) located
in 16 branch offices in 15 markets in the southern United States. In the future,
the Company expects to expand significantly its direct sales force and open
branch offices in additional major and secondary population centers in the
southern United States. The Company's sales personnel make direct calls to
prospective and existing business customers, conduct analyses of business
customers' usage histories and service needs, and demonstrate how the Company's
service package will improve a customer's communications capabilities and costs.
Sales personnel locate potential business customers by several methods,
including customer referral, market research, telemarketing and other networking
alliances such as endorsement agreements with trade associations and local
chambers of commerce. The Company's sales personnel work closely with the
Company's network engineers and information systems consultants to design new
service products and applications. The Company's branch offices are also
primarily responsible for coordinating service and customer premise equipment
installation activities. Technicians survey customers' premises to assess power
and space requirements, and coordinate delivery, installation and testing of
equipment.
A primary element of the Company's Retail Services marketing strategy is to
enter into contracts with its customers. Those agreements generally provide for
payment in arrears based on minutes of use for switched services and in advance
for private line services. The agreements generally also provide that the
customer may terminate the affected service without penalty in the event of
substantial and prolonged outages arising from causes within the Company's
control, and for certain other defined causes. Generally, the agreements
provide that the customer must utilize at least a minimum dollar amount
(measured by dollars or minutes of use) of switched long distance services per
month for the term of the agreement.
In addition, the Company markets its business communication services
through advertisements, event sponsorships, trade journals, direct mail and
trade forums. Because the Company intends to distinguish its retail products
largely on the convenience of its single communications bundle and the benefits
of the Company's comprehensive, individualized and innovative customer support,
the Company believes that advertising will play a larger role in its marketing
strategy than it has in the past.
Carriers' Carrier Services. The Company has long-haul circuit contracts
with major long distance carriers, including AT&T, MCI, Sprint, WorldCom, Cable
& Wireless, LCI, Frontier and IXC. As of December 31, 1997, the Company had
remaining future long term contract commitments totaling approximately $77.9
million. These contracts expire on various dates through 2006 and are expected
to generate approximately $58.2 million in revenues to the Company through 2001,
of which $18.0 million are expected to be realized in 1998. The Company also
provides long-haul
11
transmission to customers after contract expiration on a month-to-month basis.
The Company's long-haul contracts provide for fixed monthly payments, generally
in advance. Although sales volumes from particular customers vary from year to
year, the Company has historically enjoyed high customer retention and circuit
renewal rates.
The Company believes that it can continue to compete effectively in the
wholesale, carrier-to-carrier market on the basis of price, reliability,
state-of-the-art technology, route diversity, ease of ordering and customer
service. The Company believes that demand for its Carriers' Carrier Services
will increase as the incumbent local exchange carriers begin competing in the
long distance market.
COMPETITION
The telecommunications industry is highly competitive. The Company competes
primarily on the basis of price, availability, transmission quality,
reliability, customer service and variety of product offerings. The ability of
the Company to compete effectively will depend on its ability to maintain high
quality services at prices generally equal to or below those charged by its
competitors. In particular, price competition in the retail and carrier's
carrier long distance markets has generally been intense and is expected to
increase. Many of the Company's competitors (such as AT&T, MCI, Sprint and
WorldCom on an interexchange basis and BellSouth on an intraLATA basis) have
substantially greater financial, personnel, technical, marketing and other
resources, larger numbers of established customers and more prominent name
recognition than the Company and utilize more extensive transmission networks
than the Company. In addition, IXC, Qwest Communications International Inc.
("Qwest") and Williams Communications are constructing nationwide fiber optic
systems, including routes through portions of the southern United States. The
Company will also increasingly face competition in the long distance market from
local exchange carriers, switchless resellers, and satellite carriers and may
eventually compete with public utilities and cable companies. The Company also
may increasingly face competition from firms offering long distance data and
voice services over the Internet. Such firms could enjoy a significant cost
advantage because at this time they do not pay carrier access charges or
universal service fees.
Regional Bell Operating Companies such as BellSouth are now allowed to
provide interLATA long distance services outside their home regions, as well as
interLATA mobile services within their regions. Under the Telecommunications
Act, the Regional Bell Operating Companies will be allowed to provide interLATA
long distance services within their regions after meeting certain requirements
intended to foster opportunities for local telephone competition. The Regional
Bell Operating Companies already have extensive fiber optic cable, switching,
and other network facilities in their respective regions that can be used for
their long distance services. BellSouth and other Regional Bell Operating
Companies are already beginning to take steps toward obtaining approval to
provide in-region long distance services. The FCC forced the withdrawal of the
first Regional Bell Operating Company request for in-region long distance
authority, and rejected the next four applications, including applications by
BellSouth to provide interLATA service in South Carolina and Louisiana. However,
there can be no assurance that such approvals will be delayed until local
competition is established. Furthermore, on December 31, 1997, the U.S. District
Court for the Northern District of Texas ruled that the Telecommunications Act
provisions restricting interLATA service by the Regional Bell Operating
Companies were unconstitutional. Although that decision has been stayed pending
appeal, it would, if sustained, allow BellSouth to enter the interLATA market on
a region-wide basis irrespective of the progress towards local exchange service
competition.
The Company's principal competitor for local exchange services will be the
incumbent local exchange carrier in the particular market, including BellSouth
in virtually all of the Company's initial market areas. The incumbent local
exchange carriers will enjoy substantial competitive advantages arising from
their historical monopoly position in the local telephone market, including
their preexisting customer relationship with all or virtually all end users.
Furthermore, the
12
Company will be highly dependent on the competing incumbent local exchange
carrier for local network facilities and wholesale services required in order
for the Company to assemble its own local retail products. The Company will also
face competition from competitive local exchange carriers, some of whom have
already established local operations in the Company's target markets. See "Risk
Factors--Dependence on Incumbent Local Exchange Carriers."
Large long distance carriers, such as AT&T, MCI, Sprint and WorldCom have
begun to offer local services together with their long distance
telecommunications services in certain markets, and are expected to expand that
activity as opportunities created by the Telecommunications Act develop. In
addition, incumbent local exchange carriers are expected to compete in each
other's markets in some cases. For example, BellSouth has recently announced
plans to provide local services within its geographic region in competition with
independent telephone companies. Wireless telecommunications providers may
develop into effective substitutes for wireline local telephone service. The
Company also competes with numerous direct marketers and telemarketers and
equipment vendors and installers with respect to certain portions of its
business.
A continuing trend toward consolidation, mergers, acquisitions and
strategic alliances in the telecommunications industry could also increase the
level of competition faced by the Company or the Company's carrier customers.
For example, WorldCom has a pending agreement to merge with MCI. WorldCom also
has acquired competitive local exchange carriers, including MFS Communications
Company, Inc. and Brooks Fiber Properties, Inc. In March 1997, BellSouth and
International Business Machines Corp. ("IBM") announced an alliance to
provide Internet and Intranet services to businesses in the South and, in
January 1998, AT&T announced plans to acquire another competitive local exchange
carrier, Teleport Communications Group Inc. ("TCG"). Additionally, in March
1998, Qwest announced its intention to acquire LCI, which combination would
result in the nation's fourth-largest long distance carrier. The
telecommunications market is very dynamic, and additional competitive changes
are likely in the future.
REGULATION
Overview. The Company's services are subject to federal, state and local
regulation. The Company, through its wholly owned subsidiaries, holds various
federal and state regulatory authorizations. The FCC exercises jurisdiction over
telecommunications common carriers to the extent they provide, originate or
terminate interstate or international communications. The FCC also establishes
rules and has other authority over certain issues related to local telephone
competition. State regulatory commissions retain jurisdiction over
telecommunications carriers to the extent they provide, originate or terminate
intrastate communications. Local governments may require the Company to obtain
licenses, permits or franchises in order to use the public rights of way
necessary to install and operate its networks.
Federal Regulation. The Company is categorized as a non-dominant carrier by
the FCC, and as a result is subject to relatively limited regulation of its
interstate and international services. Certain general policies and rules apply,
as well as certain reporting requirements, but the Company's rates are not
reviewed. The Company has all the operating authority required by the FCC to
conduct its long distance business. As a non-dominant carrier, the Company may
install and operate additional facilities for the transmission of domestic
interstate communications without prior FCC authorization, except to the extent
that radio licenses are required.
The FCC also imposes prior approval requirements on transfers of control
and assignments of radio licenses and operating authorizations. The FCC has the
authority generally to condition, modify, cancel, terminate or revoke licenses
and operating authority for failure to comply with federal laws and/or the
rules, regulations and policies of the FCC. Fines or other penalties also may
13
be imposed for such violations. There can be no assurance that the FCC or third
parties will not raise issues with regard to the Company's compliance with
applicable laws and regulations.
The FCC also regulates the interstate access rates charged by incumbent
local exchange carriers for the origination and termination of interstate long
distance traffic. Those access rates make up a significant portion of the cost
of providing long distance service. The FCC has recently implemented changes to
its interstate access rules that result in restructuring of the access charge
system and changes in access charge rate levels. These changes reduce per-minute
access charges and substitute new per-line flat-rate monthly charges. These
actions, along with additional changes to occur later this year and in
subsequent years, are expected to reduce access rates, and hence the cost of
providing long distance service, especially to business customers. However, the
full impact of the FCC's new decisions will not be known until those decisions
are implemented over the next several years, during which time those decisions
may be revised. In a related proceeding, the FCC has adopted changes to the
methodology by which access has been used in part to subsidize universal
telephone service and other public policy goals. Telecommunications providers
like the Company will pay a fee calculated as a percentage of their revenues to
support these goals. The full implications of this decision also remain
uncertain and subject to change. In addition, the FCC and the courts are
considering related questions regarding the applicability of access charge and
universal service fees to Internet service providers. Currently such providers
are not subject to these expenses. However, the incumbent local exchange
carriers and other parties argue that this exemption unfairly advantages
Internet service providers, particularly when they provide data, voice or other
services in direct competition with conventional telecommunications. The Company
is not in a position to determine how these access and universal service matters
will be resolved, and whether or not such resolution will be harmful to its
competitive position.
The Telecommunications Act also gives the FCC a role, working with the
state public utility commissions ("PUCs"), in establishing rules for the
implementation of local telephone competition. The Telecommunications Act
imposes a variety of new duties on incumbent local exchange carriers in order to
promote competition in local exchange and access services, and the FCC has
authority to develop rules to implement these duties. Some smaller independent
incumbent local exchange carriers may seek suspension or modification of these
obligations, and some companies serving rural areas are exempt from them.
In that regard, on August 8, 1996, the FCC adopted the Interconnection
Decision (the "Decision") to implement the interconnection, resale and number
portability provisions of the Telecommunications Act. The Decision establishes
rules pursuant to which incumbent local exchange carriers interconnect their
networks with the networks of competitive local exchange carriers at rates that
are reasonable and non-discriminatory. The Decision also establishes rules
governing the rights of competitive local exchange carriers to obtain and use
elements of the incumbent local exchange carriers' networks at cost-based rates
either to supplement or substitute for alternative local network facilities that
the competitive local exchange carrier would otherwise be required to install.
The Decision sets rules governing competitive local exchange carrier access to
wholesale versions of the incumbent local exchange carriers' retail local
services for resale. The incumbent local exchange carriers are required to
establish administrative support systems so that these services and
functionalities can be made available to other carriers on a nondiscriminatory
basis. The Decision also created rules to deal with reciprocal compensation for
the transport and termination of local telecommunications, non-discriminatory
access to rights of way, and related matters. A related FCC order adopted the
same day established rules implementing the Telecommunications Act with respect
to local and toll dialing parity among competitors; nondiscriminatory access to
telephone numbers, operator services, directory assistance and listings, and
network information; and reform of numbering administration.
The FCC's rules were challenged in the federal courts by GTE, the Regional
Bell Operating Companies, large independent incumbent local exchange carriers
and state regulatory commissions.
14
On October 15, 1996, the U.S. Court of Appeals for the Eighth Circuit ("Eighth
Circuit") issued a stay of the implementation of certain of the FCC's rules and
on July 18 and October 14, 1997, the same Court issued decisions finding that
the FCC lacked statutory authority under the Telecommunications Act for certain
of its rules. In particular, the Eighth Circuit found that the FCC was not
empowered to establish the pricing standards governing unbundled local network
elements or wholesale local services of the incumbent local exchange carriers,
or to require such carriers to provide network elements in a combined form. The
Eighth Circuit also struck down other FCC rules, including one that would have
enabled new entrants to "pick and choose" from provisions of established
interconnection agreements between the incumbent local exchange carriers and
other carriers. The Eighth Circuit, however, rejected certain other objections
to the FCC rules brought by the incumbent local exchange carriers or the states,
including challenges to the FCC's definition of unbundled elements, and to the
FCC's rules allowing new competitors to create their own networks by combining
incumbent local exchange carrier network elements together without adding
additional facilities of their own. The overall impact of the Eighth Circuit's
decisions are to limit the obligations of incumbent local exchange carriers as
originally interpreted by the FCC, materially reduce the role of the FCC in
fostering local competition, including its ability to take enforcement action if
the Telecommunications Act is violated, and increase the role of state utility
commissions. On January 26, 1998, the Supreme Court granted a request by the FCC
and other parties to review the Eighth Circuit decisions. The Supreme Court is
not expected to complete this process until late 1998 or early 1999. Meanwhile,
certain state commissions have asserted that they will be active in promoting
local telephone competition using the authority they have under the Eighth
Circuit decisions, which may lessen the significance of the reduced FCC role. At
this time the impact of the Eighth Circuit's decisions cannot be evaluated and
there can be no assurance that these decisions and related developments will not
have a material adverse effect on the Company. Furthermore, other FCC rules
related to local telephone competition remain the subject of legal challenges.
For example, on August 22, 1997, the Eighth Circuit issued a separate order
striking down certain FCC rules regarding dialing parity for new competitors.
There can be no assurance that these and other pending decisions affecting local
competition will not be adverse to companies seeking to enter the local
telephone market.
There can be no assurance that the FCC's remaining rules (including such
rules that may be reinstated by the Supreme Court, if any), together with rules
adopted by state public utility commissions, will be implemented in a manner
that will permit local telephone competition to develop to a substantial extent
and without significant delays. For example, many new carriers, including the
Company, have experienced problems with respect to the operational support
systems used by new carriers to order and receive network elements and wholesale
services from the incumbent local exchange carriers. These systems are necessary
for new carriers like the Company to provide local service to customers on a
timely and competitive basis. The FCC has recently created a task force to
examine problems that have slowed the development of local telephone
competition.
The Company has entered into the Interconnection Agreement with BellSouth.
The Interconnection Agreement currently allows the Company to provide local
service on a resale basis or by purchasing all unbundled network elements
required to provide local service on a facilities basis, without using
Company-owned facilities. The Company and BellSouth have agreed on interim
pricing terms for such resale and purchase of unbundled network elements. The
terms of the Interconnection Agreement, including the interim pricing terms, are
subject to the approval of the PUCs regulating the Company's markets. Such
approval has been received from the PUCs of Alabama, Florida, Georgia, Kentucky,
Louisiana, Mississippi, North Carolina, South Carolina and Tennessee. In
addition, the Interconnection Agreement does not resolve all operational issues,
particularly those relating to the collocation of the Company's equipment with
that of BellSouth. The Company and BellSouth are continuing to negotiate to
resolve such issues. The Company expects that the Interconnection Agreement will
provide a foundation for it to provide local service on a reasonable commercial
basis, but there can be no assurance in this regard and important
15
issues remain unsettled as a result of the Court decision and related matters.
See "Risk Factors--Dependence on Incumbent Local Exchange Carriers."
The Company expects to negotiate similar interconnection agreements with
other incumbent local exchange carriers. However, other carriers who have
preceded the Company in the negotiation process with certain of these incumbent
local exchange carriers have expressed dissatisfaction with some of the terms of
their agreements, or with the operational support systems by which they obtain
the interconnection they require to provide local services to end users.
As a general matter, no assurance is possible regarding how quickly or how
adequately the Company will be able to take advantage of the opportunities
created by the Telecommunications Act. The Company could be adversely affected
if the court decision reversing some of the new FCC rules, or problems in the
related arbitration and negotiation process, result in increasing the cost of
using incumbent local exchange carrier network elements or services, or if such
actions otherwise result in delays in the implementation of the
Telecommunications Act or impediments to the development of local telephone
competition.
The Telecommunications Act also imposes certain duties on non-incumbent
local exchange carriers, such as the Company. These duties include the
obligation to complete calls originated by competing carriers under reciprocal
arrangements or through mutual exchange of traffic without explicit payment; the
obligation to permit resale of their telecommunications services without
unreasonable restrictions or conditions; and the duty to provide dialing parity,
number portability, and access to rights of way. The Company does not anticipate
that these obligations will impose a material burden on its operations. However,
in view of the fact that local telephone competition is still in its infancy and
implementation of the Telecommunications Act has just begun, there can be no
assurance in this regard.
The Telecommunications Act also establishes the foundation for substantial
additional competition with the Company's long distance operations through
elimination or modification of previous prohibitions on the provision of
interLATA long distance services by the Regional Bell Operating Companies and
GTE. The Regional Bell Operating Companies are now permitted to provide
interLATA long distance service outside those states in which they provide local
exchange service ("out-of-region long distance service") upon receipt of any
necessary state and/or federal regulatory approvals that are otherwise
applicable to the provision of intrastate and/or interstate long distance
service. They also are allowed to provide long distance services for their
cellular and other mobile services within the regions in which they also provide
local exchange service ("in-region service"). Under the Telecommunications Act,
the Regional Bell Operating Companies will be allowed to provide wireline
in-region services upon specific approval of the FCC and satisfaction of other
conditions, including a checklist of interconnection requirements. GTE is
permitted to enter the long distance market without regard to limitations by
region. GTE is also subject to the provisions of the Telecommunications Act that
impose interconnection and other requirements on local exchange carriers.
BellSouth and other Regional Bell Operating Companies have begun to take actions
directed towards obtaining authority from the FCC to offer in-region long
distance services in certain of the states in their respective regions. The FCC
forced the withdrawal of the first Regional Bell Operating Company request for
in-region long distance authority, and rejected the next four applications,
including applications by BellSouth to provide interLATA service in South
Carolina and Louisiana. However, there can be no assurance that such approvals
will be delayed until local competition is established. There can be no
assurance that the Regional Bell Operating Companies will be prevented from
offering in-region long distance service until local competition is established.
The Eight Circuit recently rejected the FCC's attempt to condition interLATA
entry on compliance with certain pricing principles that the Court had
previously found were outside the jurisdiction of the FCC to mandate as a
general matter. Other court actions are now pending challenging the terms under
which the FCC has denied an in-region application. Furthermore, on December 31,
1997, the U.S. District Court for the Northern District of Texas
16
ruled that the Telecommunications Act provisions restricting interLATA service
by the Regional Bell Operating Companies were unconstitutional. Although that
decision has been stayed pending appeal, it would, if sustained, allow BellSouth
to enter the interLATA market on a region-wide basis irrespective of the state
of local competition.
The FCC has granted incumbent local exchange carriers certain flexibility
in pricing their interstate special and switched access services. Under this
pricing scheme, local exchange carriers may establish pricing zones based on
access traffic density and charge different prices for access provided in each
zone. The Company anticipates that the FCC will grant incumbent local exchange
carriers increasing pricing flexibility as the number of interconnection
agreements and competitors increases. In a pending rulemaking proceeding
scheduled for completion soon, the FCC is expected to announce new and more
specific policies regarding the conditions and timing under which incumbent
local exchange carriers will be eligible for such increased pricing flexibility.
There can be no assurance that such pricing flexibility will not place the
Company at a competitive disadvantage, either as a purchaser of access for its
long distance operations, or as a vendor of access to other carriers or end user
customers.
State Regulation. The Company is also subject to various state laws and
regulations. Most public utility commissions require providers such as the
Company to obtain authority from the commission prior to the initiation of
service. In most states, including Alabama, Georgia and Florida, the Company
also is required to file tariffs setting forth the terms, conditions and prices
for services that are classified as intrastate. The Company also is required to
update or amend its tariffs when it adjusts its rates or adds new products, and
is subject to various reporting and record-keeping requirements.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply with
state law and/or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such violations.
There can be no assurance that state utilities commissions or third parties will
not raise issues with regard to the Company's compliance with applicable laws or
regulations.
The Company has all necessary authority to offer intrastate long distance
services in Alabama, Arkansas, California, Colorado, Connecticut, Delaware,
District of Columbia, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas,
Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi,
Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New
York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South
Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington,
West Virginia, Wisconsin and Wyoming. The Company is authorized to provide
intrastate long distance service in the states of Arizona and Pennsylvania while
certificates in those states are pending. An application for authority to
provide intrastate long distance service is also pending in Minnesota.
Applications will be filed, in the near future, in the states of Alaska and
Hawaii. The Company seeks authority to provide long distance service in states
outside of its target markets to enhance its ability to attract business
customers with offices, or whose employees travel, outside of the Company's
target markets.
The Company now provides local exchange services in its region by reselling
the retail local services of the incumbent local exchange carrier in a given
territory and, in some established markets, using its own local switching
facilities. The Company has obtained competitive local exchange carrier
certification in Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi,
North Carolina, South Carolina and Tennessee.
17
Many issues remain open regarding how new local telephone carriers will be
regulated at the state level. For example, although the Telecommunications Act
preempts the ability of states to forbid local service competition, the
Telecommunications Act preserves the ability of states to impose reasonable
terms and conditions of service and other regulatory requirements. However,
these statutes and related questions arising from the Telecommunications Act
will be elaborated further through rules and policy decisions made by PUCs in
the process of addressing local service competition issues.
The Company also will be heavily affected by state PUC decisions related to
the incumbent local exchange carriers, particularly in view of the decisions of
the Eighth Circuit noted above which recognizes a larger role for state utility
commissions and a reduced role for the FCC. For example, PUCs have significant
responsibility under the Telecommunications Act to oversee relationships between
incumbent local exchange carriers and their new competitors with respect to such
competitors' use of the incumbent local exchange carriers' network elements and
wholesale local services. PUCs arbitrate interconnection agreements between the
incumbent local exchange carriers and new competitors such as the Company when
necessary. PUCs are considering incumbent local exchange carrier pricing issues
in major proceedings now underway. PUCs will also determine how competitors can
take advantage of the terms and conditions of interconnection agreements that
incumbent local exchange carriers reach with other carriers. It is too early to
evaluate how these matters will be resolved, or their impact on the ability of
the Company to pursue its business plan.
States also regulate the intrastate carrier access services of the
incumbent local exchange carriers. The Company is required to pay such access
charges to originate and terminate its intrastate long distance traffic. The
Company could be adversely affected by high access charges, particularly to the
extent that the incumbent local exchange carriers do not incur the same level of
costs with respect to their own intrastate long distance services. In a related
development, states also will be developing intrastate universal service charges
parallel to the interstate charges created by the FCC. For example, incumbent
local exchange carriers such as BellSouth are proposing that states create funds
that would be supported by potentially large payments by firms such as the
Company based on their total intrastate revenues. Another issue is use by
certain incumbent local exchange carriers, with the approval of PUCs, of
extended local area calling that converts otherwise competitive intrastate toll
service to local service. States also are or will be addressing various
intraLATA dialing parity issues that may affect competition. The Company's
business could be adversely affected by these or other developments.
The Company also will be affected by how states regulate the retail prices
of the incumbent local exchange carriers with which it competes. The Company
believes that, as the degree of intrastate competition increases, the states
will offer the incumbent local exchange carriers increasing pricing flexibility.
This flexibility may present the incumbent local exchange carriers with an
opportunity to subsidize services that compete with the Company's services with
revenues generated from non-competitive services, thereby allowing incumbent
local exchange carriers to offer competitive services at lower prices than they
otherwise could. In a related development, BellSouth is seeking authority to
create "CLEC" affiliates that would operate on a much less regulated basis and
therefore could provide significant competition in the business market whether
or not the traditional BellSouth local business receives more pricing
flexibility. The Company cannot predict the extent to which these developments
may occur or their impact on the Company's business.
Local Government Authorizations and Related Rights of Way. The Company is
required to obtain street use and construction permits and licenses and/or
franchises to install and expand its fiber optic networks using municipal rights
of way. In some municipalities where the Company has
18
installed or anticipates constructing networks, it will be required to pay
license or franchise fees based on a percentage of gross revenues or on a per
linear foot basis. There can be no assurance that, following the expiration of
existing franchises, fees will remain at their current levels. In many markets,
the incumbent local exchange carriers do not pay such franchise fees or pay fees
that are substantially less than those required to be paid by the Company,
although the Telecommunications Act requires that in the future such fees be
applied in a competitively neutral manner. To the extent that, notwithstanding
the Telecommunications Act, competitors do not pay the same level of fees as the
Company, the Company could be at a competitive disadvantage. Termination of the
existing franchise or license agreements prior to their expiration dates or a
failure to renew the franchise or license agreements and a requirement that the
Company remove its facilities or abandon its network in place could have a
material adverse effect on the Company. In addition, the Company would be
adversely affected if it is unable to obtain additional authorization for new
construction on reasonable terms. Furthermore, open issues exist regarding the
ability of new local service providers to gain access to commercial office
buildings to serve tenants.
General. The telecommunications market is in a period of substantial change
and uncertainty. As the Telecommunications Act and related FCC and state actions
are implemented, new issues are likely to arise that can affect the Company and
its business plan. No assurance can be given that future regulatory developments
will not have a materially adverse impact on the Company.
DESCRIPTION OF CERTAIN INDEBTEDNESS
Credit Facility. The Company's wholly owned subsidiary, Interstate
FiberNet, Inc. (the "Borrower"), has a credit agreement with NationsBank of
Texas, N.A. (the "Credit Agreement") for a credit facility that will mature on
February 24, 2003 (the "Credit Facility"). The Credit Agreement provides for a
$50.0 million revolving Credit Facility to be used for working capital and other
purposes, including refinancing indebtedness of the Borrower existing at the
closing of the Credit Facility, capital expenditures and permitted acquisitions.
The following summary of the material provisions of the Credit Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, the Credit Agreement. Certain capitalized terms used in this
description of the Credit Facility are defined at the end of this section.
Amounts drawn under the Credit Facility will bear interest, at the
Borrower's option, at either the Base Rate or the LIBOR Rate, plus an Applicable
Margin. The Applicable Margin will be an annual rate which will fluctuate based
on the Borrower's Total Leverage Ratio and which will be between 1.125% and 0%
for Base Rate borrowings and between 2.125% and 1.0% for LIBOR Rate borrowings.
The Credit Agreement requires the Borrower to repay indebtedness
outstanding under the Credit Facility with the net cash proceeds from sales of
assets by the Company, the Borrower or the Borrower's subsidiaries other than in
the ordinary course of business and from certain public or private issuances of
equity securities or debt securities by the Company, the Borrower or the
Borrower's subsidiaries.
The Borrower's obligations under the Credit Facility are guaranteed by the
Company and the Borrower's subsidiaries and are secured by a first priority lien
on all current and future assets and properties of the Borrower and its
subsidiaries, except for certain contract rights and interests in real estate,
and by a first priority pledge of the stock of the Borrower and its
subsidiaries.
The Credit Agreement contains negative covenants limiting the ability of
the Borrower, the Borrower's current and future subsidiaries and the Company to
incur debt, create liens, pay
19
dividends, make distributions or stock repurchases, make investments or capital
expenditures, change their business, issue capital stock, engage in transactions
with affiliates, sell assets, engage in mergers and acquisitions and assume or
make guaranties. In addition, the Credit Agreement contains affirmative
covenants, including covenants requiring compliance with laws, maintenance of
corporate existence, licenses, properties and insurance, payment of taxes and
performance of other material obligations and the delivery of financial and
other information.
The Credit Agreement restricts the Borrower from declaring and paying
dividends or other distributions to the Company. However, the Borrower is
permitted to pay dividends to the Company to pay scheduled interest on (i) the
1997 Notes beginning after the sixth scheduled interest payment and (ii) the
1998 Notes, unless at the time of such dividend or distribution an event of
default (other than an event of default resulting solely from the breach of a
representation or warranty) under the Credit Agreement exists or would be caused
by such dividend or distribution; provided that, with respect to any event of
default (other than a payment default, a bankruptcy event with respect to the
Company, the Borrower or (with respect to the Notes) any Significant Subsidiary
of the Company, or an event in which any portion of the assets of the Borrower
and its subsidiaries that has generated more than 5% of the Operating Cash Flow
for the most recently completed twelve-month period shall not be operating for a
period in excess of 30 days), the Borrower will not be prohibited for more than
180 days from paying dividends to the Company to pay scheduled cash interest due
and payable on the 1997 Notes and the 1998 Notes.
The Credit Agreement also requires the Borrower to comply with certain
financial tests and to maintain certain financial ratios on a consolidated
basis. The Borrower must maintain (i) a Total Leverage Ratio no greater than
9.5:1.0 through June 30, 1999, 8.75 to 1.0 from July 1, 1999 to June 30, 2000,
7.5 to 1.0 from July 1, 2000 to June 30, 2001, 6.0 to 1.0 from July 1, 2001 to
June 30, 2002 and 4.5 to 1.0 from July 1, 2002 and thereafter; (ii) a Senior
Leverage Ratio no greater than 2.75:1.0 through June 30, 2000 and 2.25:1.0
thereafter; (iii) an Interest Coverage Ratio no less than 1.50:1.0 (or, in the
event the Borrower does not redeem 35% of the 1997 Notes within 60 days after
the closing date of the Credit Agreement, 1.75:1.0) through June 30, 2000 and
1.75:1.0 thereafter; and (iv) capital expenditures no greater than $105,000,000
for fiscal year 1998, $100,000,000 for fiscal year 1999, $50,000,000 for fiscal
year 2000, $45,000,000 for fiscal year 2001 and for each fiscal year thereafter;
provided, that (A) to the extent that less than such amount is used for any
fiscal year, the limitation on capital expenditures for succeeding fiscal years
may be increased by the amount of such unused amount and (B) the Borrower may
add $25,000,000 in the aggregate to the maximum amounts set forth above,
provided that at the time the Borrower elects to increase the maximum amount by
any portion of the $25,000,000, there exists no event of default.
Failure to satisfy any of the financial covenants constitutes an event of
default under the Credit Facility, notwithstanding the ability of the Borrower
to meet its debt service obligations. The Credit Agreement also includes other
customary events of default, including, without limitation, a cross-default to
other indebtedness, material undischarged judgments, bankruptcy and a change of
control.
As used in the foregoing description:
"Annualized Operating Cash Flow" means Operating Cash Flow for the
six-month period most recently ended, multiplied by two.
"Interest Coverage Ratio" means, for the Borrower on a consolidated basis
for any period, the ratio of Annualized Operating Cash Flow to the aggregate
amount of interest due and payable by the Company, the Borrower and the
Borrower's subsidiaries with respect to Total Debt, as described below, during
such period net of interest on the 1997 Notes funded by pledged securities,
interest income for such period, interest actually paid-in-kind, any one-time
facility fees paid in connection with the Credit Facility and in connection with
any pre-existing debt of the Company, the Borrower
20
or the Borrower's subsidiaries, up to $9.5 million of accrued interest paid by
the Borrower to ITC Holding prior to September 17, 1987, one-time prepayment
penalties incurred as a result of the extinguishment on the closing date of the
Credit Agreement of interest rate protection agreements of the Borrower in an
amount not in excess of $2,800,000 and any interest expense associated
exclusively with the mark to market on such closing date of interest rate
protection agreements of the Borrower in an amount not in excess of $2,800,000.
"Operating Cash Flow" for any period means the consolidated net income
(loss) of the Company, the Borrower and the Borrower's subsidiaries for such
period plus the following amounts for such period, to the extent included in the
determination of such income (loss): depreciation expense, amortization expense
and other non-cash charges reducing income, net interest expense, and income tax
expense.
"Senior Leverage Ratio" means, for the Borrower on a consolidated basis at
any date, the ratio of Senior Debt (Total Debt minus the aggregate outstanding
principal amount, and accrued and unpaid interest, on the Notes and the 1997
Notes plus aggregate cash balances in excess of $5,000,000) to Annualized
Operating Cash Flow.
"Total Debt" means the aggregate indebtedness of the Borrower for borrowed
money on a consolidated basis.
"Total Leverage Ratio" means at any date, for the Borrower on a
consolidated basis, the ratio of Total Debt (net of cash balances in excess of
$5,000,000 plus the balance of pledged securities securing the 1997 Notes) on
such date to Annualized Operating Cash Flow.
1997 Notes. On June 3, 1997, the Company completed the 1997 Notes Offering.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." Interest on the 1997
Notes is payable semiannually in cash, on each June 1 and December 1.
