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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-23253
ITC/\DeltaCom, Inc.
------------------
(Exact name of registrant as specified in its charter)
Delaware 58-2301135
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1791 O.G. Skinner Drive, West Point, GA 31833
--------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 385-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Outstanding at November 6, 2002
-------------------------------
Common Stock, $.01 par value 44,750,000 shares
ITC/\DELTACOM, INC.
Index
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2002 (unaudited) and December 31, 2001......................... 3
Unaudited Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2002 and 2001...................... 5
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001................................ 6
Notes to Unaudited Condensed Consolidated Financial
Statements................................................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 33
Item 4. Controls and Procedures...................................................... 33
Part II. Other Information
Item 1. Legal Proceedings............................................................ 34
Item 3. Defaults Upon Senior Securities.............................................. 35
Item 5. Other Information............................................................ 35
Item 6. Exhibits and Reports on Form 8-K............................................. 36
Signatures
Sarbanes-Oxley Act Section 302(a) Certifications
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITC/\DELTACOM, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31,
2002 2001
--------------- ---------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................................... $ 22,341 $ 41,043
Accounts receivable:
Customer, net of allowance for uncollectible accounts of
$6,711 and $5,689 in 2002 and 2001, respectively .......................... 54,964 62,099
Affiliate .................................................................. 5,767 4,889
Inventory ...................................................................... 4,992 6,301
Prepaid expenses ............................................................... 5,229 4,193
--------------- ---------------
Total current assets ................................................ 93,293 118,525
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $389,339
and $295,746 in 2002 and 2001, respectively ................................... 619,545 691,037
--------------- ---------------
OTHER LONG-TERM ASSETS:
Intangible assets, net of accumulated amortization of
$15,203 and $14,596 in 2002 and 2001, respectively ............................ 55,339 55,946
Other long-term assets ......................................................... 2,332 12,824
--------------- ---------------
Total other long-term assets ........................................ 57,671 68,770
--------------- ---------------
Total assets ........................................................ $ 770,509 $ 878,332
=============== ===============
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
ITC/\DELTACOM, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31,
2002 2001
--------------- ---------------
(Unaudited)
LIABILITIES AND CAPITAL DEFICIT
LIABILITIES NOT SUBJECT TO COMPROMISE:
Current Liabilities:
Accounts payable:
Trade ..................................................................................... $ 37,804 $ 38,779
Construction .............................................................................. 4,010 8,613
Accrued interest .............................................................................. 372 8,844
Accrued compensation .......................................................................... 4,385 6,554
Unearned revenue .............................................................................. 20,206 35,851
Other accrued liabilities ..................................................................... 21,204 19,914
Current portion of long-term debt and capital lease obligations (Note 4) ...................... 4,840 6,711
--------------- ---------------
Total current liabilities ........................................................... 92,821 125,266
--------------- ---------------
Long-term Debt and Capital Lease Obligations (Note 4) ......................................... 200,187 717,163
--------------- ---------------
LIABILITIES SUBJECT TO COMPROMISE (Notes 2 and 4) ............................................. 538,147 --
--------------- ---------------
CONVERTIBLE REDEEMABLE PREFERRED STOCK (Returned to equity on
June 25, 2002) (Note 5):
Series B-1; par value $.01; 67,000 shares authorized; 30,673 shares issued and
outstanding in 2001 .......................................................................... -- 24,121
Series B-2; par value $.01; 90,000 shares authorized; 40,000 shares issued and
outstanding in 2001 .......................................................................... -- 33,712
--------------- ---------------
Total convertible redeemable preferred stock ........................................ -- 57,833
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Note 7)
CAPITAL DEFICIT:
Preferred Stock, $.01 par value; 5,000,000 shares authorized;
Series A - liquidation preference of $7.40; 1,480,771 shares issued and outstanding ....... 15 15
Convertible Redeemable Preferred Stock; $.01 par value (Note 5);
Series B-1; 67,000 shares authorized; 31,905 shares issued and outstanding in 2002 ..... 26,708 --
Series B-2; 90,000 shares authorized; 41,837 shares issued and outstanding in 2002 ..... 36,983 --
Common Stock, $.01 par value; 200,000,000 shares authorized; 62,364,768 shares
issued and outstanding ....................................................................... 624 624
Additional paid-in-capital .................................................................... 356,839 356,839
Warrants outstanding .......................................................................... 11,441 11,441
Deficit ....................................................................................... (493,256) (390,849)
--------------- ---------------
Total capital deficit ............................................................... (60,646) (21,930)
--------------- ---------------
Total liabilities and capital deficit ............................................... $ 770,509 $ 878,332
=============== ===============
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
4
ITC/\DELTACOM, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Three Months Ended September 30,
----------------------------------
2002 2001
--------------- ---------------
Operating revenues ....................................................................... $ 101,021 $ 102,482
Cost of services (exclusive of items show separately below) .............................. 47,852 47,401
Inventory write-down ..................................................................... -- 1,663
--------------- ---------------
Gross margin ............................................................................. 53,169 53,418
--------------- ---------------
Operating expenses:
Selling, operations and administration ............................................... 39,750 52,470
Depreciation and amortization ........................................................ 32,194 30,649
Special charges ...................................................................... -- 74,437
--------------- ---------------
Total operating expenses .......................................................... 71,944 157,556
--------------- ---------------
Operating loss ........................................................................... (18,775) (104,138)
--------------- ---------------
Other income (expense):
Interest expense (contractual interest was $16.3 million and $46.4
million for the three and nine months ended September 30, 2002) ..................... (5,036) (14,370)
Interest income ...................................................................... 90 199
Other expense, net ................................................................... (15) (285)
--------------- ---------------
Total other expense, net .......................................................... (4,961) (14,456)
--------------- ---------------
Loss before reorganization items and
income taxes ............................................................................ (23,736) (118,594)
Reorganization items (Note 2) ............................................................ 11,022 --
--------------- ---------------
Loss before income taxes ................................................................. (34,758) (118,594)
Income tax expense ....................................................................... -- --
--------------- ---------------
Net loss ................................................................................. (34,758) (118,594)
Preferred stock dividends and accretion
(contractual dividend was $1.5 million and $4.4 million for the
three and nine months ended September 30, 2002, respectively) (Note 5) .................. -- 1,348
--------------- ---------------
Net loss applicable to common stockholders ............................................... $ (34,758) $ (119,942)
=============== ===============
Basic and diluted net loss per common share .............................................. $ (0.56) $ (1.92)
=============== ===============
Basic and diluted weighted average common
shares outstanding ...................................................................... 62,364,768 62,364,650
=============== ===============
Nine Months Ended September 30,
----------------------------------
2002 2001
--------------- ---------------
Operating revenues ....................................................................... $ 318,980 $ 310,723
Cost of services (exclusive of items show separately below) .............................. 149,088 136,934
Inventory write-down ..................................................................... -- 1,663
--------------- ---------------
Gross margin ............................................................................. 169,892 172,126
--------------- ---------------
Operating expenses:
Selling, operations and administration ............................................... 123,930 146,703
Depreciation and amortization ........................................................ 95,208 88,166
Special charges ...................................................................... 223 74,437
--------------- ---------------
Total operating expenses .......................................................... 219,361 309,306
--------------- ---------------
Operating loss ........................................................................... (49,469) (137,180)
--------------- ---------------
Other income (expense):
Interest expense (contractual interest was $16.3 million and $46.4
million for the three and nine months ended September 30, 2002) ..................... (34,516) (43,552)
Interest income ...................................................................... 316 2,002
Other expense, net ................................................................... (289) (579)
--------------- ---------------
Total other expense, net .......................................................... (34,489) (42,129)
--------------- ---------------
Loss before reorganization items and
income taxes ............................................................................ (83,958) (179,309)
Reorganization items (Note 2) ............................................................ 14,239 --
--------------- ---------------
Loss before income taxes ................................................................. (98,197) (179,309)
Income tax expense ....................................................................... -- --
--------------- ---------------
Net loss ................................................................................. (98,197) (179,309)
Preferred stock dividends and accretion
(contractual dividend was $1.5 million and $4.4 million for the
three and nine months ended September 30, 2002, respectively) (Note 5) .................. 4,210 1,556
--------------- ---------------
Net loss applicable to common stockholders ............................................... $ (102,407) $ (180,865)
=============== ===============
Basic and diluted net loss per common share .............................................. $ (1.64) $ (2.90)
=============== ===============
Basic and diluted weighted average common
shares outstanding ...................................................................... 62,364,768 62,267,535
=============== ===============
The accompanying notes are an integral part of these condensed consolidated
statements.
5
ITC/\DELTACOM, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended September 30,
----------------------------------
2002 2001
--------------- ---------------
Cash flows from operating activities:
Net loss ................................................................................. $ (98,197) $ (179,309)
--------------- ---------------
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization .......................................................... 95,208 88,166
Special charges ........................................................................ 223 77,301
Non cash reorganization items .......................................................... 8,937 --
Amortization of bond issue costs ....................................................... 1,601 1,747
Changes in current operating assets and liabilities:
Accounts receivable, net ............................................................. 6,257 6,070
Inventory ............................................................................ 1,309 (450)
Prepaid expenses ..................................................................... (1,041) 616
Accounts payable ..................................................................... (692) 2,094
Accrued interest ..................................................................... 14,675 2,810
Unearned revenue ..................................................................... (15,645) (19,605)
Accrued compensation and other accrued liabilities ................................... 482 5,333
--------------- ---------------
Total adjustments .............................................................. 111,314 164,082
--------------- ---------------
Net cash provided by (used in) operating activities ............................ 13,117 (15,227)
--------------- ---------------
Cash flows from investing activities:
Capital expenditures ..................................................................... (23,285) (118,638)
Change in accrued construction costs ..................................................... (4,603) (23,099)
Release of restricted assets ............................................................. -- 6,982
Other .................................................................................... 11 171
--------------- ---------------
Net cash used in investing activities .......................................... (27,877) (134,584)
--------------- ---------------
Cash flows from financing activities:
Repayments of long-term debt and capital lease obligations ............................... (3,935) (1,375)
Proceeds from issuance of Series B preferred stock and common stock warrants,
net of issuance costs ................................................................... -- 66,620
Proceeds from exercise of common stock options ........................................... -- 1,098
Other .................................................................................... (7) (568)
--------------- ---------------
Net cash (used in) provided by financing activities ............................ (3,942) 65,775
--------------- ---------------
Decrease in cash and cash equivalents ........................................................ (18,702) (84,036)
Cash and cash equivalents at beginning of period ............................................. 41,043 141,140
--------------- ---------------
Cash and cash equivalents at end of period ................................................... $ 22,341 $ 57,104
=============== ===============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest ....................................................................... $ 18,231 $ 43,951
=============== ===============
Cash paid for reorganization items ........................................................... $ 5,302 $ --
=============== ===============
NONCASH TRANSACTIONS:
Capital lease obligations issued for network equipment ....................................... $ -- $ 9,283
=============== ===============
Preferred stock dividends and accretion ...................................................... $ 4,210 $ 1,556
=============== ===============
The accompanying notes are an integral part of these condensed consolidated
statements.
6
ITC/\DELTACOM, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of Business
ITC/\DeltaCom, Inc. ("ITC/\DeltaCom" and, together with its
wholly-owned subsidiaries, the "Company") provides integrated voice and data
telecommunications services on a retail basis to businesses in the southern
United States ("retail services") and regional telecommunications transmission
services over its network on a wholesale basis to other telecommunications
companies ("broadband transport services"). Retail services include local
exchange services, long distance services, calling card and operator services,
asynchronous transfer mode, frame relay, and high capacity broadband private
line services, as well as Internet access and colocation services and customer
premise equipment sales, installation and repair. The Company also provides
colocation, Web server hosting and other services integral to operating
important business applications over the Internet through its e/\deltacom
business. In connection with these services, the Company owns, operates or
manages an extensive fiber optic network, which extends throughout ten southern
states.
Segment Disclosure
Beginning in 2002, the Company has revised its segment reporting to
align its financial presentation more closely with its basic retail and
wholesale customer businesses and to reflect more accurately the trends in those
customer bases (Note 8). One segment consists of the Company's retail services
business and the second segment consists of its broadband transport services
business. Beginning in 2002, results of the Company's e/\deltacom business are
no longer reported as a separate business segment, but instead are included as
part of the Company's retail services business segment.
Basis of Presentation
The accompanying interim condensed consolidated financial statements
are unaudited and have been prepared by the Company's management in accordance
with the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments unless otherwise disclosed in a separate footnote, considered
necessary for the fair presentation of the unaudited condensed consolidated
financial statements have been included, and the unaudited condensed
consolidated financial statements present fairly the financial position and
results of operations for the interim periods presented. These unaudited,
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and related footnotes included in
the Company's Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission on April 1, 2002.
Reclassifications
Reclassifications have been made to amounts previously reported to
conform to the current period presentation.
Liquidity
The Company has experienced operating losses as a result of efforts to
build its network infrastructure, hire personnel, develop its systems and expand
into new markets. The Company expects to continue to focus on increasing its
customer base and expanding its network operations, although at a slower rate
than in previous years. Accordingly, the Company expects that its cost of
services will continue to increase and that its capital expenditures, although
expected to decrease, will be significant. In addition, the Company may reduce
some of its prices to respond to a changing competitive environment. These
factors will have a negative impact on the Company's short-term operating
results. The Company has realized cost efficiencies in its operations through
its restructuring, thereby reducing its selling, operations and administration
expense. Interstate FiberNet, Inc., a wholly-owned subsidiary of ITC/\DeltaCom,
has a $156 million senior secured credit facility with Morgan Stanley Senior
Funding, Inc., Bank of America, N.A. and other lenders. The Company has also
raised funds from sales of senior notes, convertible subordinated notes,
convertible redeemable preferred stock and common stock and is subject to
operating and capital lease commitments.
To conserve liquidity for its business, ITC/\DeltaCom did not pay the
scheduled May 15, 2002 interest payments due on its 9-3/4% senior notes due 2008
and on its 4-1/2% convertible subordinated notes due 2006 or the scheduled June
1, 2002 interest payment due on its 11% senior notes due 2007. The scheduled May
15, 2002 payments totaled approximately $6.1
7
million on the 9-3/4% senior notes and approximately $2.3 million on the 4-1/2%
convertible subordinated notes. The scheduled June 1, 2002 payment totaled
approximately $7.2 million.
2. CHAPTER 11 BANKRUPTCY PROCEEDINGS
On June 25, 2002, ITC/\DeltaCom filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court"). The Company adopted the provisions of Statement of Position 90-7 ("SOP
90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code," upon commencement of these proceedings (the "Bankruptcy Proceedings"). In
accordance with SOP 90-7, liabilities subject to compromise under the Bankruptcy
Proceedings have been segregated on the condensed consolidated balance sheets.
Liabilities subject to compromise are recorded for the amounts the Company
expects to be allowed on known claims rather than estimates of the amounts for
which those claims may be settled as a result of a plan of reorganization
approved by the Bankruptcy Court. As discussed in Note 10, ITC/\DeltaCom's plan
of reorganization was confirmed by the Bankruptcy Court on October 17, 2002 and
became effective October 29, 2002.
Liabilities for which payment is subject to the Bankruptcy Proceedings
have been classified as liabilities subject to compromise in the condensed
consolidated balance sheets. As of September 30, 2002, liabilities of
ITC/\DeltaCom subject to compromise consisted of the following (in thousands):
Notes:
11% Senior Notes due 2007....................... $ 130,000
8-7/8% Senior Notes due 2008 ................... 160,000
9-3/4% Senior Notes due 2008 ................... 125,000
4-1/2% Convertible Subordinated Notes due 2006 . 100,000
Accrued interest .................................... 23,147
------------
$ 538,147
============
Under the Bankruptcy Code, interest on the outstanding senior notes and
convertible subordinated notes, and the preferred stock dividends on the Series
B-1 preferred stock and Series B-2 preferred stock, ceased to accrue during the
Bankruptcy Proceedings.
