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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to ___________
Commission file number: 0-23253
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ITC/\DELTACOM, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-2301135
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1791 O.G. Skinner Drive, West Point, Georgia 31833
(Address of principal executive offices) (Zip Code)
(706) 385-8000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [_] No [X]
The aggregate market value of the registrant's voting and non-voting common
equity held by non-affiliates of the registrant at June 28, 2002, based upon the
last reported sale price of the registrant's common stock on the NASDAQ National
Market on that date, was approximately $3.0 million.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [_]
The number of shares of the registrant's common stock outstanding on March
21, 2003 was 44,848,300.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business ............................................................................. 1
Item 2. Properties ........................................................................... 18
Item 3. Legal Proceedings .................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders .................................. 23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................ 24
Item 6. Selected Financial Data .............................................................. 26
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ........................................................................ 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........................... 52
Item 8. Financial Statements and Supplementary Data .......................................... 53
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure ........................................................................ 53
PART III
Item 10. Directors and Executive Officers of the Registrant ................................... 54
Item 11. Executive Compensation ............................................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ............................................................... 63
Item 13. Certain Relationships and Related Transactions ....................................... 70
Item 14. Controls and Procedures .............................................................. 74
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................... 75
Index to Consolidated Financial Statements ............................................................ F-1
i
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We intend our forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements in these sections. All
statements regarding our expected financial position and operating results, our
business strategy, our financing plans, forecasted demographic and economic
trends relating to our industry and the markets in which we operate, and similar
matters are forward-looking statements. These statements can sometimes be
identified by our use of forward-looking words such as "may," "will,"
"anticipate," "estimate," "expect" or "intend." We cannot promise you that our
expectations in such forward-looking statements will turn out to be correct. Our
actual results could be materially different from our expectations because of
various factors, including those discussed under "Business--Risks" in
this report.
ii
PART I
Some of the information contained in this report concerning the markets and
industry in which we operate is derived from publicly available information and
from industry sources. Although we believe that this publicly available
information and the information provided by these industry sources are reliable,
we have not independently verified the accuracy of any of this information.
Unless we indicate otherwise, references in this report to "we," "us,"
"our" and "ITC/\DeltaCom" mean ITC/\DeltaCom, Inc. and its subsidiaries and
predecessors. Unless we indicate otherwise, we have rounded dollar amounts over
$1 million to the nearest hundred thousand and dollar amounts less than $1
million to the nearest thousand.
Item 1. Business.
Overview
ITC/\DeltaCom, Inc. is a competitive telecommunications company that
provides voice and data telecommunications services on a retail basis to
businesses and residential customers in the southern United States and regional
telecommunications transmission services over its network on a wholesale basis
to other telecommunications companies. In connection with these services, we
own, operate or manage an extensive fiber optic network, which extends
throughout ten southern states.
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 some non-core services, the key elements of this
strategy include reduction of our employee base, consolidation of facilities and
operations, and reduction of capital expenditures. We also have sought to
eliminate a substantial portion of our existing indebtedness and reduce our
fixed interest costs so that we are able to achieve and maintain positive cash
flow from operations through the current period of uncertainty affecting the
telecommunications industry and competitive telecommunications companies.
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 United States bankruptcy court entered
an order confirming our plan of reorganization. We consummated our
reorganization under the plan on October 29, 2002.
As a consequence of our reorganization and in accordance with applicable
accounting rules, we have separately presented our financial results for 2002 in
the accompanying audited consolidated financial statements and in other portions
of this report as follows: results for the period from January 1, 2002 to
October 29, 2002 are reported under "Predecessor" and the results for the period
from October 30, 2002 to December 31, 2002 are reported under "Successor." To
compare our 2002 financial results, after giving effect to our reorganization,
to our 2001 financial results for purposes of the Management's Discussion and
Analysis of Financial Condition and Results of Operations appearing elsewhere in
this report, we have combined the periods from January 1, 2002 to October 29,
2002 and from October 30, 2002 to December 31, 2002.