The 1997 Notes are unsubordinated indebtedness of the Company, ranking pari
passu in right of payment with all existing and future unsubordinated
indebtedness of the Company, including the Notes. At December 31, 1997,
approximately $50.5 million of the net proceeds from the sale of the 1997 Notes
were being held in a pledged account as security for and to fund the remaining
five interest payments on the 1997 Notes.
The 1997 Notes will mature on June 1, 2007. The 1997 Notes are redeemable
at the option of the Company, in whole or in part, at any time on or after June
1, 2002, initially at 105.5% of their principal amount, declining ratably to
100% of their principal amount, plus accrued interest, on or after June 1, 2004.
In addition, at any time prior to June 1, 2000, the Company may redeem up to 35%
of the aggregate principal amount of the 1997 Notes from the proceeds of one or
more public equity offerings at 111% of their principal amount, provided that
after any such redemption, at least $130.0 million principal amount of 1997
Notes remain outstanding. The Company plans to redeem $70.0 million principal
amount of the 1997 Notes on April 2, 1998.
The indenture pursuant to which the 1997 Notes were issued (the "1997 Notes
Indenture") contains certain covenants that affect, and in certain cases
significantly limit or prohibit, among other things, the ability of the Company
to incur indebtedness, pay dividends, prepay subordinated indebtedness,
repurchase capital stock, make investments, engage in transactions with
stockholders and affiliates, create liens, sell assets and engage in mergers and
consolidations. If the Company fails to comply with these covenants, the
Company's obligation to repay the 1997 Notes may be accelerated. However, these
limitations are subject to a number of important qualifications and
21
exceptions. In particular, while the 1997 Notes Indenture restricts the
Company's ability to incur additional indebtedness by requiring compliance with
specified leverage ratios, it permits the Company and its subsidiaries to incur
an unlimited amount of additional indebtedness to finance the acquisition of
equipment, inventory and network assets and up to $100 million of additional
indebtedness.
Upon a "Change of Control" of the Company (as defined in the 1997 Notes
Indenture), the Company will be required to make an offer to purchase the 1997
Notes at a purchase price equal to 101% of their principal amount, plus accrued
interest.
1998 Notes. On March 3, 1998, the Company completed the 1998 Notes
Offering. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." Interest
on the 1998 Notes is payable semiannually in cash, on each March 1 and September
1.
The 1998 Notes are unsubordinated indebtedness of the Company, ranking pari
passu in right of payment with all existing and future unsubordinated
indebtedness of the Company, including the 1997 Notes.
The 1998 Notes will mature on March 1, 2008. The 1998 Notes are redeemable
at the option of the Company, in whole or in part, at any time on or after March
1, 2003, initially at 104.4375% of their principal amount, declining ratably to
100% of their principal amount, plus accrued interest, on or after March 1,
2006. In addition, at any time prior to March 1, 2001, the Company may redeem up
to 35% of the aggregate principal amount of the 1998 Notes from the proceeds of
one or more public equity offerings at 108.875% of their principal amount;
provided that after any such redemption at least $104.0 million principal amount
of the 1998 Notes remain outstanding.
The indenture pursuant to which the 1998 Notes were issued (the "1998 Notes
Indenture," together with the 1997 Notes Indenture, collectively, the
"Indentures") contains certain covenants that affect, and in certain cases
significantly limit or prohibit, among other things, the ability of the Company
to incur indebtedness, pay dividends, prepay subordinated indebtedness,
repurchase capital stock, make investments, engage in transactions with
stockholders and affiliates, create liens, sell assets and engage in mergers and
consolidations. If the Company fails to comply with these covenants, the
Company's obligation to repay the 1998 Notes may be accelerated. However, these
limitations are subject to a number of important qualifications and exceptions.
In particular, while the 1998 Notes Indenture restricts the Company's ability to
incur additional indebtedness by requiring compliance with specified leverage
ratios, it permits the Company and its subsidiaries to incur an unlimited amount
of additional indebtedness to finance the acquisition of equipment, inventory
and network assets and up to $100.0 million of additional indebtedness.
Upon a "Change of Control" of the Company (as defined in the 1998 Notes
Indenture), the Company will be required to make an offer to purchase the 1998
Notes at a purchase price equal to 101% of their principal amount, plus accrued
interest.
22
RISK FACTORS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, set forth below are cautionary statements
identifying important factors that could cause the Company's actual results to
differ materially from those projected in any forward-looking statements of the
Company made by or on behalf of the Company, whether oral or written. These
forward-looking statements can be identified by use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
The Company wishes to ensure that any forward-looking statements are accompanied
by meaningful cautionary statements in order to maximize to the fullest extent
possible the protections of the safe harbor established in the Private
Securities Litigation Reform Act of 1995. Accordingly, any such statements are
qualified in their entirety by reference to, and are accompanied by, the
following important factors, among others, that could cause the Company's actual
results to differ materially from those projected in forward-looking statements
of the Company.
Historical and Anticipated Future Operating Losses and Negative Cash Flow After
Capital Expenditures
The Company expects to incur significant and increasing operating losses
and negative cash flow (after capital expenditures) during the next several
years as it implements its business strategy to expand its telecommunications
service offerings, expand its fiber optic network and enter new markets.
Although the Company expects that a majority of its revenue growth will come
from Retail Services, it does not expect its Retail Services to obtain a
significant share of the market for telecommunications services in the southern
United States, and there can be no assurance that the Company will achieve or
sustain profitability or positive net cash flow in the future. If the Company
cannot achieve or sustain operating profitability and positive net cash flow, it
may not be able to meet its working capital or debt service requirements, which
could have a material adverse effect on the Company's ability to meet its
obligations on the Notes. See "--Significant Capital Requirements; Uncertainty
of Additional Financing," "Item 6. Selected Financial Data," and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Significant Capital Requirements; Uncertainty of Additional Financing
Expansion of the Company's network, operations and services will require
significant capital. The Company currently estimates that its aggregate capital
requirements will total approximately $105.0 million in 1998. The Company
anticipates making substantial capital expenditures thereafter. Capital
expenditures will be primarily for the following: (i) the addition of
facilities-based local telephone service to the Company's bundle of integrated
telecommunications services, including acquisition and installation of switches;
(ii) market expansion; (iii) continued development and construction of its fiber
optic network (including transmission equipment); and (iv) infrastructure
enhancements, principally for information systems. The Company believes that
cash on hand, cash flow from operations and borrowings expected to be available
under the Credit Facility will provide sufficient funds to enable the Company
to expand its business as currently planned through the maturity of the Credit
Facility in 2003, after which the Company will need to seek additional financing
to fund capital expenditures and working capital. Because the Credit Facility
will mature in 2003, the Company may not have a ready source of liquidity after
2003. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "--Description of Certain Indebtedness."
23
The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimate depending on the demand for
the Company's services and as a result of regulatory, technological and
competitive developments (including new market developments and new
opportunities) in the Company's industry. The Company may also require
additional capital in the future (or sooner than currently anticipated) for new
business activities related to its current and planned businesses, or in the
event it decides to make acquisitions or enter into joint ventures and
strategic alliances. Sources of additional capital may include cash flow from
operations and public and private equity and debt financings. There can be no
assurance, however, that the Company will be successful in producing sufficient
cash flows or raising sufficient debt or equity capital to meet its strategic
objectives or that such funds, if available at all, will be available on a
timely basis or on terms that are acceptable to the Company. Failure to generate
or raise sufficient funds would require the Company to delay or abandon some or
all of its future expansion plans or expenditures, which could have a material
adverse effect on the Company. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview."
High Leverage; Ability to Service Debt; Restrictive Covenants
At December 31, 1997, the Company had $203.9 million of indebtedness and
its stockholders' equity was $148.3 million. The Company's earnings were
insufficient to cover its fixed charges for the year ended December 31, 1997 by
$13.7 million and its EBITDA less capital expenditures and interest expenses was
negative $43.5 million. In March 1998, the Company issued an additional $160
million in senior notes and announced plans to redeem $70 million of its 1997
Notes in April 1998. See "--Description of Certain Indebtedness." These
transactions will have a further negative impact on the Company's ratio of
earnings to fixed charges.
The Indentures and the Credit Facility contain restrictions on the Company
and its subsidiaries that affect, and in certain cases significantly limit or
prohibit, among other things, the ability of the Company and its subsidiaries to
incur additional indebtedness, create liens, make investments, issue stock of
subsidiaries and sell assets. In addition, the Credit Facility requires the
Company to maintain certain financial ratios. See "--Description of Certain
Indebtedness--Credit Facility." There can be no assurance that the Company will
be able to maintain such ratios or that such covenants will not adversely affect
the Company's ability to finance its future operations or capital needs or to
engage in other business activities that may be in the interest of the Company.
The limitations in the Indentures are subject to a number of important
qualifications and exceptions. In particular, while the Indentures restrict the
Company's ability to incur indebtedness by requiring compliance with specified
leverage ratios, they permit the Company to incur an unlimited amount of
additional indebtedness to finance the acquisition of equipment, inventory or
network assets.
There can be no assurance that the Company will be able to improve its
earnings before fixed charges or that the Company will be able to meet its debt
service obligations, including its obligations under the Notes. If the Company
is unable to generate sufficient cash flow or otherwise obtain funds necessary
to make required payments, or if the Company otherwise fails to comply with the
various covenants in its debt obligations, it would be in default under the
terms thereof, which would permit the holders of such indebtedness to accelerate
the maturity of such indebtedness and could cause defaults under other
indebtedness of the Company. Such defaults could result in a default on the
Notes and could delay or preclude payment of interest or principal on the Notes.
The ability of the Company to meet its obligations will be dependent upon the
future performance of the Company, which will be subject to prevailing economic
conditions and to financial, business and other factors. See "Description of
Certain Indebtedness."
24
The level of the Company's indebtedness could adversely affect the Company
in a number of ways. For example, (i) the ability of the Company to obtain any
necessary financing in the future for working capital, capital expenditures,
debt service requirements or other purposes may be limited; (ii) the Company's
level of indebtedness could limit its flexibility in planning for, or reacting
to, changes in its business; (iii) the Company will be more highly leveraged
than some of its competitors, which may place it at a competitive disadvantage;
(iv) the Company's degree of indebtedness may make it more vulnerable to a
downturn in its business or the economy generally; (v) the debt service
requirements of any additional indebtedness could make it more difficult for the
Company to make payments on the Notes; and (vi) a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of
principal and interest on its indebtedness and will not be available for other
purposes.
The successful implementation of the Company's strategy, including
expansion of its network and obtaining and retaining a significant number of
customers, and significant and sustained growth in the Company's cash flow are
necessary for the Company to be able to meet its debt service requirements,
including its obligations under the Notes. There can be no assurance that the
Company will successfully implement its strategy or that the Company will be
able to generate sufficient cash flow from operating activities to meet its debt
service obligations and working capital requirements. In the event the
implementation of the Company's strategy is delayed or is unsuccessful or the
Company does not generate sufficient cash flow to meet its debt service and
working capital requirements, the Company may need to seek additional financing.
There can be no assurance that any such financing could be obtained on terms
that are acceptable to the Company, or at all. In the absence of such financing,
the Company could be forced to dispose of assets in order to make up for any
shortfall in the payments due on its indebtedness under circumstances that might
not be favorable to realizing the highest price for such assets. A substantial
portion of the Company's assets consists of intangible assets, the value of
which will depend upon a variety of factors (including the success of the
Company's business). As a result, there can be no assurance that the Company's
assets could be sold quickly enough or for sufficient amounts to enable the
Company to meet its obligations, including its obligations with respect to the
Notes.
Ability to Manage Growth
The expansion and development of the Company's business will depend on,
among other things, the Company's ability to implement successfully its sales
and marketing strategy, evaluate markets, design fiber routes, secure financing,
install facilities, acquire rights of way, obtain any required government
authorizations, implement interconnection to, and collocation with, facilities
owned by incumbent local exchange carriers and obtain appropriately priced
unbundled network elements and wholesale services from the incumbent local
exchange carriers, all in a timely manner, at reasonable cost and on
satisfactory terms and conditions. The Company's rapid growth, particularly in
the provision of Retail Services, has placed, and anticipated growth in other
services in the future may also place, a significant strain on its
administrative, operational and financial resources. The Company's ability to
continue to manage its growth successfully will require the Company to enhance
its operational, management, financial and information systems and controls and
to hire and retain qualified sales, marketing, administrative, operating and
technical personnel. There can be no assurance that the Company will be able to
do so. In addition, as the Company increases its service offerings and expands
its targeted markets, there will be additional demands on customer support,
sales and marketing, administrative resources and network infrastructure. The
Company's inability to manage its growth effectively could have a material
adverse effect on the Company's business, results of operations and financial
condition.
25
Business Development and Expansion Risks
The successful implementation of the Company's business strategy to provide
an integrated bundle of telecommunications services and expand its operations
will be subject to a variety of risks, including competition and pricing, the
availability of capital on favorable terms, regulatory uncertainties, operating
and technical problems, the need to establish interconnection and collocation
arrangements with incumbent local exchange carriers in its target markets and
the potential difficulties in adding a local service offering. See "--Dependence
on Incumbent Local Exchange Carriers." In addition, the expansion of the
Company's business may involve acquisitions of other telecommunications
businesses and assets that, if made, could divert the resources and management
time of the Company and could require integration with the Company's operations.
There can be no assurance that any such acquisition could be successfully
integrated into the Company's operations or that any acquired business will
perform as expected. Failure of the Company to implement its expansion and
growth strategy successfully would have a material adverse effect on the
Company's business, results of operations and financial condition.
Risks Related to Local Services Strategy
The Company has recently entered the newly created competitive local
telecommunications services industry. The local telephone services market has
been opened to competition through the passage of the Telecommunications Act and
subsequent state and federal regulatory actions designed to implement the
Telecommunications Act. Regulatory bodies have not completed all actions
expected to be needed to implement local service competition, and there is
little experience under those decisions that have been made to date. The Company
will have to make significant operating and capital investments in order to
implement its local exchange services strategy. There are numerous operating
complexities associated with providing these services. The Company will be
required to develop new products, services and systems and will need to develop
new marketing initiatives and train its sales force in connection with selling
these services. The Company will also need to implement the necessary billing
and collecting systems for these services. The Company will face significant
competition from the Regional Bell Operating Companies, whose core business is
providing local dial tone service. The Regional Bell Operating Companies, who
currently are the dominant providers of services in their markets, are expected
to mount a significant competitive response to new entrants in their markets
such as the Company. The Company also will face significant competitive product
and pricing pressures from other incumbent local exchange carriers and from
other firms seeking to compete in the local services market.
The Company also expects that the addition of local service to its bundle
of telecommunications services will have an adverse impact on its gross margin
because the gross margin on the resale of local services through incumbent local
exchange carrier facilities is lower than the gross margin on the Company's
existing business. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
Pricing Pressures and Risks of Industry Over-Capacity
The long distance transmission industry has generally been characterized by
over-capacity and declining prices since shortly after the AT&T divestiture in
1984. The Company believes that, in the last several years, increasing demand
has ameliorated the over-capacity and that pricing pressure has been reduced.
However, the Company anticipates that prices for its Carriers' Carrier Services
will continue to decline over the next several years. The Company is aware that
certain long distance carriers are expanding their capacity and believes that
other long distance carriers, as well as potential new entrants to the industry,
are constructing new fiber optic and other long distance
26
transmission networks in the southern United States. Since the cost of the
actual fiber (as opposed to construction costs) is a relatively small portion of
the cost of building new transmission lines, persons building such lines are
likely to install fiber that provides substantially more transmission capacity
than will be needed over the short or medium term. Further, recent technological
advances may greatly expand the capacity of existing and new fiber optic cable.
Although such technological advances may enable the Company to increase its
capacity, an increase in the capacity of the Company's competitors could
adversely affect the Company's business. If industry capacity expansion results
in capacity that exceeds overall demand along any of the Company's routes,
severe additional pricing pressure could develop. In addition, strategic
alliances or similar transactions, such as the long distance capacity purchasing
alliance among certain Regional Bell Operating Companies announced in the spring
of 1996, could result in additional pricing pressure on long distance carriers.
Furthermore, the marginal cost of carrying an additional call over existing
fiber optic cable is extremely low. As a result, within a few years, there may
be dramatic and substantial price reductions. See "--Competition."
Dependence on Billing, Customer Service and Information Systems
Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. As the Company commences providing
dial tone and switched local access services, the need for enhanced billing and
information systems will increase significantly. The inability of the Company to
identify adequately all of its information and processing needs, or to upgrade
systems as necessary, could have a material adverse effect on the Company's
ability to reach its objectives and on its financial condition and results of
operations.
Risks Associated with the Year 2000 Issue
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of
operations, including, among others, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has commenced an analysis, which it expects to complete during
the second quarter of 1998, to determine the extent to which its own
information, customer service and billing systems and the systems of its major
vendors and third party network service providers (insofar as they relate to the
Company's business) are vulnerable to the Year 2000 issue. The Company is
currently unable to predict the extent to which the Year 2000 issue will affect
its internal systems, or those of its vendors and third party network service
providers. Any failure by the Company, such vendors or third party network
service providers to resolve any Year 2000 issues on a timely basis, or in a
manner that is compatible with the Company's systems, could have a material
adverse effect on the Company. Although the Company may incur substantial costs,
particularly costs resulting from charges by its vendors or third party network
service providers, in correcting Year 2000 issues, such costs cannot currently
be estimated. Additionally, such costs will be expensed as incurred, which will
have a negative effect on current operating results.
Dependence on Rights of Way and Other Third Party Agreements
The Company has obtained easements, rights of way, franchises and licenses
from various private parties, including actual and potential competitors, and
local governments in order to
27
construct and maintain its fiber optic network. There can be no assurance that
the Company will continue to have access to existing rights of way and
franchises after the expiration of such agreements, or that the Company will
obtain additional rights necessary to extend its network on reasonable terms. If
a franchise, license or lease agreement were terminated and the Company were
forced to remove or abandon a significant portion of its network, such
termination could have a material adverse effect on the Company. Similarly, the
Company's business plans could be adversely affected if its network expansion is
hindered through delays or denial of rights of way, easements or related
licenses on competitive terms.
Regulation
The Company is required to obtain certain authorizations from the FCC and
PUCs to offer certain of its telecommunications services, as well as file
tariffs for many of its services. To date the Company has not experienced
significant difficulties in receiving certification, maintaining tariffs or
otherwise complying with its regulatory obligations. The Company will face new
regulatory obligations as it begins to enter the local telephone market. It also
is likely that state PUCs will regulate the local telephone services offered by
the Company and other competitive local exchange carriers more heavily than
competitive long distance services have been regulated in the past. Because the
FCC and the states have yet to adopt many of the rules and policies necessary to
implement local telephone competition, or to respond to other related issues, it
is uncertain how burdensome these requirements will be for the Company.
In addition, the Company's plans to provide local telephone service are
heavily dependent upon implementation of provisions of the Telecommunications
Act. The Telecommunications Act preempted state and local laws to the extent
that they prohibited local telephone competition, and imposed a variety of new
duties on incumbent local exchange carriers intended to advance such
competition, including the duty to negotiate in good faith with competitors
requesting interconnection to the incumbent local exchange carrier's network.
However, negotiations with incumbent local exchange carriers have sometimes
involved considerable delays and the resulting negotiated agreements may not
necessarily be obtained on terms and conditions that are acceptable to the
Company. In such instances, the Company may petition the proper state regulatory
agency to arbitrate disputed issues. There can be no assurance that the Company
will be able to negotiate acceptable new interconnection agreements with
incumbent local exchange carriers or that if state regulatory authorities impose
terms and conditions on the parties in arbitration, such terms will be
acceptable to the Company. Although the Company entered into the Interconnection
Agreement pursuant to which it will obtain wholesale local services and access
to unbundled network elements from BellSouth, the terms of the Interconnection
Agreement are subject to the approval of the PUCs regulating the Company's
markets. Such approval has been received from the PUCs of Alabama, Florida,
Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina and
Tennessee. However, the Company continues to face issues related to
implementation of those interconnection agreements.
On August 8, 1996, the FCC adopted rules and policies implementing the
local competition provisions of the Telecommunications Act, which rules, in
general, were considered favorable to new competitive entrants, but those rules
have not been fully implemented. The FCC's rules were challenged in the federal
courts by GTE, Regional Bell Operating Companies, large independent incumbent
local exchange carriers and state regulatory commissions. On October 15, 1996,
the Eighth Circuit issued a stay of the implementation of certain of the FCC's
rules, and on July 18 and October 14, 1997, the same Court issued decisions
finding that the FCC lacked statutory authority under the Telecommunications Act
for certain of its rules. In particular, the Eighth Circuit found that the FCC
was not empowered to establish the pricing standards governing unbundled local
network elements or wholesale local services of the incumbent local exchange
carriers, or to require
28
such carriers to provide network elements in a combined form. The Eighth Circuit
also struck down other FCC rules, including one that would have enabled new
entrants to "pick and choose" from provisions of established interconnection
agreements between the incumbent local exchange carriers and other carriers. The
Eighth Circuit rejected certain other objections to the FCC rules brought by the
incumbent local exchange carriers or the states, including challenges to the
FCC's definition of unbundled elements, and to the FCC's rules allowing new
competitors to create their own networks by combining incumbent local exchange
carrier network elements together without adding additional facilities of their
own. The overall impact of the Eighth Circuit's decision is to limit the
obligations of incumbent local exchange carriers as originally interpreted by
the FCC, materially reduce the role of the FCC in fostering local competition,
including its ability to take enforcement action if the Telecommunications Act
is violated, and increase the role of state utility commissions. On January 26,
1998, the Supreme Court granted a request by the FCC and other parties to review
the Eighth Circuit decisions. The Supreme Court is not expected to complete this
process until late 1998 or early 1999. Meanwhile, certain state commissions have
asserted that they will be active in promoting local telephone competition using
the authority they have under the Eighth Circuit decisions, lessening the
significance of the reduced FCC role. At this time the impact of the Eighth
Circuit decisions cannot be evaluated and there can be no assurance that those
decisions and related developments will not have a material adverse effect on
the Company. Furthermore, other FCC rules related to local telephone competition
remain the subject of legal challenges, and there can be no assurance that
decisions affecting those rules will not be adverse to companies seeking to
enter the local telephone market.
The Telecommunications Act also creates the foundation for increased
competition in the long distance market from the incumbent local exchange
carriers, which could affect the successful implementation of the Company's
business plans. For example, certain provisions eliminate previous prohibitions
on the provision of interLATA long distance services (both retail and carriers'
carrier) by the Regional Bell Operating Companies subject to compliance by such
companies with requirements set forth in the Telecommunications Act and
implemented by the FCC. On December 31, 1997, the U.S. District Court for the
Northern District of Texas ruled that the imposition of these preconditions on
the Regional Bell Operating Companies was unconstitutional, and that these
Companies must be allowed to provide interLATA services without meeting them.
The District Court has stayed its order pending appeal. The Company could be
adversely affected if the Regional Bell Operating Companies (and particularly
BellSouth) are allowed to provide wireline interLATA long distance services
within their own regions before local competition is established.
In a related development, the FCC is considering proposed new policies and
rules that would grant the incumbent local exchange carriers additional
flexibility in the pricing of interstate access services, and states are
considering or are expected to consider incumbent local exchange carrier
requests for similar regulatory relief with respect to intrastate services. Such
flexibility is likely to come first for services offered in the business market.
Any pricing flexibility or other significant deregulation of the incumbent local
exchange carriers could have a material adverse effect on the Company. The
Company also could be adversely affected by FCC or state regulatory decisions
affecting access charges and universal service. See "Item 1.
Business--Regulation."
Competition
The Company operates in a highly competitive environment, and the level of
competition, particularly with respect to pricing, is increasing. Local
telephone and intraLATA long distance services substantially similar to those
expected to be offered by the Company are also offered by the incumbent local
exchange carriers serving the markets that the Company plans to serve. BellSouth
is the incumbent local exchange carrier and a particularly strong competitor in
most of the markets to be served by the Company. BellSouth and other incumbent
local exchange carriers already have
29
relationships with every customer and have the potential to subsidize services
of the type offered by the Company from service revenues not subject to
effective competition, which could result in even more intense price
competition. The Company competes with long distance carriers in the provision
of interLATA long distance Retail and Carriers' Carrier Services. The interLATA
long distance market consists of four major competitors (AT&T, MCI, Sprint and
WorldCom) but other companies operate or are building networks in the southern
United States and other geographic areas. Other competitors of the Company in
the Retail and Carriers' Carrier Services markets are likely to include Regional
Bell Operating Companies providing out-of-region (and, with the future removal
of regulatory barriers, in-region) long distance services, other competitive
local exchange carriers, microwave and satellite carriers, and private networks
owned by large end-users. The Company also may increasingly face competition
from firms offering long distance data and voice services over the Internet.
Such firms could enjoy a significant cost advantage because at this time they do
not pay carrier access charges or universal service fees. In addition, the
Company competes with direct marketers, equipment vendors and installers, and
telecommunications management companies with respect to certain portions of its
business. Many of the Company's existing and potential competitors have
financial, technical and other resources and customer bases and name recognition
far greater than those of the Company. The long distance business is extremely
competitive and prices have declined substantially in recent years and are
expected to continue to decline, which will adversely affect the Company's gross
margins as a percentage of revenues. See "--Dependence on Incumbent Local
Exchange Carriers" and "Item 1. Business--Regulation."
The Telecommunications Act, other recent state legislative actions, and
current federal and state regulatory initiatives provide increased business
opportunities for the Company by removing or substantially reducing certain
barriers to local exchange competition. However, these new competitive
opportunities are expected to be accompanied by new competitive opportunities
for the incumbent local exchange carriers. It is also expected that increased
local competition will result in increased pricing flexibility for, and
relaxation of regulatory oversight of, the incumbent local exchange carriers. If
the incumbent local exchange carriers are permitted to engage in increased
volume and discount pricing practices or charge competitive local exchange
carriers increased fees for interconnection to their networks, or if the
incumbent local exchange carriers seek to delay implementation of
interconnection by competitors to their networks, the Company's results of
operations and financial condition could be adversely affected. There can be no
assurance that the Company will be able to achieve or maintain adequate market
share or revenues, or compete effectively in any of its markets.
In addition, a continuing trend toward business combinations and strategic
alliances in the telecommunications industry may further enhance competition.
For example, the national long distance carrier WorldCom has a pending agreement
to merge with MCI. WorldCom also has acquired competitive local exchange
carriers, including MFS Communications Company, Inc. and Brooks Fiber
Properties, Inc. In March 1997, BellSouth and IBM announced an alliance to
provide Internet and Intranet services to businesses in the southern United
States. In January 1998, AT&T announced plans to acquire another competitive
local exchange carrier, TCG. Additionally, in March 1998, Qwest announced its
intention to acquire LCI, which combination would result in the nation's fourth-
largest long distance carrier. These types of strategic alliances could put the
Company at a significant competitive disadvantage.
The Company will face competition in the markets in which it operates from
one or more competitive local exchange carriers operating fiber optic networks,
in some cases in conjunction with the local cable television operator. One of
the primary purposes of the Telecommunications Act is to promote competition,
particularly in the local telephone market. AT&T, MCI, Sprint and others have
begun to offer local telecommunications services, either directly or in
conjunction with other competitive local exchange carriers in certain locations,
and are expected to expand that activity as
30
opportunities created by the Telecommunications Act develop. BellSouth has
announced plans to provide local service in areas of its region where it is not
the incumbent local exchange carrier.
To complement its telecommunications services offerings, the Company offers
data transmission services. The data transmission business is extremely
competitive and prices have declined substantially in recent years and are
expected to continue to decline.
The recent World Trade Organization ("WTO") agreement on basic
telecommunications services could increase the level of competition faced by the
Company. Under this agreement, the United States and other members of the WTO
committed themselves to opening their telecommunications markets to competition
and foreign ownership and to adopting regulatory measures to protect against
anticompetitive behavior by dominant telephone companies effective as early as
January 1, 1998.
The Company also believes that providers of wireless services increasingly
will offer, in addition to products that supplement a customer's wireline
communications (similar to cellular telephone services in use today), wireline
replacement products that may result in wireless services becoming the
customer's primary mode of communication. Competition with providers of wireless
telecommunications services may be intense. Many of the Company's potential
wireless competitors have substantially greater financial, technical, marketing,
sales, manufacturing and distribution resources than those of the Company.
Furthermore, the FCC has made spectrum available through public auction over the
past several years for use in wireless communications and plans to offer
additional spectrum in this manner in 1998. This additional spectrum is intended
by the FCC to be used for broadband, data and video transmission but its use in
wireless local loop is also possible.
Dependence on Incumbent Local Exchange Carriers
The Company is dependent on incumbent local exchange carriers to provide
access service for the origination and termination of its toll long distance
traffic and interexchange private lines. Historically charges for such access
service have made up a significant percentage of the overall cost of providing
long distance service. On May 7, 1997, the FCC adopted changes to its interstate
access rules that, among other things, will reduce per-minute access charges and
substitute new per-line flat rate monthly charges. The FCC also approved
reductions in overall access rates, and established new rules to recover
subsidies to support universal service and other public policies. The impact of
these changes on the Company or its competitors is not yet clear. The Company
could be adversely affected if it does not experience access cost reductions
proportionally equivalent to those of its competitors. Insofar as new
Internet-based competitors continue to be exempt from these charges, they could
enjoy a significant cost advantage in this area. See "Item 1.
Business--Regulation."
The Company also generally will be dependent on incumbent local exchange
carriers for provision of local telephone service through access to local loops,
termination service and, in some markets, central office switches of such
carriers. In addition, the Company intends to obtain the local telephone
services of the incumbent local exchange carriers on a wholesale basis and
resell that service to end users, particularly in the early stages of its local
telephone service business.
Any successful effort by the incumbent local exchange carriers to deny or
substantially limit the Company's access to the incumbent local exchange
carrier's network elements or wholesale services would have a material adverse
effect on the Company's ability to provide local telephone services. Although
the Telecommunications Act imposes interconnection obligations on incumbent
local exchange carriers, there can be no assurance that the Company will be able
to obtain access to such network elements or services at rates, and on terms and
conditions, that permit the Company to
31
offer local services at rates that are both profitable and competitive. As noted
above, the Eighth Circuit recently struck down certain FCC rules intended to
govern such rates, terms and conditions. See "--Regulation." One result of this
decision is to give state utility commissions a significantly larger role in
implementing the Telecommunications Act. It is uncertain whether such
commissions will adopt and enforce rules or take other actions that will permit
new carriers to have economical use of incumbent local exchange carrier networks
and facilities. The Interconnection Agreement currently allows the Company to
provide local service on a resale basis or by purchasing all unbundled network
elements required to provide local service on a facilities basis, without using
Company-owned facilities. The terms of the Interconnection Agreement, including
interim pricing terms agreed to by the Company and BellSouth, have been approved
by state regulatory authorities in all states in which BellSouth operates,
although they remain subject to review and modification by such authorities. In
addition, the Interconnection Agreement does not resolve all operational issues,
which issues the Company and BellSouth are continuing to negotiate to resolve.
Also, many issues relevant to the terms and conditions by which competitors may
use the incumbent local exchange carrier network and wholesale services remain
to be resolved. For example, BellSouth and certain other incumbent local
exchange carriers have taken the position that when a carrier seeking to provide
local service obtains all necessary elements (loops and switches) from the
incumbent local exchange carrier, the incumbent local exchange carrier retains
the right to receive the access revenues associated with the service to the
customers served on that basis. Although the FCC has rejected this position,
further legal challenges are in progress and other important issues related to
this form of interconnection remain open. For example, many new carriers,
including the Company, have experienced problems with respect to the operational
support systems used by new carriers to order and receive network elements and
wholesale services from the incumbent local exchange carriers. These systems are
necessary for new carriers like the Company to provide local service to
customers on a timely and competitive basis. The FCC has created a task force to
examine problems that have slowed the development of local telephone
competition. The Telecommunications Act creates incentives for local exchange
carriers to permit access to their facilities by denying such carriers the
ability to provide long distance services until there is adequate competition at
the local level. However, the U.S. District Court for the Northern District of
Texas has found these provisions unconstitutional, but this order has been
stayed pending appeal. BellSouth is not yet permitted to offer long distance
services. There can be no assurance, however, that BellSouth or other local
exchange carriers will be accommodating to the Company once they are permitted
to offer long distance service. See "--Regulation" and "--Services and
Facilities."