Reorganization items are composed of items of expense that were
realized or incurred by ITC/\DeltaCom as a result of its reorganization under
Chapter 11 of the Bankruptcy Code. Reorganization items for the three months and
nine months ended September 30, 2002 consisted of the following (in thousands):
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
------------------ ------------------
Professional fees and related expenses . $ 2,085 $ 5,302
Write-off of deferred financing fees ... 8,849 8,849
Write-off of debt discounts............. 88 88
------------------ ------------------
$ 11,022 $ 14,239
================== ==================
Professional fees and related expenses represent legal, financial advisory and
other expenses directly related to the Bankruptcy Proceedings. The condensed
consolidated statements of operations for the three and nine months ended
September 30, 2002 set forth in Note 9 separately disclose expenses related to
the Bankruptcy Proceedings.
Loss per common share has been computed using the weighted average
number of shares of common stock outstanding at the balance sheet date. On
October 29, 2002, under ITC/\DeltaCom's plan of reorganization, ITC/\DeltaCom's
outstanding common stock and preferred stock were cancelled and ITC/\DeltaCom
issued 44,750,000 shares of new common stock and 300,000 shares of a new issue
of convertible redeemable preferred stock. See Note 10. The reduction in the
number of shares outstanding will have a significant impact on the loss per
share calculation.
3. RECENT ACCOUNTING PRONOUNCEMENTS
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 requires companies to cease amortizing
goodwill that existed at June 30, 2001. The amortization of existing goodwill
ceased on December 31, 2001. Included in the accompanying consolidated
statements of operations is amortization expense related to goodwill of
approximately $1.5 million for the three months ended September 30, 2001 and
$4.6 million for the nine months ended September 30, 2001. SFAS No. 142 also
establishes a new
8
method of testing goodwill for impairment on an annual basis or on an interim
basis if an event occurs or circumstances change that would reduce the fair
value of a reporting unit below its carrying value. In accordance with SFAS No.
142, the Company has six months after adoption of the statement to complete the
first step of the transitional goodwill impairment test. Pursuant to the
adoption of SFAS No. 142, the Company has established its reporting units based
on its reporting structure in a reasonable and supportable manner. The Company
completed the transitional test as of January 1, 2002 and determined that
goodwill has not been impaired. Pursuant to the adoption of SFAS No. 142, the
Company will annually test goodwill for impairment on the anniversary of the
transitional goodwill impairment test.
Asset Retirement Obligations
SFAS No. 143, "Accounting for Asset Retirement Obligations," was
issued in June 2001. SFAS No. 143 applies to legal obligations associated with
the retirement of certain tangible long-lived assets. This statement is
effective for fiscal years beginning after June 15, 2002. Accordingly, the
Company will adopt this statement on January 1, 2003. The Company believes the
adoption of SFAS No. 143 will not have a material impact on its consolidated
financial statements.
Impairment or Disposal of Long-Lived Assets
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued in August 2001. SFAS No.144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," for the disposal of a
business segment. SFAS No. 144 also amended Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001 and for interim
periods within those fiscal years. The Company adopted SFAS No. 144 on January
1, 2002, with no material effect on its consolidated financial statements.
Other Pronouncement
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, an
amendment of FASB Statement No. 13, and Technical Corrections," was issued in
April 2002. This statement, among other things, significantly limits the
instances in which the extinguishment of debt may be treated as an extraordinary
item in the statement of operations. This statement also requires
reclassification of all prior period extraordinary items related to the
extinguishment of debt. The Company will implement this statement, as required
by SOP 90-7, as part of its fresh start reporting upon completion of the
Bankruptcy Proceedings.
Costs Associated with Exit or Disposal Activities
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in July 2002. This statement requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated upon the Company's emergence from the Bankruptcy Proceedings on
October 29, 2002.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations at September 30, 2002 and
December 31, 2001 consisted of the following (in thousands):
September 30, December 31,
2002 2001
--------------- ---------------
11% Senior Notes due 2007 ..................................................................... $ 130,000 $ 130,000
8-7/8% Senior Notes due 2008, net of unamortized discount of $99 in 2001 ...................... 160,000 159,901
9-3/4% Senior Notes due 2008 .................................................................. 125,000 125,000
4-1/2% Convertible Subordinated Notes due 2006 ................................................ 100,000 100,000
Senior secured credit facility ................................................................ 156,000 157,200
Capital lease obligations at varying interest rates, maturing through July 2020 ............... 49,027 51,773
--------------- ---------------
Total long-term debt and capital lease obligations ............................................ 720,027 723,874
Less liabilities subject to compromise ........................................................ (515,000) --
--------------- ---------------
Total long-term debt and capital lease obligations not subject to compromise .................. 205,027 723,874
Less current maturities ....................................................................... (4,840) (6,711)
--------------- ---------------
Total ......................................................................................... $ 200,187 $ 717,163
=============== ===============
9
Pursuant to SOP 90-7, the Company has reclassified all of the senior
notes and convertible subordinated notes as liabilities subject to compromise
and wrote-off, in the three months ended September 30, 2002, the remaining
unamortized discount of $88,000 related to the 8-7/8% Senior Notes due 2008. See
Note 2 for information about the write-off of the unamortized discount.
As a result of ITC/\DeltaCom's failure to pay interest on the senior
notes and convertible subordinated notes on May 15 and June 1, 2002, and its
filing of a voluntary petition under Chapter 11 of the Bankruptcy Code on June
25, 2002, the Company was in default under its $156 million senior secured
credit facility and capital lease facilities with NTFC Capital Corporation and
General Electric Capital Corporation. As a result of this default, the Company
was required to pay interest under the senior credit facility at an annual rate
of 8.625%, which was computed on the basis of a default rate of 2% in excess of
the base rate of 4.75%, plus a margin of 1.875%.
On September 13, 2002, the Company entered into forbearance agreements
with the lenders of its senior credit facility and capital lease facilities
pursuant to which the lenders agreed to forbear from exercising their rights to
declare a default or pursue remedies under those facilities based solely on
ITC/\DeltaCom's failure to pay interest on the senior notes and convertible
subordinated notes, and its subsequent filing of a voluntary petition under
Chapter 11 of the Bankruptcy Code. The forbearance agreements terminated on
October 29, 2002, upon the Company's closing of its amended and restated senior
credit facility. The amended and restated senior credit facility accelerates the
schedule for repayment of principal, increases the interest rates applicable to
outstanding borrowings, adds financial covenants, and modifies existing
affirmative and negative covenants. See Note 10 for information about the
amended and restated senior credit facility.
On October 29, 2002, the Company amended its capital lease facilities
with NTFC Capital Corporation and General Electric Capital Corporation. See Note
10 for information about this amendment.
The Company's senior credit obligations are secured by liens on
substantially all of its assets.
5. CONVERTIBLE REDEEMABLE PREFERRED STOCK
In 2001, the Company secured a commitment for $150 million in equity
financing in an investment agreement with ITC Holding Company, Inc. ITC Holding
Company, Inc. subsequently assigned an aggregate of $50 million of the purchase
commitment to two other investors. The purchase commitments expired on June 20,
2002. The investment agreement provided for the issuance and sale by the Company
of up to $150 million of multiple series of its Series B cumulative convertible
preferred stock and related common stock purchase warrants. The Company
completed the sale of $30 million of Series B-1 preferred stock in June 2001 and
the sale of $40 million of Series B-2 preferred stock in September 2001.
During the Bankruptcy Proceedings, the outstanding shares of Series B
preferred stock are considered equity interests in the Company. Accordingly, the
Series B preferred stock was returned to stockholders' equity in the condensed
consolidated balance sheets as of June 25, 2002, which was the date of
commencement of the Bankruptcy Proceedings.
As of June 25, 2002, ITC/\DeltaCom had accrued dividends on the Series
B preferred stock of $2.8 million. Contractual dividends were $1.5 million and
$4.4 million for the three and nine months ended September 30, 2002,
respectively. Under the Bankruptcy Code, dividends on the Series B preferred
stock ceased to accrue during the Bankruptcy Proceedings.
On October 29, 2002, the effective date of the Company's plan of
reorganization, all of the outstanding Series B preferred stock, related accrued
and undistributed dividends, and related common stock purchase warrants were
cancelled. See Note 10.
6. RESTRUCTURING CHARGES
In September 2001, the Company announced changes to its business plan
and other actions intended to reduce its operating expenses through a 20%
reduction in its workforce and to reduce non-personnel operating expenses and
planned capital expenditures. As a result of this restructuring, the Company in
September 2001 recorded $4.8 million in restructuring costs, which were included
as components of selling, operations and administration expenses. Restructuring
charges included the Company's estimate of employee severance and related costs
for employees terminated as a result of the revised business plan. The
restructuring charges also included estimates of office space lease commitments
where the Company closed offices, net of any sublease rentals, and other exit
costs. In connection with the restructuring, the Company closed an
administrative office, retail services offices and an e/\deltacom office.
Restructuring costs were accrued in accordance with Emerging Issues Task Force,
or EITF, Issue 94-3, "Liability Recognition for Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." The Company
10
terminated some employees in certain departments and did not specifically
identify the termination of an entire function or department.
In April and September 2002, the Company further restructured its
operations to implement additional reductions to its workforce, non-personnel
operating expenses and planned capital expenditures. As a result of these
restructurings, the Company recorded approximately $1,842,000 in April 2002,
related to its data center operations, and $943,000 in September 2002, primarily
related to its retail services, in restructuring costs, which were included as
components of selling, operations and administrative expenses. Restructuring
charges included the Company's estimate of employee severance and related costs
for employees terminated and office lease termination costs. The restructuring
charges also included estimates of termination payments for cancelled service
contracts. Restructuring costs were accrued in accordance with EITF Issue 94-3.
The Company also recorded impairment charges of approximately $223,000 in April
2002 that related to the net book value of software, less expected salvage
value, removed from service from its data center. The impairment of software
relates to software that the Company no longer plans to use as a result of its
April 2002 restructuring. In April 2002, the Company terminated more than 40
employees from its e/\deltacom business. In the quarter ended September 30,
2002, the Company terminated eight employees from its broadband transport
business and approximately ten employees from its retail services business. The
Company did not specifically identify the termination of an entire function or
department in either restructuring.
Following is a summary by segment of the restructuring and impairment
charges that were recorded in 2002 (in thousands):
Retail Broadband Transport
Services Services Total
---------- --------------------- ---------
Employee severance............. $ 2,107 $ 73 $ 2,180
Office space leases............ 297 -- 297
Contract termination costs..... 308 -- 308
Write-off of assets............ 223 -- 223
---------- --------------------- ---------
Total..................... $ 2,935 $ 73 $ 3,008
========== ===================== =========
The following table reflects activity associated with accrued
restructuring costs from January 1, 2002 through September 30, 2002, which are
recorded in accrued liabilities (in thousands):
Balance at Write-offs/ Balance at
December 31, 2001 Accruals Payments September 30, 2002
----------------- ------------ ------------ ------------------
Restructuring charges:
Employee severance ................ $ 216 $ 2,180 $ 1,875 $ 521
Office space leases ............... 1,067 297 478 886
Contract termination costs ........ -- 308 308 --
----------------- ------------ ------------ ------------------
Total .................................. $ 1,283 $ 2,785 $ 2,661 $ 1,407
================= ============ ============ ==================
The accrual for contract termination costs of $308,000 reflects a
reduction of $152,000 from the original accrual of $460,000 resulting from
successful negotiations to reduce the amounts owed. Management expects to use
the remaining restructuring accruals during the remainder of 2002 and in 2003 as
additional payments are made under the terms of employee severance and office
space lease agreements.
7. COMMITMENTS AND CONTINGENCIES
At September 30, 2002, the Company had entered into agreements with
vendors to purchase approximately $4.2 million of property, plant, equipment and
services during 2002 related to the improvement and installation of switches,
other network expansion efforts and certain services.
Surety Bonds
Some of the Company's customers, especially governmental entities, and
some governmental entities from which the Company has acquired a franchise or
rights-of-way agreement, require the Company to obtain surety bonds as a
condition to its provision of service to them or other entities within their
control. In February 2002, because of the Company's financial condition, its
surety cancelled all outstanding surety bonds that contained cancellation
clauses. At the time the surety bonds were cancelled, the Company's surety bond
portfolio had a face value of approximately $1.9 million in outstanding
obligations, of which approximately $1.2 million were cancelled. The surety did
not renew an additional $405,000 of bonds, which it could not cancel
immediately, that were scheduled for renewal in the second quarter of 2002. As
of October 31, 2002, the cancelled and unrenewed bonds had not been replaced.
The remaining bonds, valued at $282,000, are noncancellable, unless the Company
no longer needs them or does not perform its obligations under the bonds. The
surety also has advised the Company it will not underwrite any new surety bonds
unless the Company provides 100% collateral for such bonds. The Company is
actively working
11
with the existing obligees of the bonds to provide the security they require,
and another surety has offered to underwrite new bonds or replace cancelled
bonds for the Company if the Company provides 100% collateral for each bond. The
Company's inability to provide surety bonds to replace the cancelled surety
bonds or issue new surety bonds will have an adverse impact on its ability to
provide service to some customers, especially government entities and other
entities that generally require surety bonds. In addition, the requirement to
provide 100% collateral for any bond issued may have an adverse impact on the
funds available for capital expenditures or other uses if the Company chooses to
purchase the surety bond and provide the collateral. The Company believes that
its strengthened liquidity position as a result of its reorganization and recent
changes to its major credit agreements provide the Company with greater
flexibility to satisfy its requirements for surety bonds and similar security
arrangements.
Nortel Contingency
In November 2000, the Company entered a purchase agreement with Nortel
Networks, Inc. for the purchase of telecommunications equipment and services.
The agreement provides for specified volume discounts if the Company purchases
at least $250 million of equipment and services from Nortel Networks between
November 1, 1999 and December 31, 2002. If the Company purchases less than $250
million of equipment and services, the agreement provides that the Company will
be required to pay to Nortel a portion of the difference between the commitment
and the amount actually purchased. Based on the Company's actual and forecasted
purchases under the agreement, it currently estimates that it may be required to
pay Nortel Networks approximately $3.5 million to $3.8 million in the first
quarter of 2003. In addition, Nortel Networks has deployed approximately $6.6
million of equipment under terms providing that payment is due when the Company
places the deployed equipment into service. Based on its current schedule for
placing this equipment into service, the Company expects that these terms will
require it to pay $6.6 million in the fourth quarter of 2002 or the first
quarter of 2003, depending on its need for capacity. Under other terms of this
agreement, the Company is required to purchase, or pay for, an additional $10
million of equipment by the fourth quarter of 2003. The Company has reached an
agreement in principle with Nortel Networks to modify the Company's obligations
under the existing agreement. If the agreement in principle is reflected in a
new definitive agreement executed by the Company and Nortel Networks, the
Company expects that it will not be required to make the estimated $3.5 million
to $3.8 million payment described above, that it will be able to use
approximately $4 million in accumulated vendor credits to reduce to
approximately $12 million its estimated remaining payment obligations of
approximately $16 million under the existing agreement, and that it will be
obligated to make equipment-related payments to Nortel Networks of $1 million
quarterly from the first quarter of 2003 through the fourth quarter of 2005.