We were incorporated in Delaware in 1997. Our principal executive offices
are located at 1791 O.G. Skinner Drive, West Point, Georgia 31833, and our
telephone number at that address is (706) 385-8000. Our web site may be found at
www.itcdeltacom.com. The contents of our web site do not form part of this
report.
Services and Facilities
Services. We currently provide our services in two business segments:
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. integrated voice and data telecommunications services on a retail
basis, which we refer to as our "retail services"; and
. regional telecommunications transmission services to other
telecommunications companies on a wholesale basis using our fiber
optic network and directory assistance services, which we refer to as
our "broadband transport services."
Retail Services. Our retail services involve the provision of voice and
data telecommunications services to end users and resellers. These retail
services include:
. local telephone services;
. long distance telephone services;
. toll-free calling, calling card and operator services;
. asynchronous transfer mode, frame relay and high-capacity broadband
private line services;
. primary rate interface connectivity and colocation services to
Internet service providers;
. enhanced services, including conference calling and fax broadcasting;
. consulting, integration, operation and proactive management of data
networks;
. in-depth network performance analysis and implementation and design
services for data network deployment;
. Internet access services;
. customer premise equipment sales, installation and maintenance; and
. managed services, professional services and hardware and software
sales.
Our customer-focused software and network architecture permit us to present our
customers with one fully integrated monthly billing statement for the entire
package of telecommunications services they purchase from us.
We previously provided our managed services, professional services and
hardware and software sales operations through our e/\deltacom business, which
we reported as a separate business segment through December 31, 2001. Because we
no longer manage e/\deltacom as a separate business segment, we integrated these
services into our suite of retail services beginning in the first quarter of
2002.
Local Telephone Services. We currently provide local telephone services by
using our network and facilities and by reselling the services of the former
monopoly local telephone companies, which we refer to as the "incumbent
carriers." We offer local telephone services in all 35 markets in which we have
a branch office.
In connection with offering local telephone services, we have entered into
interconnection agreements with BellSouth Telecommunications, Inc., CenturyTel,
Inc., SBC Communications Inc., Sprint Communications Company, L.P. and Verizon
Communications Inc. to resell the local telephone services of these incumbent
carriers and interconnect our network with the networks of these incumbent
carriers for the purpose of gaining immediate access to their unbundled network
elements. These interconnection agreements currently allow us to provide local
service on a resale basis or by purchasing the unbundled network elements
required to provide local service over our network and facilities. These
agreements allow us to enter new markets with reduced capital expenditures and
to offer local service to our customer base. State regulatory authorities have
approved the terms of our interconnection agreements. Our interconnection
agreements will remain subject to review and modification by these state
regulatory authorities. We believe, but cannot assure you, that these
interconnection agreements provide a foundation for us to provide local service
on a reasonable commercial basis. Factors that may adversely
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affect our ability to provide local service on a reasonable commercial basis
include unsettled legal and regulatory issues, legal and regulatory developments
and existing operational issues with the incumbent carriers that are not
resolved by the interconnection agreements.
Our interconnection agreements with BellSouth expire in June 2003. We will
continue to operate under the terms of the existing agreements until new
agreements are reached. We are arbitrating, or plan to initiate arbitration of,
the rates and terms of new interconnection agreements with BellSouth in all nine
BellSouth states. We are unable to determine the impact, if any, these
arbitration proceedings or any new interconnection agreements will have on our
results of operations and financial condition.
Our strategy is to offer facilities-based local service in a majority of
our markets by connecting, or "colocating," our equipment with the equipment of
the former monopoly local telephone companies with which we have interconnection
agreements. As of December 31, 2002, we had installed our telecommunications
equipment in 185 locations and were offering our "Infinity" local telephone
service, as well as our "Unity," "DUNE" and data services, in all of the 35
markets in which we have a branch office. The Unity service typically connects
our customer's telecommunications equipment to our network using a direct T-1
digital transmission line and provides the customer with local and long distance
calling capacity on any of the T-1's 24 available channels. DUNE is an offering
of individual telephone lines on a T-1 digital transmission line and is
connected directly to a customer's telephone or other telecommunications
equipment.