Dependence on Certain Customers
For the year ended December 31, 1997, the Company's two largest Carriers'
Carrier customers would together have accounted for approximately 12.5% of the
Company's consolidated revenues. For the year ended December 31, 1997, the
Company's five largest Retail Services customers would have represented an
aggregate of approximately 10% of the Company's consolidated revenues. The
Company's customers generally use more than one service provider and may reduce
their use of the Company's services and switch to other providers without
incurring significant expense. The Company's agreements with its customers
generally provide that the customer may terminate service without penalty in the
event of certain outages in service and for certain other defined causes.
Although as of December 31, 1997, the Company's Carriers' Carrier business had
remaining future long-term contract commitments totaling approximately $77.9
million, some of such contractual commitments provide that, if the customer is
offered lower pricing with respect to any circuit by another carrier, the
customer's commitment to the Company will be reduced to the extent the Company
does not match the price for such circuit and the customer purchases such
circuit from the other carrier. There can be no assurance that the Company will
be able to retain its customers. The loss of or a significant decrease of
business from any of its largest customers would
32
have a material adverse effect on the Company's business, results of operations
and financial condition.
Risk of Rapid Technological Changes
The telecommunications industry is subject to rapid and significant changes
in technology. Although the Company believes that, for the foreseeable future,
these changes will neither materially affect the continued use of its fiber
optic network, digital switches and transmission equipment, nor materially
hinder its ability to acquire necessary technologies, the effect of
technological changes on the business of the Company, such as changes relating
to emerging wireline (including fiber optic) and wireless (including broadband)
transmission technologies, and use of the Internet for traditional voice, data
or broadband communications, cannot be predicted. In addition, the Company may
be required to select in advance one technology over another, but it will be
impossible to predict with any certainty, at the time the Company is required to
make its investment, which technology will prove to be the most economic,
efficient or capable of attracting customer usage.
Dependence on Network Infrastructure
The Company has entered into marketing and management agreements with three
southern public utility companies to sell long-haul private line services on a
commission basis on the fiber optic networks owned by these companies. Pursuant
to these agreements, which have remaining terms ranging from four to seven
years, the Company generally earns a commission based upon a percentage of the
gross revenues generated by the sale of capacity on the utility's networks. By
interconnecting the Company's owned network to these other networks owned by the
public utilities, and by marketing and selling capacity on such networks to the
Company's customers, the Company has effectively extended its network with
minimal capital expenditure. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview." The Company also has a
buy-sell agreement with Carolinas Fibernet, LLC, which manages fiber optic
facilities in North Carolina and South Carolina. Although the Company does not
believe that any of these agreements will be terminated in the near future,
cancellation or non-renewal of any of such agreements could materially adversely
affect the Company's business. In addition, two of the Company's three
agreements with public utility companies are nonexclusive, and the Company may
encounter competition for capacity on the utilities' networks from other service
providers that enter into comparable arrangements with the utilities. Any
reduction in the amount of capacity that is made available to the Company could
adversely affect the Company. To the extent the Company is unable to establish
similar arrangements in new markets, it may be required to make additional
capital expenditures to extend its fiber optic network.
The Company's business also could be materially adversely affected by a
cable cut or equipment failure in the Company's fiber optic network. Although
the Company has implemented electronic redundancy throughout its network, which
enables traffic to be rerouted to another fiber in the same fiber sheath in the
event of a partial fiber cut or electronics failure, a substantial portion of
the Company's owned and managed fiber optic network is not protected in the
event of a total cable cut.
Dependence on Key Personnel
The Company's business is currently managed by a small number of key
management and operating personnel. The Company does not have any employment
agreements with, nor does the
33
Company maintain "key man" insurance on, these employees. The loss of the
services of key personnel, or the inability to attract, recruit and retain
sufficient or additional qualified personnel, could have a material adverse
effect on the Company. See "Item 10. Directors and Executive Officers of the
Registrant."
Potential Influence By and Relationship With Certain Stockholders
As of December 31, 1997, Campbell B. Lanier, III beneficially owned
approximately 18% of the outstanding Common Stock. See "Item 12. Security
Ownership of Certain Beneficial Owners and Management." To the extent that Mr.
Lanier exercises his voting and investment rights in concert with other
stockholders, Mr. Lanier and such other stockholders may be able to exercise
control over the Company's business by virtue of their voting power with respect
to the election of directors and other actions requiring stockholder approval.
Dividend Policy
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends in the foreseeable future.
See "Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters--Dividend Policy." Additionally, the Indentures and the Credit Facility
contain restrictions on the Company's ability to pay dividends. See "--
Description of Certain Indebtedness."
Certain Anti-Takeover Provisions
Certain provisions of the Company's Certificate of Incorporation and
Amended and Restated Bylaws and the General Corporation Law of the State of
Delaware could delay or impede the removal of incumbent directors and could make
more difficult a merger, tender offer or proxy contest involving the Company, or
could discourage a third party from attempting to acquire control of the
Company, even if such events would be beneficial to the interests of the
stockholders. In particular, the classification of the Company's Board of
Directors could have the effect of delaying a change in control of the Company.
In addition, the Certificate of Incorporation authorizes the Board of Directors
to provide for the issuance of shares of preferred stock of the Company, in one
or more series, which the Board of Directors could issue without further
stockholder approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine.
Volatility of Stock Price
Since the Common Stock has been publicly traded, the market price of the
Common Stock has fluctuated over a wide range and may continue to do so in the
future. See "Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters." The market price of the Common Stock could be subject to
significant fluctuations in response to various factors and events, including,
among other things, the depth and liquidity of the trading market of the Common
Stock, quarterly variations in actual or anticipated operating results, growth
rates, changes in estimates by analysts, market conditions in the industry,
announcements by competitors, regulatory actions and general economic
conditions. In addition, the stock market has from time to time experienced
significant price and volume fluctuations, which have particularly affected the
market prices of the stocks of telecommunications companies, and which may be
unrelated to the operating performance of particular companies. As a result of
the foregoing, the Company's operating results and prospects from time to time
may be below the expectations of public market analysts and investors. Any such
event would likely result in a material adverse effect on the price of the
Common Stock.
34
EMPLOYEES
As of December 31, 1997, the Company had over 500 full-time employees, none
of whom was represented by a union or covered by a collective bargaining
agreement. The Company believes that its relationship with its employees is
good. In connection with the construction and maintenance of its fiber optic
network and the conduct of its other business operations, the Company uses third
party contractors, some of whose employees may be represented by unions or
covered by collective bargaining agreements.
EXECUTIVE OFFICERS
The following is a list of the executive officers of the Company, together
with biographical summaries of their experience. The ages of persons set forth
below are as of December 31, 1997.
NAME AGE POSITION(S) WITH COMPANY
- ---- --- ------------------------
Campbell B. Lanier, III 47 Chairman, Director
Andrew M. Walker 56 Chief Executive Officer, Director
Foster O. McDonald 35 President
Douglas A. Shumate 32 Senior Vice President,
Chief Financial Officer
Steven D. Moses 48 Senior Vice President-
Network Services
J. Thomas Mullis 54 Senior Vice President-
General Counsel, Secretary
Roger F. Woodward 45 Senior Vice President, Sales,
Marketing and Customer Support
Sara L. Plunkett 48 Vice President-Finance, Treasurer
Campbell B. Lanier, III has been Chairman of the Company since March 1997.
Mr. Lanier served as Chairman of the Board and Chief Executive Officer of ITC
Holding prior to the Merger and served as a director of ITC Holding since its
inception in 1985 through a predecessor company. Mr. Lanier also is a director
of KNOLOGY Holdings, Inc. ("KNOLOGY") (a broadband telecommunications services
company) (formerly known as CyberNet Holding, Inc.), MindSpring Enterprises,
Inc. ("MindSpring") (a company that provides Internet services), National Vision
Associates, Ltd. (a full service optical retailer) and K&G Men's Centers (a
discount retailer of men's clothing), Vice Chairman of the Board of AvData
Systems, Inc. ("AvData") (a company providing data communications networks) and
Chairman of the Board of Powertel, Inc. (formerly InterCel, Inc.) ("Powertel")
(a wireless telecommunications services company). He served as Chairman of the
Board of AvData from 1988 to 1990 and has served as a Managing Director of South
Atlantic Private Equity Fund IV, Limited Partnership since 1997.
Andrew M. Walker has been Chief Executive Officer of the Company since
March 1997. He served as President and Chief Executive Officer of the managing
partner of each of Interstate FiberNet and Gulf States FiberNet from November
1994 until March 1997. Mr. Walker has served as a director of KNOLOGY since July
1996, and he served as Chief Executive Officer and President of KNOLOGY from
July 1996 to February 1997. Mr. Walker worked for MCI from 1990 to 1994 as Vice
President Carrier Services. From 1986 to 1990, Mr. Walker served as a Division
President for Telecom*USA, Inc. Prior to 1986, Mr. Walker held different
positions with the Christian Broadcasting Network, M/A-Com and Comsat
Laboratories.
35
Foster O. McDonald has been President of the Company since March 1997. He
served as President of DeltaCom from January 1991 until March 1997. From
February 1996 until March 1997, Mr. McDonald also served as Chief Executive
Officer of DeltaCom. From May 1984 through December 1990, Mr. McDonald served as
Vice President and General Manager of DeltaCom. He also serves as a director of
Brindlee Mountain Telephone Company.
Douglas A. Shumate has been Senior Vice President and Chief Financial
Officer of the Company since March 1997. He served as Chief Financial Officer of
the Managing Partners of each of Interstate FiberNet and Gulf States FiberNet
from January 1995 until March 1997. From May 1991 to January 1995, he served as
Vice President-Finance and Chief Financial Officer of Interstate Telephone
Company ("Interstate Telephone"), a local telephone service provider and wholly
owned subsidiary of ITC Holding. From December 1986 through April 1991, Mr.
Shumate was employed as a C.P.A. at Arthur Andersen LLP.
Steven D. Moses has been Senior Vice President-Network Services of the
Company since March 1997. He served as Vice President of Interstate FiberNet
from January 1992 until April 1995 and Chief Operating Officer of Interstate
FiberNet from April 1995 until March 1997. From May 1991 to January 1992, Mr.
Moses served as Director-Special Projects of Interstate Telephone and Valley
Telephone Company (a local telephone service provider and a wholly owned
subsidiary of ITC Holding).
J. Thomas Mullis has been Senior Vice President, General Counsel and
Secretary of the Company since March 1997. Mr. Mullis served as General Counsel
and Secretary of DeltaCom from May 1985 to March 1997 and as Executive Vice
President of DeltaCom from January 1994 to November 1996. From November 1996 to
March 1997, he also served as Senior Vice President of DeltaCom. From January
1990 to December 1993, Mr. Mullis served as President, General Counsel and
Secretary of both Southern Interexchange Services, Inc. (a switched services
carrier) and Southern Interexchange Facilities, Inc. (a private line carriers'
carrier).
Roger F. Woodward has been Senior Vice President-Sales, Marketing and
Customer Support of the Company since March 1997. Mr. Woodward served as Senior
Vice President-Sales of DeltaCom from October 1996 until March 1997. From March
1990 until July 1996, Mr. Woodward served in a variety of positions, including
Regional Sales Director and Vice President-Sales, with Allnet Communications,
Inc., which was acquired by Frontier in August 1995.
Sara L. Plunkett has been Vice President-Finance and Treasurer for the
Company since March 1997. She served as Vice President-Finance of DeltaCom from
October 1996 until March 1997. From May 1989 through October 1996, she served as
Chief Financial Officer of DeltaCom.
36
ITEM 2. PROPERTIES
The Company leases its corporate headquarters space in West Point, Georgia
from KNOLOGY. See "Item 13. Certain Relationships and Related Transactions." The
Company also owns a switch site in Birmingham, Alabama and leases space for a
network operations center and a switch site in Arab, Alabama. In addition, the
Company is constructing a multi-service facility in Anniston, Alabama to
function as a centralized switching control center for the Company's network and
an operator services center. Construction of the Anniston facility is expected
to be completed in the third quarter of 1998. The Company also intends to begin
construction on an administrative office in Arab, Alabama in the second quarter
of 1998.
The Company operates branch offices in Atlanta (two offices), Georgia;
Pensacola and Jacksonville, Florida; Columbia and Greenville, South Carolina;
Charlotte, North Carolina; New Orleans and Baton Rouge, Louisiana; and
Huntsville, Mobile, Auburn, Dothan, Florence, Montgomery and Birmingham,
Alabama. The leases for these offices expire between 1998 and 2001.
As part of its fiber optic network and switched service system, the Company
owns or leases rights of way, land, office space and towers throughout the
southern United States.
The Company owns land and microwave transmission towers at various
locations in Alabama.
The Company expects to lease or purchase additional office space and
switching and other network facilities in connection with the planned expansion
of its telecommunications network system.
The Company believes that all of its properties are well maintained.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal proceedings in the ordinary course of its
business, including disputes with contractors or vendors, which the Company
believes are not material to the Company or its business. The Company also is a
party to regulatory proceedings affecting the relevant segments of the
communications industry generally.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 16, 1997, prior to the Equity Offering, ITC Holding (the
Company's sole stockholder on such date) consented in writing to resolutions
adopted by the Company's Board of Directors regarding the Reorganization and
related matters.
37
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Company completed the Equity Offering on October 29, 1997, at a price
per share of Common Stock of $16.50. The Common Stock is traded on the Nasdaq
National Market under the symbol "ITCD." The following table sets forth for the
periods indicated the high and low sales prices per share of the Common Stock as
reported by the Nasdaq National Market.
1997 High Low
- ---- ---- ---
Fourth Quarter (from October 23, 1997) $ 20.375 $ 13.875
On March 16, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $30.25 per share and there were 311 holders of record
of the Common Stock.
Dividend Policy
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. It is the current policy of the Board of Directors to retain
earnings to finance the expansion of the Company's operations. Future
declaration and payment of dividends, if any, will be determined in light of the
then-current conditions, including the Company's earnings, operations, capital
requirements, financial condition, restrictions in financing agreements and
other factors deemed relevant by the Board of Directors. Additionally, the
Indentures and the Credit Facility contain restrictions on the Company's ability
to pay dividends. See "--Description of Certain Indebtedness."
Recent Sales of Unregistered Securities
None.
Changes in Securities and Use of Proceeds
The Company completed the Equity Offering on October 29, 1997. The
registration statement (the "Registration Statement") relating to the Equity
Offering (File No. 333-31361) was declared effective by the Securities and
Exchange Commission ("SEC") on October 22, 1997. The managing underwriters of
the Equity Offering were Morgan Stanley & Co, Incorporated, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, J.C. Bradford & Co. and Wheat, First
Securities, Inc. The number of shares of Common Stock registered and sold in the
Equity Offering was 5,750,000 and the aggregate price of the offering amount
registered and sold was $94,875,000. All shares were sold by the Company.
From the effective date of the Registration Statement through the date of
this report, the total amount of expenses incurred by the Company in connection
with the issuance and distribution of the shares in the Equity Offering was
approximately $7,375,000. Of such expenses, $6,641,250 consisted of underwriting
discounts and commissions.
38
The following table sets forth the various expenses in connection with the
issuance and distribution of the securities registered in the Equity Offering,
other than underwriting discounts and commissions. All amounts except the SEC
Registration Fee and the National Association of Securities Dealers ("NASD")
Filing Fee are estimated. All of such expenses were borne by the Company.
SEC Registration Fee $ 28,750.00
NASD Filing Fee 9,987.00
Nasdaq National Market Listing Fee 50,000.00
Blue Sky Fees and Expenses 10,000.00
Accounting Fees and Expenses 150,000.00
Legal Fees and Expenses 250,000.00
Printing and Engraving Expenses 228,750.00
Transfer Agent Fees and Expenses 5,500.00
Miscellaneous 763.00
-------------
Total $ 733,750.00
The amounts set forth in the preceding table were paid to persons other
than directors or officers of the Company or their associates, persons owning
ten percent or more of any class of equity of the Company, or affiliates of the
Company.
The net proceeds of the Equity Offering to the Company, after deducting the
foregoing expenses, totaled approximately $87,500,000.
From the effective date of the Registration Statement through the date of
this report, the Company has applied the following amounts of the net proceeds
of the Equity Offering to the uses set forth in the following table.
Construction of plant, building and facilities and
purchase and installation of machinery and equipment $ 452,685
Purchases of real estate -0-
Acquisition of other businesses -0-
Repayment of indebtedness 9,137,265
Working capital -0-
Temporary investments (consisting of short-term, interest-
bearing, investment grade securities) 77,910,050
-----------
Total $87,500,000
The amounts set forth in the preceding table were paid to persons other
than directors or officers of the Company or their associates, persons owning
ten percent or more of any class of equity of the Company, or affiliates of the
Company.
Additionally, the Company intends to use up to $77.7 million of the net
proceeds of the Equity Offering to fund the Planned Redemption on April 2, 1998.
See "Item 1. Business--1997 Notes Offering; Planned Redemption."
39
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating data for
the Company. The selected historical statement of operations data for each of
the years ended December 31, 1994, 1995, 1996 and 1997 and the selected
historical balance sheet data for the years then ended, have been derived from
the consolidated financial statements that have been audited by Arthur Andersen
LLP, independent public accountants.
Year Ended December 31,
---------------------------------------------------------------------------------
1993(a) 1994(a)(b) 1995 1996(c) 1997(d)(e)
------------- ------------- ------------- ------------- -------------
(Unaudited)
Income Statement Data:
Operating revenues $ 636,913 $ 4,945,902 $ 5,750,587 $ 66,518,585 $ 114,589,998
------------- ------------- ------------- ------------- -------------
Operating expenses:
Cost of services 578,206 2,484,744 3,149,231 38,756,287 54,550,348
Selling, operations, and
administration expense 235,627 948,230 1,626,678 18,876,572 38,254,893
Depreciation and amortization 47,068 738,052 1,267,882 6,438,074 18,332,451
------------- ------------- ------------- ------------- -------------
Total operating expenses 860,901 4,171,026 6,043,791 64,070,933 111,137,692
Operating income (loss) (223,988) 774,876 (293,204) 2,447,652 3,452,306
Equity in income (losses) of
unconsolidated subsidiaries 360,257 (96,920) (258,242) (1,589,812) 0
Interest expense 0 (273,759) (297,228) (6,172,421) (21,367,351)
Interest and other income (other
expense) (826) 82,348 41,734 171,514 4,251,088
------------- ------------- ------------- ------------- -------------
Income (loss) before taxes, preacquisition
earnings (losses) and extraordinary
item 135,443 486,545 (806,940) (5,143,067) (13,663,957)
Income tax (provision) benefit (54,582) (113,248) 302,567 1,233,318 3,324,466
Preacquisition earnings (losses) 0 (236,300) 0 0 74,132
Extraordinary item (net of tax benefit) 0 0 0 0 (507,515)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 80,861 $ 136,997 $ (504,373) $ (3,909,749) $ (10,772,874)
============= ============= ============= ============= =============
Basic and diluted net income (loss) per
common share:
Before extraordinary loss $ 0.00 $ 0.01 $ (0.03) $ (0.20) $ (0.51)
Extraordinary loss 0.00 0.00 0.00 0.00 (0.03)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 0.00 $ 0.01 $ (0.03) $ (0.20) $ (0.54)
============= ============= ============= ============= =============
Basic weighted average common shares
outstanding(f) 19,053,675 19,053,675 19,053,675 19,053,675 20,124,908
Diluted weighted average common shares
outstanding(f) 19,101,926 19,101,926 19,101,926 19,101,926 20,124,908
Balance Sheet Data:
Working capital (deficit) $ 382,562 $ 254,988 $ (242,136) $ 3,415,088 $ 116,445,515
Total assets 6,294,266 20,062,286 20,922,337 113,207,979 386,104,477
Long-term debt, advances from ITC
Holding and capital lease obligations,
including current portions 797,288 4,013,977 3,143,977 75,442,971 203,889,536
Stockholders' equity 4,737,090 13,761,409 14,307,036 19,256,526 148,265,527
Other Financial Data:
Capital expenditures 531,187 3,703,835 1,805,742 6,172,660 43,873,990
Cash flows provided by
operating activities 33,667 978,775 1,437,317 8,188,618 6,302,123
EBITDA (g) (176,920) 1,512,928 974,678 8,885,726 21,784,757
Ratio of earnings to fixed charges(h) N/A 2.65x -- -- --
40
(a) Through August 17, 1994, the Company owned a 49% interest in Interstate
FiberNet and accounted for this investment under the equity method. On
August 17, 1994, the Company purchased the remaining 51% interest in
Interstate FiberNet from SCANA. Therefore, Interstate FiberNet's revenues
and expenses have been included in the consolidated statement of operations
data effective January 1, 1994, with the preacquisition earnings
attributable to SCANA deducted to determine consolidated net income for
1994.
(b) On August 17, 1994, the Company entered into the Gulf States FiberNet
partnership with SCANA. The Company obtained a 36% general partnership
interest, and the investment was accounted for under the equity method. See
Note 5 to the financial statements.
(c) On January 29, 1996, ITC Holding purchased DeltaCom. DeltaCom's results of
operations are included in the historical statement of operations data
since the date of acquisition. See Note 13 to the financial statements.
(d) On March 27, 1997, the Company purchased the Georgia Fiber Assets from
SCANA. The results of operations for the Georgia Fiber Assets are included
in the consolidated statements of operations beginning April 1, 1997. See
Note 15 to the financial statements.
(e) On March 27, 1997, the Company purchased the remaining 64% partnership
interest in Gulf States FiberNet from SCANA. Therefore, Gulf States
FiberNet's revenues and expenses have been included in the consolidated
statement of operations data effective January 1, 1997 with the
preacquisition losses attributable to SCANA deducted to determine the
consolidated net loss for the year ended December 31, 1997. See Note 15 to
the financial statements.
(f) Pursuant to SAB 98, for periods prior to the completion of the Equity
Offering, basic net loss per share is computed using the weighted average
number of shares of Common Stock outstanding during the period. Diluted net
loss per share is computed using the weighted average number of shares of
Common Stock outstanding during the period and nominal issuances of Common
Stock and Common Stock equivalents, regardless of whether they are
anti-dilutive.
(g) EBITDA represents earnings before extraordinary item, preacquisition
(earnings) losses, equity in losses of unconsolidated subsidiaries, net
interest, income taxes, depreciation and amortization. EBITDA is provided
because it is a measure commonly used in the industry. EBITDA is not a
measurement of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flow as a measure of liquidity. EBITDA is
not necessarily comparable with similarly titled measures for other
companies.
(h) Earnings consist of income before income taxes, plus fixed charges. Fixed
charges consist of interest charges and amortization of debt issuance costs
and the portion of rent expense under operating leases representing
interest (estimated to be one-third of such expense). Earnings were
insufficient to cover fixed charges for the years ended December 31, 1995,
1996 and 1997 by $.8 million, $5.1 million and $13.7 million, respectively.
41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION, MEMBERS OF THE COMPANY'S
SENIOR MANAGEMENT MAY, FROM TIME TO TIME, MAKE CERTAIN FORWARD-LOOKING
STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, PERFORMANCE AND OTHER
DEVELOPMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING THOSE SET FORTH UNDER THE CAPTION "BUSINESS--RISK FACTORS" AND
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K, AS WELL AS FACTORS WHICH MAY BE
IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION.
UNLESS THE CONTEXT SUGGESTS OTHERWISE, REFERENCES IN THIS ANNUAL REPORT ON
FORM 10-K TO THE "COMPANY" MEAN ITC/\DELTACOM, INC. AND ITS SUBSIDIARIES AND
PREDECESSORS. UNLESS OTHERWISE INDICATED, DOLLAR AMOUNTS OVER $1 MILLION HAVE
BEEN ROUNDED TO ONE DECIMAL PLACE AND DOLLAR AMOUNTS LESS THAN $1 MILLION HAVE
BEEN ROUNDED TO THE NEAREST THOUSAND. SEE THE "GLOSSARY" APPEARING ELSEWHERE
HEREIN FOR DEFINITIONS OF CERTAIN TERMS USED IN THIS FORM 10-K.
OVERVIEW
Company Background. The Company was incorporated in March 1997 as a wholly
owned subsidiary of ITC Holding to acquire and operate ITC Holding's Retail
Services and Carriers' Carrier Services businesses. As discussed in Note 1 to
the financial statements, this reorganization has been accounted for in a manner
similar to a pooling of interests.
The Company has provided operator and directory assistance services since
March 1992 through InterQuest. Carriers' Carrier Services have been offered
since late 1992 through Interstate FiberNet, a partnership originally formed by
ITC Holding (with a 49% interest) and SCANA (with a 51% interest). In August
1994, ITC Holding acquired SCANA's interest in Interstate FiberNet. Also in
August 1994, ITC Holding formed a second partnership with SCANA, Gulf States
FiberNet, to construct and operate a fiber optic route primarily between
Atlanta, Georgia and Shreveport, Louisiana with several supplemental spur
routes. In the Gulf States Acquisition, ITC Holding acquired SCANA's 64%
partnership interest in Gulf States FiberNet and the Georgia Fiber Assets, which
included one customer contract representing $3.5 million in annual revenues
through August 2001, the term of the contract. Members of the Company's
management have been managing the businesses of both Interstate FiberNet and
Gulf States FiberNet since their inception. In 1995, the Company began offering
Signaling System 7 Services ("SS7") to its Carriers' Carrier customers.
In January 1996, as a result of the DeltaCom Acquisition, the Company
entered the retail long distance business and acquired several fiber optic
routes within Alabama that complemented the existing networks operated by
Interstate FiberNet and Gulf States FiberNet. DeltaCom, a provider of
telecommunications services since its inception in 1982, provides long distance
services to mid-sized businesses primarily in Alabama.
Revenues. The Company derives revenues primarily from two business
segments: (i) Retail Services, which encompass the retail sale of local, long
distance, data, and Internet services and the sale and installation of customer
premise equipment to mid-sized and major regional business customers and certain
switched services telecommunications companies, and (ii) Carriers' Carrier
42
Services, which encompass the sale of long-haul private line services on a
wholesale basis to other telecommunications companies, using the Company's owned
and managed fiber optic network, and operator and directory assistance services.
The Company currently offers a wide range of Retail Services, including
retail long distance services such as traditional switched and dedicated long
distance, 800/888 calling, calling card and operator services, ATM and frame
relay, high capacity broadband private line, as well as Internet, Intranet and
Web page hosting and development services, and customer premise equipment
installation and repair. Since January 1996, the Company has expanded its retail
long distance operations into the following markets: Pensacola and
Jacksonville, Florida; Atlanta and Columbus, Georgia; Charlotte, North
Carolina; Greenville and Columbia, South Carolina; and New Orleans and Baton
Rouge, Louisiana. As of December 31, 1997, the Company provided Retail Services
to over 7,700 business customers and approximately 7,100 residential customers.
Such residential customers represented less than 5% of the Company's revenues
during 1997.
The Company offers local exchange services as part of its Retail Services
in a majority of its markets. Although the Company's local exchange services
offerings are in the very early stages, initial expressions of customer interest
in such services have been positive, consistent with management's expectations.
However, there can be no assurance that demand for the Company's local services
will match such preliminary indications of customer interest. The Company
currently offers local exchange services in 11 of the 15 markets to which it
provides Retail Services.
In connection with offering local exchange services, the Company has
entered into the Interconnection Agreement with BellSouth to (i) resell
BellSouth's local exchange services and (ii) interconnect the Company's network
with BellSouth's network for the purpose of gaining immediate access to all of
BellSouth's unbundled network elements. This agreement allows the Company to
enter new markets with minimal capital expenditures and to offer local exchange
service to its current customer base. The Interconnection Agreement currently
allows the Company to provide local service on a resale basis or by purchasing
all unbundled network elements required to provide local service on a facilities
basis, without using Company-owned facilities. The terms of the Interconnection
Agreement, including interim pricing terms agreed to by the Company and
BellSouth, have been approved by state regulatory authorities in all states in
which BellSouth operates, although they remain subject to review and
modification by such authorities. In addition, the Interconnection Agreement
does not resolve all operational issues, which issues the Company and BellSouth
are continuing to negotiate to resolve. The Company believes that the
Interconnection Agreement provides a foundation for it to provide local service
on a reasonable commercial basis, but there can be no assurance in this regard
and important issues remain unsettled as a result of legal and regulatory
developments and related matters. The Interconnection Agreement expires in July
1999, and there can be no assurance that the Company will be able to renew it
under favorable terms or at all.
The Company's strategy is ultimately to offer facilities-based local
service in certain established markets by collocating its equipment with that of
BellSouth which will enable the Company to purchase fewer unbundled network
elements. The Company expects that it will be able to begin providing local
service to such markets in the second quarter of 1998 by using its own
facilities and network, as supplemented by BellSouth's unbundled network
elements. The Company and BellSouth have finalized the terms of an agreement
with respect to the collocation of the Company's equipment with BellSouth in
certain markets in which the Company has an existing base of long distance
customers. BellSouth has been experiencing certain central office space
limitations, however, resulting in delays in completing arrangements for
physical collocation of Company equipment.
The Company anticipates that an increasing portion of its revenue will be
derived from local services, primarily those provided pursuant to the
Interconnection Agreement with BellSouth and
43
similar agreements with other local exchange carriers. Management expects that
gross margin associated with local Retail Services will be slightly better than
gross margin associated with long distance Retail Services, but that, in
general, gross margin associated with Retail Services will be lower than that
associated with Carriers' Carrier Services. There can be no assurance that the
Company will be able to enter into additional interconnection agreements on
terms acceptable to the Company or at all, or that the incumbent local exchange
carriers will provide the operational support required for the Company to
provide local services to end users.
As the Company begins to offer local service on a facilities rather than
resale basis, it will begin to sell switched access and termination services to
carriers terminating calls to its local end user customers, and originating
switched access to long distance companies where the end users choose a carrier
other than the Company for that service. Certain incumbent local exchange
companies, including BellSouth, have taken the position that when a carrier
seeking to provide local service obtains all necessary elements (loops and
switches) from the incumbent local exchange carrier in a combined form, the
incumbent local exchange carrier retains the right to receive the access
revenues associated with service to the customers served on that basis. Although
a recent Eighth Circuit decision appears to reject this position, further legal
challenges are likely and important issues related to this form of
interconnection remain open.
The Company provides Carriers' Carrier Services using its owned and managed
fiber optic network, which reaches over 60 POPs in ten southern states (Alabama,
Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South
Carolina, Tennessee and Texas). Of the network's approximately 6,300 route
miles, approximately 3,300 are Company-owned and operated and approximately
3,000 are owned and operated principally by three public utilities (Duke Power
Company, Florida Power & Light Company and Entergy Technology Company) with
which the Company has marketing and management arrangements. The Company's
arrangement with Entergy is exclusive. In addition, the Company has a buy-sell
agreement with Carolinas Fibernet, LLC, which manages fiber optic facilities in
North Carolina and South Carolina. This agreement enables the parties to buy and
sell capacity on each other's networks and allows the Company to provide
customers with access to POPs throughout those states. In addition, as part of
its strategy, the Company intends to continue to evaluate the potential
expansion of its network through a combination of new construction, long-term
dark fiber leases and fiber swap transactions, depending on the extent of
capital required over the economic life of the fiber assets to be deployed. To
the extent that the Company elects to expand its network through long-term
leases in lieu of construction or fiber swap transactions, the Company expects
such leases to have a negative effect on EBITDA; however, the Company expects
any such expansion of its network would provide opportunities to generate
additional revenues, which would partly offset such negative effects.
The Company derives commission revenues from the marketing, sale and
management of capacity on the utility-owned portions of the Company's network.
Negligible incremental costs are associated with these commissions, because the
Company uses the same marketing and sales force in servicing the utility-owned
portions of the network as it does for the portions owned by the Company. In
1996, the Company's commission revenues from these arrangements amounted to
approximately $170,000 because, although the utility-owned portions owned by
Duke Power Company began generating revenues in late 1995, the portions owned by
Florida Power & Light Company and Entergy Technology Company began generating
revenues in late 1996. For the year ended December 31, 1997, the Company's
commission revenues from these arrangements amounted to approximately
$1,533,000. The Company expects commissions associated with the utility-owned
portions of the network to continue to increase in 1998.
The Company provides long-haul services to its carrier customers on a "take
or pay" long-term basis, on an individual circuit basis, or on a month-to-month
basis after the initial term of the "take or pay" or individual circuit
contract. As of December 31, 1997, the Company had remaining future long-term
contract commitments totaling approximately $77.9 million. These contracts
expire on
44
various dates through 2006 and are expected to generate approximately $58.2
million in revenues to the Company through 2001. No single Carriers' Carrier
Services customer or Retail Services customer represented over 10% of the
Company's total revenues for the year ended December 31, 1997.