Legal Proceedings
In the normal course of business, the Company is subject to various
litigation. In management's opinion, there are no legal proceedings, other than
those described below, pending against the Company that could have a material
adverse effect on the financial position, results of operations or liquidity of
the Company.
BellSouth Deposit Contingency
The Company depends on BellSouth for the provision of wholesale
telecommunications services under its interconnection agreements with BellSouth
and pursuant to various access tariffs that BellSouth has filed with federal and
state regulatory agencies. As previously reported, BellSouth has requested by
letter dated March 8, 2002 that the Company provide a $10 million security
deposit by March 29, 2002 in connection with BellSouth's provision of services
to the Company. On March 28, 2002, the Company filed a petition for declaratory
judgment in Georgia state court seeking a ruling from the court that, based upon
the terms of the Company's interconnection agreements with BellSouth, BellSouth
may not require the Company to place a $10 million deposit with BellSouth as
security for future payment for services to be rendered to the Company by
BellSouth. BellSouth has responded to the Company's petition by seeking to have
the matter heard before the Georgia Public Service Commission, rather than in
Georgia state court. BellSouth has filed a petition with the Georgia Public
Service Commission seeking a determination that the Company should be required
to place a security deposit of approximately $17 million with BellSouth. The
Company is contesting both the requirement for, and the amount of, the requested
deposit. Based on the Company's payment history with BellSouth, including the
fact that BellSouth received all payments due from the Company during its
reorganization process, the Company's strengthened liquidity position as a
result of its reorganization, and other relevant factors, the Company does not
believe BellSouth is entitled to any amount of the deposit it seeks. The Company
is actively negotiating with BellSouth a resolution of this dispute that would
either eliminate or substantially reduce the amount of the requested deposit.
BellSouth also has requested the Federal Communications Commission to approve
new deposit language in its access tariff. The FCC has suspended BellSouth's new
tariff and is investigating BellSouth's proposed deposit language. If the FCC
were to adopt BellSouth's proposed deposit language and if BellSouth were
authorized to require a substantial deposit, the Company's cash reserves may be
insufficient to fund the deposit, which could have a material adverse effect on
the Company's ability to provide services to its customers.
BellSouth Interconnection Agreement
The Company's interconnection agreement with BellSouth expires at the
end of 2002. The Company is currently negotiating terms of a new agreement with
BellSouth, but it is unlikely to resolve all issues before the current agreement
expires. The Company will continue to operate under terms of the existing
agreement until a new agreement is reached. The terms of the
12
new agreement will be retroactive to January 1, 2003. Any unresolved issues will
be settled through binding arbitration before the various state public service
commissions. The Company is unable to determine the impact, if any, these
negotiations will have on its results of operations and financial condition.
Proceedings Affecting Rights-of-Way
A portion of the Company's network runs through fiber optic cables
owned by Mississippi Power Company over its rights-of-way located in Jasper
County, Mississippi. A proceeding involving Mississippi Power Company and
several landowners who have granted Mississippi Power Company rights-of-way in
Jasper County resulted in a January 1999 order of the Mississippi Supreme Court
holding that Mississippi Power Company could not permit third parties to use its
rights-of-way at issue for any purpose other than in connection with providing
electricity to customers of Mississippi Power Company. The Company became a
party to the proceeding after the January 1999 order. The Circuit Court of the
First Judicial District of Jasper County, Mississippi has directed the Company
not to use that portion of its fiber optic network located on Mississippi Power
Company's rights-of-way in Jasper County, except in an emergency, pending the
outcome of the trial. The Company has rerouted all of the circuits on the
affected portion of its network so that it may continue to provide services to
its customers along the affected route. If the courts ultimately agree with the
landowners that the existing easements do not permit the Company's use, the
Company believes its potential liability for damages may be limited to the value
of a permanent easement for that use. The Company cannot make assurances in this
respect, however, since the landowners are seeking damages equal to the profits
or gross revenues received by the Company from its use of Mississippi Power
Company's rights-of-way in Jasper County and punitive damages for the Company's
use of the route. The trial of this matter was scheduled for the week of August
5, 2002, but has since been continued. No future trial date has been set by the
court to date. The Company cannot reasonably estimate the amount of any
potential loss arising from this pending litigation.
The Company initiated civil suits in August 2001 and May 2002 in the
U.S. District Court for the Southern District of Mississippi in which it seeks a
declaratory judgment confirming its continued use of cables in Mississippi Power
Company's rights-of-way on 37 parcels of land and 63 parcels of land,
respectively, or, alternatively, condemnation of the right to use the cables
upon payment of just compensation to the landowners. Some of the defendants in
the August 2001 proceeding have filed counterclaims against Mississippi Power
Company and the Company seeking a constructive trust upon the revenues earned on
those rights-of-way, together with compensatory and punitive damages. Although
the Company has resolved the issue of its use of the rights-of-way with some of
the defendants, the Company cannot provide assurance that it will be successful
in either of these proceedings. The August 2001 proceeding has been consolidated
with another pending civil suit in the U.S. District Court for the Southern
District of Mississippi, in which the Company was recently made a defendant,
initiated by landowners claiming to represent a class of landowners and seeking
compensatory and punitive damages against Mississippi Power Company arising from
Mississippi Power Company's allowance of third parties to use its rights-of-way
for telecommunications purposes. The Company cannot reasonably estimate the
amount of any potential loss arising from this pending litigation.
The Company uses the rights-of-way of Gulf Power Company in Florida
for a portion of its network. In the fourth quarter of 2000, Gulf Power was sued
in the Circuit Court of Gadsden County, Florida by two landowners that claim to
represent a class of all landowners over whose property Gulf Power has
facilities that are used by third parties. The landowners have alleged that Gulf
Power does not have the authority to permit the Company or other carriers to
transmit telecommunications services over the rights-of-way. The Company was
made a party to this litigation in August 2001. In March 2002, the court
dismissed this matter without prejudice on the basis, among others, that there
was no additional burden on the property as a result of third-party use of the
rights-of-way for telecommunications purposes and that the easements were broad
enough in scope to permit such third-party use. However, the court has permitted
the plaintiffs to amend their complaint to allege additional facts regarding the
use of the rights-of-way to support the landowners' contention that there is an
additional burden on the property because of the maintenance requirements of the
fiber routes and the placement of buildings and other physical
telecommunications equipment on the rights-of-way. The Company cannot reasonably
estimate the amount of any potential loss.
The Company uses rights-of-way of Georgia Power Company in Georgia for
a portion of its network. In July 2001, a suit filed in the Superior Court of
Decatur County, Georgia by a group seeking compensatory and punitive damages and
claiming to represent a class of landowners alleged that Georgia Power and other
entities do not have the right to grant third parties the use of the
rights-of-way for the transmission of telecommunications services of such third
parties. The Company was made a party to the suit in January 2002. The Company
cannot reasonably estimate the amount of any potential loss.
In August 2001, the Company filed suit in the Superior Court of Troup
County, Georgia against Southern Telecom, Inc., Alabama Power Company, Georgia
Power Company, Mississippi Power Company, Gulf Power Company and related
entities from which the Company has obtained use of rights-of-way for its fiber
optic telecommunications network. The Company seeks a declaratory judgment that
the defendants are legally required to use their best efforts to defend against
any claims that the Company does not have the right to use the rights-of-way
granted to these entities and to defend, indemnify and hold the Company harmless
against all such claims. In December 2001, the Company filed for summary
judgment and, subsequently, the
13
defendants have filed a motion for summary judgment, but the court has not ruled
on these motions. The defendants also have filed a counterclaim requesting,
among other items, that the Company reimburse them for the cost of perfecting
the applicable rights-of-way. The Company cannot reasonably estimate the amount
of any potential loss.
In April and May 2002, 190 lawsuits were filed by a single counsel in
the Circuit Court for Harrison County, Mississippi, against Mississippi Power
Company, the Company and WorldCom, Inc. d/b/a MCI Group. Each plaintiff claims
to be the owner of property over which Mississippi Power Company has an easement
and that WorldCom and/or the Company have benefited by using the easement to
provide telecommunications services. As a result of these allegations, each of
the plaintiffs claims trespass, unjust enrichment, fraud and deceit, and civil
conspiracy against each of the defendants. Each of the plaintiffs also seeks $5
million in compensatory damages, $50 million in punitive damages, disgorgement
of the gross revenues derived from the use by WorldCom and the Company of the
cable over the easements, a percentage of gross profits obtained from the use of
the cable, and the plaintiffs' costs to prosecute the action. Mississippi Power
Company, WorldCom and the Company have denied all of the plaintiffs'
allegations. These actions are substantially similar to the other actions that
the Company is defending in state and federal courts in Mississippi. Of the 190
lawsuits, the Company believes only approximately 11 involve parcels of land
across which the optical fiber of Mississippi Power Company runs are used by the
Company in the provision of telecommunications services. On August 5, 2002,
Mississippi Power Company removed all actions involving WorldCom's use of
Mississippi Power Company's rights-of-way to the United States District Court
for the Southern District of Mississippi and requested the actions to be
transferred to the United States Bankruptcy Court for the Southern District of
New York, where WorldCom's bankruptcy proceeding is pending. The Company cannot
reasonably estimate the amount of any potential loss.
On April 19, 2002, a civil action was filed by an individual property
owner in the Chancery Court of Harrison County, Mississippi against Mississippi
Power Company, Southern Company Services and the Company. The plaintiff seeks to
permanently enjoin Mississippi Power Company and Southern Company from
continuing to permit their rights-of-way across the plaintiff's property to be
used by third parties in any manner that is not related to the transmission of
electric power. The plaintiff also seeks proof of cancellation of all leases and
contracts between third parties and Mississippi Power Company and Southern
Company regarding the use of the fiber optic cable on the rights-of-way across
the plaintiff's property, proof that the use of the rights-of-way is for
purposes associated with providing electricity, an accounting of revenues of
third parties from the use of the rights-of-way, punitive damages of $1 million,
and costs and expenses. Mississippi Power Company, Southern Company and the
Company have denied all of the plaintiff's allegations. The Company cannot
reasonably estimate the amount of any potential loss.
On July 8, 2002, nine lawsuits on behalf of 101 property owners were
filed against Mississippi Power Company, Southern Company and the Company in the
Chancery Court of Jones County, Mississippi. All nine complaints are identical
in seeking relief for trespass, nuisance, conversion, unjust enrichment and
accounting, fraudulent concealment, fraud, fraudulent misrepresentation, and
rescission and equitable reformation arising from the alleged unauthorized use
of the subject rights-of-way in violation of the terms of the easements held by
Mississippi Power Company. The landowners are seeking unspecified monetary
damages and certain equitable relief. Mississippi Power Company, Southern
Company and the Company deny all the allegations. Although WorldCom is not a
party to these actions, Mississippi Power Company has removed these actions
involving WorldCom's use of Mississippi Power Company's rights-of-way to the
United States District Court for the Southern District of Mississippi and
requested the actions to be transferred to the United States Bankruptcy Court
for the Southern District of New York, where WorldCom's bankruptcy proceeding is
pending. The Company cannot reasonably estimate the amount of any potential
loss.
On August 8, 2002, the Company was served with a complaint filed in
the Circuit Court of Hinds County, Mississippi, in which four owners of property
located in Hancock County, Mississippi allege Mississippi Power Company and the
Company have violated the plaintiffs' rights with regard to the use of
Mississippi Power Company's easement across the plaintiffs' property. The
plaintiffs allege trespass, unjust enrichment, negligence, breach of contract
and tortious breach of contract, fraudulent concealment, fraudulent
misrepresentation, conspiracy, accounting and seek an unspecified amount of
damages. The Company denies all such allegations. Although WorldCom is not a
party to this action, Mississippi Power Company has removed this action
involving WorldCom's use of Mississippi Power Company's rights-of-way to the
United States District Court for the Southern District of Mississippi and
requested the action to be transferred to the United States Bankruptcy Court for
the Southern District of New York, where WorldCom's bankruptcy proceeding is
pending. The Company cannot reasonably estimate the amount of any potential
loss.
Other Rights-of-Way Contingency
The Company has obtained a portion of its rights-of-way under an
agreement that provides for significant annual fixed payments by the Company
through 2020. Upon the occurrence of certain events specified in the agreement,
including a change of control of ITC/\DeltaCom, as defined, the annual payments
would be terminated and the Company would be required to make a one-time
payment. The amount of this one-time payment would be approximately $19.6
million if such an event were to occur before August 1, 2003 and could be
greater than such amount if such an event were to occur thereafter. Any such
one-time payment would reduce the Company's capital lease obligations. Such a
reduction would total approximately $9.5 million if such an event were to occur
before August 1, 2003.