Since the fourth quarter of 1999, we have offered our "Integrated-T"
service, which allows our customers to use a single digital T-1 transmission
line for both voice and data services, including frame relay, Internet access
and private line services. The Integrated-T service enables our customers to
take advantage of advanced features and lower costs offered by digital access
and offers the convenience of one service provider for voice and data services.
This service enables us to take advantage of our existing voice services and
network infrastructure by selling data services over the same transmission line.
In the fourth quarter of 2000, we began to offer, under an agreement we
signed with BellSouth in June 2000, a UNE-P, or unbundled network
element-platform, service in all of the BellSouth markets in which we operate.
To provide the UNE-P service, we purchase all of the required elements from
BellSouth at reduced prices. This has allowed us to earn higher gross margins on
the sale of our services. Through December 31, 2002, we had installed over
52,950 UNE-P lines. We expect to continue to convert resale customers to this
service during 2003. We anticipate that this conversion will continue to have a
favorable impact on our gross margins.
Long Distance Telephone Services. We offer a range of retail long distance
telephone services, including traditional switched and dedicated long distance,
toll-free calling, international, calling card and operator services.
Data Services. We provide a variety of data services to our customers,
including point-to-point, asynchronous transfer mode, frame relay and Internet
protocol-based virtual private networking services. Our network equipment
enables customers to use a single network connection to communicate with
multiple connection sites throughout our fiber optic network. We will continue
to seek, through strategic business relationships with other providers, to
interconnect our fiber optic network with the fiber optic networks of those
other providers.
Since 2001, we have offered virtual private networking services based on
the Internet protocol, Internet security services, including managed firewall
services and our Intrusion Detection Service, and network managed services. Our
virtual private network offering provides our customers with a dedicated line or
secure dial-up access between multiple sites allowing the same level of
security, performance and availability as a private network. The managed
firewall service and our Intrusion Detection Service provide our customers
security for Internet connections and reduce our customer's capital expenditures
and personnel costs necessary to achieve this level of security. Our network
management services allow our customers to outsource all of their frame relay
network management to us.
Internet Access. We provide dedicated Internet access, electronic mail and
web hosting services. We expect businesses will require faster Internet access
and larger bandwidth in the future, and we intend to offer products that will
meet that demand.
3
Local Telecommunications Services for Internet Service Providers. We
provide local wholesale telecommunications services to Internet service
providers. These services include primary rate interface connectivity between
our network and the network of the Internet service provider and equipment
colocation services that permit the Internet service provider to colocate its
modems, routers or network servers with our network equipment.
Customer Premise Equipment. We sell, install and perform on-site
maintenance of equipment, such as telephones, office switchboard systems and, to
a lesser extent, private branch exchanges, for customers in the following
markets:
. Anniston, Birmingham, Dothan, Florence, Huntsville, Mobile and
Montgomery, Alabama;
. Albany, Atlanta, Augusta, Columbus and Macon, Georgia;
. Pensacola, Florida;
. Baton Rouge and New Orleans, Louisiana;
. Biloxi, Greenwood, Gulfport, Hattiesburg, Jackson and Tupelo,
Mississippi;
. Charlotte, North Carolina;
. Charleston, Columbia and Greenville, South Carolina; and
. Nashville, Tennessee.
We intend to offer these customer premise equipment sales, installation and
maintenance services in additional markets in the future, with the goals of
augmenting and supporting our sale of local and long distance services and
enhancing customer retention.