Although the Company expects that a majority of its revenue growth will
come from its Retail Services business, the Company does not expect its Retail
Services to obtain a significant share of the market for telecommunications
services in the southern United States. The customer contracts for Retail
Services generally provide for payment in arrears based on minutes of use for
switched services and payment in advance for private line services. The
contracts generally also provide that the customer may terminate the affected
services without penalty in the event of certain outages in service, and for
certain other defined causes. The contracts also typically provide that the
customer must use at least a minimum dollar amount of switched long distance
services per month for the term of the contract. During the past several years,
market prices for many telecommunications services segments have been declining,
which the Company believes will likely continue. In response to these and other
competitive pressures, the Company recently modified certain of its retail
contracts to extend to certain customers lower rates over longer terms as a
means of maintaining and developing the Company's customer base. In the future,
in response to competitive considerations, the Company may decide to modify
certain other retail customer contracts in a similar manner, emphasizing lower
pricing and longer commitment periods. A substantial portion of the Company's
total revenues are from retail long distance services. Revenue per minute from
such services has been declining and is expected to continue to decline. This
decline will have a negative effect on the Company's gross margin which may not
be offset completely by savings from decreases in the Company's cost of
services.
Operating Expenses. The Company's principal operating expenses consist of
cost of services, selling, operations and administration expenses, and
depreciation and amortization. Cost of services related to Retail Services
consists primarily of access charges and local facility charges paid to local
exchange carriers, as well as wholesale carrier origination, termination and
interexchange facility charges paid to other interexchange carriers. Cost of
services related to Carriers' Carrier Services are substantially all fixed costs
attributable to (i) the leasing of dark fiber under long-term operating leases,
(ii) the leasing of capacity outside the Company's owned or managed network
(off-net capacity) to meet customer requirements, (iii) labor associated with
operator services and (iv) network costs associated with the provision of SS7
Services. The Company purchases off-net capacity to provide Carriers' Carrier
Services in cases where the Company plans to construct its own network to
replace the off-net portion of certain fiber routes. The Company also purchases
off-net capacity in connection with an existing customer contract, pursuant to
which the Company is the exclusive provider of network capacity to such
customer. Although the Company is substantially able to meet the requirements of
such customer on the Company's network, the Company purchases off-net capacity
to fill such customer's requirements that cannot be met on the Company's
network. Selling, operations and administration expenses consist of expenses of
selling and marketing, field personnel engaged in direct network maintenance and
monitoring, customer service and corporate administration. Depreciation and
amortization include depreciation of the Company's telecommunications network
and equipment and amortization of goodwill and other intangible assets related
to acquisitions, primarily the DeltaCom Acquisition.
As the Company continues to expand into new geographic markets, add new
branch offices and facilities and enlarge its current product offerings to
include local telephone and other services, cost of services and selling,
operations and administration expenses are expected to increase substantially.
Therefore, the Company expects to incur increasing operating losses over the
next few years. Although the Company anticipates that it will continue to
generate positive cash flow from operations, it expects that such cash flows
will be more than offset by capital expenditures during the next several years
as it implements its business plan. The Company also expects that the
45
addition of local service to its bundle of telecommunications services will have
an adverse impact on its gross margin, because the gross margin on the resale of
local services through incumbent local exchange carrier facilities will be lower
than the gross margin on the Company's existing businesses. As the Company
increasingly uses incumbent local exchange carrier unbundled network elements
instead of resold services, the Company expects gross margin on local service to
improve. Such improvement is expected to result from reduced access charges and
from efficiencies realized through increased reliance on the Company's owned
network. Such improved margins, however, could be offset by competitive market
pressures to reduce prices for Retail Services, as discussed above. There can be
no assurance that growth in the Company's revenues or customer base will
continue or that the Company will be able to achieve or sustain profitability or
positive net cash flows. In addtion, the Company may from time to time engage
in discussions involving potential acquisitions, joint venture or strategic
alliances. Depending upon the circumstances, the Company may not disclose
material acquisitions until completion of a definitive agreement. Any
significant transaction, shortfalls in anticipated revenue, or increases in
expenses could have a material adverse effect on the Company's liquidity and
capital resources and on its ability to meet its strategic objectives, and could
require the Company to seek additional private or public equity or debt
financing. There can be no assurance that the Company will be able to raise any
such capital on terms acceptable to the Company or at all.
RESULTS OF OPERATIONS
The following tables set forth certain historical financial data for the
years ended December 31, 1995, 1996 and 1997 for the Carriers' Carrier Services
business and for the year ended December 31, 1996 and 1997 for the Retail
Services business.
The comparability of the historical financial data for the year ended
December 31, 1996 and 1997 has been affected by the DeltaCom Acquisition and the
Gulf States Acquisition. The historical financial statements for the year ended
December 31, 1996 include the results of operations for DeltaCom since its
acquisition on January 29, 1996. For the year ended December 31, 1996, the
Company's 36% interest in Gulf States FiberNet's results of operations is
reflected using the equity method. Due to the Gulf States Acquisition on March
27, 1997, the results of operations for the year ended December 31, 1997 reflect
the total revenues and expenses from January 1, 1997 attributable to Gulf States
FiberNet with the preacquisition losses attributable to the previous owner from
January 1, 1997 through March 27, 1997, deducted to determine the Company's
consolidated net loss. The results of operations for the year ended
December 31, 1997 also reflect the revenues and expenses of Georgia Fiber since
March 27, 1997.
Results of Operations
Carriers' Carrier Services
--------------------------
Year Ended December 31,
-------------------------------------------------------------------------------------------
1995 % 1996 % 1997 %
----------- ----------- ----------- ----------- ----------- -----------
Revenues $ 5,750,587 100% $ 6,598,709 100% $31,024,054 100%
Cost of services 3,149,231 55 2,363,073 36 3,908,202 13
----------- ----------- -----------
Gross margin 2,601,356 45 4,235,636 64 27,115,852 87
----------- ----------- -----------
Selling, operations and
administration 1,626,678 28 1,826,420 28 8,401,158 27
Depreciation and amortization 1,267,882 22 1,656,685 25 12,077,349 39
----------- ----------- -----------
Total operating expenses 2,894,560 50 3,483,105 53 20,478,507 66
----------- ----------- -----------
Operating income (loss) $ (293,204) (5) $ 752,531 11 $ 6,637,345 21
=========== =========== ===========
46
Retail Services
------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1996 % 1997 %
------------ ----- ------------- -----
Revenues $ 59,919,876 100% $ 83,565,944 100%
Cost of services 36,393,214 61 50,642,146 61
------------ ------------
Gross margin 23,526,662 39 32,923,798 39
------------ ------------
Selling, operations and
administration 17,050,152 28 29,853,735 36
Depreciation and amortization 4,781,389 8 6,255,102 7
------------ ------------
Total operating expenses 21,831,541 36 36,108,837 43
------------ ------------
Operating income (loss) $ 1,695,121 3 $ (3,185,039) (4)
============ ============
47
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Revenues
Total revenue increased $48.1 million (72.3%), from $66.5 million for the
year ended December 31, 1996 to $114.6 million for the year ended December 31,
1997. Revenues from Retail Services increased $23.7 million (39.6%), from $59.9
million for the year ended December 31, 1996 to $83.6 million for the year ended
December 31, 1997. Results for the year ended December 31, 1996 exclude revenue
of $5.3 million related to revenues earned before the acquisition of DeltaCom,
Inc. on January 29, 1996. The increase in the Retail Services segment revenue
was primarily attributable to continued geographic expansion through the opening
of branch sales offices, continued product expansion through sales of new
products to existing customers, and continuing low rates of customer revenue
turnover (churn). Revenues from Carriers' Carrier Services increased $24.4
million (370%), from $6.6 million for the year ended December 31, 1996 to $31.0
million for the year ended December 31, 1997. Results for the year ended
December 31, 1997 reflect $19.8 million of revenues related to revenues earned
by Gulf States FiberNet in 1997. Gulf States FiberNet was not consolidated in
the Company's 1996 financial statements. The increase in revenue for the
Carriers' Carrier segment was primarily attributable to continued increasing
demand for bandwidth, continued owned and operated route expansions and the
continued growth in the managed, monitored, and marketed routes.
Cost of Services
Total cost of services increased $15.8 million, from $38.8 million for the
year ended December 31, 1996 to $54.6 million for the year ended December 31,
1997. Cost of services for Retail Services operations increased $14.2 million,
from $36.4 million for the year ended December 31, 1996 to $50.6 million for the
year ended December 31, 1997. Cost of services for the Carriers' Carrier
operations increased $1.5 million, from $2.4 million for the year ended December
31, 1996 to $3.9 million for the year ended December 31, 1997. The cost of
services as a percentage of revenue for Retail Services operations remained
consistent at a rate of approximately 61%. The cost of services as a percentage
of revenue for Carriers' Carrier operations, 13% in 1997 vs. 36% in 1996,
decreased significantly due to the acquisition of Gulf States FiberNet in March
1997 and the increased margins associated with this line of business.
Selling, Operations and Administration Expense
Total selling, operations and administration expense increased $19.4
million, from $18.9 million (28% as a percentage of revenue) for the year ended
December 31, 1996 to $38.3 million (33% as a percentage of revenue) for the year
ended December 31, 1997. Selling, operations and administration expense
attributable to Retail Services increased $12.7 million, from $17.1 million (29%
as a percentage of revenue) for the year ended December 31, 1996 to $29.9
million (36% as a percentage of revenue) for the year ended December 31, 1997.
The increase in selling, operations and administration expense as a percentage
of revenue for the Retail Services segment is related to continued geographic
expansion and introduction of new services, primarily local services. Selling,
operations and administration expense attributable to the Carriers' Carrier
segment increased $6.6 million, from $1.8 million (28% as a percentage of
revenue) for the year ended December 31, 1996 to $8.4 million (27% as a
percentage of revenue) for the year ended December 31, 1997. The increase in
selling, operations, and administration expense for the Carrier's Carrier
segment relate specifically to an increase in personnel stemming from the
geographic expansion and various costs associated with those personnel. Selling,
operations, and administration expenses are expected to continue to increase as
a percentage of revenue during 1998 and early 1999, due to the continued
expansion of the Retail Services segment, both geographically and in terms of
products offered. By
48
mid-1999, such expansion is expected to be substantially completed, and selling,
operations and administration expenses are expected to improve as a percentage
of revenue.
Depreciation and Amortization
Total depreciation and amortization increased $11.9 million, from $6.4
million for the year ended December 31, 1996 to $18.3 million for the year ended
December 31, 1997. Retail Services accounted for $1.5 million of the increase,
which was primarily related to installation of new central office equipment.
Carriers' Carrier Services' operations accounted for $10.4 million of the
increase, with $8.2 million related to the acquisition of Gulf States FiberNet.
Interest Expense
Total interest expense increased $15.2 million, from $6.2 million for the
year ended December 31, 1996 to $21.4 million for the year ended December 31,
1997. The increase in interest expense was primarily due to interest expense
incurred on the 1997 Notes.
Income Taxes
As a result of tax sharing arrangements with ITC Holding, the Company
received benefits for certain of its net operating losses. The benefit received
as a percentage of taxable income was 24.3% and 24.0% for the years ended
December 31, 1996 and 1997, respectively.
EBITDA
EBITDA increased $12.9 million, from $8.9 million for the year ended
December 31, 1996 to $21.8 million for the year ended December 31, 1997.
Carriers' Carrier Services accounted for $16.3 million of the increase. EBITDA
attributable to Retail Services for the year ended December 31, 1997 was $3.1
million compared to $6.5 million for the year ended December 31, 1996. EBITDA
attributable to Retail Services decreased from 11% of revenues for the year
ended December 31, 1996 to 4% of revenues for the year ended December 31, 1997,
primarily due to increased costs associated with the opening of new branch
offices and the employment of additional support personnel to position the
Retail Services segment for expansion. The Company expects EBITDA for Retail
Services to continue to decline at least through 1998 as the Company opens
additional branch offices and expands its offerings of local service.
49
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenues
Revenues increased from $5.8 million in 1995 to $66.5 million in 1996. The
$60.7 million increase was primarily attributable to revenues of $59.9 million
generated by DeltaCom since it was acquired on January 29, 1996. Revenues from
Carriers' Carrier Services increased approximately $800,000 in 1996 (15%),
primarily due to the growth in new SS7 Services and directory assistance
products and growth in demand for Carriers' Carrier Services.
Cost of Services
Cost of services increased from $3.1 million in 1995 to $38.8 million in
1996. DeltaCom's operations accounted for $36.4 million of this increase.
Carriers' Carrier Services accounted for a decrease of $700,000 primarily due to
intersegment eliminations related to its utilization of DeltaCom's network
infrastructure.
Selling, Operations and Administration Expense
Selling, operations and administration expense increased from $1.6 million
in 1995 to $18.9 million in 1996. DeltaCom's operations accounted for $17.1
million of the increase. Carriers' Carrier Services accounted for $200,000 of
the increase.
Depreciation and Amortization
Depreciation and amortization expense increased from $1.3 million in 1995
to $6.4 million in 1996. Of this $5.1 million increase, $4.8 million was
attributable to DeltaCom, including $1.3 million of intangible amortization on
$54.6 million of intangibles pushed down to the Company. See "--Effects of
Accounting Standards." Carriers' Carrier Services accounted for $300,000 of the
increase as a result of additional capital expenditures made for the provision
of SS7 Services, capital expenditures associated with the Company's network
management systems required to support the various management and marketing
agreements with various utilities, and small electronic overbuilds on existing
network segments.
Other Income (Expense)
Other expense increased from $200,000 in 1995 to $1.4 million in 1996. The
Company's share of Gulf States FiberNet's partnership losses accounted for $1.3
million of this increase, which was partially offset by a $100,000 increase in
other interest and miscellaneous income. Gulf States FiberNet began full
operations in late 1995 and, accordingly, the effect of a full year of
operations was not reflected until 1996. Gulf States FiberNet recorded a pretax
loss of $4.4 million in 1996, compared to a pretax loss of $700,000 in 1995. As
of December 31, 1995 and 1996, the Company owned 36% of Gulf States FiberNet and
recorded losses of $300,000 and $1.6 million, respectively, from such interest.
50
Interest Expense
Interest expense increased from $300,000 in 1995 to $6.2 million in 1996.
The increase was primarily attributable to the increase in the Company's
aggregate indebtedness resulting from the $74.0 million of DeltaCom
Indebtedness. See "--Effects of Accounting Standards." The Company incurred
interest expense of $5.8 million related to such indebtedness in 1996.
EBITDA
EBITDA increased from $1.0 million in 1995 to $8.9 million in 1996.
DeltaCom accounted for $6.5 million and Carriers' Carrier Services accounted for
$1.4 million of the increase. The increased EBITDA attributable to Carriers'
Carrier Services is a result of an increase in revenues with minimal increases
in associated variable costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated positive cash flow from operations
from its existing lines of business, but has required equity infusions and
advances from ITC Holding to finance a significant portion of its investing and
financing activities. In addition, during 1997, the Company generated
approximately $192.1 million and $87.5 million in net proceeds from the 1997
Notes Offering and the Equity Offering, respectively, and in March 1998,
generated approximately $155.0 million in net proceeds from the 1998 Notes
Offering. The Company generated net cash from operating activities of $1.4
million, $8.2 million, and $6.3 million for 1995, 1996 and 1997, respectively.
The components of cash flow from operations (consisting of net loss adjusted for
depreciation, amortization, deferred income taxes, equity in losses of investee,
preacquisition losses, extraordinary item-loss on extinguishment of debt and
other) totaled $1.5 million, $4.7 million, and $11.3 million for 1995, 1996 and
1997, respectively. Changes in working capital were ($42,000) in 1995,
$3.5 million in 1996 and ($5.0 million) in 1997. The change in 1996 was
primarily due to an increase in accrued interest, accounts payable and unearned
revenue, partially offset by an increase in accounts receivable resulting
primarily from the DeltaCom Acquisition. For 1997, such changes were
primarily due to increases in unearned revenue and accrued liabilities, offset
by increases in accounts receivable. Of this increase in accounts receivable
and unearned revenue, $2.3 million and $1.3 million, respectively, resulted
from the Gulf States Acquisition, with the remaining increase in accounts
receivable attributable to increased earned and unearned revenue in the
Carriers' Carrier Ser vices and Retail Services.
Cash used for investing activities was $1.5 million, $72.7 million, and
$93.9 million for the years ended December 31, 1995, 1996 and 1997,
respectively. The cash used in 1996 was primarily attributable to the investment
of $63.5 million, net of cash received, in connection with the DeltaCom
Acquisition in January 1996. The cash used in 1997 was primarily attributable to
the purchase of restricted investments held by a trustee to fund the first six
interest payments on the 1997 Notes, as required by the 1997 Notes Indenture,
and to fund capital expenditures. The Company made capital expenditures of $1.8
million, $6.2 million, and $43.9 million for the years ended December 31, 1995,
1996 and 1997, respectively. Of the $6.2 million of capital expenditures in
1996, $4.1 million related to Retail Services and $2.1 million related to
Carriers' Carrier Services. In addition, the Company contributed an additional
$2.4 million to Gulf States FiberNet in 1996 to meet debt service requirements
and to fund additional capital requirements of that business. Of the $43.9
million of capital expenditures for the year ended December 31, 1997, $27.5
million related to Carriers' Carrier Services and $16.4 million related to
Retail Services.
51
Cash provided by financing activities was $200,000, $65.1 million, and
$180.6 million for the years ended December 31, 1995, 1996 and 1997,
respectively. For 1996, cash provided by financing activities was primarily
attributable to the DeltaCom Indebtedness, which was advanced to the Company by
ITC Holding. See "--Effects of Accounting Standards." Net cash provided by
financing activities for the year ended December 31, 1997 consisted primarily of
net proceeds of $192.1 million from the sale of the 1997 Notes and $87.5 million
from the Equity Offering, less $43.2 million of repayment of advances from ITC
Holding, net repayments of other long-term debt and capital leases of $52.6
million and $3.3 million of other cash used in financing activities.
ITC Holding partially financed the DeltaCom Acquisition and the Gulf States
Acquisition with debt, which consists of the following: (i) a $74.0 million term
loan under a bank facility incurred in connection with the DeltaCom Acquisition
and pushed down to the Company (the DeltaCom Indebtedness); (ii) a $41.6 million
Bridge Facility incurred in connection with the Gulf States Acquisition, which
required the refinancing of Gulf States FiberNet's existing project facility;
and (iii) a $10.0 million unsecured note issued in connection with the Gulf
States Acquisition and assumed by a subsidiary of the Company. In November
1997, this note was repaid in full (approximately $9.0 million) with a portion
of the net proceeds from the Equity Offering.
On July 25, 1997, in connection with the Reorganization, approximately
$62.7 million of the $192.1 million of net proceeds from the sale of the 1997
Notes was used to purchase U.S. government securities. The U.S. government
securities are being held by the 1997 Notes trustee in a pledged account to fund
the first six scheduled interest payments on the 1997 Notes. The balance of the
net proceeds from the 1997 Notes Offering, approximately $129.4 million, was
released to the Company. A portion of the released proceeds was applied on July
25, 1997 as follows: (i) to repay approximately $57.8 million of indebtedness to
ITC Holding (including approximately $9.5 million of accrued interest)
associated with the DeltaCom Acquisition and advances used by the Company for
capital expenditures; and (ii) to repay approximately $41.6 million of
indebtedness incurred under the Bridge Facility (together with approximately
$200,000 of accrued interest). In connection with the Reorganization, $31.0
million of the DeltaCom Indebtedness was forgiven by ITC Holding and contributed
to the Company as additional equity.
In September 1997, Interstate FiberNet, Inc., a wholly owned subsidiary of
the Company, entered into a credit agreement with NationsBank of Texas, N.A. for
a five-year $100.0 million term and revolving credit facility to be used for
working capital and other corporate purposes, including refinancing existing
indebtedness, capital expenditures and permitted acquisitions. In February 1998,
the Company amended the Credit Facility, among other things, to provide for a
$50.0 million revolving credit facility. See "Item 1. Business--Description of
Certain Indebtedness." The Company recorded a loss of approximately $2.5 million
in connection with the reclassification of the Company's interest rate swap
agreement converting a hedge of an anticipated transaction to a trading security
as a result of the 1998 Notes Offering described below. See Note 17 to the
Consolidated Financial Statements for further discussion of this interest rate
swap agreement. The Credit Facility contains restrictions on Interstate
FiberNet, Inc. and its subsidiaries and requires Interstate FiberNet, Inc. to
comply with certain financial tests and to maintain certain financial ratios.
The Credit Facility is guaranteed by the Company and DeltaCom and is secured by
a first priority lien on all current and future assets of Interstate FiberNet,
Inc. and its subsidiaries and a first priority pledge of the stock of Interstate
FiberNet, Inc. and its subsidiaries.
On October 29, 1997, the Company completed the Equity Offering in which it
issued 5,575,000 shares of common stock, par value $.01 per share, at a price of
$16.50 per share. On March 3, 1998, the Company completed the 1998 Notes
Offering, generating net proceeds of approximately $155.0 million. On April 2,
1998, the Company intends to redeem $70.0 million principal amount of the 1997
Notes in the Planned Redemption, with proceeds remaining from the Equity
Offering, at a
52
redemption price of 111% of such principal amount, plus accrued and unpaid
interest. The Company expects to record an extraordinary loss of approximately
$10.7 million related to the early redemption of this debt. In connection with
the Planned Redemption, the Company anticipates that the trustee for the 1997
Notes will release to the Company approximately $18.0 million held by the
trustee as security for the payment of remaining interest through June 1, 2000
on the 1997 Notes being redeemed. See "Item 1. Business--Description of Certain
Indebtedness--1997 Notes."
To achieve its business plan, the Company will need significant financing
for capital expenditure and working capital requirements, including repayment of
indebtedness and operating losses. Expansion of the Company's network,
operations and services will require significant capital expenditures. At
December 31, 1997, the Company had entered into agreements with vendors to
purchase approximately $9.8 million of equipment and services, and, for the year
ended December 31, 1997, had made capital expenditures of $43.9 million. The
Company currently estimates that its aggregate capital requirements will total
approximately $155.0 million in 1998 and 1999, of which a total of approximately
$105.0 million is expected to be incurred in 1998 and approximately $50.0
million is expected to be incurred in 1999. The Company expects to make
substantial capital expenditures thereafter. Capital expenditures will be
primarily for the following: (i) addition of facilities-based local telephone
service to its bundle of integrated telecommunications services, including
acquisition and installation of switches and related equipment; (ii) market
expansion; (iii) continued development and construction of its fiber optic
network (including transmission equipment); and (iv) infrastructure
enhancements, principally for information systems. The actual amount and timing
of the Company's capital requirements may differ materially from the foregoing
estimate as a result of regulatory, technological and competitive developments
(including market developments and new opportunities), or in the event the
Company decides to make acquisitions or enter into joint ventures and strategic
alliances in the Company's industry. See "Item 1. Business--Risk Factors--
Significant Capital Requirements; Uncertainty of Additional Financing."
Although the Company's liquidity has improved, the Company's level of
indebtedness and debt service obligations significantly increased as a result of
the 1997 and 1998 Notes Offerings. The successful implementation of the
Company's strategy, including expansion of its network and obtaining and
retaining a significant number of customers, and significant and sustained
growth in the Company's cash flow are necessary for the Company to be able to
meet its debt service requirements. There can be no assurance that the Company
will successfully implement its strategy or that the Company will be able to
generate sufficient cash flow from operating activities to improve its earnings
before fixed charges, or to meet its debt service obligations and working
capital requirements. The ability of the Company to meet its obligations will be
dependent upon the future performance of the Company, which will be subject to
prevailing economic conditions and to financial, business and other factors.
The Year 2000 Issue. The Year 2000 issue is the result of computer programs
using two digits rather than four to define the applicable year. Date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among others, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activities. The Company has commenced an analysis, which it expects to complete
during the second quarter of 1998, to determine the extent to which its own
information, customer service and billing systems and the systems of its major
vendors and third party network service providers (insofar as they relate to the
Company's business) are vulnerable to the Year 2000 issue. The Company is
currently unable to predict the extent to which the Year 2000 issue will affect
its internal systems, or those of its vendors and third party network service
providers. Any failure by the Company, such vendors or third party network
service providers to resolve any Year 2000 issues on a timely basis, or in a
manner that is compatible with the Company's systems, could have a material
adverse effect on the Company. Although the Company may incur substantial
costs, particularly costs resulting from charges by its
53
vendors or third party network service providers, in correcting Year 2000
issues, such costs cannot currently be estimated. Additionally, such costs will
be expensed as incurred, which will have a negative effect on current operating
results.
EFFECTS OF ACCOUNTING STANDARDS
SFAS No. 121, SFAS No. 123 and SFAS No. 128. Statement of Financial
Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to Be Disposed Of, issued by the
Financial Accounting Standards Board, requires the Company to review for
impairment, and potentially write down, the carrying values of long-lived assets
and certain identifiable intangibles (including goodwill) to be held and used by
the Company whenever events or changes in circumstances indicate that the
carrying amount of any such asset may not be recoverable. The Company adopted
SFAS No. 121, effective January 1, 1996, with no material impact on the
consolidated financial statements.
SFAS No. 123, Accounting for Stock-Based Compensation, establishes a fair
market value based method for financial accounting and reporting stock-based
employee compensation plans. Companies may elect to adopt the measurement
criteria of SFAS No. 123 for accounting purposes, thereby recognizing
compensation expense in results of operations on a prospective basis, or to
disclose the pro forma effects of the new measurement criteria. The Company has
elected to disclose the pro forma effects of the new measurement criteria. See
Note 9 to the consolidated financial statements.
SFAS No. 128, Earnings Per Share, which was adopted on December 31, 1997
establishes new guidelines for the calculation and presentation of earnings per
share. In February 1998, the SEC issued SAB No. 98, on computations of earnings
per share in an initial public offering. SAB No. 98 revised prior SEC guidance
including earnings per share computations in periods prior to an initial public
offering, to reflect the requirements of SFAS No. 128. SAB No. 98 was effective
immediately upon issuance and the Company has restated its earnings per share
for periods prior to its initial public offering. This restatement increased
basic and diluted net loss per share by $.01 and $.02 for the years ended
December 31, 1995 and 1996, respectively.
"Push Down" of Assets and Liabilities Related to the Acquisitions. ITC
Holding financed the cash purchase price for the DeltaCom Acquisition of
approximately $65.4 million and related debt refinancing of approximately $8.6
million principally with debt. The DeltaCom Acquisition was accounted for under
the purchase method of accounting. In accordance with applicable accounting
requirements of the Securities and Exchange Commission, purchase transactions
that result in one entity becoming substantially wholly owned by the acquiror
establish a new basis of accounting for the purchased assets and liabilities.
Thus, the purchase price for the DeltaCom Acquisition has been allocated to the
underlying assets purchased and liabilities assumed based on their estimated
fair market values at January 29, 1996, the acquisition date. Because the
DeltaCom Acquisition was recorded as a purchase, generally accepted accounting
principles require that the purchase price paid and the debt incurred by ITC
Holding for the DeltaCom Acquisition (and the related assets) be "pushed down"
to establish a new accounting basis in DeltaCom's financial statements so that
the basis of accounting for the purchased assets and liabilities is the same
between ITC Holding and DeltaCom. This accounting treatment is also required
because the Company used a portion of the proceeds of the 1997 Notes Offering to
repay a significant portion of the debt incurred by ITC Holding to finance the
DeltaCom Acquisition. Similarly, the purchase price and debt associated with the
Gulf States Acquisition was also "pushed down" to the financial statements of
Interstate FiberNet and Gulf States Transmission.
54
Inflation
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, including the
Company's consolidated balance sheets as of December 31, 1997 and 1996, and
consolidated statements of operations, consolidated statements of cash flows,
and consolidated statements of changes in stockholders' equity for the years
ended December 31, 1997, 1996 and 1995, and notes to consolidated financial
statements, together with a report thereon of Arthur Andersen LLP, dated
February 23, 1998 (except with respect to Note 17, as to which the date is March
18, 1998), are attached hereto as pages F-1 through F-27.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information set forth under the captions "Election
of Directors--Information as to Nominees and Other Directors" and "Executive
Compensation and Other Information--Section 16(a) Beneficial Ownership Reporting
Compliance" appearing in the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on June 4, 1998 (the "Proxy Statement"), to
be filed within 120 days after the end of the Company's fiscal year, which
information is incorporated herein by reference. Information required by this
item with respect to executive officers is provided in "Item 1
Business--Executive Officers." of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information set forth under the captions "Election
of Directors--Directors' Compensation" and "Executive Compensation and Other
Information" appearing in the Proxy Statement to be filed within 120 days after
the end of the Company's fiscal year, which information is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information set forth under the caption "Stock
Owned by Management" and "Principal Holders of Voting Securities" appearing in
the Proxy Statement to be filed within 120 days after the end of the fiscal
year, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information set forth under the caption "Executive
Compensation and Other Information--Certain Transactions" appearing in the Proxy
Statement to be filed within 120 days after the end of the Company's fiscal
year, which information is incorporated herein by reference.
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following Consolidated Financial Statements of the Company and report
of independent public accountants are included in Item 8 of this Form 10-K:
Report of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statement of Operations for the years ended December 31, 1997,
1996 and 1995.
Consolidated Statement of Stockholders' Equity for the years ended December
31, 1997, 1996 and 1995.
Consolidated Statement of Cash Flows for the years ended December 31, 1997,
1996 and 1995.
Notes to Consolidated Financial Statements.
(a)(2) The following financial statement schedule is filed as part of this
report and is attached hereto as pages S-1 and S-2:
Report of Independent Public Accountants on the Financial Statement
Schedule.
Schedule II--Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable accounting
regulations of the Commission either have been included in the Consolidated
Financial Statements of the Company or the notes thereto, are not required under
the related instructions or are inapplicable, and therefore have been omitted.
(a)(3) The following exhibits are either provided with this Form 10-K or are
incorporated herein by reference:
57
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
3.1 Certificate of Incorporation of ITC/\DeltaCom, Inc. (filed as
Exhibit 3.1 to Registration Statement on Form S-1, as amended,
File No. 333-36683 ("Form S-1") and incorporated herein by
reference).
3.2 Amended and Restated Bylaws of ITC/\DeltaCom, Inc. (filed as
Exhibit 3.2 to Form S-1 and incorporated herein by reference).
4.1 Form of Common Stock Certificate of ITC/\DeltaCom, Inc. (filed as
Exhibit 4.1 to Form S-1 and incorporated herein by reference).
4.2 Indenture dated March 3, 1998 between ITC/\DeltaCom, Inc. and
United States Trust Company of New York, as Trustee, relating to
the 8-7/8% Senior Notes Due 2008 of ITC/\DeltaCom, Inc.
4.3 Registration Rights Agreement, dated March 3, 1998, among
ITC/\DeltaCom, Inc. and Morgan Stanley & Co. Incorporated,
Salomon Brothers Inc and NationsBanc Montgomery Securities LLC.
4.4 Form of Initial Global 8-7/8% Note Due 2008.
10.1 Capacity Agreement dated as of February 1, 1997 between
Interstate FiberNet and Entergy Technology Company (filed as
Exhibit 10.1 to Registration Statement on Form S-4, as amended,
File No. 333-31361 ("Form S-4") and incorporated herein by
reference).
10.2 License Agreement dated February 1, 1997 between Interstate
FiberNet and Metropolitan Atlanta Rapid Transit Authority (filed
as Exhibit 10.2 to Form S-4 and incorporated herein by
reference).
10.3 Supply Agreement for Transmission Equipment dated March 26, 1993
between Interstate FiberNet and Northern Telecom, Inc. (filed as
Exhibit 10.3 to Form S-4 and incorporated herein by reference).
10.3.1 Network Products Purchase Agreement, dated as of December 24,
1997, by and between Interstate FiberNet, Inc. and Northern
Telecom, Inc.
10.4 First Amendment to Supply Agreement for Transmission Equipment
dated as of September 9, 1993 between Interstate FiberNet and
Northern Telecom, Inc. (filed as Exhibit 10.4 to Form S-4 and
incorporated herein by reference).
10.5 Second Amendment to Supply Agreement for Transmission Equipment
dated as of January 19, 1994 between Interstate FiberNet and
Northern Telecom, Inc. (filed as Exhibit 10.5 to Form S-4 and
incorporated herein by reference).
10.6 Sixth Amendment to Supply Agreement for Transmission Equipment
dated as of November 21, 1996 between Interstate FiberNet and
Northern Telecom, Inc. (which supersedes the Third and the Fourth
Amendment to this Agreement) (filed as Exhibit 10.6 to Form S-4
and incorporated herein by reference).
10.7 Seventh Amendment to Supply Agreement for Transmission Equipment
dated as of April 15, 1997 between Interstate FiberNet and
Northern Telecom, Inc. (which supersedes the Fifth Amendment to
this Agreement) (filed as Exhibit 10.7 to Form S-4 and
incorporated herein by reference).