14
8. SEGMENT REPORTING
As discussed in Note 1, the Company operates in two business segments:
retail services and broadband transport services. The Company also has a
corporate segment, which has no operations. In the first quarter of 2002, as a
result of its restructuring in 2001 discussed in Note 1, the Company changed its
approach to making operating decisions and assessing performance with respect to
its business. As a result, the Company no longer manages the e/\deltacom
business as a separate segment, but instead manages that business as a component
of its retail services segment. The Company has restated the 2001 segment
information to include the results of the former e/\deltacom segment as part of
the results of the retail services segment. The Company evaluates segment
performance based on operating revenues, gross margin, selling, operations and
administration expense, and depreciation and amortization expense. All
intercompany transactions between segments have been eliminated. Summarized
financial data by business segment for the nine-months ended September 30, 2002
and 2001 are as follows (in thousands):
2002
---------------------------------------------------------------
Broadband
Retail Transport Corporate
Segment Segment Segment Consolidated
--------- ---------- --------- ------------
Operating revenues................................... $ 254,444 $ 64,536 $ -- $ 318,980
Gross margin......................................... 112,219 57,673 -- 169,892
Selling, operations, and administration.............. 97,389 26,541 -- 123,930
Depreciation and amortization........................ 54,895 40,265 48 95,208
Special charges...................................... 223 -- -- 223
Interest expense..................................... -- -- -- (34,516)
Other income (expense), net.......................... -- -- -- 27
Reorganization items................................. -- -- -- (14,239)
------------
Loss before income taxes............................. $ -- $ -- $ -- $ (98,197)
========= ========== ========= ============
Identifiable assets.................................. $ 459,803 $ 309,658 $ 1,048 $ 770,509
========= ========== ========= ============
Capital expenditures, net............................ $ 24,197 $ 3,691 $ -- $ 27,888
========= ========== ========= ============
2001
---------------------------------------------------------------
Broadband
Retail Transport Corporate
Segment Segment Segment Consolidated
--------- ---------- --------- ------------
Operating revenues................................... $ 239,171 $ 71,552 $ -- $ 310,723
Gross margin......................................... 108,987 63,139 -- 172,126
Selling, operations, and administration............. 121,155 25,548 -- 146,703
Depreciation and amortization........................ 51,930 36,174 62 88,166
Special charges...................................... 74,382 55 -- 74,437
Interest expense..................................... -- -- -- (43,552)
Other income (expense), net.......................... -- -- -- 1,423
------------
Loss before income taxes............................. $ -- $ -- $ -- $ (179,309)
========= ========== ========= ============
Identifiable assets.................................. $ 510,637 $ 390,381 $ 11,553 $ 912,571
========= ========== ========= ============
Capital expenditures, net............................ $ 105,314 $ 36,423 $ -- $ 141,737
========= ========== ========= ============
15
9. CONDENSED FINANCIAL STATEMENTS OF ENTITY IN BANKRUPTCY
The condensed balance sheets for the parent company, ITC/\DeltaCom, as
of September 30, 2002 and December 31, 2001 and other financial information for
the three and nine months ended September 30, 2002 are as follows:
CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
September 30, December 31,
2002 2001
--------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents ................................................................. $ 1,048 $ 1,028
--------------- ---------------
Total current assets .................................................................... 1,048 1,028
Other long-term assets ........................................................................ -- 10,070
Investments in and net advances to wholly-owned subsidiaries .................................. 476,836 550,382
--------------- ---------------
$ 477,884 $ 561,480
=============== ===============
LIABILITIES AND CAPITAL DEFICIT
Current Liabilities:
Accrued interest .......................................................................... $ -- $ 8,281
Other accrued liabilities ................................................................. 383 2,395
--------------- ---------------
Total current liabilities .............................................................. 383 10,676
--------------- ---------------
Long-term debt ................................................................................ -- 514,901
--------------- ---------------
Liabilities subject to compromise ............................................................. 538,147 --
--------------- ---------------
Convertible Redeemable Preferred Stock (Returned to equity on June 25, 2002); par value $.01
Series B-1: 67,000 shares authorized; 30,673 shares issued and outstanding in 2001 ........ -- 24,121
Series B-2: 90,000 shares authorized; 40,000 shares issued and outstanding in 2001 ........ -- 33,712
--------------- ---------------
Total Convertible Redeemable Preferred Stock ........................................... -- 57,833
--------------- ---------------
Capital Deficit:
Preferred Stock - $.01 par value; 5,000,000 shares authorized
Preferred stock, Series A - liquidation preference of $7.40;
1,480,771 shares issued and outstanding ............................................... 15 15
Preferred stock, Series B-1 and B-2
Series B-1: 67,000 shares authorized; 31,905 shares issued and outstanding in 2002 ... 26,708 --
Series B-2: 90,000 shares authorized; 41,837 shares issued and outstanding in 2002 ... 36,983 --
Common stock - $.01 par value; 200,000,000 shares authorized;
62,364,768 shares issued and outstanding ................................................. 624 624
Additional paid-in-capital ................................................................ 356,839 356,839
Warrants outstanding ...................................................................... 11,441 11,441
Deficit ................................................................................... (493,256) (390,849)
--------------- ---------------
Total capital deficit .................................................................. (60,646) (21,930)
--------------- ---------------
$ 477,884 $ 561,480
=============== ===============
16
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
------------------ ------------------
Operating expenses:
Depreciation and amortization.............................................. $ 7 $ 48
------------------ ------------------
Total operating expenses................................................ 7 48
------------------ ------------------
Other income (expense):
Interest income - intercompany............................................. 9,242 27,727
Interest income - external................................................. 3 20
Interest expense (contractual interest was $11.3 million and $33.9 million
for the three and nine months ended September 30, 2002, respectively)...... (296) (23,149)
------------------ ------------------
Total other income, net.................................................. 8,949 4,598
------------------ ------------------
Income before reorganization items and equity in losses of Subsidiaries........ 8,942 4,550
Reorganization items........................................................... (10,948) (14,165)
Equity in losses of subsidiaries............................................... (32,752) (88,582)
------------------ ------------------
Net loss................................................................ (34,758) (98,197)
Preferred stock dividends and accretion (contractual dividends were $1.5 million
and $4.4 million for the three and nine months ended September 30, 2002,
respectively)(Note 5)........................................................ -- 4,210
------------------ ------------------
Net loss applicable to common shares.................................... $ (34,758) $ (102,407)
================== ==================
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
September 30, 2002
------------------
Net loss.................................................................................... $ (98,197)
------------------
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization............................................................... 48
Amortization of bond issue costs............................................................ 1,183
Noncash reorganization items................................................................ 8,937
Equity in losses of subsidiaries............................................................ 88,582
Changes in current assets and liabilities:
Accounts receivable - affiliate......................................................... (15,782)
Other accrued liabilities............................................................... 383
Accrued interest........................................................................ 14,866
------------------
Total adjustments............................................................... 98,217
------------------
Net increase in cash and cash equivalents................................................... 20
Cash and cash equivalents at beginning of period............................................ 1,028
------------------
Cash and cash equivalents at end of period.................................................. $ 1,048
==================
17
10. SUBSEQUENT EVENTS
Court Confirmation and Effectiveness of Plan of Reorganization
ITC/\DeltaCom's plan of reorganization was confirmed by the Bankruptcy
Court on October 17, 2002 and became effective on October 29, 2002. Under the
plan on the effective date:
. All of ITC/\DeltaCom's outstanding senior notes plus accrued and
unpaid interest, having a total principal amount of $415 million, were
cancelled and the former holders of those notes received in exchange a
total of 40,750,000 shares, or 81.5%, of the new common stock of the
reorganized ITC/\DeltaCom.
. All of ITC/\DeltaCom's outstanding convertible subordinated notes plus
accrued and unpaid interest, having a total principal amount of $100
million, were cancelled and the former holders of those notes received
in exchange a total of 2,500,000 shares, or 5%, of the new common
stock.
. All of ITC/\DeltaCom's outstanding common stock, Series A preferred
stock and Series B preferred stock, plus accrued and undistributed
dividends, were cancelled and the former holders of those securities
collectively received a total of 500,000 shares, or 1%, of the new
common stock.
. ITC/\DeltaCom issued and sold in a rights offering to holders of the
old common stock and old preferred stock, for a total purchase price
of $184,600, 1,846 shares of new 8% Series A convertible redeemable
preferred stock of the reorganized ITC/\DeltaCom (the "new Series A
preferred stock") and warrants to purchase approximately 6,276 shares
of new common stock.
. Investors, including members of the Company's management, collectively
purchased in a private offering, for a purchase price of $29.8
million, 298,154 shares of the new Series A preferred stock and
warrants to purchase approximately 1,013,724 shares of the new common
stock. As consideration for this commitment, the investors
collectively received 1,000,000 shares of new common stock.
The foregoing ownership percentages assume the conversion of the new Series A
preferred stock into the new common stock as of the effective date.
Amended and Restated Senior Credit Facility
On the effective date of the plan of reorganization, the Company
entered into a senior credit facility with Morgan Stanley Senior Funding, Inc.
and other lenders which amended and restated the $156 million senior credit
facility in effect since April 5, 2000. Under the new credit agreement, interest
per annum is payable on outstanding borrowings, at the Company's option, at a
base rate plus a base rate margin, which is 1% less than the eurodollar rate
margin, or at a eurodollar rate (LIBOR) plus an applicable eurodollar rate
margin, which is initially fixed at 4%. The eurodollar rate margin will be
adjusted quarterly and will vary with the Company's senior debt ratio, as
defined in the credit agreement. Payments, excluding interest, on the
outstanding principal amount of $156 million will be $400,000 quarterly through
June 2005, $5 million in September 2005, December 2005 and March 2006 and $136
million on the facility termination date, which will occur not later than June
30, 2006. The new credit agreement requires the Company to maintain in a
segregated account cash and cash equivalents in an amount of $18.5 million for
the twelve-month period following the effective date, which may be reduced to
$9.25 million for the six-month period thereafter. The amounts in the account
may be applied solely to the payment of specified contingencies. The new credit
agreement contains additional covenants, including a covenant that limits the
ratio of the Company's senior debt to a specified measure of its earnings before
interest, income taxes, depreciation, amortization and other items and a
covenant that limits the maximum amount the Company may spend on capital
expenditures in any year to a specified amount or, if greater, to an amount
equal to the foregoing measure of earnings, as reduced by specified cash
interest expense and other payments. The credit agreement also requires the
Company to prepay outstanding principal balances from excess cash flows, as
defined, and from the proceeds of specified types of transactions.
Amended Capital Lease Facilities
On the effective date of the plan of reorganization, the Company
entered into an amendment to its existing capital lease facilities with NTFC
Capital Corporation and General Electric Capital Corporation to defer until
September 2005 through June 2006 approximately $9.9 million in principal
payments that would otherwise become due and payable during 2003. The
18
amendment provides that the Company generally will pay interest only on the
existing balance of the capital leases during 2003 and resume principal and
interest payments in 2004.
Investment in New Series A Preferred Stock
On the effective date of the plan of reorganization, the Company
received total gross proceeds of $30 million from the sale of 300,000 shares of
the new Series A preferred stock. The new Series A preferred stock has a
liquidation preference over the new common stock equal to the greater of $100
per share plus accrued and unpaid dividends or the amount that would have been
received with respect to the shares of common stock issuable upon conversion of
the shares of new Series A preferred stock if such shares had been converted
immediately before the liquidation event. Each share of new Series A preferred
stock accrues dividends, payable quarterly when and if declared by the board of
directors, equal to the greater of (1) 8% of the sum of the liquidation
preference of $100 per share plus accrued and unpaid dividends from prior
dividend periods or (2) dividends that would have accrued with respect to that
share on an as-converted basis as a result of any dividend declared on the new
common stock during the applicable quarterly dividend period. Dividends on the
new Series A preferred stock at the 8% annual rate are payable, at the Company's
option, in shares of new Series A preferred stock or cash. The new Series A
preferred stock will be redeemable in cash at the Company's option beginning
three years after the issue date and will be subject to mandatory redemption in
cash ten years after the issue date. The redemption price per share will be
equal to the liquidation preference of $100 per share plus accrued and unpaid
dividends. The new Series A preferred stock is convertible into new common stock
at any time at a conversion price initially equal to $5.7143 per share of new
common stock. As of the date of issue, the new Series A preferred stock was
convertible into a total of 5,250,000 shares of new common stock. The conversion
price is subject to antidilution adjustments in specified circumstances.
The Company issued warrants to purchase new common stock with the new
Series A preferred stock at a ratio of 3.40 warrants for each share of new
Series A preferred stock. The warrants have a five-year term. The warrant
exercise price is initially $5.114 per share of new common stock and is subject
to antidilution adjustments in specified circumstances. As of the date of issue,
the warrants were exercisable for a total of 1,020,000 shares of new common
stock.
The Company has applied approximately $5.1 million of the sale
proceeds to pay expenses related to its reorganization and expects to pay out of
such proceeds an additional $3.0 million related to reorganization expenses in
the fourth quarter of 2002.
Fresh Start Reporting
As of October 30, 2002, the Company will implement fresh start
reporting under the provision of SOP 90-7. The provisions of fresh start
reporting require that the Company revalue its assets and liabilities to fair
value, reestablish stockholders' equity using the reorganized value established
in connection with the plan of reorganization and record any applicable
reorganization value in excess of amounts allocable to identifiable assets as an
intangible asset. As a result of the adoption of SOP 90-7, the Company is
reviewing the fair value of its assets and liabilities and expects it will be
required to write down the value of some of its assets and liabilities. The
Company expects that the implementation of fresh start reporting under SOP 90-7
will have a material effect on its financial statements.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This quarterly report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. When used in this report,
the words "anticipate," "believe," "estimate," "expect," "intend" and "plan" as
they relate to the Company or our management are intended to identify these
forward-looking statements. All statements by the Company regarding our expected
future financial position and operating results, our business strategy, our
financing plans, forecasted trends relating to the markets in which we operate
and similar matters are forward-looking statements. We cannot assure you that
our expectations expressed or implied in these forward-looking statements will
turn out to be correct. The following analysis should be read in conjunction
with our Annual Report on Form 10-K for the year ended December 31, 2001 and the
financial statements and related notes thereto.
We have included data with respect to EBITDA, as adjusted, in the
following analysis because it is a measure commonly used in our industry.
EBITDA, as adjusted, represents earnings before other income and other expenses,
net interest, income taxes, and depreciation and amortization. EBITDA, as
adjusted, is not a measure of financial performance under accounting principles
generally accepted in the United States and should not be considered an
alternative to net income as a measure of performance or to cash flows as a
measure of liquidity. EBITDA, as adjusted, is not necessarily comparable with
similarly titled measures for other companies.
Unless we indicate otherwise, references in this report to "we," "us,"
"our," and "the Company" mean ITC/\DeltaCom, Inc. and its subsidiaries. Unless
we indicate otherwise, we have rounded dollar amounts over $1 million to the
nearest hundred thousand and dollar amounts of less than $1 million to the
nearest thousand.
PLAN OF REORGANIZATION
Beginning in the third quarter of 2001, we initiated a strategic and
operational restructuring intended to accelerate positive cash flow from
operations by emphasizing our core retail services and reducing operating costs.
In addition to de-emphasizing certain non-core services, the key elements of
this plan have included a reduction of our employee base, consolidation of
facilities and operations and the reduction of capital expenditures. We also
have sought, by eliminating a substantial portion of our existing indebtedness,
to reduce our fixed interest costs so that we are positioned to achieve and
maintain positive cash flow from operations from the effective date of our plan
of reorganization on October 29, 2002 through the current period of uncertainty
affecting the telecommunications industry and competitive telecommunications
companies. In the second and third quarters of 2002, we were able to generate
positive cash flow from operations even after incurring substantial expenses
associated with our reorganization. Our positive cash flow from operations
during these quarters excludes the effects of interest payments that were not
paid and subsequently were eliminated under our plan of reorganization.
In order to complete our reorganization expeditiously, we filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code on June 25, 2002. On October 17, 2002, the Bankruptcy Court entered an
order confirming our plan of reorganization. The transactions contemplated by
the plan became effective on October 29, 2002.
Under our plan of reorganization on the effective date:
. All of ITC/\DeltaCom's outstanding senior notes plus accrued and
unpaid interest, having a total principal amount of $415 million,
were cancelled and the former holders of those notes received in
exchange a total of 40,750,000 shares, or 81.5%, of the new
common stock of the reorganized ITC/\DeltaCom.
. All of ITC/\DeltaCom's outstanding convertible subordinated notes
plus accrued and unpaid interest, having a total principal amount
of $100 million, were cancelled and the former holders of those
notes received in exchange a total of 2,500,000 shares, or 5%, of
the new common stock.
. All of ITC/\DeltaCom's outstanding common stock, Series A
preferred stock and Series B preferred stock, plus accrued and
undistributed dividends, were cancelled and the former holders of
those securities collectively received a total of 500,000 shares,
or 1%, of the new common stock.
. ITC/\DeltaCom issued and sold in a rights offering to holders of
the old common stock and old preferred stock, for a total
purchase price of $184,600, 1,846 shares of new 8% Series A
convertible redeemable preferred stock of the reorganized
ITC/\DeltaCom (the "new Series A preferred stock") and warrants
to purchase approximately 6,276 shares of new common stock.
20
. Investors, including members of the Company's management,
collectively purchased in a private offering, for a purchase
price of $29.8 million, 298,154 shares of the new Series A
preferred stock and warrants to purchase approximately 1,013,724
shares of the new common stock. As consideration for this
commitment, the investors collectively received 1,000,000 shares
of new common stock.
The foregoing ownership percentages assume the conversion of the new Series A
preferred stock into the new common stock as of October 29, 2002.
In connection with our plan of reorganization, as discussed in this
report below under "-Liquidity and Capital Resources," we also amended our
senior credit facility and our capital lease facilities with NTFC Capital
Corporation and General Electric Capital Corporation.
We adopted the provisions of Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," upon
commencement of the bankruptcy proceedings. In accordance with SOP 90-7,
liabilities subject to compromise under the bankruptcy proceedings have been
segregated on the condensed consolidated balance sheets included elsewhere in
this report. Liabilities subject to compromise are recorded for the amounts we
expect to be allowed on known claims rather than estimates of the amounts for
which those claims may be settled as a result of the plan of reorganization
approved by the Bankruptcy Court.