Colocation Services. Our colocation services allow businesses to have a
secure data center presence without incurring significant capital expenditures,
increasing traffic on their corporate network or burdening their information
technology staff. We offer hosting, security, data storage, monitoring,
networking and hardware solutions. Our colocation services include Internet
connectivity with varying speeds of bandwidth, primary and secondary domain name
services support, timely reporting of system performance and continuous
monitoring by our network operations staff.
Managed Services. Our managed services include system monitoring, managed
messaging, managed system and e-mail security services, storage management
services and hardware management services. Our system monitoring services
include the monitoring of critical system thresholds, problem resolution and
detailed reporting. Our managed security services include managed firewalls,
virtual private networks, intrusion detection, vulnerability assessments,
content and virus scanning and authentication systems. Our storage management
services include the assessment and implementation of storage solutions, which
offer customers multiple technology and hardware choices. Our hardware
management services offer the customer our ability to provide hardware
maintenance for servers from numerous vendors.
Professional services. Our professional services provide our customers with
a single source for the design and implementation of an e-business solution from
the needs assessment phase to the design, implementation and support phases.
These professional services include project management and methodology,
consulting, system design, implementation and deployment services, and
maintenance and support services.
Hardware and software sales. We sell hardware and software from various
manufacturers, including Sun Microsystems, Inc., Cisco Systems, Inc., EMC
Corporation, Hewlett-Packard Company, Microsoft Corporation, Checkpoint Systems,
Inc. and Oracle Corporation.
Broadband Transport Services. Our broadband transport services customers
include telecommunications
4
companies that own transmission facilities, such as fiber optic cables, as well
as telecommunications companies that do not own transmission facilities. These
customers use our broadband transport services to transport the traffic of their
customers between local access and transport areas, which are geographic areas
composed of contiguous local exchanges. Calls transmitted over a long-haul
circuit for a customer are generally routed by the customer through a switch to
a receiving terminal in our network. We transmit the signals over a long-haul
circuit to the terminal where the signals are to exit our network. Our customer
then routes the signals through another switch and to the call recipient through
a local carrier. We offer our broadband transport services in varying degrees of
speed and size. Some of our services are used by our customers for very high
capacity inter-city connectivity and specialized high-speed data networking. We
connect our network to our customer's facilities either by local carrier or by a
direct connection. We typically bill our broadband transport services customers
a fixed monthly rate depending on the capacity and length of the circuit,
regardless of the amount of capacity that is actually used by the customer. We
also offer directory assistance services through our broadband transport
services business.
As a result of general market conditions and continued reductions in the
rates we charge for our broadband transport services, we have decreased the
amount of capital we invest in our broadband transport business. We expect that
our broadband transport services will continue to experience less favorable
market conditions and a decline in revenues in 2003 compared to 2002.
Consolidation of Retail Services and Broadband Transport Services Segments.
As a result of cost-reducing measures we implemented in connection with our
reorganization and the changing environment of the telecommunications business.
We expect to consolidate, beginning with the first quarter of 2003, our
broadband transport services segment into our retail services segment, which
will be managed and reported as a single business segment. We expect to continue
to provide detailed revenue disclosure concerning our end-user, retail customers
and our wholesale customers.
Facilities. As of December 31, 2002, we owned or managed approximately
10,088 route miles of a fiber optic network that covered portions of ten states
in the southern United States. 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, including in some smaller cities where
our only competitor is the former monopoly local telephone company.
As of December 31, 2002, we owned approximately 6,143 route miles of our
fiber optic network, which we have built or acquired since 1992, either directly
or through indefeasible rights of use arrangements. In addition, we have
strategic relationships principally with three public utilities, Duke Power
Company, Florida Power & Light Company and Entergy Technology Company, pursuant
to which we market, sell and manage capacity on approximately 3,945 route miles
of network owned and operated by these three utilities. In addition, we are able
to purchase network capacity to some cities not covered by our owned and managed
network in North Carolina and South Carolina under a buy-sell agreement with
PalmettoNet, Inc. and SCANA Communications, Inc., which manage fiber optic
facilities in those two states. This agreement enables us to buy capacity on the
networks of these two companies at pre-established prices, which are generally
more favorable than the prices for such capacity available in the open market.