10.8 Master Capacity Lease dated July 22, 1996 between Interstate
FiberNet and Intercel PCS Services, Inc. (filed as Exhibit 10.8
to Form S-4 and incorporated herein by reference).
10.9 First Amendment to Master Capacity Lease dated as of August 22,
1996 between Interstate FiberNet and InterCel PCS Services, Inc.
(filed as Exhibit 10.9 to Form S-4 and incorporated herein by
reference).
10.10 Amended and Restated Loan Agreement dated as of March 27, 1997 by
and
58
among Gulf States Transmission Systems, Inc., the Lenders parties
thereto and NationsBank, N.A. (filed as Exhibit 10.10 to Form S-4
and incorporated herein by reference).
10.11 Promissory Note dated March 27, 1997 between Gulf States
Transmission Systems, Inc. and NationsBank, N.A. (filed as
Exhibit 10.11 to Form S-4 and incorporated herein by reference).
10.12 Amended and Restated Security Agreement dated as of March 27,
1997 between Gulf States FiberNet and Gulf States Transmission
Systems, Inc. and NationsBank, N.A. (filed as Exhibit 10.12 to
Form S-4 and incorporated herein by reference).
10.13 Assignment and Assumption Agreement dated as of March 27, 1997
between Gulf States FiberNet and Gulf States Transmission
Systems, Inc. (filed as Exhibit 10.13 to Form S-4 and
incorporated herein by reference).
10.14 Term Agreement dated as of August 11, 1994 between Gulf States
FiberNet and Illinois Central Railroad Company (filed as Exhibit
10.14 to Form S-4 and incorporated herein by reference).
10.15 Revised and Restated Fiber Optic Facilities and Services
Agreement dated as of June 9, 1995 among Southern Development and
Investment Group, Inc., on behalf of itself and as agent for
Alabama Power Company, Georgia Power Company, Gulf Power Company,
Mississippi Power Company, Savannah Electric and Power Company,
Southern Electric Generating Company and Southern Company
Services, Inc. and MPX Systems, Inc., which was assigned in part
by MPX Systems, Inc. to Gulf States FiberNet pursuant to an
Assignment dated as of July 25, 1995 (filed as Exhibit 10.15 to
Form S-4 and incorporated herein by reference).
10.15.1 Release, Waiver, and Assumption Agreement, dated as of December
31, 1997, between Southern Development Investment Group, Inc., on
behalf of itself and as agent for Alabama Power Company, Georgia
Power Company, Gulf Power Company, Mississippi Power Company,
Savannah Electric and Power Company, Southern Electric Generating
Company and Southern Company Services, Inc. and Interstate
FiberNet, Inc. and Gulf States Transmission Systems, Inc.
10.16 First Amendment to Revised and Restated Fiber Optic Facilities
and Services Agreement dated as of July 24, 1995 between Southern
Development and Investment Group, Inc. on behalf of itself and as
agent for others and MPX Systems, Inc. (filed as Exhibit 10.16 to
Form S-4 and incorporated herein by reference).
10.17 Partial Assignment and Assumption of Revised and Restated Fiber
Optic Facilities and Services Agreement dated July 25, 1995
between MPX Systems, Inc. and Gulf States FiberNet (filed as
Exhibit 10.17 to Form S-4 and incorporated herein by reference).
+10.17.1 Amendment to Revised and Restated Fiber Optic Facilities and
Services Agreement, dated July 15, 1997, by and among Southern
Development and Investment Group, Inc., on behalf of itself and
its agent for Alabama Power Company, Georgia Power Company, Gulf
Power Company, Mississippi Power Company, Savannah Electric and
Power Company, Southern Electric Generating Company and Southern
Company Services, Inc. (collectively "SES"), ITC Transmission
Systems, Inc. (as managing partner of Interstate Fibernet) and
Gulf States Transmission Systems, Inc. (filed as Exhibit 10.17.1
to Form S-4 and incorporated herein by reference).
10.18 Consent for Assignment of Interest dated February 20, 1997 among
SCANA Communications, Inc., Gulf States FiberNet, Gulf States
Transmission Systems, Inc. and Southern Development and
Investment Groups, Inc. (filed as Exhibit 10.18 to Form S-4 and
incorporated herein by reference).
10.19 Second Partial Assignment and Assumption of Revised and Restated
Fiber Optic
59
Facilities and Services Agreement dated March 27, 1997 between
SCANA Communications, Inc. and ITC Holding Company, Inc. (filed
as Exhibit 10.19 to Form S-4 and incorporated herein by
reference).
10.20 Fiber System Lease Agreement dated January 30, 1996 between CSW
Communications, Inc. and Gulf States FiberNet (filed as Exhibit
10.20 to Form S-4 and incorporated herein by reference).
10.21 Consent for Acquisition and Assignment dated January 13, 1997
between CSW Communications, Inc. and Gulf States FiberNet (filed
as Exhibit 10.21 to Form S-4 and incorporated herein by
reference).
10.22 Agreement for the Provision of Fiber Optic Services and
Facilities dated April 21, 1986 between SouthernNet, Inc. and MPX
Systems, Inc. (filed as Exhibit 10.22 to Form S-4 and
incorporated herein by reference).
10.23 First Amendment to Agreement for the Provision of Fiber Optic
Services and Facilities dated May 8, 1992 between MPX Systems,
Inc. and MCI Telecommunications Corporation (filed as Exhibit
10.23 to Form S-4 and incorporated herein by reference).
10.24 Second Amendment to Agreement for the Provision of Fiber Optic
Services and Facilities dated January 30, 1996 between MPX
Systems, Inc. and MCI Telecommunications Corporation (filed as
Exhibit 10.24 to Form S-4 and incorporated herein by reference).
10.25 Network Operating Agreement dated March 25, 1996 among Gulf
States FiberNet, TriNet, Inc., Hart Communications, Inc. and
SCANA Communications, Inc. (f/k/a MPX Systems, Inc.) (filed as
Exhibit 10.25 to Form S-4 and incorporated herein by reference).
10.26 Agreement for the Provision of Fiber Optic Facilities and
Services dated March 29, 1990 between Alabama Power Company and
Southern Interexchange Facilities, Inc. (filed as Exhibit 10.26
to Form S-4 and incorporated herein by reference).
10.27 Amendment to the Agreement for Provision of Fiber Optic
Facilities and Services dated March 29, 1990 between Alabama
Power Company and Southern Interexchange Facilities, Inc. (filed
as Exhibit 10.27 to Form S-4 and incorporated herein by
reference).
10.28 First Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated March 22, 1991 between Alabama
Power Company and Southern Interexchange Facilities, Inc. (filed
as Exhibit 10.28 to Form S-4 and incorporated herein by
reference).
10.29 Second Amendment to the Agreement for the Provision of Fiber
Optic Facilities and Services dated December 1, 1991 between
Alabama Power Company and Southern Interexchange Facilities, Inc.
(filed as Exhibit 10.29 to Form S-4 and incorporated herein by
reference).
10.30 Third Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated September 23, 1992 between Alabama
Power Company and Southern Interexchange Facilities, Inc. (filed
as Exhibit 10.30 to Form S-4 and incorporated herein by
reference).
10.31 Fourth Amendment to the Agreement for the Provision of Fiber
Optic Facilities and Services dated January 1, 1994 between
Alabama Power Company and Southern Interexchange Facilities, Inc.
(filed as Exhibit 10.31 to Form S-4 and incorporated herein by
reference).
10.32 Agreement dated March 6, 1990 between Tennessee Valley Authority
and Consolidated Communications Corporation (predecessor to
DeltaCom, Inc.) (filed as Exhibit 10.32 to Form S-4 and
incorporated herein by reference).
10.32.1 Supplement Agreement; Leased Fiber Pathways, dated as of
September 26, 1997, by and between Tennessee Valley Authority and
DeltaCom, Inc.
10.33 Interconnection Agreement signed March 12, 1997 between DeltaCom,
Inc. and
60
BellSouth Telecommunications, Inc. (filed as Exhibit 10.33 to
Form S-4 and incorporated herein by reference).
10.34 Amendment to Interconnection Agreement relating to BellSouth
loops dated March 12, 1997 between DeltaCom, Inc. and BellSouth
Telecommunications, Inc. (filed as Exhibit 10.34 to Form S-4 and
incorporated herein by reference).
10.35 Amendment to Interconnection Agreement relating to resale of
BellSouth services dated March 12, 1997 between DeltaCom, Inc.
and BellSouth Telecommunications, Inc. (filed as Exhibit 10.35 to
Form S-4 and incorporated herein by reference).
10.35.1 Third Amendment to Interconnection Agreement, dated March 12,
1997, by and between DeltaCom, Inc. and BellSouth
Telecommunications, Inc. (filed as Exhibit 10.35.1 to Form S-4
and incorporated herein by reference).
10.35.2 Fourth Amendment to Interconnection Agreement, dated August 22,
1997, by and between DeltaCom, Inc. and BellSouth
Telecommunications, Inc. (filed as Exhibit 10.35.2 to Form S-4
and incorporated herein by reference).
10.35.3 Amendment to Interconnection Agreement, dated October 3, 1997, by
and between DeltaCom, Inc. and BellSouth Telecommunications, Inc.
(filed as Exhibit 10.35.3 to Form S-1 and incorporated herein by
reference).
10.36 Master Equipment Lease Agreement dated October 30, 1995 between
AT&T Systems Leasing Co. and DeltaCom, Inc. (filed as Exhibit
10.36 to Form S-4 and incorporated herein by reference).
10.37 Network Products Purchase Agreement dated January 24, 1996, as
amended through March 4, 1997, between DeltaCom, Inc. and
Northern Telecom, Inc. (filed as Exhibit 10.37 to Form S-4 and
incorporated herein by reference).
10.38 First Amendment to Product Attachment Carrier Network Products,
dated May 20, 1997 (filed as Exhibit 10.38 to Form S-4 and
incorporated herein by reference).
10.39 Agreement for Use of Optical Fiber System, Microwave Radio Tower
Site and Associated Facilities dated January 2, 1996 between
DeltaCom, Inc. and SCI Systems, Inc. (filed as Exhibit 10.39 to
Form S-4 and incorporated herein by reference).
10.40 Collocate Agreement dated January 7, 1991 between Williams
Telecommunications Services, Inc., and Southern Interexchange
Facilities, Inc. (including consent for change of control) (filed
as Exhibit 10.40 to Form S-4 and incorporated herein by
reference).
10.41 Agreement dated January 14, 1997 between DeltaCom, Inc. and SCANA
Communications, Inc., for switch location in Columbia, South
Carolina (filed as Exhibit 10.41 to Form S-4 and incorporated
herein by reference).
10.42 Lease Agreement dated January 1, 1996 between Brindlee Mountain
Telephone Company and DeltaCom, Inc. for, among other purposes,
switch location in Arab, Alabama (filed as Exhibit 10.42 to Form
S-4 and incorporated herein by reference).
10.43 Promissory Note dated March 27, 1997 between ITC Holding Company,
Inc. and SCANA Communications, Inc. (filed as Exhibit 10.43 to
Form S-4 and incorporated herein by reference).
+ 10.44 Agreement for the Provision of Telecommunications Services and
Facilities, dated January 27, 1996, by and between Interstate
FiberNet, Inc. and Carolinas FiberNet, LLC (filed as Exhibit
10.44 to Form S-4 and incorporated herein by reference).
++ 10.44.1 First Amendment to the Agreement for the Provision of
Telecommunications Services and Facilities, dated as of September
1, 1997, by and between Interstate FiberNet, Inc. and Carolinas
FiberNet, LLC.
+ 10.45 Fiber Optic Facilities Agreement, dated November 15, 1996, by and
between Interstate FiberNet and Florida Power Corporation (filed
as Exhibit 10.45 to Form S-4 and incorporated herein by
reference).
61
+ 10.46 Fiber Optic Capacity Marketing and Operating Agreement, dated
March 21, 1996, by and between Interstate FiberNet and Florida
Power & Light Company (filed as Exhibit 10.46 to Form S-4 and
incorporated herein by reference).
+ 10.47 Addendum to Fiber Optic Capacity Marketing and Operating
Agreement, dated July 10, 1997, by and between Interstate
FiberNet and Florida Power & Light Company (filed as Exhibit
10.47 to Form S-4 and incorporated herein by reference).
+ 10.48 Master Service Agreement, dated May 6, 1996, by and between
Interstate FiberNet and MCI Telecommunications Corporation (filed
as Exhibit 10.48 to Form S-4 and incorporated herein by
reference).
+ 10.49 Telecommunications System Maintenance Agreement, dated as of
January 26, 1995, by and between Interstate FiberNet and Sprint
Communications Company L.P. (filed as Exhibit 10.49 to Form S-4
and incorporated herein by reference).
+ 10.50 Sprint Communications Company Facilities and Services Agreement,
dated January 26, 1995, by and between Interstate FiberNet and
Sprint Communications Company L.P. (filed as Exhibit 10.50 to
Form S-4 and incorporated herein by reference).
+ 10.51 Fiber Optic Facility Lease Agreement, dated as of January 31,
1997, by and between Interstate FiberNet and Southern Telecom 1,
Inc. (filed as Exhibit 10.51 to Form S-4 and incorporated herein
by reference).
10.52 First Assignment and Assumption of Fiber Optic Facility Lease
Agreement, dated February 1, 1997, by and between Interstate
FiberNet and Gulf States FiberNet (filed as Exhibit 10.52 to Form
S-4 and incorporated herein by reference).
+ 10.53 Telecommunications System Agreement, dated January 26, 1995, by
and between Interstate FiberNet and Sprint Communications Company
L.P. (filed as Exhibit 10.53 to Form S-4 and incorporated herein
by reference).
10.54 Amendment to Telecommunications System Agreement, dated July 25,
1995, by and between Gulf States FiberNet and Sprint
Communications Company L.P. (filed as Exhibit 10.54 to Form S-4
and incorporated herein by reference).
+ 10.55 Amendment No. 2 to Telecommunications System Agreement, dated
August 8, 1996, by and between Gulf States FiberNet and Sprint
Communications Company L.P. (filed as Exhibit 10.55 to Form S-4
and incorporated herein by reference).
+ 10.56 Assignment of the Telecommunications System Agreement, dated July
25, 1995, between Interstate FiberNet, Gulf States FiberNet and
Sprint Communications Company L.P. (filed as Exhibit 10.56 to
Form S-4 and incorporated herein by reference).
+ 10.57 Assignment of the Telecommunications System Agreement, dated
February 27, 1997, between Sprint Communications Company L.P.,
Gulf States FiberNet and Gulf States Transmission Systems, Inc.
(filed as Exhibit 10.57 to Form S-4 and incorporated herein by
reference).
10.58 Fixed Fee Agreement for Exchange of Use and Maintenance of Six
(6) Fiber Optic Fibers with an Option of Two (2) Additional Fiber
Optic Fibers, dated July 25, 1997, by and between Interstate
FiberNet, Gulf States Transmission Systems, Inc. and ALLTEL
Telephone Services Corporation. (filed as Exhibit 10.58 to Form
S-4 and incorporated herein by reference).
+ 10.59 MCI Carrier Agreement, effective August 1, 1995, by and between
MCI Telecommunications Corporation and Associated Communications
Companies of America (ACCA) (filed as Exhibit 10.59 to Form S-4
and incorporated herein by reference).
+ 10.60 First Amendment to MCI Carrier Agreement, dated as of March 20,
1996, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.60 to Form
62
S-4 and incorporated herein by reference).
+ 10.61 Third Amendment to MCI Carrier Agreement, dated as of August 1,
1996, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.61 to Form S-4 and incorporated herein by reference).
10.62 Fourth Amendment to MCI Carrier Agreement dated as of May 1,
1996, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.62 to Form S-4 and incorporated herein by reference).
+ 10.63 Fifth Amendment to MCI Carrier Agreement, dated as of April 10,
1996, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.63 to Form S-4 and incorporated herein by reference).
+ 10.64 Sixth Amendment to MCI Carrier Agreement, dated as of September
11, 1996, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.64 to Form S-4 and incorporated herein by reference).
+ 10.65 Seventh Amendment to MCI Carrier Agreement, dated as of August 1,
1996, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.65 to Form S-4 and incorporated herein by reference).
+ 10.66 Eighth Amendment to MCI Carrier Agreement, effective March 1,
1997, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.66 to Form S-4 and incorporated herein by reference).
+ 10.67 Ninth Amendment to MCI Carrier Agreement, dated as of May
15, 1997, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.67 to Form S-4 and incorporated herein by reference).
10.68 Tenth Amendment to MCI Carrier Agreement, dated July 11, 1997, by
and between MCI Telecommunications Corporation and Associated
Communications Companies of America (ACCA) (filed as Exhibit
10.68 to Form S-4 and incorporated herein by reference).
+ 10.69 Switched Reseller Services Agreement, dated January 25,
1994, by and between DeltaCom, Inc. and Allnet Communication
Services, Inc. (filed as Exhibit 10.69 to Form S-4 and
incorporated herein by reference).
+ 10.70 WilTel, Inc. Carrier Digital Services Agreement, dated
September 1, 1995, by and between WorldCom Network Services, Inc.
D/b/a WilTel, Associated Communications Companies of America
(ACCA) and the individual members of ACCA referenced therein
(filed as Exhibit 10.70 to Form S-4 and incorporated herein by
reference).
+ 10.71 Amendment to WilTel, Inc. Carrier Digital Services Agreement,
dated April 1, 1996, by and between WorldCom Network Services,
Inc. d/b/a/ WilTel, Associated Communications Companies of
America (ACCA) and the individual members of ACCA referenced
therein (filed as Exhibit 10.71 to Form S-4 and incorporated
herein by reference).
+ 10.72 Amendment No. 2 to WilTel, Inc. Carrier Digital Services
Agreement, dated June 1, 1996, by and between WorldCom Network
Services, Inc. d/b/a/ WilTel, Associated Communications Companies
of America (ACCA) and the individual members of ACCA referenced
therein (filed as Exhibit 10.72 to Form S-4 and incorporated
herein by reference).
+ 10.73 Amendment No. 3 to WilTel, Inc. Carrier Digital Services
Agreement, dated May 1, 1997, by and between WorldCom Network
Services, Inc. d/b/a/ WilTel, Associated Communications Companies
of America (ACCA) and the individual
63
members of ACCA referenced therein (filed as Exhibit 10.73 to
Form S-4 and incorporated herein by reference).
+ 10.74 Marketing and Operating Agreement, dated as of October 6,
1994, by and between Interstate FiberNet and DukeNet
Communications, Inc. (filed as Exhibit 10.74 to Form S-4 and
incorporated herein by reference).
+ 10.75 Reseller Agreement, dated June 25, 1997, by and between
DeltaCom, Inc. and Total Network Services, a division of Cable &
Wireless, Inc. (filed as Exhibit 10.75 to Form S-4 and
incorporated herein by reference).
10.76 Sublease Agreement, dated as of January 1, 1995, by and between
ITC Holding Company, Inc. and ITC Transmission Systems, Inc.
(filed as Exhibit 10.76 to Form S-4 and incorporated herein by
reference).
10.77.1 $100,000,000 Credit Agreement, dated as of September 17, 1997,
among Interstate FiberNet, Inc., NationsBank of Texas, N.A. as
Administrative Lender, and certain other Lenders identified
therein (the "IFN Credit Agreement") (filed as Exhibit 10.77 to
Form S-4 and incorporated herein by reference).
10.77.2 First Amendment to Credit Agreement, dated as of October 20,
1997, among Interstate FiberNet, Inc., NationsBank of Texas, N.A.
as Administrative Lender, and certain other Lenders identified
therein (filed as Exhibit 10.77.2 to Form S-1 and incorporated
herein by reference).
10.77.3 First Amended and Restated Credit Agreement, dated as of February
24, 1998, among Interstate FiberNet, Inc., NationsBank of Texas,
N.A. as Administrative Lender, and certain other Lenders
identified therein.
10.78.1 $8,750,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
NationsBank of Texas, N.A. (filed as Exhibit 10.78.1 to Form S-4
and incorporated herein by reference).
10.78.2 $3,750,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
Amsouth Bank (filed as Exhibit 10.78.2 to Form S-4 and
incorporated herein by reference).
10.78.3 $5,000,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
Creditanstalt-Bankverein (filed as Exhibit 10.78.3 to Form S-4
and incorporated herein by reference).
10.78.4 $5,000,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
Meespierson Capital Corp. (filed as Exhibit 10.78.4 to Form S-4
and incorporated herein by reference).
10.78.5 $5,000,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
State Street Bank and Trust Company (filed as Exhibit 10.78.5 to
Form S-4 and incorporated herein by reference).
10.78.6 $7,500,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
Corestates Bank, N.A. (filed as Exhibit 10.78.6 to Form S-4 and
incorporated herein by reference).
10.78.7 $2,500,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
First Union National Bank (filed as Exhibit 10.78.7 to Form S-4
and incorporated herein by reference).
10.78.8 $5,000,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
Regions Bank (filed as Exhibit 10.78.8 to Form S-4 and
incorporated herein by reference).
10.78.9 $7,500,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
Toronto Dominion (Texas), Inc. (filed as Exhibit 10.78.9 to Form
S-4 and incorporated herein by reference).
10.79.1 $8,750,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of
NationsBank of Texas, N.A. (filed as Exhibit 10.79.1 to Form S-4
and incorporated herein by reference).
10.79.2 $5,000,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of
Creditanstalt-Bankverein (filed as Exhibit 10.79.2 to Form S-4
and incorporated herein by reference).
10.79.3 $5,000,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of
Meespierson Capital Corp. (filed
64
as Exhibit 10.79.3 to Form S-4 and incorporated herein by
reference).
10.79.4 $5,000,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of State
Street Bank and Trust Company (filed as Exhibit 10.79.4 to Form
S-4 and incorporated herein by reference).
10.79.5 $7,500,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of
Corestates Bank, N.A. (filed as Exhibit 10.79.5 to Form S-4 and
incorporated herein by reference).
10.79.6 $2,500,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of First
Union National Bank (filed as Exhibit 10.79.6 to Form S-4 and
incorporated herein by reference)
10.79.7 $5,000,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of Regions
Bank (filed as Exhibit 10.79.7 to Form S-4 and incorporated
herein by reference).
10.79.8 $7,500,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of Toronto
Dominion (Texas), Inc. (filed as Exhibit 10.79.8 to Form S-4 and
incorporated herein by reference).
10.79.9 $3,750,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of Amsouth
Bank (filed as Exhibit 10.79.9 to Form S-4 and incorporated
herein by reference).
10.80.1 Security Agreement, dated as of September 17, 1997, made by
Interstate FiberNet, Inc. in favor of NationsBank of Texas, N.A.,
as Administrative Lender, and each other lender party to the IFN
Credit Agreement (filed as Exhibit 10.80.1 to Form S-4 and
incorporated herein by reference).
10.80.2 Security Agreement, dated as of September 17, 1997, made by
DeltaCom, Inc. in favor of NationsBank of Texas, N.A., as
Administrative Lender, and each other lender party to the IFN
Credit Agreement (filed as Exhibit 10.80.2 to Form S-4 and
incorporated herein by reference).
10.80.3 Security Agreement, dated as of September 17, 1997, made by Gulf
States Transmission Systems, Inc. in favor of NationsBank of
Texas, N.A., as Administrative Lender, and each other lender
party to the IFN Credit Agreement (filed as Exhibit 10.80.3 to
Form S-4 and incorporated herein by reference).
10.81 Placement Agreement, dated as of May 29, 1997, among
ITC/\DeltaCom, Inc. and Morgan Stanley & Co. Incorporated,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, First Union
Capital Markets Corp. and NationsBanc Capital Markets, Inc.
(filed as Exhibit 1.1 to Form S-4 and incorporated herein by
reference).
10.82.1 Indenture, dated as of June 3, 1997, between ITC/\DeltaCom, Inc.
and United States Trust Company of New York, as Trustee, relating
to the 11% Senior Notes due 2007 of ITC/\DeltaCom, Inc. (filed as
Exhibit 4.1 to Form S-4 and incorporated herein by reference).
10.82.2 Supplemental Indenture, dated as of October 17, 1997, between
ITC/\DeltaCom, Inc. and United States Trust Company of New York,
as Trustee (filed as Exhibit 82.2 to Form S-1 and incorporated
herein by reference).
10.83 Registration Rights Agreement, dated June 3, 1997, among
ITC/\DeltaCom, Inc. and Morgan Stanley & Co. Incorporated,
Merrill Lynch & Co., First Union Capital Markets Corp. and
NationsBanc Capital Markets, Inc. (filed as Exhibit 4.2 to Form
S-4 and incorporated herein by reference).
10.84 Pledge and Security Agreement dated as of June 3, 1997 from
ITC/\DeltaCom, Inc. as Pledgor to United States Trust Company of
New York as Trustee (filed as Exhibit 4.3 to Form S-4 and
incorporated herein by reference).
10.85 Form of Exchange Note (contained in Indenture filed as Exhibit
10.82).
10.86 Assignment and Contribution Agreement Pursuant to Pledge and
Security
65
Agreement dated as of July 25, 1997, by and among ITC/\DeltaCom,
Inc., Interstate FiberNet, Inc. and United States Trust Company
of New York, as Trustee filed herewith (filed as Exhibit 4.5 to
Form S-4 and incorporated herein by reference).
+ 10.87 MCI Carrier Agreement, effective September 1, 1997, by and
between MCI Telecommunications Corporation and Associated
Communications Companies of America (ACCA) (filed as Exhibit
10.87 to Form S-1 and incorporated herein by reference).
++ 10.87.1 First Amendment to the MCI Carrier Agreement, dated as of
November 21, 1997, by and between MCI Telecommunications
Corporation and Associated Communication Companies of America
(ACCA).
10.88 ITC/\DeltaCom, Inc. 1997 Stock Option Plan (filed as Exhibit
10.88 to Form S-1 and incorporated herein by reference).
10.89 ITC/\DeltaCom, Inc. 1997 Director Stock Option Plan (filed as
Exhibit 10.89 to Form S-1 and incorporated herein by reference).
10.90 ITC Holding Company, Inc. Amended and Restated Stock Option Plan
(filed as Exhibit 10.90 to Form S-1 and incorporated herein by
reference).
10.91 ITC Holding Company, Inc. Nonemployee Director Stock Option Plan
(filed as Exhibit 10.91 to Form S-1 and incorporated herein by
reference).
10.92 Description of ITC/\DeltaCom, Inc. Bonus Plan (filed as Exhibit
10.92 to Form S-1 and incorporated herein by reference).
10.93 Form of Indemnity Agreement between ITC/\DeltaCom, Inc. and its
Directors and Certain Officers (filed as Exhibit 10.93 to Form
S-1 and incorporated herein by reference).
10.94 Sale and Purchase Agreement, dated as of March 11, 1997, by and
between SCANA Corporation and ITC Holding Company, Inc. (filed as
Exhibit 10.94 to Form S-1 and incorporated herein by reference).
10.95 First Amendment to Sale and Purchase Agreement. Among SCANA
Corporation, SCANA Communications, Inc., and ITC Holding Company,
Inc., dated as of October 16, 1997, among SCANA Corporation,
SCANA Communications, Inc., ITC Holding Company, Inc. and
ITC/\DeltaCom, Inc. (filed as Exhibit 10.95 to Form S-1 and
incorporated herein by reference).
12.1 Statement regarding Computation of Ratios.
21.1 Subsidiaries of ITC/\DeltaCom, Inc.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule for the year ended December 31, 1997.
- -----------------
+ Confidential treatment has been granted for this exhibit. The copy filed as
an exhibit omits the information subject to the confidential treatment
request.
++ Confidential treatment has been requested for this exhibit. The copy filed
as an exhibit omits the information subject to the confidential treatment
request.
66
(b) Reports on Form 8-K.
None.
(c) Exhibits.
The Company hereby files as part of this Form 10-K the Exhibits listed in
the Index to Exhibits.
(d) Financial Statement Schedule.
The following financial statement schedule is filed herewith:
67
Schedule II - Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because they are inapplicable
or the information required to be set forth therein is provided in the
Consolidated Financial Statements of the Company or notes thereto.
68
GLOSSARY
Access--Telecommunications services that permit long distance carriers to
use local exchange facilities to originate and/or terminate long distance
service.
Access charges--The fees paid by long distance carriers to local exchange
carriers for originating and terminating long distance calls on their local
network.
AT&T--AT&T Corp.
Cable & Wireless--Cable & Wireless Communications Inc.
Central offices--The switching centers or central switching facilities of
the local exchange companies.
Collocation--The ability of a competitor carrier to connect its network to
the local exchange carriers' central offices. Physical collocation occurs when a
competitor carrier places its network connection equipment inside the local
exchange company's central offices. Virtual collocation is an alternative to
physical collocation pursuant to which the local exchange company permits a
competitor carrier to connect its network to the local exchange company's
central offices on comparable terms, even through the competitor carrier's
network connection equipment is not physically located inside the central
offices.
Dedicated--Local telecommunications lines reserved for use by particular
customers, generally for connection between the customer's location and an
interexchange carrier POP.
DeltaCom--DeltaCom, Inc., an Alabama corporation which provides long
distance telephone services in the southeastern United States. DeltaCom became a
wholly owned subsidiary of the Company as part of the Reorganization.
Dialing Parity--The ability of a competing local or toll service provider
to provide telecommunications services in such a manner that customers have the
ability to route automatically, without the use of any access code, their
telecommunications to the service provider of the customer's designation.
Digital--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. The precise digital numbers minimize distortion (such as
graininess or snow in the case of video transmission, or static or other
background distortion in the case of audio transmission).
DS-1, DS-3--Standard telecommunications industry digital signal formats,
which are distinguishable by bit rate (the number of binary digits (0 and 1)
transmitted per second). DS-1 service has a bit rate of 1.544 megabits per
second and DS-3 service has a bit rate of 45 megabits per second.
Frontier--Allnet Communications Services, Inc. d/b/a Frontier
Communications Services.
GTE--GTE Corporation.
Gulf States FiberNet--A Georgia general partnership, prior to the
Reorganization, that operates a fiber-optic telecommunications network between
Atlanta, Georgia and Longview, Texas.
69
Gulf States FiberNet's assets and operations now are 100% owned by Gulf States
Transmission Systems, Inc.
Gulf States Transmission--Gulf States Transmission Systems, Inc., a
Delaware corporation, formed in 1994 by ITC Holding to be the 36% managing
general partner in Gulf States FiberNet and which now owns 100% of Gulf States
FiberNet's assets and its operations. Gulf States Transmission Systems, Inc.
became a wholly owned subsidiary of the Company as part of the Reorganization.
Interconnection--Interconnection of facilities between or among local
exchange carriers, including potential physical collocation of one carrier's
equipment in the other carrier's premises to facilitate such interconnection.
Interconnection Decision--The August 1996 order issued by the FCC
implementing the interconnection provisions of the Telecommunications Act.
Portions of this order have been stayed by the U.S. Eighth Circuit Court of
Appeals.
InterLATA--Telecommunications services originating in a LATA and
terminating outside of that LATA.
InterQuest--Eastern Telecom, Inc., a Georgia corporation, d/b/a InterQuest,
engaged solely in the provision of operator and other directory assistance
services. Eastern Telecom merged into Interstate FiberNet, Inc. as part of the
Reorganization.
Interstate FiberNet--A Georgia general partnership which operates a
fiber-optic telecommunications network between Georgia and Alabama. Interstate
FiberNet became part of Interstate FiberNet, Inc. following the Reorganization.
Interstate FiberNet, Inc.--The wholly owned subsidiary of the Company that
currently holds the businesses that were held by ITC Transmission Systems, Inc.,
ITC Transmission Systems II, Inc., InterQuest and Interstate FiberNet prior to
the Reorganization.
IntraLATA--Telecommunications services originating and terminating in the
same LATA.
ITC Holding--ITC Holding Company, Inc. was a diversified telecommunications
company based in West Point, Georgia, with substantial holdings in
telecommunications companies operating in the southern United States. ITC
Holding Company, Inc. merged with and into the Company on October 20, 1997,
after transferring substantially all of its assets and liabilities (other than
its stock in the Company) to another company, which has since been renamed ITC
Holding Company, Inc.
ITC Transmission Systems II, Inc.--A Delaware corporation formed by ITC
Holding to hold a 51 percent interest in InterState FiberNet. ITC Transmission
Systems II merged into Interstate FiberNet, Inc. as part of the Reorganization.
IXC--IXC Communications Inc.
LATA (local access and transport area)--A geographic area composed of
contiguous local exchanges, usually but not always within a single state. There
are approximately 200 LATAs in the United States.