As of October 30, 2002, we will implement fresh start reporting under
the provision of SOP 90-7. The provisions of fresh start reporting require that
we revalue our assets and liabilities to fair value, reestablish stockholders'
equity using the reorganized value established in connection with the plan and
record any applicable reorganization value in excess of amounts allocable to
identifiable assets as an intangible asset. As a result of the adoption of SOP
90-7, we are reviewing the fair value of our assets and liabilities and expect
we will be required to write down the value of some of our assets and
liabilities. We expect that the implementation of fresh start reporting under
SOP 90-7 will have a material effect on our financial statements.
OVERVIEW
We provide voice and data telecommunications services on a retail
basis to businesses in the southern United States. Through our broadband
transport business, we also provide regional telecommunications transmission
services to other telecommunications companies on a wholesale basis using our
network. In connection with these businesses, we own, operate or manage an
extensive fiber optic network in the southern United States. Through our
e/\deltacom business, we provide customers with colocation services, managed
services and professional services primarily through e/\deltacom's data center
in Suwanee, Georgia.
Retail Services
We provide our retail services individually or in a bundled package
tailored to the business customer's specific needs. We derive our retail
services revenues from the following four sources:
. sales of integrated telecommunications services, including local
exchange, long distance, enhanced data and Internet services, to
end-user customers;
. sales of local dial-up services to Internet service providers for
use in their provision of services to their customers;
. sales of nonrecurring equipment and professional services to
end-user customers; and
. sales of wholesale long distance services for resale by other
telecommunications carriers.
As of September 30, 2002, we provided retail services to approximately
18,680 business customers, which were served by 35 branch offices. As of
September 30, 2002, we had sold approximately 224,700 access lines, excluding
lines that had been disconnected or cancelled. Of these access lines,
approximately 214,630 had been installed as of September 30, 2002. The following
table presents, for the periods indicated, selected operating data, in
thousands, for our retail services segment:
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Operating revenues....................... $ 80,679 $ 78,614 $ 254,444 $ 239,171
EBITDA, as adjusted...................... 4,359 (85,829) 14,607 (86,550)
Operating loss........................... (14,609) (103,957) (40,288) (138,480)
Pro forma EBITDA, as adjusted ........... $ 5,229 $ (3,882) $ 14,042 $ (6,103)
21
Pro forma EBITDA, as adjusted, for our retail services excludes $3.5
million of revenues for the nine months ended September 30, 2002 related to a
non-recurring fee received from a local interconnection customer for the early
termination of a contract and $1.5 million of revenues for the nine months ended
September 30, 2001 related to a prior-period interconnection agreement
settlement. Pro forma EBITDA, as adjusted, for the three months ended September
30, 2002 for retail services excludes $870,000 of restructuring charges,
including employee severance expenses of $725,000, office space lease
termination costs of $297,000 and a reduction in the amount originally accrued
for contract termination costs of $152,000. Pro forma EBITDA, as adjusted, for
the nine months ended September 30, 2002 for retail services excludes $2.7
million of restructuring charges and $223,000 of special charges related to the
write-down of impaired assets. Pro forma EBITDA, as adjusted, for the three and
nine months ended September 30, 2001 for retail services excludes a $1.7 million
charge for inventory write-down, restructuring charges of $5.9 million and
special charges related to the write-down of impaired assets and goodwill of
$74.4 million.
Broadband Transport Services
Our broadband transport services include the provision to other
telecommunications companies of regional telecommunications transmission
services on a wholesale basis using our network, as well as the provision of
directory assistance services. The following table presents, for the periods
indicated, selected operating data, in thousands, for our broadband transport
services segment:
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Operating revenues....................... $ 20,342 $ 23,868 $ 64,536 $ 71,552
EBITDA, as adjusted...................... 9,060 12,339 31,132 37,536
Operating (loss) income.................. (4,159) (160) (9,133) 1,362
Pro forma EBITDA, as adjusted ........... $ 9,133 $ 12,505 $ 31,205 $ 37,702
Pro forma EBITDA, as adjusted, for the three and nine months ended
September 30, 2002 for broadband transport services excludes $73,000 of
restructuring charges, which consist of employee severance expenses. Pro forma
EBITDA, as adjusted, for the three and nine months ended September 30, 2001 for
broadband transport services excludes $111,000 of restructuring charges and
$55,000 special charges related to the write-down of impaired assets.
WorldCom, Inc. and certain of its subsidiaries accounted for
approximately 20% and 21% of our revenues from broadband transport services in
the three and nine months ended September 30, 2002, respectively. WorldCom filed
for protection under Chapter 11 of the Bankruptcy Code on July 21, 2002. We do
not have any material exposure for nonpayment of WorldCom revenues recognized
through September 30, 2002. We are currently unable to determine the impact that
the WorldCom filing and other developments affecting WorldCom will have on our
revenues from broadband transport services for future periods.
As of September 30, 2002, we owned or managed approximately 9,980
route miles of a fiber optic network which covered portions of ten states in the
southern United States, including Alabama, Arkansas, Florida, Georgia,
Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and Texas. As
of the same date, our network extended to approximately 188 points of presence,
which are the locations along our network where we are able to deliver
telecommunications traffic to, and receive telecommunications traffic from,
other carriers for further transmission or ultimate delivery to an end-user.
These points of presence are located in most major population centers in the
areas covered by our fiber optic network and in a significant number of smaller
cities where, in several of the smaller markets, our only competitor is the
incumbent local telephone company.
As of September 30, 2002, we owned approximately 6,180 route miles of
our fiber optic network, which we have built or acquired through long-term dark
fiber leases or indefeasible rights-of-use agreements. In addition, we have
strategic relationships principally with three public utilities, Duke Power
Company, Florida Power & Light Company and Entergy Technology Company, under
which we market, sell and manage capacity on approximately 3,800 route miles of
network owned and operated by these three utilities.
SEGMENT DISCLOSURE
Beginning in 2002, we revised our segment reporting to align our
financial presentation more closely with our basic retail and wholesale customer
businesses and to reflect more accurately the trends in those customer bases.
One segment consists of our retail services business and the second segment
consists of our broadband transport business. Beginning in 2002, results of our
e/\deltacom business are no longer being reported as a separate segment, but
instead are included in our retail services business segment. We have restated
the 2001 segment information in this report to include the results of the former
e/\deltacom segment as part of the results of the retail services segment.
Although sales to retail customers account for a substantial amount of the
revenues of the retail services segment, the retail services segment also
accounts for sales of a significant amount of services on a wholesale basis.
22
OTHER INFORMATION ABOUT OUR BUSINESS
The following table presents, as of the dates indicated, additional
information about our operations and business. The data presented, except branch
office, colocation and switch data, are rounded.
September 30, June 30, March 31, December 31, September 30,
2002 2002 2002 2001 2001
------------- ------------ ------------- -------------- ---------------
Branch offices ...................... 35 35 35 35 35
Business customers served - retail
services (1)........................ 18,680 17,730 16,560 15,400 14,720
Route miles ......................... 9,980 9,980 9,980 9,980 9,980
Colocations.......................... 180 179 178 177 177
Voice switches....................... 12 12 12 12 12
Frame relay/ATM switches (2) ........ 44 46 88 80 80
"Next generation" voice switches (3). 47 48 48 42 41
Number of employees.................. 1,875 1,910 2,000 2,030 1,960
- ----------
(1) Reflects the combination of certain customers' multiple accounts into a
single customer account.
(2) Reflects the combination of previously reported asynchronous transfer mode,
frame relay and passport switches. The decrease in the number of such
switches from March 31, 2002 to June 30, 2002 resulted primarily from the
removal of 36 passport switching facilities from our network during the
second quarter of 2002.
(3) Formerly referred to as Unisphere SMX-2100 switches. Excludes Nortel DMS500
voice switches reported under "Voice switches."
We generally provide our services to the following two types of
customers: (1) ultimate end-users that purchase our services on a retail basis,
including revenues from other carriers that result from end-user customers; and
(2) other communications companies that purchase our services on a wholesale
basis in connection with their provision of services to their customers. The
following tables present information about our revenues generated by our retail
customers and wholesale customers and about telephone access lines installed for
and sold to each type of customer. The following tables do not present results
of our retail services and broadband transport services segments, which are
discussed below under "-Results of Operations." The dollar amounts are shown in
thousands.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------- ------------- -----------
Retail customer revenues: (1)
Local (3)............................... $ 27,649 $ 21,236 $ 79,247 $ 59,706
Long distance (3) ...................... 16,235 15,703 48,590 48,841
Enhanced data (3) ...................... 15,672 11,625 45,027 31,447
------------ ------------- ------------- -----------
Integrated telecom revenue .......... 59,556 48,564 172,864 139,994
Equipment and other (3) ................ 10,592 11,638 33,205 40,641
------------ ------------- ------------- -----------
Total retail revenues................ $ 70,148 $ 60,202 $ 206,069 $ 180,635
============ ============= ============= ===========
Wholesale customer revenues: (1) (2)
Broadband transport revenues (4) ....... $ 20,342 $ 23,868 $ 64,536 $ 71,552
Local/interconnection revenues (2) (3) 5,984 13,484 31,454 40,532
Long distance and data (3) ............. 3,286 4,214 9,772 13,500
Other (3) .............................. 1,261 714 3,649 3,004
------------ ------------- ------------- -----------
Total wholesale revenues............. $ 30,873 $ 42,280 $ 109,411 $ 128,588
============ ============= ============= ===========
Retail lines sold (5) ..................... 170,410 133,600
Wholesales lines sold (5) ................. 54,300 153,700
------------- -----------
Total lines sold (5) ................... 224,710 287,300
============= ===========
Retail lines installed .................... 162,420 124,750
Wholesales lines installed................. 52,210 150,850
------------- -----------
Total lines installed................... 214,630 275,600
============= ===========
Lines installed/sold percentage:
Retail customers........................ 95% 93%
Wholesale customers..................... 96% 98%
- ----------
(1) Excludes $1.5 million of prior-period interconnection agreement settlements
in the nine months ended September 30, 2001.
23
(2) Excludes a non-recurring fee of $3.5 million received by us in April 2002
for the early termination of a wholesale customer contract.
(3) Reported in retail services segment revenues.
(4) Reported in broadband transport services segment revenues.
(5) Reported net of lines disconnected or cancelled.
The declines in wholesale customer revenues were attributable to
adverse trends affecting our wholesale business and resulted primarily from
service disconnections in our local interconnection business, from a reduction
in rates charged to our customers due to overcapacity in the broadband services
business and from service cancellations by some customers. We expect revenues
and EBITDA, as adjusted, from our wholesale customers to stabilize no earlier
than the first quarter of 2003. As a result of general market conditions, we
have decreased the amount of capital we invest in our wholesale business and
expect that wholesale services will continue to experience less favorable market
conditions and minimal revenue growth, if not a decline in revenues, at least
through the end of 2003.
RESULTS OF OPERATIONS
The following tables present, for the periods indicated, selected
statement of operations data in dollars and as a percentage of operating
revenues for our retail services and broadband transport services. The dollar
amounts are shown in thousands.
RETAIL SERVICES
-------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------- ---------------------------------------
2002 % 2001 % 2002 % 2001 %
------------ ----- ------------ ------ ------------ ----- ------------ ----
Operating revenues ..................... $ 80,679 100 $ 78,614 100 $ 254,444 100 $ 239,171 100
Cost of services ....................... 45,599 57 44,618 57 142,225 56 128,521 54
Inventory write-down ................... -- -- 1,663 2 -- -- 1,663 1
------------ ------------ ------------ ------------
Gross margin ........................... 35,080 43 32,333 41 112,219 44 108,987 45
------------ ------------ ------------ ------------
Selling, operations and administration . 30,721 38 43,780 56 97,389 38 121,155 51
Depreciation and amortization .......... 18,968 24 18,128 23 54,895 22 51,930 22
Special charges ........................ -- -- 74,382 94 223 -- 74,382 31
------------ ------------ ------------ ------------
Total operating expenses ............... 49,689 62 136,290 173 152,507 60 247,467 103
------------ ------------ ------------ ------------
Operating loss ......................... (14,609) (18) (103,957) (132) (40,288) (16) (138,480) (58)
------------ ------------ ------------ ------------
EBITDA, as adjusted .................... $ 4,359 5 $ (85,829) (109) $ 14,607 6 $ (86,550) (36)
============ ============ ============ ============
Pro forma EBITDA, as adjusted .......... $ 5,229 6 $ (3,882) (5) $ 14,042 6 $ (6,103) (3)
============ ============ ============ ============
BROADBAND TRANSPORT SERVICES
----------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------- ------------------------------------------
2002 % 2001 % 2002 % 2001 %
------------ ----- ------------ ----- ------------ ----- ------------ -----
Operating revenues .................. $ 20,342 100 $ 23,868 100 $ 64,536 100 $ 71,552 100
Cost of services .................... 2,253 11 2,783 12 6,863 11 8,413 12
------------ ------------ ------------ ------------
Gross margin ........................ 18,089 89 21,085 88 57,673 89 63,139 88
------------ ------------ ------------ ------------
Selling, operations and
administration ..................... 9,029 44 8,691 36 26,541 41 25,548 36
Depreciation and amortization ....... 13,219 65 12,499 52 40,265 62 36,174 50
Special charges ..................... -- -- 55 1 -- -- 55 --
------------ ------------ ------------ ------------
Total operating expenses ............ 22,248 109 21,245 89 66,806 104 61,777 86
------------ ------------ ------------ ------------
Operating (loss) income ............. (4,159) (20) (160) (1) (9,133) (14) 1,362 2
------------ ------------ ------------ ------------
EBITDA, as adjusted ................. $ 9,060 45 $ 12,339 52 $ 31,132 48 $ 37,536 52
============ ============ ============ ============
Pro forma EBITDA, as adjusted ....... $ 9,133 45 $ 12,505 52 $ 31,205 48 $ 37,702 53
============ ============ ============ ============
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2001
Operating Revenues. Total operating revenues decreased $1.5 million,
or 1.4%, from $102.5 million for the three months ended September 30, 2001 to
$101.0 million for the three months ended September 30, 2002. Total operating
revenues for the nine months ended September 30, 2002 increased $8.3 million, or
2.7%, to $319.0 million from total operating revenues of $310.7 million for the
nine months ended September 30, 2002.
Operating revenues from our retail services increased $2.1 million, or
2.6%, from $78.6 million for the 2001 fiscal quarter to $80.7 million for the
2002 fiscal quarter. Operating revenues from our retail services for the 2002
fiscal nine-month period increased $15.2 million, or 6.4%, to $254.4 million
from $239.2 million for the 2001 fiscal nine-month period. Our retail services
operating revenues for the 2002 fiscal nine-month period included a one-time net
benefit of $3.5 million received by us in April 2002 for the early termination
of a wholesale customer contract. Our retail services operating revenues for the
2001 fiscal nine-month period included a one-time net benefit of $1.5 million
related to an interconnection agreement settlement. Excluding
24
these one-time benefits, our retail services revenues increased $13.3 million,
or 5.6%, for the 2002 fiscal nine-month period. The changes in our retail
services operating revenues were primarily attributable to the following
factors:
. an increase in revenues from our end-user customers generated by
our local exchange telephone services of $5.4 million for the
2002 fiscal quarter and $16.5 million for the 2002 fiscal
nine-month period, which reflected increases of 35% for the 2002
fiscal quarter and 41% for the 2002 fiscal nine-month period in
the average number of installed lines compared to the
corresponding periods in 2001;
. an increase in revenues generated by our Internet access services
of $1.9 million for the 2002 fiscal quarter and $6.7 million for
the 2002 fiscal nine-month period, which represented increases of
58% for the 2002 fiscal quarter and 89% for the 2002 fiscal
nine-month period compared to the corresponding periods in 2001;
and
. a decrease in revenues generated by our provision of local
dial-up service to Internet service providers of $5.3 million for
the 2002 fiscal quarter and $6.6 million for the 2002 fiscal
nine-month period, which resulted primarily from decreases of 54%
for the 2002 fiscal quarter and 32% for the 2002 fiscal
nine-month period in the average number of installed lines,
excluding $3.5 million received by us in April 2002 for the early
termination of a wholesale customer contract.