As a result of cost-reducing measures we implemented in connection with our
2002 reorganization and the continued revenue decline experienced by our
broadband transport business, we do not expect to spend a significant amount of
capital on the development of our fiber optic network in 2003 or, possibly,
thereafter. We expect little, if any, expansion of our network route mileage
during 2003, and anticipate that any capital expenditures associated with our
network will be applied to maintain the existing capabilities of the network.
We have implemented electronic redundancy, which enables traffic to be
rerouted to another fiber in the same fiber sheath in the event of a partial
fiber cut or electronic failure, over a portion of our network. At December 31,
2002, over 63% of our network traffic was also protected by geographical diverse
routing, a network design also called a "self healing ring," which enables
traffic to be rerouted in the event of a total cable cut to an entirely
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different fiber optic cable, assuming capacity is available.
We purchase much of our network equipment, including switches, optical
transport products and access nodes, from Nortel Networks Inc. Under the
purchase agreement we entered into in November 2000, we have committed to
purchase up to $250 million of products and services from Nortel Networks before
a deadline that has been extended to April 4, 2003. As of December 31, 2002, we
had purchased $115.9 million of such products and services. For additional
information about our agreement with Nortel Networks, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
A key component of our network is our switches, which are the primary
electronic components that connect customers to our network and transmit voice
communications over our network. Our primary switching facilities for voice
communications consist of Nortel DMS-500 switches in the following locations:
. Anniston, Birmingham and Montgomery, Alabama;
. Jacksonville, Ocala and West Palm Beach, Florida;
. Atlanta, Georgia;
. Gulfport, Mississippi;
. Greensboro, North Carolina;
. Columbia, South Carolina;
. Nashville, Tennessee; and
. Houston, Texas.
The Nortel DMS-500 switches are capable of handling both local and long distance
voice and data traffic.
We expect to continue to evaluate our network and assess the need for
additional switching capacity. We also have colocated telecommunications
equipment in various markets in the southern United States. Colocation enables
us to provide remote local and long distance services in additional markets
where we do not have switches by using our Nortel DMS-500 switches as hosts to
the equipment we locate in remote markets. This equipment is connected to our
Nortel DMS-500 switching platform using our fiber optic network wherever
possible. This networking design, together with our interconnection agreements
with large local telephone companies such as BellSouth, has enabled us to be a
facilities-based provider of local and long distance telephone services in all
of our markets.
We are a member of the Associated Communications Companies of America, a
ten-member trade association that negotiates with carriers for wholesale
telecommunications services for its members. The collective buying power of its
members enables the association to negotiate as if it were one of the larger
telecommunications services providers in the United States.
In November 2000, we opened and commenced operations in an initial portion
of our data center in Suwanee, Georgia. We completed the remainder of the
facility in 2001. The data center is a centralized facility that provides
advanced hosting, colocation and other services. The data center floor space
contains open racks, enclosed cabinets, caged areas and suites. The center is
connected through multiple and diverse connections to our fiber optic network.
Site access is controlled by security officers, video surveillance and enhanced
security procedures, and the center is protected by advanced fire protection
devices. Temperature, humidity and air quality are carefully maintained to
promote uninterrupted server operation. The data center also has redundant power
supply systems to provide a constant source of power in the event of a component
failure.
6
Sales and Marketing
Retail Services. We focus our retail sales efforts on businesses in the
southern United States. We market our retail services through a sales force
composed of direct sales personnel, technical consultants and technicians. We
believe that high-quality employee training is a prerequisite for superior
customer service and, as a result, require each member of our retail sales force
to complete our intensive training program. Our marketing strategy is built upon
the belief that customers prefer to have one company accountable for all of
their telecommunications services. Each branch office provides technical
assistance for its voice, data, Internet and customer premise equipment as
required. Our customers are assured that they will have a single point of
contact, 24 hours a day, seven days a week, to support all of the services they
receive from us.