LCI--LCI International Telecom Corp.
Local exchange--A geographic area determined by the local exchange carrier
in which calls generally are transmitted without toll charges to the calling or
called party.
70
Local exchange carrier--A company providing local telephone services.
Long distance carriers (interexchange carriers)--Long distance carriers
provide services between local exchanges on an interstate or intrastate basis. A
long distance carrier may offer services over its own or another carrier's
facilities.
MCI--MCI Communications Corporation.
Nortel Access Node--A remote multi-purpose vehicle for local switched
access transport services. Used to extend Nortel DMS-500 local access lines to
remote cities along the long-haul network.
Number portability--The ability of an end user to change local exchange
carriers while retaining the same telephone number.
OC-N--Standard telecommunications industry measurements for optical
transmission capacity distinguishable by bit rate transmitted per second and the
number of voice or data transmissions that can be simultaneously transmitted
through fiber optic cable. "N" represents the number of DS-3s involved. For
example, an OC-3 is generally equivalent to three DS-3s and has a bit rate of
155.52 megabits per second and can transmit 2,016 simultaneous voice or data
transmissions. An OC-12 has a bit rate of 622.08 megabits per second and can
transmit 8,064 simultaneous voice or data transmissions. An OC-48 has a bit rate
of 2488.32 megabits per second and can transmit 32,256 simultaneous voice or
data transmissions.
POPs (points of presence)--Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
Private line--A dedicated telecommunications connection between end user
locations.
"PUC" or "Public utilities commission"--A state regulatory body,
established in most states, which regulates utilities, including telephone
companies providing intrastate services.
Reciprocal compensation--The same compensation of a new competitive local
exchange carrier for termination of a local call by the local exchange carrier
on its network as the new competitor pays the local exchange carrier for
termination of local calls on the local exchange carrier network.
Reorganization--The contribution to the Company by ITC Holding of the
businesses of Interstate FiberNet, Gulf States FiberNet, DeltaCom and
InterQuest.
Resale--Resale by a provider of telecommunications services (such as a
local exchange carrier) of such services to other providers or carriers on a
wholesale or a retail basis.
Route miles--The number of miles of the telecommunications path in which
fiber optic cables are installed.
SCANA--SCANA Communications, Inc.
Self-healing ring--A self-healing ring is a network design in which the
network backbone consists of a continuous ring connecting a central hub facility
with one or more network nodes. Traffic is routed between the hub and each of
the nodes simultaneously in both a clockwise and a counterclockwise direction.
In the event of a cable cut or component failure along one of these paths,
traffic will continue to flow along the alternate path so no traffic is lost. In
the event of a
71
catastrophic node failure, other nodes will be unaffected because traffic will
continue to flow along whichever path (primary or alternate) does not pass
through the affected node. The switch from the primary to the alternate path
will be imperceptible to most users.
Sprint--Sprint Corporation.
"SS7" or "Signaling System 7" services--Signaling System 7 network services
utilize common channel signaling, which reduces connect time delays and directs
calls.
Switch--A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
Switched access transport services--Transportation of switched traffic
along dedicated lines between the local exchange company central offices and
long distance carrier POPs.
Switched traffic--Telecommunications traffic along the public switched
network. This traffic is generally switched at the local exchange company's
central offices.
Transmission--ITC Transmission Systems, Inc., a Delaware corporation formed
by ITC Holding to hold a 49% managing interest in InterState FiberNet.
Transmission became a wholly owned subsidiary of the Company as part of the
Reorganization and changed its name to Interstate FiberNet, Inc.
Unbundled Access--Access to unbundled elements of a telecommunications
services provider's network, including network facilities, equipment, features,
functions and capabilities, at any technically feasible point within such
network.
WorldCom--WorldCom, Inc.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of the 30th day of
March, 1998.
ITC/\DELTACOM, INC.
By: /s/ Andrew M. Walker
------------------------
Andrew M. Walker
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Campbell B. Lanier, III
- ---------------------------- Chairman, Director March 30, 1998
Campbell B. Lanier, III
/s/ Andrew M. Walker Chief Executive Officer and Director March 30, 1998
- --------------------------- (Principal executive officer)
Andrew M. Walker
/s/ Douglas A. Shumate Senior Vice President and Chief March 30, 1998
- --------------------------- Financial Officer (Principal
Douglas A. Shumate financial officer and principal
accounting officer)
/s/ Donald W. Burton
- --------------------------- Director March 30, 1998
Donald W. Burton
/s/ Malcolm C. Davenport, V
- --------------------------- Director March 30, 1998
Malcolm C. Davenport, V
/s/ Robert A. Dolson
- --------------------------- Director March 30, 1998
Robert A. Dolson
/s/ O. Gene Gabbard
- --------------------------- Director March 30, 1998
O. Gene Gabbard
/s/ William T. Parr
- --------------------------- Director March 30, 1998
William T. Parr
73
/s/ William H. Scott, III
- --------------------------- Director March 30, 1998
William H. Scott, III
/s/ William B. Timmerman
- --------------------------- Director March 30, 1998
William B. Timmerman
74
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITC/\DELTACOM, INC. AND SUBSIDIARIES
Report of Independent Public Accountants ........................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 .... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996, and 1995 ........................ F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1997, 1996, and 1995 .................. F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995 ........................ F-7
Notes to Consolidated Financial Statements ...................... F-9
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ITC/\DELTACOM, INC. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of
ITC/\DELTACOM, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31,
1997 and 1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ITC/\DeltaCom, Inc. and
subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 23, 1998
(except with respect to
Note 17, as to which
the date is March 18, 1998)
F-2
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------
1997 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 94,373,610 $ 1,301,415
Restricted assets .............................................. 22,000,000 0
Accounts receivable:
Customer, net of allowance for uncollectible accounts of
$1,060,842 and $856,858 in 1997 and 1996, respectively ...... 21,439,365 11,029,037
Affiliate ................................................... 2,011,822 1,227,661
Inventory ...................................................... 1,018,212 543,447
Prepaid expenses ............................................... 534,909 1,191,287
Federal income tax receivables from ITC Holding (Note 8) ....... 2,448,297 2,546,534
Deferred income taxes (Note 8) ................................. 589,799 525,660
------------ ------------
Total current assets ..................................... 144,416,014 18,365,041
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net (Note 3) ...................... 141,534,626 31,880,556
OTHER LONG-TERM ASSETS:
Intangible assets, net of accumulated amortization of $3,634,152
and $1,431,753 in 1997 and 1996, respectively (Note 4) ......... 61,347,786 55,517,575
Restricted assets .............................................. 28,495,831 0
Investments (Note 5) ........................................... 0 7,424,797
Other long-term assets ......................................... 10,310,220 20,010
------------ ------------
Total assets ............................................. $386,104,477 $113,207,979
============ ============
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
1997 1996
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade ................................................................ $ 7,714,878 $ 4,192,927
Construction ......................................................... 6,770,923 972,215
Affiliate (Note 12) .................................................. 534,461 658,990
Accrued interest ....................................................... 1,867,208 5,830,716
Accrued compensation ................................................... 1,875,663 1,189,395
Unearned revenue ....................................................... 4,778,819 762,829
Other accrued liabilities .............................................. 3,516,510 983,270
Current portion of long-term debt and capital lease obligations (Note 6) 912,037 359,611
------------- -------------
Total current liabilities ........................................ 27,970,499 14,949,953
------------- -------------
LONG-TERM LIABILITIES:
Advance from ITC Holding (Note 7) ...................................... 0 74,227,827
Deferred income taxes (Note 8) ......................................... 6,890,952 3,918,140
Long-term debt and capital lease obligations (Note 6) .................. 202,977,499 855,533
------------- -------------
Total long-term liabilities ...................................... 209,868,451 79,001,500
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 6, 7, 10, and 17) STOCKHOLDERS'
EQUITY:
Preferred stock, $.01 par value; $7.40 liquidation preference;
5,000,000 shares authorized; 1,480,771 and 0 shares issued and
outstanding in 1997 and 1996, respectively ........................... 14,808 0
Common stock, $.01 par value; 90,000,000 shares authorized; 24,817,556
and 15,000,000 shares issued and outstanding in 1997 and 1996,
respectively ......................................................... 248,176 150,000
Additional paid-in capital ............................................. 163,011,879 23,492,988
Contributions receivable ............................................... 0 (150,000)
Accumulated deficit .................................................... (15,009,336) (4,236,462)
------------- -------------
Total stockholders' equity ....................................... 148,265,527 19,256,526
------------- -------------
Total liabilities and stockholders' equity ....................... $ 386,104,477 $ 113,207,979
============= =============
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
-----------------------------------------------
1997 1996 1995
------------- ------------- -------------
OPERATING REVENUES ............................... $ 114,589,998 $ 66,518,585 $ 5,750,587
COST OF SERVICES ................................. 54,550,348 38,756,287 3,149,231
------------- ------------- -------------
GROSS MARGIN ..................................... 60,039,650 27,762,298 2,601,356
------------- ------------- -------------
OPERATING EXPENSES:
Selling, operations, and administration ..... 38,254,893 18,876,572 1,626,678
Depreciation and amortization ............... 18,332,451 6,438,074 1,267,882
------------- ------------- -------------
Total operating expenses ............... 56,587,344 25,314,646 2,894,560
------------- ------------- -------------
OPERATING INCOME (LOSS) .......................... 3,452,306 2,447,652 (293,204)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Equity in losses of unconsolidated subsidiary
(Note 5) ................................. 0 (1,589,812) (258,242)
Interest expense ............................ (21,367,351) (6,172,421) (297,228)
Interest and other income ................... 4,251,088 171,514 41,734
------------- ------------- -------------
Total other expense .................... (17,116,263) (7,590,719) (513,736)
------------- ------------- -------------
LOSS BEFORE INCOME TAXES,
PREACQUISITION LOSSES
AND EXTRAORDINARY ITEM ........................ (13,663,957) (5,143,067) (806,940)
INCOME TAX BENEFIT ............................... (3,324,466) (1,233,318) (302,567)
------------- ------------- -------------
LOSS BEFORE PREACQUISITION
LOSSES AND EXTRAORDINARY ITEM ................. (10,339,491) (3,909,749) (504,373)
PREACQUISITION LOSSES (Note 1) ................... 74,132 0 0
------------- ------------- -------------
LOSS BEFORE EXTRAORDINARY ITEM ................... (10,265,359) (3,909,749) (504,373)
EXTRAORDINARY ITEM--LOSS ON
EXTINGUISHMENT OF DEBT (LESS
RELATED INCOME TAX BENEFITS OF $311,057) ...... (507,515) 0 0
------------- ------------- -------------
NET LOSS ........................................ $ (10,772,874) $ (3,909,749) $ (504,373)
============= ============= =============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE:
Before extraordinary loss ................... $ (0.51) $ (0.20) $ (0.03)
Extraordinary loss .......................... (0.03) 0.0 0.0
------------- ------------- -------------
Net loss .................................... $ (0.54) $ (0.20) $ (0.03)
============= ============= =============
Basic weighted average common shares
outstanding .............................. 20,124,908 19,053,675 19,053,675
============= ============= =============
Diluted weighted average common shares
outstanding .............................. 20,124,908 19,101,926 19,101,926
============= ============= =============
The accompanying notes are an integral part of these consolidated statements.
F-5
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
--------------- ------------ Contributions
Shares Amount Shares Amount Paid-in Capital Receivable
------------- ------------- ------------- ------------- --------------- -------------
BALANCE, December 31, 1994 0 $ 0 15,000,000 $ 150,000 $ 13,583,749 $ (150,000)
Capital contributions
from ITC Holding, net .... 0 0 0 0 1,050,000 0
Net loss ................. 0 0 0 0 0 0
------------- ------------- ------------- ------------- ------------- -------------
BALANCE, December 31, 1995 0 0 15,000,000 150,000 14,633,749 (150,000)
Acquisition of DeltaCom,
Inc. (Note 13) ........... 0 0 0 0 6,000,000 0
Capital contributions
from ITC Holding, net .... 0 0 0 0 2,859,239 0
Net loss ................. 0 0 0 0 0 0
------------- ------------- ------------- ------------- ------------- -------------
BALANCE, December 31, 1996 0 0 15,000,000 150,000 23,492,988 (150,000)
Initial capitalization of 0 0 0 0 0 150,000
ITC/\DeltaCom
Capital contributions from
ITC Holding, net ......... 0 0 0 0 52,070,363 0
Issuance of stock in
connection with merger
with ITC Holding ......... 1,480,771 14,808 4,053,675 40,537 (55,345) 0
Sale of common stock, net
of offering expenses ..... 0 0 5,750,000 57,500 87,442,500 0
Issuance of stock options 0 0 0 0 579,494 0
Deferred compensation .... 0 0 0 0 (555,348) 0
Exercise of stock options 0 0 13,881 139 37,227 0
Net loss ................. 0 0 0 0 0 0
------------- ------------- ------------- ------------- ------------- -------------
BALANCE, December 31, 1997 1,480,771 $ 14,808 24,817,556 $ 248,176 $ 163,011,879 $ 0
============= ============= ============= ============= ============= =============
Total
Retained -----
Earnings Stockholders'
(Accumulated ------------
Deficit) Equity
------------- -------------
BALANCE, December 31, 1994 $ 177,660 $ 13,761,409
Capital contributions
from ITC Holding, net .... 0 1,050,000
Net loss ................. (504,373) (504,373)
------------- -------------
BALANCE, December 31, 1995 (326,713) 14,307,036
Acquisition of DeltaCom,
Inc. (Note 13) ........... 0 6,000,000
Capital contributions
from ITC Holding, net .... 0 2,859,239
Net loss ................. (3,909,749) (3,909,749)
------------- -------------
BALANCE, December 31, 1996 (4,236,462) 19,256,526
Initial capitalization of 0 150,000
ITC/\DeltaCom
Capital contributions from
ITC Holding, net ......... 0 52,070,363
Issuance of stock in
connection with merger
with ITC Holding ......... 0 0
Sale of common stock, net
of offering expenses ..... 0 87,500,000
Issuance of stock options 0 579,494
Deferred compensation .... 0 (555,348)
Exercise of stock options 0 37,366
Net loss ................. (10,772,874) (10,772,874)
------------- -------------
Balance, December 31, 1997 $ (15,009,336) $ 148,265,527
============= =============
The accompanying notes are an integral part of these consolidated statements.
F-6
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss ....................................... $(10,772,874) $ (3,909,749) $ (504,373)
------------ ------------ ------------
Adjustments to reconcile net loss to
net cash provided by operating activities
(excluding the effects of acquisitions):
Depreciation and amortization ................ 18,332,451 6,438,074 1,267,882
Amortization of bond issue costs ............. 720,796 0 0
Deferred income taxes ........................ 2,056,218 611,530 368,998
Equity in losses of investee ................. 0 1,589,812 258,242
Extraordinary item--loss on extinguishment
of debt ................................... 818,572 0 0
Other ........................................ 186,582 13,853 88,293
Changes in current operating assets and
liabilities:
Accounts receivable ....................... (9,027,582) (2,646,760) 471,988
Other current assets ...................... 335,648 (2,451,764) (565,182)
Accounts payable .......................... 552,253 1,506,728 15,083
Accrued interest .......................... (4,054,065) 5,830,716 0
Unearned revenue .......................... 4,015,990 514,370 4,225
Accrued compensation and other accrued
liabilities ............................. 3,138,134 691,808 32,161
------------ ------------ ------------
Total adjustments ....................... 17,074,997 12,098,367 1,941,690
------------ ------------ ------------
Net cash provided by operating activities 6,302,123 8,188,618 1,437,317
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures ........................... (48,692,156) (6,003,971) (2,526,646)
Change in accrued construction costs ........... 4,818,166 (168,689) 720,904
Investment in Gulf States FiberNet ............. 0 (2,361,530) 0
Purchase of DeltaCom, net of cash received
(Note 13) .................................... 0 (63,534,092) 0
Purchase of assets of Viper Computer Systems,
Inc. (Note 14) ............................... 0 (625,000) 0
Purchase of Gulf States FiberNet, net of cash
received (Note 15) ........................... 574,600 0 0
F-7
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years ended December 31,
-----------------------------------------------
1997 1996 1995
------------- ------------- -------------
Purchase of restricted assets, net of investments
released from restriction ....................... $ (50,495,831) $ 0 $ 0
Other ............................................. (59,615) 0 326,984
------------- ------------- -------------
Net cash used in investing activities ...... (93,854,836) (72,693,282) (1,478,758)
------------- ------------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from Senior Notes, net of issuance costs . 192,112,875 0 0
Proceeds from other long-term debt ................ 41,290,000 0 0
Payment of debt issuance costs .................... (2,718,957) 0 0
Repayment of other long-term debt and capital lease
obligations ..................................... (93,894,088) (10,619,682) (675,000)
Proceeds from advance from ITC Holding ............ 0 74,005,598 0
Repayment of advance from ITC Holding ............. (43,227,827) (1,234,248) (195,000)
Capital contributions from ITC Holding, net ....... (624,461) 2,859,239 1,050,000
Proceeds from issuance of common stock, net of
offering expenses ............................... 87,650,000 0 0
Other ............................................. 37,366 139,076 0
------------- ------------- -------------
Net cash provided by financing activities ......... 180,624,908 65,149,983 180,000
------------- ------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS ................ 93,072,195 645,319 138,559
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ................................. 1,301,415 656,096 517,537
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR ........................................... $ 94,373,610 $ 1,301,415 $ 656,096
============= ============= =============
SUPPLEMENTAL CASH FLOW
DISCLOSURES:
Cash paid for interest ............................ $ 24,390,910 $ 280,791 $ 174,513
============= ============= =============
Cash paid (refunds received) for income taxes, net $ (6,287,448) $ 546,501 $ 11,558
============= ============= =============
NONCASH TRANSACTIONS:
Equity portion of acquisition of DeltaCom (Note 13) $ 0 $ 6,000,000 $ 0
============= ============= =============
Assumption of capital leases related to
acquisition of assets of Viper Computer
Systems, Inc. (Note 14) ......................... $ 0 $ 171,683 $ 0
============= ============= =============
Equity portion of acquisition of 64% interest in
Gulf State FiberNet and Georgia Fiber Assets .... $ 21,694,931 $ 0 $ 0
============= ============= =============
Assumption of long-term debt related to
acquisition of Georgia Fiber Assets ............. $ 9,964,091 $ 0 $ 0
============= ============= =============
Forgiveness of long-term advances by ITC Holding .. $ 31,000,000 $ 0 $ 0
============= ============= =============
The accompanying notes are an integral part of these consolidated statements.
F-8
ITC/\DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Basis of Presentation, and Nature of Business
Organization
InterState FiberNet, Inc. (formerly ITC Transmission Systems, Inc.)
("FiberNet"), ITC Transmission Systems II, Inc. ("Transmission II"), Gulf States
Transmission Systems, Inc. ("GSTS"), and Eastern Telecom, Inc. d.b.a. InterQuest
("InterQuest") (collectively, the "Fiber Companies"), as well as ITC/\DeltaCom
Communications, Inc. (formerly DeltaCom, Inc.) ("DeltaCom"), were wholly owned
subsidiaries of ITC Holding Company, Inc. ("ITC Holding"). ITC/\DeltaCom, Inc.
(the "Company") was incorporated on March 24, 1997 under the laws of the State
of Delaware, as a wholly owned subsidiary of ITC Holding, to acquire and operate
the Fiber Companies and DeltaCom. Upon receipt of certain regulatory approvals
and certain other consents on July 25, 1997, ITC Holding completed the
reorganization of such subsidiaries (the "Reorganization"), as follows:
a. InterQuest and Transmission II were merged with and into FiberNet.
b. ITC Holding contributed all of the outstanding capital stock of
FiberNet, DeltaCom and GSTS to the Company.
c. The Company contributed all of the outstanding capital stock of
DeltaCom and GSTS to FiberNet.
At December 31, 1996, FiberNet and Transmission II together held 100% of
the ownership interests in Interstate FiberNet ("Interstate"), a Georgia general
partnership. Effective with the Reorganization, Interstate was absorbed by law
into FiberNet. GSTS held a 36% ownership in and was the managing partner of Gulf
States FiberNet ("Gulf States"), a Georgia general partnership (Note 5). On
March 27, 1997, ITC Holding purchased the remaining 64% interest in Gulf States
(Note 15) and contributed this interest to GSTS upon the Reorganization. On
December 29, 1997, GSTS merged with and into FiberNet.
Effective October 20, 1997, as part of a further reorganization of ITC
Holding, ITC Holding transferred all of its assets, other than its stock in the
Company, and all of its liabilities to another entity and then merged with and
into the Company (the "Merger"). The Company was the surviving corporation in
the Merger.
Basis of Accounting and Financial Statement Presentation
The accompanying consolidated financial statements are prepared on the
accrual basis of accounting. The consolidated financial statements reflect the
Reorganization in a manner similar to a pooling of interests and include the
accounts of the Company and its wholly owned subsidiaries. Investments in
affiliated entities in which the Company has at least 20% ownership and does not
have management control are accounted for using the equity method. All material
intercompany accounts and transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
On January 29, 1996, ITC Holding acquired 100% of the common stock of
DeltaCom (Note 13). The acquisition was accounted for using the purchase method
of accounting. The results of
F-9
operations of DeltaCom have been included in the accompanying consolidated
statements of operations since the date of acquisition.
Prior to 1997, GSTS accounted for its 36% investment in Gulf States using
the equity method. To reflect the acquisition of the remaining 64% of Gulf
States, the revenues and expenses of Gulf States have been included in the
consolidated statement of operations for the year ended December 31, 1997, with
the preacquisition losses attributable to the previous owner deducted to
determine the consolidated net loss of the Company.
Nature of Business
The Company operates primarily in two business segments. DeltaCom is a
regional long-distance company operating primarily in the southern United
States. DeltaCom is engaged in the retail sale of long-distance services such as
traditional switched and dedicated long-distance; 800/888 calling; calling card
and operator services; ATM and frame relay; high-capacity broadband private line
services, as well as Intranet, Internet, and Web page hosting and development
services; and customer premises equipment installation and repair. DeltaCom
primarily serves midsized and major regional businesses in the southern United
States (the "Retail Services").
The Fiber Companies are engaged in the sale of long-haul private-line
services on a wholesale basis to other telecommunications companies using their
owned and managed fiber optic network which extends throughout ten southern
states (Arkansas, Texas, Tennessee, Mississippi, Louisiana, Alabama, Georgia,
North Carolina, South Carolina, and Florida) (the "Carriers' Carrier Services").
The Company has experienced operating losses as a result of efforts to
build its network infrastructure and internal staffing, develop its systems, and
expand into new markets. Assuming financing is available, the Company expects to
continue to focus on increasing its customer base and expanding its network
operations. Accordingly, the Company expects that its cost of services, selling,
operations, and administration expenses and capital expenditures will continue
to increase significantly, all of which will have a negative impact on
short-term operating results. In addition, the Company may change its pricing
policies to respond to a changing competitive environment. FiberNet has obtained
a five-year, secured credit facility with NationsBank of Texas, N.A. (Note 6),
and the Company has issued senior notes and equity (Notes 9 and 17). In the
opinion of management, the Company's current cash position and available line of
credit will be sufficient to meet the capital and operating needs of the Company
through at least 1998. However, there can be no assurance that growth in the
Company's revenue or customer base will continue or that the Company will be
able to achieve or sustain profitability and/or positive cash flow.
Sources of Supplies
The Company voluntarily uses a single vendor for transmission equipment
used in its network. However, if this vendor were unable to meet the Company's
needs, management believes that other sources for this equipment exist on
commensurate terms and that operating results would not be adversely affected.
Credit Risk and Significant Customers
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to certain customers for services and the
ability to terminate access on delinquent accounts. The concentration of credit
risk is mitigated by the large number of customers comprising the customer base.
In 1997 and 1996, no customer represented more than 10% of the Company's
consolidated operating
F-10
revenues. However, in 1995, one customer represented approximately 30% of the
Company's consolidated operating revenues.
Regulation
The Company is subject to certain regulations and requirements of the
Federal Communications Commission and various state public service commissions.
2. Summary of Significant Accounting Policies
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all short-term highly liquid investments with an
original maturity date of three months or less to be cash equivalents.
Inventory
Inventory consists primarily of customer premise equipment held for resale
and is valued at the lower of cost or market, using the first-in, first-out
method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation of property and
equipment is provided using the composite or straight line method over the
following estimated useful lives:
Years
-------
Buildings and towers................................. 30
Office furniture, fixtures, and equipment............ 3 to 15
Vehicles............................................. 5
Telecommunications equipment......................... 5 to 20
Intangible Assets
Intangible assets include the excess of the purchase price of acquisitions
over the fair value of net assets acquired as well as various other acquired
intangibles. Intangible assets are amortized over the following estimated useful
lives:
Years
-----
Goodwill....................... 40
Trademark...................... 40
Customer base.................. 5 to 12
Noncompete agreements.......... 5
F-11
Restricted Assets
Restricted assets include investments in U.S. government treasury notes
that are classified as held-to-maturity and are reported at amortized costs.
These investments represent a portion of the proceeds from the Company's 1997
senior notes offering (Note 6) that are held by a Trustee as security for and to
fund the next five interest payments on these notes.
Other Long-Term Assets
Other long-term assets primarily include debt issuance costs which are
amortized using the effective interest rate method over the life of the related
debt.
Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," on January 1, 1996. SFAS No. 121 establishes
accounting standards for the impairment of long lived assets and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangible assets to be disposed of. The effect of adopting
SFAS No. 121 was not material to the Company's consolidated financial
statements.
The Company reviews its intangible assets for impairment at each balance
sheet date or whenever events or changes in circumstances indicate that the
carrying amount of an asset should be assessed. Management evaluates the
intangible assets related to each acquisition individually to determine whether
an impairment has occurred. An impairment is recognized when the discounted
future cash flows estimated to be generated by the acquired business are
insufficient to recover the current unamortized balance of the intangible asset,
with the amount of any such deficiency charged to income in the current year.
Estimates of future cash flows are based on many factors, including current
operating results, expected market trends, and competitive influences.
Unearned Revenue
Unearned revenue represents the liability for advanced billings to
customers for use of the Company's fiber-optic network. Customers are billed in
advance for fixed monthly charges.
Unbilled Revenue
DeltaCom records unbilled revenue for long-distance services provided to
customers but not yet billed. Approximately $3.8 million and $3.4 million in
unbilled revenue are included in accounts receivable in the accompanying
consolidated balance sheets at December 31, 1997 and 1996, respectively.
Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred taxes are determined based on the
difference between the financial and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse.
The Internal Revenue Code and applicable state statutes provide that the
income and expenses of a partnership are not separately taxable to the
partnership but rather accrue directly to the partners. Accordingly, the
accompanying financial statements include provisions for federal and state
income taxes related to partnership interests in Interstate and Gulf States held
by FiberNet, Transmission II, and GSTS prior to the Reorganization.
F-12
The Company was included in the consolidated federal income tax return of
ITC Holding through 1996. As a result of the Merger (Note 1), ITC Holding's
consolidated results of operations through October 20, 1997 will be included in
the Company's 1997 consolidated federal income tax return. The Company and its
subsidiaries file separate state income tax returns. Under a tax-sharing
arrangement, the Company was paid for the utilization of net operating losses
included in the consolidated tax return, even if such losses could not have been
used if the Company were to have filed on a separate return basis.
Revenue Recognition
Revenues are recognized as services are provided and consist primarily of
charges for use of long-distance services and for use of the Company's
fiber-optic network.
Fair Value of Financial Instruments
The carrying values of the Company's financial instruments approximate
their fair values, except for the Company's $200 million Senior Notes (Note 6).
Based on their quoted market price, such notes have a fair value of $220
million at December 31, 1997.
Advertising Costs
The Company expenses all advertising costs as incurred.
Net Loss Per Share
The Company adopted SFAS No. 128, "Earnings per Share," effective December
31, 1997. Basic net loss per common share was computed by dividing net loss by
the weighted average number of common shares outstanding for the year then
ended.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 98, for periods prior to the Company's initial public offering (Note 9),
basic net loss per share is computed using the weighted average number of shares
of common stock outstanding during the period. Diluted net loss per share is
computed using the weighted average number of shares of common stock outstanding
during the period and, nominal issuances of common stock and common stock
equivalents, regardless of whether they are antidilutive. For periods prior to
1997, 48,251 stock options are included in the computation of diluted net loss
per share. For periods subsequent to the Company's initial public offering, the
effect of the Company's potential common stock equivalents was not included in
the computation of diluted net loss per share as their effect is antidilutive.
F-13
3. Property and Equipment
Balances of major classes of assets and the related accumulated
depreciation as of December 31, 1997 and 1996 are as follows:
1997 1996
------------ ------------
Land ............................................. $ 143,195 $ 140,695
Buildings and towers ............................. 2,325,850 1,293,495
Furniture and fixtures ........................... 8,333,303 4,140,188
Vehicles ......................................... 1,009,403 287,219
Telecommunications equipment ..................... 143,460,560 32,321,553
------------ ------------
155,272,311 38,183,150
Less accumulated depreciation .................... 25,825,447 6,569,908
------------ ------------
Net property, plant, and equipment in service .... 129,446,864 31,613,242
Assets under construction ........................ 12,087,762 267,314
------------ ------------
Property, plant, and equipment, net .............. $141,534,626 $ 31,880,556
============ ============
4. Intangible Assets
Goodwill and other intangible assets and the related amortization as of
December 31, 1997 and 1996 are as follows:
1997 1996
------------ ------------
Goodwill ............................... $ 58,993,733 $ 50,961,123
Customer Base .......................... 5,846,371 5,846,371
Noncompete agreements .................. 102,000 102,000
Trademark .............................. 39,834 39,834
------------ ------------
64,981,938 56,949,328
Less accumulated amortization .......... (3,634,152) (1,431,753)
------------ ------------
Intangibles, net ....................... $ 61,347,786 $ 55,517,575
============ ============
See Note 15 for discussion of intangible assets recorded in 1997 related to
acquisition of the Gulf States and Notes 13 and 14 for a discussion of
intangible assets recorded in 1996 related to the acquisitions of DeltaCom and
the assets of Viper Computer Systems, Inc. ("ViperNet"), respectively.
F-14
5. Investments
Gulf States
At December 31, 1996, investments represent GSTS's 36% ownership interest
in Gulf States, which was formed as a partnership in 1994. Gulf States provides
digital communications transport services to communications common carriers in
the states of Georgia, Texas, Alabama, Mississippi, and Louisiana. GSTS was the
managing partner and was responsible for managing and operating Gulf States. On
March 27, 1997, ITC Holding purchased the remaining 64% interest in Gulf States
and contributed this interest to GSTS (Note 1).
The following table summarizes various financial data of Gulf States for
the years ended December 31, 1996 and 1995:
1996 1995
------------ ------------
Operating revenues ................... $ 10,056,544 $ 7,587,713
Operating (loss) income .............. (216,992) 1,214,409
Net loss ............................. (4,416,142) (717,340)
Current assets ....................... 2,751,101 6,557,741
Noncurrent assets .................... 63,820,143 64,206,522
Current liabilities .................. 9,432,588 9,831,768
Noncurrent liabilities ............... 35,625,000 41,562,500
6. Financing Obligations
Long-Term Debt
Long-term debt and capital lease obligations at December 31, 1997 and 1996
consists of the following:
1997 1996
------------- -------------
11% Senior Notes due 2007 .................. $ 200,000,000 $ 0
Other ...................................... 640,112 930,252
------------- -------------
200,640,112 930,252
Less current maturities .................... (306,882) (290,140)
------------- -------------
Long-term debt, net of current portion ..... $ 200,333,230 $ 640,112
============= =============
Maturities of long term debt at December 31, 1997 are as follows:
1998 ............................................................ $ 306,882
1999 ............................................................ 333,230
2000 ............................................................ 0
2001 ............................................................ 0
2002 ............................................................ 0
Thereafter ...................................................... 200,000,000
------------
$200,640,112
============
F-15
Lease Obligations
The Company has entered into various operating and capital leases for
facilities and equipment used in its operations. Aggregate future minimum rental
commitments under noncancelable operating leases with original or remaining
periods in excess of one year and maturities of capital lease obligations as of
December 31, 1997 are as follows:
Operating Capital
Leases Leases
----------- -----------
1998 .......................................................... $ 4,327,156 $ 942,974
1999 .......................................................... 4,043,070 927,984
2000 .......................................................... 3,331,535 919,994
2001 .......................................................... 3,109,796 369,004
2002 .......................................................... 2,698,768 318,014
Thereafter .................................................... 15,983,866 1,006,784
----------- -----------
$33,494,191 4,484,754
===========
Less amounts representing interest ............................ (1,235,330)
-----------
Present value of net minimum lease payments ................... 3,249,424
Less current portion .......................................... (605,155)
-----------
Obligations under capital leases, net of current portion ...... $ 2,644,269
===========
Rental expense charged to operations for the years ended December 31, 1997,
1996, and 1995 was $6,160,579, $1,272,389, and $74,534, respectively.