Although the average rate per minute of use we receive for our long
distance service in the 2002 fiscal quarter and the 2002 fiscal nine-month
period decreased from the corresponding periods in 2001, our revenues from this
service increased slightly, as we experienced a continued increase in the number
of minutes used. We expect that this service will continue to experience growth
in minutes used, but the effect of this growth may be offset in whole or in part
by any rate reductions we may implement as a result of competitive requirements.
As previously reported, our local interconnection revenues were
negatively affected by the cancellation of approximately 26,300 access lines by
a large Internet service provider customer. We expect this cancellation and
overall instability in the local interconnection market to have a continuing
negative effect on our local interconnection revenues for at least the remainder
of 2002 as we seek new customers.
We expect that revenues from our local, data and Internet services
will continue to grow during the remainder of 2002. Based on current economic
conditions, we do not expect significant growth, if any, from our sales of
nonrecurring equipment and services during the remainder of 2002.
Operating revenues from our broadband transport services decreased
$3.6 million, or 14.8%, from $23.9 million for the 2001 fiscal quarter to $20.3
million for the 2002 fiscal quarter. Operating revenues from these services for
the 2002 fiscal nine-month period decreased $7.1 million, or 9.8%, to $64.5
million from $71.6 million for the 2001 fiscal nine-month period. The decreases
in these revenues were primarily attributable to a decrease in the average rate
we charge for our transmission services of 33% for the 2002 fiscal quarter and
36% for the 2002 fiscal nine-month period and from service cancellations by some
customers. The decreases in average rates resulted principally from price
reductions for our broadband transport services due to industry overcapacity.
Based on known or forecasted disconnections and competitive pressures
in some smaller markets, we expect a continued decline in our broadband
transport services revenues in the fourth quarter of 2002. We presently expect
revenues from these services to stabilize no earlier than the first quarter of
2003. As a result of general market conditions, we expect that our broadband
transport services will continue to experience less favorable market conditions
and minimal revenue growth, if not a decline in revenues, at least through the
end of 2003.
Cost of Services. Total cost of services increased $451,000, from
$47.4 million, or 46.3% of total operating revenues, for the 2001 fiscal quarter
to $47.9 million, or 47.4% of total operating revenues, for the 2002 fiscal
quarter. Total cost of services of $149.1 million, or 46.7% of total operating
revenues, for the 2002 fiscal nine-month period represented an increase of $12.2
million over total cost of services of $136.9 million, or 44.1% of total
operating revenues, for the 2001 fiscal nine-month period.
Cost of services for our retail services increased $981,000 from $44.6
million for the 2001 fiscal quarter to $45.6 million for the 2002 fiscal
quarter. Cost of services of $142.2 million for retail services for the 2002
fiscal nine-month period represented an increase of $13.7 million over cost of
services of $128.5 million for the 2001 fiscal nine-month period. Cost of
services as a percentage of operating revenues from retail services remained
flat at 57% for the 2002 fiscal quarter compared to the 2001 fiscal quarter and
increased to 56% for the 2002 fiscal nine-month period from 54% for the 2001
fiscal nine-month period. These increases were primarily attributable to the
following factors:
25
. an increase of $195,000, or 1.1%, for the 2002 fiscal quarter and
$11.9 million, or 25.4%, for the 2002 fiscal nine-month period in
our facilities-based costs incurred to support our local service
offering, which resulted from an increase in the average number
of installed lines; and
. an increase of $1.6 million, or 63.0%, for the 2002 fiscal
quarter and $5.4 million, or 63.8%, for the 2002 fiscal
nine-month period in costs associated with an increase in
computer related equipment sales and services.
These costs were partially offset by decreases in our purchase of local resale
and other services.
Cost of services for our broadband transport services decreased
$530,000 from $2.8 million for the 2001 fiscal quarter to $2.3 million for the
2002 fiscal quarter. Cost of services of $6.9 million for these services during
the 2002 fiscal nine-month period decreased $1.5 million from cost of services
of $8.4 million for the 2001 fiscal nine-month period. Cost of services as a
percentage of operating revenues from broadband transport services decreased to
11% for the 2002 fiscal quarter and 2002 fiscal nine-month period from 12% for
the 2001 fiscal quarter and 2001 fiscal nine-month period. These decreases were
primarily attributable to a decrease in the rates we were charged for these
services and a reduction in our use of networks of other providers.
Inventory Mark-Down. During the 2001 fiscal quarter and the 2001
fiscal nine-month period, we incurred a charge of approximately $1.7 million for
the mark-to-market of our inventory of various telephone systems and other
equipment related to our retail services.
Selling, Operations and Administration Expense. Total selling,
operations and administration expense decreased $12.7 million from $52.5
million, or 51% of total operating revenues, for the 2001 fiscal quarter to
$39.8 million, or 39% of total operating revenues, for the 2002 fiscal quarter.
Total selling, operations and administration expense decreased $22.8 million
from $146.7 million, or 47% of total operating revenues, for the 2001 fiscal
nine-month period to $123.9 million, or 39% of total operating revenues, for the
2002 fiscal nine-month period.
Selling, operations and administration expense attributable to our
retail services decreased $13.1 million from $43.8 million, or 56% of retail
services operating revenues, for the 2001 fiscal quarter to $30.7 million, or
38% of retail services operating revenues, for the 2002 fiscal quarter. Selling,
operations and administration expense attributable to retail services during the
2002 fiscal nine-month period decreased $23.8 million to $97.4 million, or 38%
of retail services operating revenues, from $121.2 million, or 51% of retail
services operating revenues, for the 2001 fiscal nine-month period. These
decreases were primarily attributable to a decrease in personnel and occupancy
expenses resulting from a reduction in the number of employees and the closing
of some facilities as part of our restructuring efforts implemented in September
2001 and April 2002. We expect that our selling, operations and administration
expenses will continue to improve as we realize the effects of our
restructuring.
Selling, operations and administration expense attributable to our
broadband transport services increased $338,000 from $8.7 million, or 36% of
broadband transport services operating revenues, for the 2001 fiscal quarter to
$9.0 million, or 44% of broadband transport services operating revenues, for the
2002 fiscal quarter. Selling, operations and administration expense attributable
to broadband transport services during the 2002 fiscal nine-month period
increased $993,000 to $26.5 million, or 41% of broadband transport services
operating revenues, from $25.5 million, or 36% of broadband transport services
operating revenues, for the 2001 fiscal nine-month period. These increases
resulted primarily from increases in taxes and licenses expense.
Depreciation and Amortization. Total depreciation and amortization
expense increased $1.6 million from $30.6 million for the 2001 fiscal quarter to
$32.2 million for the 2002 fiscal quarter. Total depreciation and amortization
expense of $95.2 million for the 2002 fiscal nine-month period represented an
increase of $7.0 million over total depreciation and amortization expense of
$88.2 million for the 2001 fiscal nine-month period. Our retail services
accounted for $840,000 of the increase in the 2002 fiscal quarter and $3.0
million of the increase in the 2002 fiscal nine-month period. These increases
were primarily related to depreciation of telecommunications equipment added to
our network during 2001 and the 2002 fiscal nine-month period. Our broadband
transport services operations accounted for $720,000 of the increase in the 2002
fiscal quarter and $4.1 million of the increase in the 2002 fiscal nine-month
period. The increases associated with these operations were primarily
attributable to depreciation of network fiber and optical telecommunications
equipment installed during 2001 and to depreciation of telecommunications
equipment installed during the 2002 fiscal nine-month period. The increases in
depreciation and amortization include the effects of a decrease in the
amortization of goodwill, which ceased on January 1, 2002, from $1.5 million in
the 2001 fiscal quarter and $4.6 million in the 2001 fiscal nine-month period.
Special charges. We incurred total special charges of $223,000 during
the 2002 fiscal nine-month period and $74.4 million during the 2001 fiscal
nine-month period. The charges for the 2002 fiscal nine-month period were
primarily attributable to our write-down of impaired assets. The charges for the
2001 fiscal nine-month period were primarily attributable to our write-down of
impaired assets and goodwill.
26
Interest Expense. Total interest expense decreased $9.4 million, from
$14.4 million for the 2001 fiscal quarter to $5.0 million for the 2002 fiscal
quarter, as a result of our suspension of interest payments on our senior notes
and convertible subordinated notes in the 2002 fiscal quarter during our Chapter
11 reorganization process. Total interest expense of $34.5 million for the 2002
fiscal nine-month period represented a decrease of $9.1 million from total
interest expense of $43.6 million for the 2001 fiscal nine-month period.
Interest Income. Total interest income from the temporary investment
of available cash balances decreased from $199,000 for the 2001 fiscal quarter
to $90,000 for the 2002 fiscal quarter and from $2.0 million for the 2001
nine-month period to $316,000 for the 2002 nine-month period.
EBITDA, as adjusted. The following tables present, for the periods
indicated, EBITDA, as adjusted, and pro forma EBITDA, as adjusted. The amounts
are shown in thousands.
Consolidated:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
EBITDA, as adjusted...................... $ 13,419 $ (73,489) $ 45,739 $ (49,014)
Non-recurring contract termination fee... -- -- (3,500) --
Interconnection agreement settlement..... -- -- -- (1,500)
Inventory write-down..................... -- 1,663 -- 1,663
Restructuring expenses................... 943 6,013 2,785 6,013
Special charges.......................... -- 74,437 223 74,437
---------- ---------- ---------- ----------
Pro forma EBITDA, as adjusted ........... $ 14,362 $ 8,624 $ 45,247 $ 31,599
========== ========== ========== ==========
Retail Services:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
EBITDA, as adjusted...................... $ 4,359 $ (85,829) $ 14,607 $ (86,550)
Non-recurring contract termination fee... -- -- (3,500) --
Interconnection agreement settlement..... -- -- -- (1,500)
Inventory write-down..................... -- 1,663 -- 1,663
Restructuring expenses................... 870 5,902 2,712 5,902
Special charges.......................... -- 74,382 223 74,382
---------- ---------- ---------- ----------
Pro forma EBITDA, as adjusted ........... $ 5,229 $ (3,882) $ 14,042 $ (6,103)
========== ========== ========== ==========
Broadband Transport Services:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
EBITDA, as adjusted...................... $ 9,060 $ 12,339 $ 31,132 $ 37,536
Restructuring expenses................... 73 111 73 111
Special charges.......................... -- 55 -- 55
---------- ---------- ---------- ----------
Pro forma EBITDA, as adjusted ........... $ 9,133 $ 12,505 $ 31,205 $ 37,702
========== ========== ========== ==========
The increases in pro forma EBITDA, as adjusted, for our retail services
were primarily attributable to the following factors:
. an increase of $2.1 million for the 2002 fiscal quarter and $13.3
million for the 2002 fiscal nine-month period related to an increase
in our operating revenues, excluding a non-recurring contract
termination fee and interconnection agreement settlement;
. an increase, excluding restructuring expenses, of $8.0 million in the
2002 fiscal quarter and $20.5 million in the 2002 fiscal nine-month
period, resulting from a decrease in our selling, operations and
administration expense; and
. a decrease of $981,000 in the 2002 fiscal quarter and $13.7 million in
the 2002 fiscal nine-month period related to an increase in our cost
of services.
The decreases in EBITDA, as adjusted, for our broadband transport
services were primarily attributable to a decline in the revenues generated by
this business. The declines resulted primarily from a reduction in rates charged
to our customers due to industry overcapacity and from service cancellations by
some customers.
27
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2002, we had $48.6 million of cash and cash
equivalents. Based on such cash availability and our anticipated ability to
continue to generate positive cash flows from operations, we do not currently
require additional funding to finance our operations or to expand our business
as currently planned.
As discussed elsewhere in this report, we filed for reorganization
under Chapter 11 of the Bankruptcy Code because we believed our existing sources
of liquidity were insufficient to support the growth of our business and to
satisfy all of our debt service requirements. Our plan of reorganization, which
is summarized above under "-Plan of Reorganization," resulted in the elimination
of $515 million principal amount of our indebtedness through the cancellation of
all of our outstanding senior notes and convertible subordinated notes and the
issuance of common stock in our reorganized company to the former holders of the
notes. We expect that the decrease in our fixed interest costs resulting from
the reduction in our total indebtedness will enable us to maintain positive cash
flow from operations from completion of our reorganization on October 29, 2002
through the current period of uncertainty affecting the telecommunications
industry and competitive telecommunications companies.
Our liquidity position has been further strengthened by our receipt of
$30 million of gross proceeds from the sale of a new issue of convertible
redeemable preferred stock issued as part of our reorganization. On the
effective date of our plan of reorganization, we received total gross proceeds
of $30 million from the sale of 300,000 shares of the new Series A preferred
stock. The new Series A preferred stock has a liquidation preference over the
new common stock equal to the greater of $100 per share plus accrued and unpaid
dividends or the amount that would have been received with respect to the shares
of common stock issuable upon conversion of the shares of new Series A preferred
stock if such shares had been converted immediately before the liquidation
event. Each share of new Series A preferred stock accrues dividends, payable
quarterly when and if declared by our board of directors, equal to the greater
of (1) 8% of the sum of the liquidation preference of $100 per share plus
accrued and unpaid dividends from prior dividend periods or (2) dividends that
would have accrued with respect to that share on an as-converted basis as a
result of any dividend declared on the new common stock during the applicable
quarterly dividend period. Dividends on the new Series A preferred stock at the
8% annual rate are payable, at our option, in shares of new Series A preferred
stock or cash. The new Series A preferred stock will be redeemable in cash at
our option beginning three years after the issue date and will be subject to
mandatory redemption in cash ten years after the issue date. The redemption
price per share will be equal to the liquidation preference of $100 per share
plus accrued and unpaid dividends. The new Series A preferred stock is
convertible into new common stock at any time at a conversion price initially
equal to $5.7143 per share of new common stock. As of the date of issue, the new
Series A preferred stock was convertible into a total of 5,250,000 shares of new
common stock. The conversion price is subject to antidilution adjustments in
specified circumstances.
On the effective date of our plan of reorganization, we entered into a
senior credit facility with Morgan Stanley Senior Funding, Inc. and other
lenders, which amended and restated the $156 million senior credit facility in
effect since April 5, 2000. Under the new credit agreement, payments, excluding
interest, on the outstanding principal amount of $156 million will be $400,000
quarterly through June 2005, $5 million in September 2005, December 2005 and
March 2006 and $136 million on the facility termination date, which will occur
not later than June 30, 2006. The new agreement also requires us to prepay
outstanding principal balances from excess cash flows, as defined, and from the
proceeds of specified types of transactions. Under the agreement, we are
required to maintain in a segregated account cash and cash equivalents in an
amount of $18.5 million for the twelve-month period following the reorganization
effective date, which may be reduced to $9.25 million for the six-month period
thereafter. We may use the amounts in the account solely for the payment of
specified contingencies.
Under the new credit agreement, interest per annum is payable on
outstanding borrowings, at our option, at a base rate plus a base rate margin,
which is 1% less than the eurodollar rate margin, or at a eurodollar rate
(LIBOR) plus an applicable eurodollar rate margin, which is initially fixed at
4%. The eurodollar rate margin will be adjusted quarterly and will vary within a
specified range based on the ratio of our consolidated "Senior Debt" to our
consolidated earnings before interest, taxes, depreciation, amortization and
other items, adjusted as specified ("EBITDA"), as measured over the last twelve
months ("LTM") before each measurement date. Senior Debt is defined in the new
credit agreement to include all of our senior secured indebtedness, with
specified exceptions. Based on the ratio of our Senior Debt to our LTM EBITDA,
which will be measured on a quarterly basis, interest will be payable at the
following annual rates:
Ratio of Senior Debt
to LTM EBITDA
Equal to or Greater Than Interest Rate
------------------------ -------------
4.00 LIBOR + 5.25%
3.50 LIBOR + 4.75%
3.25 LIBOR + 4.25%
3.00 LIBOR + 4.00%
2.50 LIBOR + 3.75%
28
If the ratio of our Senior Debt to our LTM EBITDA is less than 2.50, interest
will be payable at an annual rate of LIBOR plus 3.50%.
The new credit agreement has added two new financial covenants.
. The first financial covenant generally limits our annual capital
expenditures, as defined in the agreement, to $42 million for fiscal
year 2002 and thereafter to the greater of (1) $10 million until
December 31, 2003 and $15 million in subsequent periods or (2) an
amount equal to our LTM EBITDA less the amounts of our cash interest
expense and principal payments under the credit facility and our
capital lease facilities with NTFC Capital Corporation and General
Electric Capital Corporation.
. The second financial covenant limits the permissible ratio of our
Senior Debt to our LTM EBITDA, as described above, but with additional
adjustments, to 4.5 for the quarters ended September 30, 2002 and
ending December 31, 2002 and to 4.0 thereafter. Our compliance with
these ratios will be measured on a quarterly basis.
Among other modifications to our previous credit agreement, the new credit
agreement imposes additional restrictions on our ability to secure indebtedness
with liens on our assets and properties, to acquire assets, to make cash
investments, and to make dividends and other restricted payments.
On the effective date of our plan of reorganization, we also entered into
an amendment to our existing capital lease facilities with NTFC Capital
Corporation and General Electric Capital Corporation to defer until September
2005 through June 2006 approximately $9.9 million in principal payments that
would otherwise become due and payable in 2003. The amendment provides that we
generally will pay only interest on the existing balance of the capital leases
during 2003 and resume principal and interest payments in 2004.
As previously reported, to conserve liquidity for our business while we
pursued reorganization negotiations, we did not pay the scheduled May 15, 2002
interest payments due on our 9-3/4% senior notes due 2008 and on our 4-1/2%
convertible subordinated notes due 2006 or the scheduled June 1, 2002 interest
payment due on our 11% senior notes due 2007. The scheduled May 15, 2002
payments totaled approximately $6.1 million on our 9-3/4% senior notes and
approximately $2.3 million on our 4-1/2% convertible subordinated notes. The
scheduled June 1, 2002 payment totaled approximately $7.2 million. As a result
of our failure to pay interest on the senior notes and convertible subordinated
notes on May 15 and June 1, 2002 and our filing of a voluntary petition under
Chapter 11 of the Bankruptcy Code on June 25, 2002, we were in default under our
senior credit facility and some of our capital lease facilities. While we were
in default, interest under the senior credit facility was payable at an annual
rate of 8.625%, which was computed on the basis of a default rate of 2% in
excess of a base rate of 4.75%, plus a margin of 1.875%. We ceased to be in
default under the senior credit facility and the foregoing capital lease
facilities upon our entry into amendments to those facilities on October 29,
2002.
On September 13, 2002, we entered into forbearance agreements with the
lenders under our senior credit facility and the foregoing capital lease
facilities pursuant to which the lenders agreed to forbear from exercising their
rights to declare a default or pursue remedies under those facilities based
solely on our failure to pay interest on the senior notes and convertible
subordinated notes, and our subsequent filing of a voluntary petition under
Chapter 11 of the Bankruptcy Code. The forbearance agreements terminated on
October 29, 2002, upon the closing of our amended and restated senior credit
facility.
We depend on BellSouth for the provision of wholesale telecommunications
services under our interconnection agreements with BellSouth and pursuant to
various access tariffs that BellSouth has filed with federal and state
regulatory agencies. By letter dated March 8, 2002, BellSouth had requested that
we provide a $10 million security deposit by March 29, 2002 in connection with
BellSouth's provision of services to us. On March 28, 2002, we filed a petition
for declaratory judgment in Georgia state court seeking a ruling from the court
that, based upon the terms of our interconnection agreements with BellSouth,
BellSouth may not require us to place a $10 million deposit with BellSouth as
security for future payment for services to be rendered to us by BellSouth.
BellSouth has responded to our petition by seeking to have the matter heard
before the Georgia Public Service Commission, rather than in Georgia state
court. BellSouth has filed a petition with the Georgia Public Service Commission
seeking a determination that we should be required to place a security deposit
of approximately $17 million with BellSouth. We are contesting both the
requirement for, and the amount of, the requested deposit. Based on our payment
history with BellSouth, including the fact that BellSouth received all payments
due from us during our reorganization process, our strengthened liquidity
position as a result of our reorganization, and other relevant factors, we do
not believe BellSouth is entitled to any amount of the deposit it seeks. We are
actively negotiating with BellSouth a resolution of this dispute that would
either eliminate or substantially reduce the amount of the requested deposit. If
we are unsuccessful in
29
either eliminating or substantially reducing the amount of the requested
security deposit, we may have to modify our planned capital expenditures, which
may have a material adverse effect on our current operating plans. For more
information about this proceeding, see note 7 to the condensed consolidated
financial statements appearing elsewhere in this report.
Some of our customers, especially governmental entities, and some
governmental entities from which we have acquired a franchise or rights-of-way
agreement, require us to obtain surety bonds as a condition to our provision of
service to them or other entities within their control. In February 2002,
because of our financial condition, our surety cancelled all outstanding surety
bonds that contained cancellation clauses. The surety also has advised us that
it will not underwrite any new surety bonds unless we provide 100% collateral
for such bonds. Our inability to provide surety bonds to replace the cancelled
surety bonds or issue new surety bonds will have an adverse impact on our
ability to provide service to some customers, especially government entities and
other entities that generally require surety bonds. We believe that our
strengthened liquidity position as a result of our reorganization and recent
changes to our major credit agreements provide us with greater flexibility to
satisfy our requirements for surety bonds and similar security arrangements. For
more information about our surety obligations, see note 7 to the condensed
consolidated financial statements appearing elsewhere in this report.
We have obtained a portion of our rights-of-way under an agreement that
provides for significant annual fixed payments by us through 2020. Certain
events specified in the agreement, including a change of control of ITC/\
DeltaCom, as defined, can cause termination of the annual payment provisions and
require us to make a one-time payment. The amount of this one-time payment would
be approximately $19.6 million if such an event were to occur before August 1,
2003 and could be greater than such amount if such an event were to occur
thereafter. Any such one-time payment would reduce our capital lease
obligations. Such a reduction would total approximately $9.5 million if such an
event were to occur before August 1, 2003.
During the 2002 fiscal nine-month period, we funded our operating and
capital requirements and other cash needs principally through cash from
operations and cash on hand. In large part to address our liquidity constraints,
we reduced our planned capital expenditures and implemented other cost-cutting
measures.
Cash provided by (used in) operating activities was $13.1 million in the
2002 fiscal nine-month period and $(15.2) million in the 2001 fiscal nine-month
period. Changes in working capital were $5.3 million in the 2002 fiscal
nine-month period and $(3.1) million in the 2001 fiscal nine-month period.
. The change in the 2002 fiscal nine-month period was primarily attributable
to a decrease in accounts receivable and inventory and an increase in
accrued interest, the effects of which were partially offset by an increase
in prepaid expenses and a decrease in accounts payable and unearned
revenue.
. The change in the 2001 fiscal nine-month period was primarily attributable
to an increase in inventory and a decrease in unearned revenue, the effects
of which were partially offset by a decrease in accounts receivable and
prepaid expenses and an increase in accounts payable, accrued interest,
accrued compensation and other accrued liabilities.
Cash used for investing activities was $27.9 million in the 2002 fiscal
nine-month period and $134.6 million in the 2001 fiscal nine-month period. The
cash used in these periods was primarily applied to fund capital expenditures.
We made capital expenditures of $27.9 million in the 2002 fiscal nine-month
period and $141.7 million in the 2001 fiscal nine-month period.
. Of the $27.9 million of capital expenditures in the 2002 fiscal nine-month
period, $24.2 million related to our retail services segment and $3.7
million related to our broadband transport services segment.
. Of the $141.7 million of capital expenditures in the 2001 fiscal nine-month
period, $105.3 million related to our retail services segment and $36.4
million related to our broadband transport services segment.
Cash (used in) provided by financing activities was $(3.9) million in the
2002 fiscal nine-month period and $65.8 million in the 2001 fiscal nine-month
period.
. Net cash used in financing activities in the 2002 fiscal nine-month period
consisted primarily of repayments of long-term debt and capital lease
obligations.
. Net cash provided by financing activities in the 2001 fiscal nine-month
period consisted primarily of proceeds of $66.6 million, net of issuance
costs, from the issuance of our Series B preferred stock and proceeds of
$1.1 million from the exercise of options to purchase common stock.
We have various contractual obligations and commercial commitments. The
following table sets forth, in thousands, the annual payments, exclusive of
interest payments, we are required to make under contractual cash obligations
and other
30
commercial commitments at September 30, 2002 (in thousands). The annual payments
have been adjusted for the revised terms under our amended and restated senior
credit facility and amended capital lease facilities discussed above.
PAYMENTS DUE BY PERIOD
TOTAL 2002 2003 2004 2005 2006 AFTER 2006
---------- ---------- ---------- ---------- ---------- ---------- ----------
Long-term debt - Credit facility ....... $ 156,000 $ 400 $ 1,600 $ 1,600 $ 10,800 $ 141,600 $ --
Capital lease obligations .............. 49,027 2,257 1,103 12,012 15,246 10,408 8,001
Operating leases ....................... 63,833 3,623 13,535 11,158 8,782 7,536 19,199
Unconditional purchase obligations .....
4,161 4,161 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Totals .............................. $ 273,021 $ 10,441 $ 16,238 $ 24,770 $ 34,828 $ 159,544 $ 27,200
========== ========== ========== ========== ========== ========== ==========
As discussed above under "-Plan of Reorganization," our senior notes and
convertible subordinated notes were cancelled and the holders of the notes
received common stock of our reorganized company. Interest payments that will
become due and payable on our senior credit facility and capital lease
obligations during the remainder of 2002 total $3.1 million.
At September 30, 2002, we had entered into agreements with vendors to
purchase approximately $4.2 million of property, plant and equipment and
services in 2002 related primarily to the improvement and installation of
telecommunications facilities and information technology equipment and services.
In the 2002 fiscal nine-month period, we made net capital expenditures of
approximately $27.9 million, primarily for addition of telecommunications
equipment in connection with our local and data telecommunications services, and
for infrastructure enhancements. We currently estimate that our aggregate
capital requirements for 2002 will total approximately $30.0 million to $40.0
million, including the $4.2 million in commitments as of September 30, 2002.
We currently estimate that our aggregate capital requirements for 2003 will
total approximately $40.0 million. We currently plan that capital expenditures
in 2003 will be used primarily for the following:
. continued addition of telecommunications equipment in connection with our
local and data telecommunications services; and
. infrastructure enhancements, principally for information systems.
In November 2000, we entered a purchase agreement with Nortel Networks,
Inc. for the purchase of telecommunications equipment and services. The
agreement provides for specified volume discounts if we purchase at least $250
million of equipment and services from Nortel Networks between November 1, 1999
and December 31, 2002. If we purchase less than $250 million of equipment and
services, the agreement provides that we will be required to pay to Nortel a
portion of the difference between the commitment and the amount actually
purchased. Based on our actual and forecasted purchases under the agreement, we
currently estimate that we may be required to pay Nortel Networks approximately
$3.5 million to $3.8 million in the first quarter of 2003. In addition, Nortel
Networks has deployed approximately $6.6 million of equipment under terms
providing that payment is due when we place the deployed equipment into service.
Based on our current schedule for placing this equipment into service, we expect
that these terms will require us to pay $6.6 million in the fourth quarter of
2002 or the first quarter of 2003, depending on our need for capacity. Under
other terms of this agreement, we are required to purchase, or pay for, an
additional $10 million of equipment by the fourth quarter of 2003. The estimated
payment obligations under this agreement are in addition to the outstanding
commitments of $4.2 million as of September 30, 2002 described above. We have
reached an agreement in principle with Nortel Networks to modify our obligations
under the existing agreement. If the agreement in principle is reflected in a
new definitive agreement executed by ITC/\DeltaCom and Nortel Networks, we
expect that we will not be required to make the estimated $3.5 million to $3.8
million payment described above, that we will be able to use approximately $4
million in accumulated vendor credits to reduce to approximately $12 million our
estimated remaining payment obligations of approximately $16 million under the
existing agreement, and that we will be obligated to make equipment-related
payments to Nortel Networks of $1 million quarterly from the first quarter of
2003 through the fourth quarter of 2005.
ADOPTION OF FRESH START ACCOUNTING
As of October 30, 2002, we will implement fresh start reporting under the
provisions of SOP 90-7. Under SOP 90-7, the reorganization fair value of the
Company will be allocated to our assets and liabilities, our deficit will be
eliminated, and our stockholders' equity will reflect the transactions under our
plan of reorganization. We anticipate that the adoption of SOP 90-7 and fresh
start reporting will have a material effect on our financial statements. As a
result, our financial statements published for periods following the
effectiveness of our plan of reorganization will not be comparable to our
financial statements published before the effectiveness of the plan of
reorganization.
31
An estimate of the effect of fresh start reporting as of September 30, 2002
follows (in thousands). The amounts are based on preliminary valuation
information. The final reorganization fair value of the Company that will be
allocated to our assets and liabilities as of October 30, 2002 may be different
from the amounts below.
ITC/\DELTACOM
PRELIMINARY EFFECTS OF PLAN OF REORGANIZATION
SEPTEMBER 30, 2002
Historical Effects of Plan Fresh Start Accounting
September 30, 2002 of Reorganization Adjustments Total
------------------ ------------------ ---------------------- ------------
Current assets .............................. $ 93,293 $ 22,000 $ -- $ 115,293
Long-term assets ............................ 677,216 -- (235,497) 441,719
------------------ ------------------ ---------------------- ------------
Total assets ............................. $ 770,509 $ 22,000 $ (235,497) $ 557,012
================== ================== ====================== ============
Current liabilities ......................... $ 92,821 $ -- $ -- $ 92,821
Long-term liabilities ....................... 738,334 (538,147) -- 200,187
------------------ ------------------ ---------------------- ------------
Total liabilities ........................ 831,155 (538,147) -- 293,008
Stockholders' equity (including
redeemable convertible preferred stock) .... (60,646) 560,147 (235,497) 264,004
------------------ ------------------ ---------------------- ------------
Total liabilities and stockholders' equity $ 770,509 $ 22,000 $ (235,497) $ 557,012
================== ================== ====================== ============
The senior notes and convertible subordinated notes and related accrued
interest, which are classified as liabilities subject to compromise in our
balance sheet dated September 30, 2002, are included as long-term liabilities in
the table above.
Current assets in the table above includes $30 million of gross proceeds
from our sale of the new Series A preferred stock, less $8.0 million of
estimated reorganization expenses payable out of such proceeds.