1997 Senior Notes Offering
On June 3, 1997, the Company completed the issuance of $200 million
principal amount of 11% Senior Notes due 2007 (the "1997 Senior Notes
Offering"). Interest is payable semiannually on June 1 and December 1. The note
indenture contains certain restrictive covenants. See Note 17 where the
Company's planned redemption of up to $70 million of these notes is discussed.
Proceeds from the 1997 Senior Notes Offering were held by the trustee until
all regulatory approvals related to the Reorganization described in Note 1 were
received. Upon their release, a portion of the proceeds was used to repay
approximately $48 million of the Company's advances from ITC Holding and
approximately $41.6 million under the GSTS Bridge Facility discussed below, as
well as accrued interest. At December 31, 1997, approximately $50.5 million of
such proceeds are held by the Trustee as security for and to fund the next five
interest payments on these notes.
GSTS Bridge Facility
In connection with the acquisition of the remaining 64% interest in Gulf
States (Note 15), GSTS refinanced Gulf States' outstanding indebtedness of
approximately $41.6 million with a bridge facility (the "GSTS Bridge Facility").
In connection with the refinancing, GSTS wrote off $818,572 ($507,515 net of tax
benefits) in unamortized debt issuance costs, which is reflected in the
accompanying statement of operations as an extraordinary loss on extinguishment
of debt. The GSTS Bridge Facility, which bore interest at LIBOR plus 2.25%,
matured on the date the proceeds from the Company's 1997 Senior Notes Offering
were released (July 25, 1997).
GSTS did not retire a forward starting interest rate swap agreement, which
swapped the variable interest rate with a fixed rate of 8.25%, held by Gulf
States in connection with this refinancing. At December 31, 1997, the forward
starting interest rate swap agreement has a notional amount of approximately
$35.6 million. At December 31, 1997, the Company would be required to pay
approximately $2.4 million to terminate the interest rate swap. The Company made
payments totaling approximately $990,000 during 1997, in connection with this
interest rate swap which are included in interest expense in the accompanying
consolidated statements of operations.
F-16
The Company planned to continue accounting for this agreement as a hedge of an
anticipated transaction, in connection with planned borrowings under a variable
rate credit agreement. The interest rate swap agreement expires in December
2002. (See " Debt Offering and Modification to Credit Agreement" in Note 17
for further discussion of this interest rate swap.)
Credit Agreement
On September 17, 1997, FiberNet entered into a credit agreement with
NationsBank of Texas, N.A., as administrative lender (the "Credit Agreement").
The Credit Agreement provides for a term and revolving credit facility of up to
$100 million to be used for working capital and other purposes, including
refinancing existing indebtedness, capital expenditures, and permitted
acquisitions. The Credit Agreement matures on September 15, 2002 and includes a
$50 million multidraw term loan facility and a $50 million revolving credit
facility. Amounts may be drawn under the term loan facility until September 15,
1999. All $50 million of the term loan facility must be utilized before any
amount over $10 million may be drawn down under the revolving credit facility.
Amounts drawn under the Credit Agreement will bear interest, at FiberNet's
option, at either the Base Rate or the LIBOR Rate, plus an applicable margin.
Borrowings under the Credit Agreement are guaranteed by the Company and are
secured by a first priority lien on substantially all current and future assets
and properties of FiberNet and its subsidiaries and a first priority pledge of
the stock of FiberNet and its subsidiaries. The Credit Agreement contains
covenants limiting the Company's ability to incur debt or make guaranties,
create liens, pay dividends, make distributions or stock repurchases, make
investments or capital expenditures, issue capital stock, engage in transactions
with affiliates, sell assets, and engage in mergers and acquisitions. The Credit
Agreement also requires the Company to comply with certain financial tests and
to maintain certain financial ratios on a consolidated basis. See Note 17 where
a modification to the Credit Agreement made subsequent to year-end is discussed.
7. Advance From ITC Holding
The advance from ITC Holding reflected on the Company's consolidated
balance sheets included the following at December 31, 1996.
1996
--------------
Advance from ITC Holding related to the DeltaCom
acquisition................................................. $ 74,005,598
Other cash advances from ITC Holding, net................... 222,229
--------------
Total advance from ITC Holding.............................. $ 74,227,827
==============
Advance From ITC Holding Related to DeltaCom Acquisition
As discussed in Note 13, ITC Holding funded the acquisition of DeltaCom and
the related refinancing of DeltaCom's outstanding debt through borrowings of
$74,005,598 on its own credit facility (the "ITC Holding Credit Facility").
These borrowings were pushed down to the accounts of the Company through the
advance from ITC Holding account under terms substantially identical to those of
ITC Holding Credit Facility. The advance from ITC Holding accrued interest at a
rate of 8.595%. At December 31, 1996, the accompanying consolidated balance
sheet reflected approximately $5.8 million of accrued interest related to this
advance. Approximately $48 million of the advance from ITC Holding was repaid
with proceeds from the 1997 Senior Notes Offering (Note 6). The remaining $31
million was forgiven by ITC Holding and contributed to the Company as additional
equity.
F-17
Cash Advances From (To) ITC Holding
Amounts reflected as other cash advances from (to) ITC Holding represented
excess funds from operations which were borrowed from (loaned to) ITC Holding
prior to the Reorganization. All such advances from (to) ITC Holding were repaid
in connection with the Reorganization. During 1997 and 1996, the Company
recorded interest income of $7,423 and $77,868, respectively, and interest
expense of $51,126, $96,665, and $122,696 in 1997, 1996 and 1995, respectively,
related to these transactions.
8. Income Taxes
Details of the income tax benefit for the years ended December 31, 1997,
1996 and 1995 are as follows:
1997 1996 1995
------------ ------------- -------------
Current:
Federal ......................... $ (6,140,815) $ (1,804,786) $ (628,795)
State ......................... 11,501 (48,829) (42,770)
------------ ------------- -------------
Total current............... (6,129,314) (1,853,615) (671,565)
------------- ------------- -------------
Deferred:
Federal ......................... 2,678,448 660,033 385,742
State............................ 126,400 (39,736) (16,744)
------------ ------------- -------------
Total deferred.............. 2,804,848 620,297 368,998
------------ ------------ ------------
Total benefit............... $ (3,324,466) $ (1,233,318) $ (302,567)
============= ========== ============
The tax effects of temporary differences between the carrying amounts of
assets and liabilities in the consolidated financial statements and their
respective tax bases, which give rise to deferred tax assets and liabilities, as
of December 31, 1997 and 1996 are as follows:
1997 1996
-------------- ------------
Noncurrent deferred tax (liabilities) assets:
Property, plant, and equipment ..................... $ (7,038,071) $ (3,903,605)
Intangible assets................................... 55,446 (57,849)
State net operating loss carryforwards.............. 389,724 0
Valuation allowance................................. (389,724) 0
Other............................................... 91,673 43,314
-------------- ------------
(6,890,952) (3,918,140)
Current deferred tax assets:
Accrued expenses.................................... 209,337 80,245
Reserves for uncollectible accounts................. 380,462 314,503
Other............................................... 0 130,912
-------------- ------------
589,799 525,660
-------------- ------------
Net deferred income tax liabilities...................... $ (6,301,153) $ (3,392,480)
=============== =============
Prior to 1997, the Company received payment for net operating losses
generated for federal income tax purposes and used by ITC Holding in ITC
Holding's consolidated federal income tax return. Through the date of the
Merger, ITC Holding's results of operations will be included in the Company's
1997 consolidated federal income tax return. Amounts receivable from ITC Holding
under these tax-sharing agreement are $2,448,297 and $2,546,534 at December 31,
1997 and 1996, respectively.
The Company and its subsidiaries file individual State income tax returns.
The Company has generated state net operating loss carryforwards which will
expire in 2012 unless utilized. Due to limitations on utilization, it is not
more likely than not that these net operating loss carryforwards will be
realized; therefore, management has provided a 100% valuation reserve against
these assets.
A reconciliation of the federal statutory income tax rate to the effective
income tax rate for the periods presented is as follows:
F-18
1997 1996 1995
------ ------ ------
Federal statutory rate ........................ (34.0)% (34.0)% (34.0)%
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefit (3.3) (2.0) (5.2)
Permanent differences .................... 5.8 9.0 0.0
Increase in valuation allowance .......... 2.9 0.0 0.0
Other .................................... 4.3 3.0 1.7
------ ------ ------
Effective income tax rate ..................... (24.3)% (24.0)% (37.5)%
====== ====== ======
9. Equity Interests
Merger With ITC Holding
In connection with the Merger (Note 1), holders of ITC Holding's common
stock and convertible preferred stock received 2.295225 shares of the Company's
Common Stock and Series A Convertible Preferred Stock. Fractional shares were
paid in cash.
Initial Public Offering
During October 1997, the Company completed the sale of 5,750,000 shares of
its Common Stock to the public at an offering price of $16.50 a share.
Employee Stock Option Plan
Upon the Reorganization, all employees of the Company became eligible to
receive stock options under the Company's 1997 Stock Option Plan, as amended
(the "Stock Option Plan"), which was adopted by the Company and approved by ITC
Holding on March 24, 1997.
The Stock Option Plan provides for the grant of options that are intended
to qualify as "incentive stock options" under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") to employees of the Company, its
subsidiaries, and ITC Holding, as well as the grant of non-qualifying options to
any other individual whose participation in the Stock Option Plan is determined
to be in the best interests of the Company. The Stock Option Plan authorizes the
issuance of up to 2,407,500 shares of the Company's Common Stock pursuant to
options granted under the Stock Option Plan (subject to antidilution adjustments
in the event of a stock split, recapitalization, or similar transaction). The
maximum number of shares subject to options that can be awarded under the Stock
Option Plan to any person is 802,500 shares. The Compensation Committee of the
Company's board of directors will administer the Stock Option Plan and will
grant options to purchase Common Stock.
The option exercise price for incentive stock options granted under the
Stock Option Plan may not be less than 100% of the fair market value of the
Common Stock on the date of grant of the option (or 110% in the case of an
incentive stock option granted to an optionee beneficially owning more than 10%
of the outstanding Common Stock). The option exercise price for non-incentive
stock options granted under the Stock Option Plan may not be less than the par
value of the Common Stock on the date of grant of the option. The maximum option
term is 10 years (or five years in the case of an incentive stock option granted
to an optionee beneficially owning more than 10% of the outstanding Common
Stock). There is also a $100,000 limit on the value of Common Stock (determined
at the time of grant) covered by incentive stock options that become exercisable
by an optionee in any year. Options granted will become exercisable with respect
to 50% of the shares subject to the options on the second anniversary of the
date of grant and with respect to 25% of the shares subject to the options on
each of the third and fourth anniversaries of the date of grant.
F-19
The Company's board of directors may amend or terminate the Stock Option
Plan with respect to shares of Common Stock as to which options have not been
granted.
On March 24, 1997 and July 29, 1997, the Company granted options to
purchase 1,266,345 shares and 168,933 shares, respectively, of Common Stock
under the Stock Option Plan. All options were granted at a price at least equal
to the estimated fair value of the common stock on the date of grant ($4.49) as
determined by the Company's board of directors based on equity transactions and
other analyses. Options to purchase an additional 48,251 shares of Common Stock
at $4.49 per share were granted on October 1, 1997. At December 31, 1997,
unamortized compensation expense of $555,348 is recorded as an offset to equity
in the accompanying balance sheet related to this option grant since the price
of the options was below fair market value. Compensation expense will be
recognized over the vesting period.
Following the Company's initial public offering, options to purchase an
additional 61,915 shares of Common Stock at $17.25 per share were granted on
October 28, 1997. The $17.25 per share represents the closing value of the
Company's stock on the date of grant.
Director Stock Option Plan
On March 24, 1997, the Company adopted and its stockholders approved the
Director Stock Option Plan (the "Director Plan"). The Director Plan provides for
the "formula" grant of options that are not intended to qualify as "incentive
stock options" under Section 422 of the Code to directors of the Company who are
not officers or employees of the Company or ITC Holding, (each an "Eligible
Director"). The Director Plan authorizes the issuance of up to 240,750 shares of
Common Stock pursuant to options granted under the Director Plan (subject to
antidilution adjustments in the event of a stock split, recapitalization, or
similar transaction). The option exercise price for options granted under the
Director Plan will be at least 100% of the fair market value of the shares of
Common Stock on the date of grant of the option. Under the Director Plan, each
Eligible Director will be granted an option to purchase 16,050 shares of Common
Stock upon such person's initial election or appointment to serve as director.
Options granted will become exercisable with respect to 50% of the shares
subject to the options on the second anniversary of the date of grant and with
respect to 25% of the shares subject to the options on each of the third and
fourth anniversaries of the date of grant. The options will expire ten years and
30 days after the date of grant.
On March 24, 1997, the Company granted options to purchase 16,050 shares of
its Common Stock to each of its six nonemployee directors. All options were
granted at a price equal to the estimated fair value of the common stock on the
date of grant ($4.49) as determined by the Company's board of directors based on
equity transactions and other analyses.
ITC Holding Stock Option Plan
Prior to the Merger, ITC Holding sponsored a stock option plan which
provided for the granting of stock options to substantially all employees of ITC
Holding and its wholly owned and majority owned subsidiaries, including the
Company. Options were generally granted at a price (established by ITC Holding's
board of directors based on equity transactions and other analyses) equal to at
least 100% of the fair market value of ITC Holding's common stock on the option
grant date. Options granted generally became exercisable 40% after two years and
20% per annum for the next three years and remained exercisable for ten years
after the option grant date. At December 31, 1996, employees of the Company held
outstanding options for a total of 314,768 of ITC Holding's shares at option
prices ranging from $7.60 to $30.50 per share. In connection with the Merger and
the related spinoff of ITC Holding's other subsidiaries, stock options
outstanding under ITC Holding's stock option plan were adjusted. Each ITC
Holding option holder received an option in
F-20
the spinoff entity and 2.295225 options in the Company (the "Replacement
Options"). All Replacement Options were at exercise prices that preserved the
economic benefit of the ITC Holding options at the spinoff and merger date. As a
result, options for 3,540,088 shares of the Company's Common Stock were issued
under the Stock Option Plan at exercise prices ranging from $0.31 per share to
$8.87 per share.
Statement of Financial Accounting Standards No. 123
The Company accounts for its stock based compensation plans under APB
Opinion No. 25, under which no compensation cost is recognized for options
granted with a strike price equal to the fair market value of the Company's
common stock at the grant date. The Company has computed, for pro forma
disclosure purposes, the value of all options for shares of common stock granted
to employees of the Company using the Black-Scholes option pricing model and the
following weighted average assumptions:
1997 1996 1995
---- ---- ----
Risk-free interest rate..... 6.0% 6.29% 5.33%
Expected dividend yield..... 0% 0% 0%
Expected lives.............. Ten years Ten years Ten years
Expected volatility......... 60% 50% 50%
The weighted average fair value of options and Replacement Options granted
to employees of the Company in 1995, 1996 and 1997 was $16.14, $19.65 and $14.67
per share, respectively. The total value of options and Replacement Options for
common stock granted to employees of the Company during 1995, 1996 and 1997 was
computed as approximately $257,000, $4,116,000 and $14,150,000 (including
approximately $7,700,000 related to the Replacement Options), respectively,
which would be amortized on a pro forma basis over the five-year vesting period
of the options. If the Company had accounted for these plans in accordance with
SFAS No. 123 ("Accounting for Stock Based Compensation"), the Company's net loss
for the years ended December 31, 1995, 1996 and 1997 would have increased as
follows:
1995 1996 1997
---- ---- ----
Net loss As Reported $(504,373) $(3,909,749) $(10,772,874)
Pro Forma $(595,987) $(5,469,440) $(20,414,911)
Basic and diluted net loss per share As Reported $ (0.03) $ (0.20) $ (0.54)
Pro Forma $ (0.03) $ (0.29) $ (1.01)
A summary of the status of the Company's portion of ITC Holding's stock option
plan through the date of the Merger is as follows:
Weighted Average
Price
Shares Per Share
------ ---------
Outstanding at December 31, 1994 94,925 $13.92
Granted 14,252 21.17
Forfeited (750) 14.35
-------
Outstanding at December 31, 1995 108,427 14.87
Granted 223,081 25.87
Exercised (840) 16.86
Forfeited (15,900) 24.55
-------
Outstanding at December 31, 1996 314,768 22.17
Granted 43,840 31.75
Exercised (6,500) 9.49
Forfeited (18,178) 25.81
-------
Outstanding at October 20, 1997 333,930 23.48
=======
F-21
A summary of the status of the Company's stock option plans at December 31, 1997
and changes during the period from inception on March 24, 1997 through
December 31, 1997 is as follows:
Weighted Average
Price
Shares Per Share
------ ---------
Assumed in the Merger 3,540,088 $4.36
Granted 1,641,642 4.94
Exercised (13,881) 2.69
Forfeited (37,738) 4.82
---------
Outstanding at December 31, 1997 5,130,111 4.66
=========
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date:
Weighted
Average Weighted Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise as of Contractual Exercise as of Exercise
Prices Dec. 31, 1997 Life Price Dec. 31, 1997 Price
------ ------------- ---- ----- ------------- -----
$0.31 - $1.08 692,658 3.38 $ 1.42 1,015,487 $ 1.04
$1.84 - $2.78 416,112 5.10 2.09 351,896 2.05
$3.48 - $4.88 2,420,133 8.52 4.34 193,321 3.97
$6.02 - $6.65 642,238 8.11 6.06 18,863 6.04
$7.30 - $8.87 897,055 9.19 7.81 -0- --
$17.25 61,915 9.82 17.25 -0- --
At December 31, 1997, 1,579,567 options for the Company's stock with a
weighted average price of $2.99 per share were exercisable by employees of the
Company. At December 31, 1996, 51,750 options for ITC Holding's stock with a
weighted average exercise price of $12.06 per share were exercisable by
employees of the Company. At December 31, 1995, 26,260 options for ITC Holding's
stock with a weighted average exercise price of $9.27 per share were exercisable
by employees of the Company.
10. Commitments and Contingencies
Purchase Commitments
At December 31, 1997, the Company had entered into agreements with vendors
to purchase approximately $9.8 million of equipment related to the improvement
and installation of switches, other network expansion efforts and certain
services.
Legal Proceedings
In the normal course of business, the Company is subject to various
litigation; however, in management's opinion and the opinion of counsel, there
are no legal proceedings pending against the Company which would have a material
adverse effect on the financial position, results of operations, or liquidity of
the Company.
11. Employee Benefit Plans
Employees of the Fiber Companies participated in ITC Holding's 401(k)
defined contribution plan. This plan covered all employees of the participating
entities who had one year of service and were at least 18 years of age. ITC
Holding contributed a discretionary amount of the employees'
F-22
earnings based on the plan's earnings. The discretionary contribution
percentages per employee for the years ended December 31, 1996 and 1995 were
2.66% and 2.53% (limited to a total for all participants of $150,000 and
$100,000 for 1996 and 1995, respectively), respectively, and were fully funded
by ITC Holding. No discretionary contributions were made for 1997. In addition,
the Fiber Companies offer a partial matching of employee contributions at a rate
of 1/2% for each 1% of the employee earnings contributed to a maximum match of
4% of employee earnings. Total matching contributions made to the plan and
charged to expense by the Fiber Companies for the years ended December 31, 1997,
1996 and 1995 were $84,014, $54,098, and $26,520, respectively.
Employees of DeltaCom participated in a separately administered 401(k)
defined contribution plan. The plan covers substantially all DeltaCom employees
with at least one year of service. Participants may elect to defer 15% of
compensation up to a maximum amount determined annually pursuant to Internal
Revenue Service regulations. DeltaCom has elected to provide matching employer
contributions equal to the lesser of 3% of compensation or the maximum amount
annually for each participant. DeltaCom's policy is to fund contributions as
earned. Company contributions made to the plan and charged to expense by
DeltaCom for the year ended December 31, 1997 were $199,104 and for the 11
months ended December 31, 1996 were $123,854.
Following the Merger, ITC Holding's 401(k) defined contribution plan became
the Company's plan. Effective January 1, 1998, the DeltaCom 401(k) plan was
merged into the Company's plan.
12. Related Party Transactions
Certain affiliates provide the Company with various services and/or receive
services provided by the Company. These entities include ITC Holding; Interstate
Telephone Company and Valley Telephone Company, which provide local and
long-distance telephone services; InterCall, Inc. ("InterCall"), which provides
conference calling services; and InterServ Services Corporation, which provides
operator services for "800" customer service numbers and full-service marketing
research in the telecommunications industry and other industries; Powertel,
Inc., formerly InterCel, Inc., which provides cellular services; KNOLOGY, which
provides cable television services; and MindSpring, which is a regional provider
of Internet access. In management's opinion, the Company's transactions with
these affiliated entities are generally representative of arm's-length
transactions.
For the years ended December 31, 1997, 1996, and 1995, the Company received
services from these affiliated entities in the amounts of $206,000, $243,162,
and $470,437, respectively, which are reflected in selling, operations, and
administration expenses in the Company's consolidated statements of operations.
In addition, in 1997 and 1996, the Company received services from these
affiliated entities in the amount of $238,000 and $762,173, respectively, which
are reflected in cost of services in the Company's consolidated statements of
operations.
The Fiber Companies provide operator and directory assistance services and
lease capacity on certain of their fiber routes to affiliated entities.
Beginning in 1996, DeltaCom also provided long-distance and related services to
ITC Holding and all of its wholly owned and majority-owned subsidiaries. Also
beginning in 1996, DeltaCom acted as an agent for InterCall and MindSpring in
contracting with major interexchange carriers to provide origination and
termination services. Under these agreements, DeltaCom contracts with the
interexchange carrier and rebills the appropriate access charges plus a margin
to InterCall and MindSpring, such that only the margin impacts the Company's
consolidated revenues. Total affiliated revenues included in the Company's
consolidated statements of operations for the years ended December 31, 1997,
1996, and 1995 were $7,995,000, $2,863,389, and $486,246, respectively.
F-23
DeltaCom had a contract with a former stockholder to provide management
services to DeltaCom in 1997 for $300,000 annually. In addition, DeltaCom leases
real properties from a former stockholder and entities controlled by the former
stockholder. Total rental expense related to these leases was approximately
$174,000 and $235,000 in 1997 and 1996, respectively. DeltaCom is obligated to
pay rentals to a former stockholder totaling approximately $180,000 annually
from 1998 through 2005 under leases which are cancelable by either of the
parties with 24 months' notice. DeltaCom is also obligated through 1999 to pay
annual rentals ranging from approximately $74,000 to $81,000 to an officer of a
former stockholder.
13. Acquisition of DeltaCom
On January 29, 1996 (the "Acquisition Date"), DeltaCom was purchased by ITC
Holding for total consideration of $71,362,213, including cash acquired of
$1,828,121 (the "Acquisition"). The consideration included $65,362,213 in cash
and $6,000,000 in common stock of ITC Holding. Simultaneously, ITC Holding
refinanced $8,643,384 of DeltaCom's outstanding debt by borrowing against its
own line of credit and contributing the proceeds to DeltaCom, which then repaid
all of its outstanding debt. The Acquisition was accounted for under the
purchase method of accounting, and the purchase accounting entries have been
"pushed down" to the Company's financial statements. The purchase price was
allocated to the underlying assets purchased and liabilities assumed based on
their estimated fair values at the Acquisition Date. The acquisition costs
exceeded the fair market value of net tangible assets acquired by $54,645,063,
of which $5,464,506 has been allocated to identifiable intangible assets and the
remainder has been recorded as goodwill in the accompanying consolidated balance
sheets. Amounts recorded in connection with the "pushdown" include the
$49,180,557 in goodwill, $5,464,506 in customer base, $74,005,598 in debt
related to the Acquisition and debt refinancing, and $6,000,000 in paid-in
capital. The operating results of DeltaCom have been included in the Company's
financial statements since the Acquisition Date.
The following table summarizes the net assets purchased in connection with
the Acquisition and the amount attributable to cost in excess of net assets
acquired:
Working capital, net of $1,828,121 cash acquired.......... $ 5,155,221
Property, plant, and equipment............................ 21,357,357
Other assets . ........................................... 198,920
Noncurrent liabilities.................................... (11,822,469)
Customer base............................................. 5,464,506
Goodwill.................................................. 49,180,557
----------
Purchase price, net of cash acquired...................... $ 69,534,092
=============
The common stock portion of the Acquisition has been accounted for as a
noncash transaction for purposes of the consolidated statements of cash flows.
The following pro forma information has been prepared assuming the
Acquisition occurred at the beginning of the respective periods. This
information includes pro forma adjustments related to the amortization of
goodwill resulting from the excess of the purchase price over the fair value of
the net assets acquired and interest expense related to the debt financing used
to acquire DeltaCom. The pro forma information is presented for informational
purposes only and may not be indicative of the results of operations as they
would have been had the Acquisition occurred at the beginning of the respective
periods, nor is the information necessarily indicative of the results of
operations which may occur in the future.
1996 1995
------------ ------------
Unaudited
Consolidated operating revenues....... $ 71,775,516 $ 62,021,598
Consolidated net loss................. (4,024,866) (1,826,756)
F-24
14. Acquisition of ViperNet
In July 1996, the Company purchased certain assets of ViperNet, which
provides business Internet services, for cash of $625,000 and assumption of
capital lease obligations in the amount of $171,683.
The following table summarizes the net assets purchased by the Company in
connection with its acquisition of ViperNet:
Working capital............................ $ 121,500
Property and equipment..................... 191,318
Noncompete agreement....................... 102,000
Customer base.............................. 381,865
Liabilities assumed........................ (171,683)
-----------
Cash paid for ViperNet net assets.......... $ 625,000
===========
The assumption of the capital lease obligations has been treated as a
noncash transaction for purposes of the consolidated statements of cash flows.
15. Acquisition of Gulf States
On March 27, 1997, ITC Holding purchased the remaining 64% interest in Gulf
States not previously owned, along with certain other fiber and fiber-related
assets, including a significant long-term customer contract (the "Georgia Fiber
Assets") for approximately $28 million, plus certain contingent consideration.
The purchase price included 588,411 shares of ITC Holding's Series A Convertible
Preferred Stock valued at approximately $17.9 million and an unsecured purchase
money note for approximately $10 million. The purchase price was allocated as
follows: $17 million to the 64% interest in Gulf States and $10.9 million to the
Georgia Fiber Assets. The note, bearing interest at 11%, was payable in ten semi
annual principal payments of approximately $1 million plus accrued interest,
beginning September 30, 1997. The contingent consideration is due no later than
April 30, 1998, at which time the Company will be obligated to deliver
additional preferred stock equal to 35.7% of 64%, multiplied by 6, multiplied by
the amount, if any, by which the earnings before interest, taxes, depreciation,
and amortization of Gulf States for the year ended December 31, 1997 exceed
$11,265,696. In October 1997, ITC Holding issued 56,742 shares of its Series A
Convertible Preferred Stock in connection with this earn-out provision. In
connection with the Merger, these shares were converted into 130,236 shares of
the Company's Series A Convertible Preferred Stock. The Company recorded
goodwill totaling approximately $7.5 million in connection with this
acquisition. No further payments under the contingent consideration provision
are currently expected.
Upon the closing of these acquisitions, ITC Holding contributed the 64%
ownership interest in Gulf States to GSTS and the Georgia Fiber Assets to
FiberNet. The Gulf States partnership has been dissolved. The note was repaid in
full in November 1997.
F-25
16. Segment Reporting
Upon the acquisition of DeltaCom in January 1996 (Note 13), the Company
began operating in two business segments: Carriers' Carrier Services and Retail
Services. Retail Services are provided by DeltaCom and include the retail sale
of long-distance, data, and Internet services, including the sale and
installation of customer premises equipment primarily to midsized and major
regional business customers. Carriers' Carrier Services are provided by the
Fiber Companies. Carriers' Carrier Services include the sale of long-haul
private line services on a wholesale basis using the Fiber Companies' owned and
managed fiber-optic network. Summarized financial data by business segment for
the years ended December 31, 1997 and 1996 and as of December 31, 1997 and 1996
are as follows:
1997
--------------------------------------------------------------------------------
Carriers'
Carrier Retail Corporate
Segment Segment Segment Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
Sales to external customers ..................... $ 31,024,054 $ 83,565,944 $ 0 $ 0 $ 114,589,998
Intersegment sales .............................. 3,673,008 2,727,894 0 (6,400,902) 0
------------- ------------- ------------- ------------- -------------
Total operating revenues ................... 34,697,062 86,293,838 0 (6,400,902) 114,589,998
------------- ------------- ------------- ------------- -------------
Gross margin .................................... 28,060,966 32,303,617 0 (324,933) 60,039,650
Selling, operations, and administration expense . 8,401,158 30,178,668 0 (324,933) 38,254,893
Depreciation and amortization ................... 12,077,349 6,255,102 0 0 18,332,451
Other income (expense), net ..................... 4,251,088
Interest expense ................................ (21,367,351)
-------------
Loss before income taxes, preacquisition
losses and extraordinary item ................... $ (13,663,957)
=============
Identifiable assets ............................. $ 192,820,282 $ 106,674,319 $ 87,062,726 $ (452,850) $ 386,104,477
============= ============= ============= ============= =============
Capital expenditures ............................ $ 27,463,550 $ 16,410,440 $ 0 $ 0 $ 43,873,990
============= ============= ============= ============= =============
1996
---------------------------------------------------------------------
Carriers'
Carrier Retail
Segment Segment Eliminations Consolidated
------------- ------------- ------------- -------------
Sales to external customers ............................. $ 6,598,709 $ 59,919,876 $ 0 $ 66,518,585
Intersegment sales ...................................... 558,312 1,553,445 (2,111,757) 0
------------- ------------- ------------- -------------
Total operating revenues ........................... 7,157,021 61,473,321 (2,111,757) 66,518,585
------------- ------------- ------------- -------------
Gross margin ............................................ 3,256,596 24,325,559 180,143 27,762,298
Selling, operations, and administration expense ......... 1,646,277 17,050,152 180,143 18,876,572
Depreciation and amortization ........................... 1,656,685 4,781,389 0 6,438,074
Equity in losses of Gulf States ......................... (1,589,812) 0 0 (1,589,812)
Other income (expense), net ............................. 171,514
Interest expense ........................................ (6,172,421)
-------------
Loss before income taxes ................................ $ (5,143,067)
=============
Identifiable assets ..................................... $ 14,597,073 $ 91,592,697 $ (406,588) $ 105,783,182
Investment in net assets of Gulf States ................. 7,424,797 0 0 7,424,797
------------- ------------- ------------- -------------
Total assets ............................................ $ 22,021,870 $ 91,592,697 $ (406,588) $ 113,207,979
============= ============= ============= =============
Capital expenditures .................................... $ 1,101,181 $ 5,071,479 $ 0 $ 6,172,660
============= ============= ============= =============
17. Subsequent Events
Debt Offering and Modification to Credit Agreement
The Company issued $160 million principal amount of senior notes due 2008
at 99.9% during the first quarter of 1998 (the "1998 Senior Notes Offering").
These notes have an interest rate of 8-7/8% and pay interest semiannually on
March 1 and September 1.
Proceeds from the 1998 Senior Notes Offering will be used for additional
network facilities, and for other general corporate purposes.
F-26
In connection with the 1998 Senior Notes Offering, the Company modified its
Credit Agreement to reduce the available credit to $50 million and to amend
and/or delete various covenants. Due to the proceeds to be received from the
1998 Senior Notes Offering, the Company's interest rate swap agreement (Note 6)
no longer may be accounted for as a hedge of an anticipated transaction, but
rather becomes a trading security. This change in classification required the
Company to record the payable related to the interest rate swap agreement on the
consolidated balance sheet at fair market value at the time of the receipt of
the proceeds from the 1998 Senior Notes Offering. The loss, charged against
earnings, was approximately $2.5 million. The interest rate swap agreement will
be marked to market at each subsequent balance sheet date, with periodic
payments (receipts) included in interest expense.
Planned Redemption
On March 2, 1998, the Company announced its intention to redeem $70 million
principal amount of its 11% Senior Notes due 2007, at a redemption price of 111%
of the principal amount thereof, plus accrued and unpaid interest, with the
proceeds from the Company's initial public offering (Note 9). The Company
estimates that it will record an extraordinary loss of approximately $10.7
million related to the early redemption of this debt.