EFFECTS OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," establishes accounting and reporting standards for goodwill
and other intangible assets. SFAS No. 142 requires that amortization of goodwill
cease on January 1, 2002 and that goodwill be assessed for impairment at least
annually by applying a fair value-based test. Under SFAS No.142, if the fair
value of the goodwill is less than the amount of goodwill recorded in the
financial statements, then the goodwill is to be reduced in the financial
statements to the fair value. SFAS No. 142 also requires that intangible assets
be separately recognized in the financial statements if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented or exchanged,
regardless of the acquirer's intent to do so. Upon our adoption of SFAS No. 142
on January 1, 2002, we ceased amortization of goodwill. Goodwill amortization
was $1.5 million in the 2001 fiscal quarter and $4.6 million in the 2001 fiscal
nine-month period. We completed the transitional test as of January 1, 2002 and
determined that goodwill has not been impaired. Pursuant to our adoption of SFAS
No. 142, we will annually test goodwill for impairment on the anniversary of the
transitional goodwill impairment test.
SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in
June 2001. SFAS No. 143 applies to legal obligations associated with the
retirement of certain tangible long-lived assets. This statement is effective
for fiscal years beginning after June 15, 2002. Accordingly, we will adopt this
statement on January 1, 2003. We believe the adoption of SFAS No. 143 will not
have a material impact on our consolidated financial statements.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued in August 2001. SFAS No.144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," for the disposal of a
business segment. SFAS No. 144 also amended Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001 and for interim
periods within those fiscal years. We adopted SFAS No. 144 on January 1, 2002,
with no material effect on our consolidated financial statements.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, an amendment
of FASB Statement no. 13, and Technical Corrections," was issued in April 2002.
This statement, among other things, significantly limits the instances where the
extinguishment of debt can be treated as an extraordinary item in the statement
of operations. This statement also requires
32
reclassification of all prior period extraordinary items related to the
extinguishment of debt. We will implement this statement, as required by SOP
90-7, as part of our fresh start reporting upon completion of our bankruptcy
proceedings.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in July 2002. This statement requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after our emergence from bankruptcy proceedings on October 29, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to minimal market risks. We manage the sensitivity of
our results of operations to these risks by maintaining an investment portfolio
consisting primarily of short-term, interest-bearing securities and by entering
into long-term debt obligations with appropriate pricing and terms. We do not
hold or issue derivative, derivative commodity or other financial instruments
for trading purposes. We do not have any material foreign currency exposure.
Our major market risk exposure is to changing interest rates on
borrowings we use to fund our business, including $156.0 million of borrowings
outstanding under our senior credit facility as of September 30, 2002. Our
policy is to manage interest rates through a combination of fixed-rate and
variable-rate debt. All $156.0 million of our outstanding borrowings under the
senior credit facility accrue interest at floating rates. A change of one
percentage point in the interest rate applicable to our $156.0 million of
variable-rate debt at October 31, 2002 would result in a fluctuation of
approximately $1.6 million in our annual interest expense.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of filing of this report, we
carried out an evaluation, under the supervision and with the participation of
management, including our Chairman and Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934. Based upon that evaluation, our Chairman and Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in our periodic filings with the Securities and Exchange
Commission.
There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out this evaluation.
33
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Chapter 11 Proceedings
As previously reported, on June 25, 2002, ITC/\DeltaCom, Inc. filed a
voluntary petition in the United States Bankruptcy Court for the District of
Delaware to reorganize under Chapter 11 of title 11 of the United States Code,
as amended. On July 26, 2002, ITC/\DeltaCom filed with the Bankruptcy Court its
proposed plan of reorganization. On August 23, 2002, ITC/\DeltaCom filed with
the Bankruptcy Court a First Amended Plan of Reorganization Under Chapter 11 of
the Bankruptcy Code, As Revised, dated as of August 23, 2002, and a First
Amended Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code, As
Revised, dated August 23, 2002. On August 26, 2002, the Bankruptcy Court
approved the disclosure statement and authorized ITC/\DeltaCom to solicit
acceptances of the proposed plan by delivering copies of the proposed plan and
disclosure statement and other information to each creditor and interest holder
entitled to vote on the proposed plan. The deadline for voting on approval of
the proposed plan was October 1, 2002. The proposed plan was approved by the
vote of all classes of creditors and interest holders entitled to vote.
On October 17, 2002, the Bankruptcy Court entered an order confirming
ITC/\DeltaCom's First Amended Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code, As Further Revised, dated as of October 15, 2002. The
transactions contemplated by the plan became effective on October 29, 2002.
Additional information about the Chapter 11 proceedings and our plan
of reorganization is set forth in our Current Reports on Form 8-K filed on
August 28, 2002 and November 1, 2002.
Proceedings Affecting Rights-of-Way
In April and May 2002, 190 lawsuits were filed by a single counsel in
the Circuit Court for Harrison County, Mississippi, against Mississippi Power
Company, us and WorldCom, Inc. d/b/a MCI Group. Each plaintiff claims to be the
owner of property over which Mississippi Power Company has an easement and that
WorldCom and/or we have benefited by using the easement to provide
telecommunications services. As a result of these allegations, each of the
plaintiffs claims trespass, unjust enrichment, fraud and deceit, and civil
conspiracy against each of the defendants. Each of the plaintiffs also seeks $5
million in compensatory damages, $50 million in punitive damages, disgorgement
of the gross revenues derived from the use by WorldCom and us of the cable over
the easements, a percentage of gross profits obtained from the use of the cable,
and the plaintiffs' costs to prosecute the action. Mississippi Power Company,
WorldCom and we have denied all of the plaintiffs' allegations. These actions
are substantially similar to the other, previously reported actions that we are
defending in state and federal courts in Mississippi. Of the 190 lawsuits, we
believe only approximately 11 involve parcels of land across which the optical
fiber of Mississippi Power Company runs are used by us in the provision of
telecommunications services. On August 5, 2002, Mississippi Power Company
removed all actions involving WorldCom's use of Mississippi Power Company's
rights-of-way to the United States District Court for the Southern District of
Mississippi and requested the actions to be transferred to the United States
Bankruptcy Court for the Southern District of New York, where WorldCom's
bankruptcy proceeding is pending.
On April 19, 2002, a civil action was filed by an individual property
owner in the Chancery Court of Harrison County, Mississippi against Mississippi
Power Company, Southern Company Services and us. The plaintiff seeks to
permanently enjoin Mississippi Power Company and Southern Company from
continuing to permit their rights-of-way across the plaintiff's property to be
used by third parties in any manner that is not related to the transmission of
electric power. The plaintiff also seeks proof of cancellation of all leases and
contracts between third parties and Mississippi Power Company and Southern
regarding the use of the fiber optic cable on the rights-of-way across the
plaintiff's property, proof that the use of the rights-of-way is for purposes
associated with providing electricity, an accounting of revenues of third
parties from the use of the rights-of-way, punitive damages of $1 million, and
costs and expenses. Mississippi Power Company, Southern Company and we have
denied all of the plaintiff's allegations.
On July 8, 2002, nine lawsuits on behalf of 101 property owners were
filed against Mississippi Power Company, Southern Company and us in the Chancery
Court of Jones County, Mississippi. All nine complaints are identical in seeking
relief for trespass, nuisance, conversion, unjust enrichment and accounting,
fraudulent concealment, fraud, fraudulent misrepresentation and rescission and
equitable reformation arising from the alleged unauthorized use of the subject
rights of way in violation of the terms of the easements held by Mississippi
Power Company. The landowners are seeking
34
unspecified monetary damages and certain equitable relief. Mississippi Power
Company, Southern Company and we deny all the allegations.
On August 8, 2002, we were served with a complaint filed in the
Circuit Court of Hinds County, Mississippi, in which four owners of property
located in Hancock County, Mississippi allege Mississippi Power Company and we
have violated the plaintiffs' rights with regard to the use of Mississippi Power
Company's easement across the plaintiffs' property. The plaintiffs allege
trespass, unjust enrichment, negligence, breach of contract and tortious breach
of contract, fraudulent concealment, fraudulent misrepresentation, conspiracy,
accounting and seek an unspecified amount of damages. We deny all such
allegations.
BellSouth Deposit Contingency
We depend on BellSouth for the provision of wholesale
telecommunications services under our interconnection agreements with BellSouth
and pursuant to various access tariffs that BellSouth has filed with federal and
state regulatory agencies. As previously reported, BellSouth has requested by
letter dated March 8, 2002 that we provide a $10 million security deposit by
March 29, 2002 in connection with BellSouth's provision of services to us. On
March 28, 2002, we filed a petition for declaratory judgment in Georgia state
court seeking a ruling from the court that, based upon the terms of our
interconnection agreements with BellSouth, BellSouth may not require us to place
a $10 million deposit with BellSouth as security for future payment for services
to be rendered to us by BellSouth. BellSouth has responded to our petition by
seeking to have the matter heard before the Georgia Public Service Commission,
rather than in Georgia state court. BellSouth has filed a petition with the
Georgia Public Service Commission seeking a determination that we should be
required to place a $17 million security deposit with BellSouth. We are
contesting both the requirement for, and the amount of, the requested deposit.
Based on our payment history with BellSouth, including the fact that BellSouth
received all payments due from us during our reorganization process, our
strengthened liquidity position as a result of our reorganization, and other
relevant factors, we do not believe BellSouth is entitled to any amount of the
deposit it seeks. We are actively negotiating with BellSouth a resolution of
this dispute that would either eliminate or substantially reduce the amount of
the requested deposit. BellSouth also has requested the Federal Communications
Commission to approve new deposit language in its access tariff relating to us
and other carriers. The FCC has suspended BellSouth's new tariff and is
investigating BellSouth's proposed deposit language. If the FCC were to adopt
BellSouth's proposed deposit language and if BellSouth were authorized to
require a substantial deposit, our cash reserves may be insufficient to fund the
deposit, which could have a material adverse effect on our ability to provide
services to our customers.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) As previously reported, to conserve liquidity for our business
while we pursued restructuring negotiations during the second quarter of 2002,
we did not pay the scheduled May 15, 2002 interest payments due on our 9 3/4%
senior notes due 2008 and on our 4 1/2% convertible subordinated notes due 2006
or the scheduled June 1, 2002 interest payment due on our 11% senior notes due
2007. The scheduled May 15, 2002 payments totaled approximately $6.1 million on
our 9 3/4% senior notes and approximately $2.3 million on our 4 1/2% convertible
subordinated notes. The scheduled June 1, 2002 payment totaled approximately
$7.2 million. The indentures under which we issued our senior notes and
convertible subordinated notes provide that an event of default will occur if we
do not pay interest on any note within 30 days after the date on which the
interest first became due and payable. Accordingly, we were in default under
each of the foregoing note issues. The total amount of due but unpaid interest
on these note issues would have been $15.6 million as of October 29, 2002. On
September 1, 2002, we did not make a scheduled interest payment of an additional
$7.1 million which would have been due on our 8-7/8% senior notes due 2008 in
the absence of our bankruptcy proceedings.
(b) We did not make the dividend payments on the outstanding shares of
our Series B-1 preferred stock or Series B-2 preferred stock for the quarterly
dividend period ended June 30, 2002. Under the Bankruptcy Code, dividends on the
Series B preferred stock ceased to accrue during our bankruptcy proceedings. The
amount of dividends which would otherwise have been payable for the quarterly
dividend period ended June 30, 2002 on the Series B-1 preferred stock and the
Series B-2 preferred stock was approximately $638,500 and $831,900,
respectively. The Series B-1 preferred stock and Series B-2 preferred stock were
cancelled on the effective date of our plan of reorganization.
ITEM 5. OTHER INFORMATION
On November 1, 2002, Welsh, Carson, Anderson & Stowe VIII, L.P., a
Delaware limited partnership ("Welsh, Carson"), its general partner and the
managing members of its general partner (collectively, the "Reporting Persons")
filed with the Securities and Exchange Commission a statement on Schedule 13D
under the Securities Exchange Act of 1934 (the "Schedule 13D") disclosing that
the Reporting Persons beneficially own 22,107,085 shares of the Company's common
stock, or approximately 49.4% of the 44,750,000 shares of new common stock
outstanding immediately after the consummation on October 29, 2002 of the
transactions contemplated by the Company's plan of reorganization. The Reporting
Persons disclosed that they may be deemed to constitute a "group" within the
meaning of Section 13(d)(3) of the Securities Exchange Act and that each
Reporting Person shares with the other Reporting Persons voting and dispositive
power with respect to the 22,107,085 shares reported as beneficially owned. The
Reporting Persons further disclosed that 7,286,907 shares of the 21,054,451
shares reported as owned by Welsh, Carson will be subject to an escrow agreement
with JP Morgan Chase Bank as escrow agent until the provisions of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), no longer restrict Welsh,
35
Carson from acquiring such shares. In an amendment to the Schedule 13D filed
with the Securities and Exchange Commission on November 8, 2002, the Reporting
Persons disclosed that on November 7, 2002 Welsh, Carson had filed a
Notification and Report Form under the HSR Act seeking clearance to acquire in
excess of 50% of the voting securities (as defined in the HSR Act) of the
Company. The waiting period under the HSR Act is scheduled to expire, unless
earlier terminated, at 11:59 p.m., New York City time, on December 6, 2002,
subject to extension in certain circumstances.
The Reporting Persons disclosed in the Schedule 13D that they acquired
the shares reported as beneficially owned pursuant to the plan of reorganization
upon cancellation of the Company's senior notes held by Welsh, Carson or JP
Morgan Chase Bank as escrow agent. The Reporting Persons state in the Schedule
13D that based upon their review of their investment in the Company and in other
companies, as well as other factors, they and/or other persons affiliated with
them may acquire additional securities of the Company or sell some or all of
their common stock and, in addition, among other transactions, may formulate
plans or proposals, and may from time to time explore, or make formal proposals
relating to, a possible acquisition or restructuring of, or a business
combination involving, the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
ITC/\DeltaCom files herewith the following exhibits:
10.1 Purchase Agreement, dated as of August 22, 2002, among
ITC/\DeltaCom, Inc., the Several Purchasers named
therein and ITC Holding Company, Inc. Filed herewith.
10.2 Purchase Agreement, dated as of August 22, 2002,
between ITC/\DeltaCom, Inc. and SCANA Corporation.
Filed herewith.
99.1 Written Statement of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
Filed herewith.
(b) Reports on Form 8-K.
The following Current Reports on Form 8-K were filed by ITC/\DeltaCom
during the period covered by this report:
Filing Date of Report Item Reported
August 9, 2002 Item 4 (termination of
relationship with Arthur
Andersen LLP as independent
auditor)
August 28, 2002 Item 9 (filing of revised plan
of reorganization and related
matters; delisting of common
stock from NASDAQ National
Market)
September 9, 2002 Item 4 (engagement of BDO
Seidman, LLP as independent
auditor)
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ITC/\DeltaCom, Inc.
(Registrant)
Date: November 14, 2002 By: /s/ Douglas A. Shumate
--------------------------
Douglas A. Shumate
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
CERTIFICATIONS
I, Larry F. Williams, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ITC/\DeltaCom, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Larry F. Williams
------------------------------------
Larry F. Williams
Chairman and Chief Executive Officer
I, Douglas A. Shumate, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ITC/\DeltaCom, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Douglas A. Shumate
-----------------------------------
Douglas A. Shumate
Senior Vice President - Chief
Financial Officer
Exhibit Index
Number Exhibit Description
- ------ ----------------------------------------------------------------------
10.1 Purchase Agreement, dated as of August 22, 2002, among ITC/\DeltaCom,
Inc., the Several Purchasers named therein and ITC Holding Company,
Inc. Filed herewith.
10.2 Purchase Agreement, dated as of August 22, 2002, between
ITC/\DeltaCom, Inc. and SCANA Corporation. Filed herewith.
99.1 Written Statement of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. Section 1350). Filed herewith.