Acquisition
On March 18, 1998, the Company announced the signing of a definitive
agreement to acquire certain assets and liabilities of IT Group, a Jackson,
Mississippi-based interexchange carrier. The Company will issue an estimated
110,000 shares of common stock and assume liabilities of approximately $1.0
million to consummate the transaction. Closing of the acquisition is subject to
customary conditions, including the receipt of required regulatory approvals,
and is expected by May 1998.
F-27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of ITC/\DELTACOM, INC. and SUBSIDIARIES
included in this Form 10-K and have issued our report thereon dated February 23,
1998 (except with respect to Note 17, as to which the date is March 18, 1998).
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 23, 1998
ITC/\DELTACOM, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFICATION ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
ADDITIONS
BALANCE AT -------------------------------- BALANCE AT
BEGINNING CHARGED TO CHARGED TO END OF
DESCRIPTION OF PERIOD INCOME OTHER ACCOUNTS DEDUCTIONS PERIOD
- ----------- --------- ------ -------------- ---------- ------
Provision for uncollect-
ible accounts
1995 .......................... $ 81,411 $ 377,116 $ 0 $ 422,740(3) $ 35,787
1996 .......................... $ 35,787 $ 458,210 $1,209,329(1) $ 846,468(3) $ 856,858
1997 .......................... $ 856,858 $ 801,339 $ 24,006(2) $ 621,361(3) $1,060,842
- ----------
Notes:
(1) Represents a purchased reserve related to the acquisition of DeltaCom, Inc.
(2) Represents a purchased reserve related to the acquisition of the remaining
interest in Gulf States FiberNet.
(3) Represents write-off of accounts considered to be uncollectible, less
recoveries of amounts previously written off.
S-1
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
3.1 Certificate of Incorporation of ITC/\DeltaCom, Inc. (filed as
Exhibit 3.1 to Registration Statement on Form S-1, as amended,
File No. 333-36683 ("Form S-1") and incorporated herein by
reference).
3.2 Amended and Restated Bylaws of ITC/\DeltaCom, Inc. (filed as
Exhibit 3.2 to Form S-1 and incorporated herein by reference).
4.1 Form of Common Stock Certificate of ITC/\DeltaCom, Inc. (filed as
Exhibit 4.1 to Form S-1 and incorporated herein by reference).
4.2 Indenture dated March 3, 1998 between ITC/\DeltaCom, Inc. and
United States Trust Company of New York, as Trustee, relating to
the 8-7/8% Senior Notes Due 2008 of ITC/\DeltaCom, Inc.
4.3 Registration Rights Agreement, dated March 3, 1998, among
ITC/\DeltaCom, Inc. and Morgan Stanley & Co. Incorporated,
Salomon Brothers Inc and NationsBanc Montgomery Securities LLC.
4.4 Form of Initial Global 8-7/8% Note Due 2008.
10.1 Capacity Agreement dated as of February 1, 1997 between
Interstate FiberNet and Entergy Technology Company (filed as
Exhibit 10.1 to Registration Statement on Form S-4, as amended,
File No. 333-31361 ("Form S-4") and incorporated herein by
reference).
10.2 License Agreement dated February 1, 1997 between Interstate
FiberNet and Metropolitan Atlanta Rapid Transit Authority (filed
as Exhibit 10.2 to Form S-4 and incorporated herein by
reference).
10.3 Supply Agreement for Transmission Equipment dated March 26, 1993
between Interstate FiberNet and Northern Telecom, Inc. (filed as
Exhibit 10.3 to Form S-4 and incorporated herein by reference).
10.3.1 Network Products Purchase Agreement, dated as of December 24,
1997, by and between Interstate FiberNet, Inc. and Northern
Telecom, Inc.
10.4 First Amendment to Supply Agreement for Transmission Equipment
dated as of September 9, 1993 between Interstate FiberNet and
Northern Telecom, Inc. (filed as Exhibit 10.4 to Form S-4 and
incorporated herein by reference).
10.5 Second Amendment to Supply Agreement for Transmission Equipment
dated as of January 19, 1994 between Interstate FiberNet and
Northern Telecom, Inc. (filed as Exhibit 10.5 to Form S-4 and
incorporated herein by reference).
10.6 Sixth Amendment to Supply Agreement for Transmission Equipment
dated as of November 21, 1996 between Interstate FiberNet and
Northern Telecom, Inc. (which supersedes the Third and the Fourth
Amendment to this Agreement) (filed as Exhibit 10.6 to Form S-4
and incorporated herein by reference).
10.7 Seventh Amendment to Supply Agreement for Transmission Equipment
dated as of April 15, 1997 between Interstate FiberNet and
Northern Telecom, Inc. (which supersedes the Fifth Amendment to
this Agreement) (filed as Exhibit 10.7 to Form S-4 and
incorporated herein by reference).
10.8 Master Capacity Lease dated July 22, 1996 between Interstate
FiberNet and Intercel PCS Services, Inc. (filed as Exhibit 10.8
to Form S-4 and incorporated herein by reference).
10.9 First Amendment to Master Capacity Lease dated as of August 22,
1996 between Interstate FiberNet and InterCel PCS Services, Inc.
(filed as Exhibit 10.9 to Form S-4 and incorporated herein by
reference).
10.10 Amended and Restated Loan Agreement dated as of March 27, 1997 by
and
1
among Gulf States Transmission Systems, Inc., the Lenders parties
thereto and NationsBank, N.A. (filed as Exhibit 10.10 to Form S-4
and incorporated herein by reference).
10.11 Promissory Note dated March 27, 1997 between Gulf States
Transmission Systems, Inc. and NationsBank, N.A. (filed as
Exhibit 10.11 to Form S-4 and incorporated herein by reference).
10.12 Amended and Restated Security Agreement dated as of March 27,
1997 between Gulf States FiberNet and Gulf States Transmission
Systems, Inc. and NationsBank, N.A. (filed as Exhibit 10.12 to
Form S-4 and incorporated herein by reference).
10.13 Assignment and Assumption Agreement dated as of March 27, 1997
between Gulf States FiberNet and Gulf States Transmission
Systems, Inc. (filed as Exhibit 10.13 to Form S-4 and
incorporated herein by reference).
10.14 Term Agreement dated as of August 11, 1994 between Gulf States
FiberNet and Illinois Central Railroad Company (filed as Exhibit
10.14 to Form S-4 and incorporated herein by reference).
10.15 Revised and Restated Fiber Optic Facilities and Services
Agreement dated as of June 9, 1995 among Southern Development and
Investment Group, Inc., on behalf of itself and as agent for
Alabama Power Company, Georgia Power Company, Gulf Power Company,
Mississippi Power Company, Savannah Electric and Power Company,
Southern Electric Generating Company and Southern Company
Services, Inc. and MPX Systems, Inc., which was assigned in part
by MPX Systems, Inc. to Gulf States FiberNet pursuant to an
Assignment dated as of July 25, 1995 (filed as Exhibit 10.15 to
Form S-4 and incorporated herein by reference).
10.15.1 Release, Waiver, and Assumption Agreement, dated as of December
31, 1997, between Southern Development Investment Group, Inc., on
behalf of itself and as agent for Alabama Power Company, Georgia
Power Company, Gulf Power Company, Mississippi Power Company,
Savannah Electric and Power Company, Southern Electric Generating
Company and Southern Company Services, Inc. and Interstate
FiberNet, Inc. and Gulf States Transmission Systems, Inc.
10.16 First Amendment to Revised and Restated Fiber Optic Facilities
and Services Agreement dated as of July 24, 1995 between Southern
Development and Investment Group, Inc. on behalf of itself and as
agent for others and MPX Systems, Inc. (filed as Exhibit 10.16 to
Form S-4 and incorporated herein by reference).
10.17 Partial Assignment and Assumption of Revised and Restated Fiber
Optic Facilities and Services Agreement dated July 25, 1995
between MPX Systems, Inc. and Gulf States FiberNet (filed as
Exhibit 10.17 to Form S-4 and incorporated herein by reference).
+10.17.1 Amendment to Revised and Restated Fiber Optic Facilities and
Services Agreement, dated July 15, 1997, by and among Southern
Development and Investment Group, Inc., on behalf of itself and
its agent for Alabama Power Company, Georgia Power Company, Gulf
Power Company, Mississippi Power Company, Savannah Electric and
Power Company, Southern Electric Generating Company and Southern
Company Services, Inc. (collectively "SES"), ITC Transmission
Systems, Inc. (as managing partner of Interstate Fibernet) and
Gulf States Transmission Systems, Inc. (filed as Exhibit 10.17.1
to Form S-4 and incorporated herein by reference).
10.18 Consent for Assignment of Interest dated February 20, 1997 among
SCANA Communications, Inc., Gulf States FiberNet, Gulf States
Transmission Systems, Inc. and Southern Development and
Investment Groups, Inc. (filed as Exhibit 10.18 to Form S-4 and
incorporated herein by reference).
10.19 Second Partial Assignment and Assumption of Revised and Restated
Fiber Optic
2
Facilities and Services Agreement dated March 27, 1997 between
SCANA Communications, Inc. and ITC Holding Company, Inc. (filed
as Exhibit 10.19 to Form S-4 and incorporated herein by
reference).
10.20 Fiber System Lease Agreement dated January 30, 1996 between CSW
Communications, Inc. and Gulf States FiberNet (filed as Exhibit
10.20 to Form S-4 and incorporated herein by reference).
10.21 Consent for Acquisition and Assignment dated January 13, 1997
between CSW Communications, Inc. and Gulf States FiberNet (filed
as Exhibit 10.21 to Form S-4 and incorporated herein by
reference).
10.22 Agreement for the Provision of Fiber Optic Services and
Facilities dated April 21, 1986 between SouthernNet, Inc. and MPX
Systems, Inc. (filed as Exhibit 10.22 to Form S-4 and
incorporated herein by reference).
10.23 First Amendment to Agreement for the Provision of Fiber Optic
Services and Facilities dated May 8, 1992 between MPX Systems,
Inc. and MCI Telecommunications Corporation (filed as Exhibit
10.23 to Form S-4 and incorporated herein by reference).
10.24 Second Amendment to Agreement for the Provision of Fiber Optic
Services and Facilities dated January 30, 1996 between MPX
Systems, Inc. and MCI Telecommunications Corporation (filed as
Exhibit 10.24 to Form S-4 and incorporated herein by reference).
10.25 Network Operating Agreement dated March 25, 1996 among Gulf
States FiberNet, TriNet, Inc., Hart Communications, Inc. and
SCANA Communications, Inc. (f/k/a MPX Systems, Inc.) (filed as
Exhibit 10.25 to Form S-4 and incorporated herein by reference).
10.26 Agreement for the Provision of Fiber Optic Facilities and
Services dated March 29, 1990 between Alabama Power Company and
Southern Interexchange Facilities, Inc. (filed as Exhibit 10.26
to Form S-4 and incorporated herein by reference).
10.27 Amendment to the Agreement for Provision of Fiber Optic
Facilities and Services dated March 29, 1990 between Alabama
Power Company and Southern Interexchange Facilities, Inc. (filed
as Exhibit 10.27 to Form S-4 and incorporated herein by
reference).
10.28 First Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated March 22, 1991 between Alabama
Power Company and Southern Interexchange Facilities, Inc. (filed
as Exhibit 10.28 to Form S-4 and incorporated herein by
reference).
10.29 Second Amendment to the Agreement for the Provision of Fiber
Optic Facilities and Services dated December 1, 1991 between
Alabama Power Company and Southern Interexchange Facilities, Inc.
(filed as Exhibit 10.29 to Form S-4 and incorporated herein by
reference).
10.30 Third Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated September 23, 1992 between Alabama
Power Company and Southern Interexchange Facilities, Inc. (filed
as Exhibit 10.30 to Form S-4 and incorporated herein by
reference).
10.31 Fourth Amendment to the Agreement for the Provision of Fiber
Optic Facilities and Services dated January 1, 1994 between
Alabama Power Company and Southern Interexchange Facilities, Inc.
(filed as Exhibit 10.31 to Form S-4 and incorporated herein by
reference).
10.32 Agreement dated March 6, 1990 between Tennessee Valley Authority
and Consolidated Communications Corporation (predecessor to
DeltaCom, Inc.) (filed as Exhibit 10.32 to Form S-4 and
incorporated herein by reference).
10.32.1 Supplement Agreement; Leased Fiber Pathways, dated as of
September 26, 1997, by and between Tennessee Valley Authority and
DeltaCom, Inc.
10.33 Interconnection Agreement signed March 12, 1997 between DeltaCom,
Inc. and
3
BellSouth Telecommunications, Inc. (filed as Exhibit 10.33 to
Form S-4 and incorporated herein by reference).
10.34 Amendment to Interconnection Agreement relating to BellSouth
loops dated March 12, 1997 between DeltaCom, Inc. and BellSouth
Telecommunications, Inc. (filed as Exhibit 10.34 to Form S-4 and
incorporated herein by reference).
10.35 Amendment to Interconnection Agreement relating to resale of
BellSouth services dated March 12, 1997 between DeltaCom, Inc.
and BellSouth Telecommunications, Inc. (filed as Exhibit 10.35 to
Form S-4 and incorporated herein by reference).
10.35.1 Third Amendment to Interconnection Agreement, dated March 12,
1997, by and between DeltaCom, Inc. and BellSouth
Telecommunications, Inc. (filed as Exhibit 10.35.1 to Form S-4
and incorporated herein by reference).
10.35.2 Fourth Amendment to Interconnection Agreement, dated August 22,
1997, by and between DeltaCom, Inc. and BellSouth
Telecommunications, Inc. (filed as Exhibit 10.35.2 to Form S-4
and incorporated herein by reference).
10.35.3 Amendment to Interconnection Agreement, dated October 3, 1997, by
and between DeltaCom, Inc. and BellSouth Telecommunications, Inc.
(filed as Exhibit 10.35.3 to Form S-1 and incorporated herein by
reference).
10.36 Master Equipment Lease Agreement dated October 30, 1995 between
AT&T Systems Leasing Co. and DeltaCom, Inc. (filed as Exhibit
10.36 to Form S-4 and incorporated herein by reference).
10.37 Network Products Purchase Agreement dated January 24, 1996, as
amended through March 4, 1997, between DeltaCom, Inc. and
Northern Telecom, Inc. (filed as Exhibit 10.37 to Form S-4 and
incorporated herein by reference).
10.38 First Amendment to Product Attachment Carrier Network Products,
dated May 20, 1997 (filed as Exhibit 10.38 to Form S-4 and
incorporated herein by reference).
10.39 Agreement for Use of Optical Fiber System, Microwave Radio Tower
Site and Associated Facilities dated January 2, 1996 between
DeltaCom, Inc. and SCI Systems, Inc. (filed as Exhibit 10.39 to
Form S-4 and incorporated herein by reference).
10.40 Collocate Agreement dated January 7, 1991 between Williams
Telecommunications Services, Inc., and Southern Interexchange
Facilities, Inc. (including consent for change of control) (filed
as Exhibit 10.40 to Form S-4 and incorporated herein by
reference).
10.41 Agreement dated January 14, 1997 between DeltaCom, Inc. and SCANA
Communications, Inc., for switch location in Columbia, South
Carolina (filed as Exhibit 10.41 to Form S-4 and incorporated
herein by reference).
10.42 Lease Agreement dated January 1, 1996 between Brindlee Mountain
Telephone Company and DeltaCom, Inc. for, among other purposes,
switch location in Arab, Alabama (filed as Exhibit 10.42 to Form
S-4 and incorporated herein by reference).
10.43 Promissory Note dated March 27, 1997 between ITC Holding Company,
Inc. and SCANA Communications, Inc. (filed as Exhibit 10.43 to
Form S-4 and incorporated herein by reference).
+ 10.44 Agreement for the Provision of Telecommunications Services and
Facilities, dated January 27, 1996, by and between Interstate
FiberNet, Inc. and Carolinas FiberNet, LLC (filed as Exhibit
10.44 to Form S-4 and incorporated herein by reference).
++ 10.44.1 First Amendment to the Agreement for the Provision of
Telecommunications Services and Facilities, dated as of September
1, 1997, by and between Interstate FiberNet, Inc. and Carolinas
FiberNet, LLC.
+ 10.45 Fiber Optic Facilities Agreement, dated November 15, 1996, by and
between Interstate FiberNet and Florida Power Corporation (filed
as Exhibit 10.45 to Form S-4 and incorporated herein by
reference).
4
+ 10.46 Fiber Optic Capacity Marketing and Operating Agreement, dated
March 21, 1996, by and between Interstate FiberNet and Florida
Power & Light Company (filed as Exhibit 10.46 to Form S-4 and
incorporated herein by reference).
+ 10.47 Addendum to Fiber Optic Capacity Marketing and Operating
Agreement, dated July 10, 1997, by and between Interstate
FiberNet and Florida Power & Light Company (filed as Exhibit
10.47 to Form S-4 and incorporated herein by reference).
+ 10.48 Master Service Agreement, dated May 6, 1996, by and between
Interstate FiberNet and MCI Telecommunications Corporation (filed
as Exhibit 10.48 to Form S-4 and incorporated herein by
reference).
+ 10.49 Telecommunications System Maintenance Agreement, dated as of
January 26, 1995, by and between Interstate FiberNet and Sprint
Communications Company L.P. (filed as Exhibit 10.49 to Form S-4
and incorporated herein by reference).
+ 10.50 Sprint Communications Company Facilities and Services Agreement,
dated January 26, 1995, by and between Interstate FiberNet and
Sprint Communications Company L.P. (filed as Exhibit 10.50 to
Form S-4 and incorporated herein by reference).
+ 10.51 Fiber Optic Facility Lease Agreement, dated as of January 31,
1997, by and between Interstate FiberNet and Southern Telecom 1,
Inc. (filed as Exhibit 10.51 to Form S-4 and incorporated herein
by reference).
10.52 First Assignment and Assumption of Fiber Optic Facility Lease
Agreement, dated February 1, 1997, by and between Interstate
FiberNet and Gulf States FiberNet (filed as Exhibit 10.52 to Form
S-4 and incorporated herein by reference).
+ 10.53 Telecommunications System Agreement, dated January 26, 1995, by
and between Interstate FiberNet and Sprint Communications Company
L.P. (filed as Exhibit 10.53 to Form S-4 and incorporated herein
by reference).
10.54 Amendment to Telecommunications System Agreement, dated July 25,
1995, by and between Gulf States FiberNet and Sprint
Communications Company L.P. (filed as Exhibit 10.54 to Form S-4
and incorporated herein by reference).
+ 10.55 Amendment No. 2 to Telecommunications System Agreement, dated
August 8, 1996, by and between Gulf States FiberNet and Sprint
Communications Company L.P. (filed as Exhibit 10.55 to Form S-4
and incorporated herein by reference).
+ 10.56 Assignment of the Telecommunications System Agreement, dated July
25, 1995, between Interstate FiberNet, Gulf States FiberNet and
Sprint Communications Company L.P. (filed as Exhibit 10.56 to
Form S-4 and incorporated herein by reference).
+ 10.57 Assignment of the Telecommunications System Agreement, dated
February 27, 1997, between Sprint Communications Company L.P.,
Gulf States FiberNet and Gulf States Transmission Systems, Inc.
(filed as Exhibit 10.57 to Form S-4 and incorporated herein by
reference).
10.58 Fixed Fee Agreement for Exchange of Use and Maintenance of Six
(6) Fiber Optic Fibers with an Option of Two (2) Additional Fiber
Optic Fibers, dated July 25, 1997, by and between Interstate
FiberNet, Gulf States Transmission Systems, Inc. and ALLTEL
Telephone Services Corporation. (filed as Exhibit 10.58 to Form
S-4 and incorporated herein by reference).
+ 10.59 MCI Carrier Agreement, effective August 1, 1995, by and between
MCI Telecommunications Corporation and Associated Communications
Companies of America (ACCA) (filed as Exhibit 10.59 to Form S-4
and incorporated herein by reference).
+ 10.60 First Amendment to MCI Carrier Agreement, dated as of March 20,
1996, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.60 to Form
5
S-4 and incorporated herein by reference).
+ 10.61 Third Amendment to MCI Carrier Agreement, dated as of August 1,
1996, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.61 to Form S-4 and incorporated herein by reference).
10.62 Fourth Amendment to MCI Carrier Agreement dated as of May 1,
1996, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.62 to Form S-4 and incorporated herein by reference).
+ 10.63 Fifth Amendment to MCI Carrier Agreement, dated as of April 10,
1996, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.63 to Form S-4 and incorporated herein by reference).
+ 10.64 Sixth Amendment to MCI Carrier Agreement, dated as of September
11, 1996, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.64 to Form S-4 and incorporated herein by reference).
+ 10.65 Seventh Amendment to MCI Carrier Agreement, dated as of August 1,
1996, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.65 to Form S-4 and incorporated herein by reference).
+ 10.66 Eighth Amendment to MCI Carrier Agreement, effective March 1,
1997, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.66 to Form S-4 and incorporated herein by reference).
+ 10.67 Ninth Amendment to MCI Carrier Agreement, dated as of May
15, 1997, by and between MCI Telecommunications Corporation and
Associated Communications Companies of America (ACCA) (filed as
Exhibit 10.67 to Form S-4 and incorporated herein by reference).
10.68 Tenth Amendment to MCI Carrier Agreement, dated July 11, 1997, by
and between MCI Telecommunications Corporation and Associated
Communications Companies of America (ACCA) (filed as Exhibit
10.68 to Form S-4 and incorporated herein by reference).
+ 10.69 Switched Reseller Services Agreement, dated January 25,
1994, by and between DeltaCom, Inc. and Allnet Communication
Services, Inc. (filed as Exhibit 10.69 to Form S-4 and
incorporated herein by reference).
+ 10.70 WilTel, Inc. Carrier Digital Services Agreement, dated
September 1, 1995, by and between WorldCom Network Services, Inc.
D/b/a WilTel, Associated Communications Companies of America
(ACCA) and the individual members of ACCA referenced therein
(filed as Exhibit 10.70 to Form S-4 and incorporated herein by
reference).
+ 10.71 Amendment to WilTel, Inc. Carrier Digital Services Agreement,
dated April 1, 1996, by and between WorldCom Network Services,
Inc. d/b/a/ WilTel, Associated Communications Companies of
America (ACCA) and the individual members of ACCA referenced
therein (filed as Exhibit 10.71 to Form S-4 and incorporated
herein by reference).
+ 10.72 Amendment No. 2 to WilTel, Inc. Carrier Digital Services
Agreement, dated June 1, 1996, by and between WorldCom Network
Services, Inc. d/b/a/ WilTel, Associated Communications Companies
of America (ACCA) and the individual members of ACCA referenced
therein (filed as Exhibit 10.72 to Form S-4 and incorporated
herein by reference).
+ 10.73 Amendment No. 3 to WilTel, Inc. Carrier Digital Services
Agreement, dated May 1, 1997, by and between WorldCom Network
Services, Inc. d/b/a/ WilTel, Associated Communications Companies
of America (ACCA) and the individual
6
members of ACCA referenced therein (filed as Exhibit 10.73 to
Form S-4 and incorporated herein by reference).
+ 10.74 Marketing and Operating Agreement, dated as of October 6,
1994, by and between Interstate FiberNet and DukeNet
Communications, Inc. (filed as Exhibit 10.74 to Form S-4 and
incorporated herein by reference).
+ 10.75 Reseller Agreement, dated June 25, 1997, by and between
DeltaCom, Inc. and Total Network Services, a division of Cable &
Wireless, Inc. (filed as Exhibit 10.75 to Form S-4 and
incorporated herein by reference).
10.76 Sublease Agreement, dated as of January 1, 1995, by and between
ITC Holding Company, Inc. and ITC Transmission Systems, Inc.
(filed as Exhibit 10.76 to Form S-4 and incorporated herein by
reference).
10.77.1 $100,000,000 Credit Agreement, dated as of September 17, 1997,
among Interstate FiberNet, Inc., NationsBank of Texas, N.A. as
Administrative Lender, and certain other Lenders identified
therein (the "IFN Credit Agreement") (filed as Exhibit 10.77 to
Form S-4 and incorporated herein by reference).
10.77.2 First Amendment to Credit Agreement, dated as of October 20,
1997, among Interstate FiberNet, Inc., NationsBank of Texas, N.A.
as Administrative Lender, and certain other Lenders identified
therein (filed as Exhibit 10.77.2 to Form S-1 and incorporated
herein by reference).
10.77.3 First Amended and Restated Credit Agreement, dated as of February
24, 1998, among Interstate FiberNet, Inc., NationsBank of Texas,
N.A. as Administrative Lender, and certain other Lenders
identified therein.
10.78.1 $8,750,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
NationsBank of Texas, N.A. (filed as Exhibit 10.78.1 to Form S-4
and incorporated herein by reference).
10.78.2 $3,750,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
Amsouth Bank (filed as Exhibit 10.78.2 to Form S-4 and
incorporated herein by reference).
10.78.3 $5,000,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
Creditanstalt-Bankverein (filed as Exhibit 10.78.3 to Form S-4
and incorporated herein by reference).
10.78.4 $5,000,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
Meespierson Capital Corp. (filed as Exhibit 10.78.4 to Form S-4
and incorporated herein by reference).
10.78.5 $5,000,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
State Street Bank and Trust Company (filed as Exhibit 10.78.5 to
Form S-4 and incorporated herein by reference).
10.78.6 $7,500,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
Corestates Bank, N.A. (filed as Exhibit 10.78.6 to Form S-4 and
incorporated herein by reference).
10.78.7 $2,500,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
First Union National Bank (filed as Exhibit 10.78.7 to Form S-4
and incorporated herein by reference).
10.78.8 $5,000,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
Regions Bank (filed as Exhibit 10.78.8 to Form S-4 and
incorporated herein by reference).
10.78.9 $7,500,000 Revolving Promissory Note, dated as of September 17,
1997, made by Interstate FiberNet, Inc. payable to the order of
Toronto Dominion (Texas), Inc. (filed as Exhibit 10.78.9 to Form
S-4 and incorporated herein by reference).
10.79.1 $8,750,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of
NationsBank of Texas, N.A. (filed as Exhibit 10.79.1 to Form S-4
and incorporated herein by reference).
10.79.2 $5,000,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of
Creditanstalt-Bankverein (filed as Exhibit 10.79.2 to Form S-4
and incorporated herein by reference).
10.79.3 $5,000,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of
Meespierson Capital Corp. (filed
7
as Exhibit 10.79.3 to Form S-4 and incorporated herein by
reference).
10.79.4 $5,000,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of State
Street Bank and Trust Company (filed as Exhibit 10.79.4 to Form
S-4 and incorporated herein by reference).
10.79.5 $7,500,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of
Corestates Bank, N.A. (filed as Exhibit 10.79.5 to Form S-4 and
incorporated herein by reference).
10.79.6 $2,500,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of First
Union National Bank (filed as Exhibit 10.79.6 to Form S-4 and
incorporated herein by reference)
10.79.7 $5,000,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of Regions
Bank (filed as Exhibit 10.79.7 to Form S-4 and incorporated
herein by reference).
10.79.8 $7,500,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of Toronto
Dominion (Texas), Inc. (filed as Exhibit 10.79.8 to Form S-4 and
incorporated herein by reference).
10.79.9 $3,750,000 Term Promissory Note, dated as of September 17, 1997,
made by Interstate FiberNet, Inc. payable to the order of Amsouth
Bank (filed as Exhibit 10.79.9 to Form S-4 and incorporated
herein by reference).
10.80.1 Security Agreement, dated as of September 17, 1997, made by
Interstate FiberNet, Inc. in favor of NationsBank of Texas, N.A.,
as Administrative Lender, and each other lender party to the IFN
Credit Agreement (filed as Exhibit 10.80.1 to Form S-4 and
incorporated herein by reference).
10.80.2 Security Agreement, dated as of September 17, 1997, made by
DeltaCom, Inc. in favor of NationsBank of Texas, N.A., as
Administrative Lender, and each other lender party to the IFN
Credit Agreement (filed as Exhibit 10.80.2 to Form S-4 and
incorporated herein by reference).
10.80.3 Security Agreement, dated as of September 17, 1997, made by Gulf
States Transmission Systems, Inc. in favor of NationsBank of
Texas, N.A., as Administrative Lender, and each other lender
party to the IFN Credit Agreement (filed as Exhibit 10.80.3 to
Form S-4 and incorporated herein by reference).
10.81 Placement Agreement, dated as of May 29, 1997, among
ITC/\DeltaCom, Inc. and Morgan Stanley & Co. Incorporated,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, First Union
Capital Markets Corp. and NationsBanc Capital Markets, Inc.
(filed as Exhibit 1.1 to Form S-4 and incorporated herein by
reference).
10.82.1 Indenture, dated as of June 3, 1997, between ITC/\DeltaCom, Inc.
and United States Trust Company of New York, as Trustee, relating
to the 11% Senior Notes due 2007 of ITC/\DeltaCom, Inc. (filed as
Exhibit 4.1 to Form S-4 and incorporated herein by reference).
10.82.2 Supplemental Indenture, dated as of October 17, 1997, between
ITC/\DeltaCom, Inc. and United States Trust Company of New York,
as Trustee (filed as Exhibit 82.2 to Form S-1 and incorporated
herein by reference).
10.83 Registration Rights Agreement, dated June 3, 1997, among
ITC/\DeltaCom, Inc. and Morgan Stanley & Co. Incorporated,
Merrill Lynch & Co., First Union Capital Markets Corp. and
NationsBanc Capital Markets, Inc. (filed as Exhibit 4.2 to Form
S-4 and incorporated herein by reference).
10.84 Pledge and Security Agreement dated as of June 3, 1997 from
ITC/\DeltaCom, Inc. as Pledgor to United States Trust Company of
New York as Trustee (filed as Exhibit 4.3 to Form S-4 and
incorporated herein by reference).
10.85 Form of Exchange Note (contained in Indenture filed as Exhibit
10.82).
10.86 Assignment and Contribution Agreement Pursuant to Pledge and
Security
8
Agreement dated as of July 25, 1997, by and among ITC/\DeltaCom,
Inc., Interstate FiberNet, Inc. and United States Trust Company
of New York, as Trustee filed herewith (filed as Exhibit 4.5 to
Form S-4 and incorporated herein by reference).
+ 10.87 MCI Carrier Agreement, effective September 1, 1997, by and
between MCI Telecommunications Corporation and Associated
Communications Companies of America (ACCA) (filed as Exhibit
10.87 to Form S-1 and incorporated herein by reference).
++ 10.87.1 First Amendment to the MCI Carrier Agreement, dated as of
November 21, 1997, by and between MCI Telecommunications
Corporation and Associated Communication Companies of America
(ACCA).
10.88 ITC/\DeltaCom, Inc. 1997 Stock Option Plan (filed as Exhibit
10.88 to Form S-1 and incorporated herein by reference).
10.89 ITC/\DeltaCom, Inc. 1997 Director Stock Option Plan (filed as
Exhibit 10.89 to Form S-1 and incorporated herein by reference).
10.90 ITC Holding Company, Inc. Amended and Restated Stock Option Plan
(filed as Exhibit 10.90 to Form S-1 and incorporated herein by
reference).
10.91 ITC Holding Company, Inc. Nonemployee Director Stock Option Plan
(filed as Exhibit 10.91 to Form S-1 and incorporated herein by
reference).
10.92 Description of ITC/\DeltaCom, Inc. Bonus Plan (filed as Exhibit
10.92 to Form S-1 and incorporated herein by reference).
10.93 Form of Indemnity Agreement between ITC/\DeltaCom, Inc. and its
Directors and Certain Officers (filed as Exhibit 10.93 to Form
S-1 and incorporated herein by reference).
10.94 Sale and Purchase Agreement, dated as of March 11, 1997, by and
between SCANA Corporation and ITC Holding Company, Inc. (filed as
Exhibit 10.94 to Form S-1 and incorporated herein by reference).
10.95 First Amendment to Sale and Purchase Agreement. Among SCANA
Corporation, SCANA Communications, Inc., and ITC Holding Company,
Inc., dated as of October 16, 1997, among SCANA Corporation,
SCANA Communications, Inc., ITC Holding Company, Inc. and
ITC/\DeltaCom, Inc. (filed as Exhibit 10.95 to Form S-1 and
incorporated herein by reference).
12.1 Statement regarding Computation of Ratios.
21.1 Subsidiaries of ITC/\DeltaCom, Inc.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule for the year ended December 31, 1997.
- -----------------
+ Confidential treatment has been granted for this exhibit. The copy filed as
an exhibit omits the information subject to the confidential treatment
request.
++ Confidential treatment has been requested for this exhibit. The copy filed
as an exhibit omits the information subject to the confidential treatment
request.
9