Our sales personnel make direct calls to prospective and existing business
customers, conduct analyses of business customers' usage histories and service
needs, and demonstrate how our service package will improve a customer's
communications capabilities and costs. Sales personnel locate potential business
customers by several methods, including customer referrals, market research,
telemarketing, and networking alliances, such as endorsement agreements with
trade associations and local chambers of commerce. Our sales personnel work
closely with our network engineers and information systems consultants to design
new service products and applications. Our branch offices also are primarily
responsible for coordinating service and customer premise equipment installation
activities. Technicians survey customers' premises to assess power and space
requirements, and coordinate delivery, installation and testing of equipment.
Our retail services contracts generally provide for payment in arrears
based on minutes of use for long distance services and in advance for local
telephone, data and Internet services. The agreements also generally provide
that the customer may terminate the affected service without a charge for early
termination in the event of substantial and prolonged outages arising from
causes within our control and for other specified causes. The agreements
generally provide that the customer must utilize at least a minimum amount,
measured by dollars or minutes of use, of switched long distance services per
month for the term of the agreement.
We also market our retail services through public relations,
advertisements, event sponsorships, trade journals, direct mail and trade
forums. Because we seek to distinguish our retail services largely based on the
convenience of our integrated bundle of these services and the benefits of our
comprehensive and individualized customer support, we continue to believe that
advertising and public relations will play a significant role in our retail
services marketing strategy.
We also offer colocation services, managed services, professional services
and hardware and software sales from our data center in Suwanee, Georgia to
business customers. The sales personnel for these services and products make
direct calls to prospective and existing business customers, work closely with
our engineering staff to design specific solutions for each customer and seek to
market these services as part of our bundle of retail service offerings.
During the first quarter of 2003, we initiated our "Grapevine" offering of
local services to residential customers. Grapevine customers receive our local
telephone services bundled with one of our long distance service plans. We
expect the incremental revenues generated by Grapevine will augment our existing
customer base, although we currently do not expect that our offering of
residential services will capture a significant share of the residential market
for local telephone service.
Broadband Transport Services. We provide long distance voice and data
transmission services through long distance circuit contracts with other long
distance carriers, including WorldCom, Inc., Sprint, Qwest Communications
International Inc. and Cable & Wireless plc. As of December 31, 2002, we had
remaining future long-term contract commitments for broadband transport services
totaling approximately $62.7 million, which expire on various dates through
2007. We also provide our long-haul transmission services to customers after
contract expiration on a month-to-month basis. Our long-haul contracts provide
for fixed monthly payments, which are generally made in advance.
7
Competition
The telecommunications industry is highly competitive. We compete primarily
on the basis of the price, availability, reliability, variety and quality of our
offerings and on the quality of our customer service. Our ability to compete
effectively depends on our ability to maintain high-quality services at prices
generally equal to or below those charged by our competitors. In particular,
price competition in the retail services and broadband transport services
markets generally has been intense and is expected to increase. Our competitors
include, among others, AT&T Corp., Sprint, WorldCom and BellSouth. These
companies, among others, have substantially greater financial, personnel,
technical, marketing and other resources, larger numbers of established
customers and more prominent name recognition than ITC/\DeltaCom. These
companies also operate more extensive transmission networks than we do. In
addition, companies such as Broadwing Inc. and Qwest have constructed or are
constructing nationwide fiber optic systems, including routes through portions
of the southern United States in which we operate our fiber optic network. We
also increasingly face competition in the local and long distance market from
local carriers, resellers, cable companies, wireless carriers and satellite
carriers, and may compete with electric utilities. We also may increasingly face
competition from businesses offering long distance data and voice services over
the Internet. These businesses could enjoy a significant cost advantage because,
at this time, they generally do not pay carrier access charges or universal
service fees.
Our principal competitor for local services is the incumbent carrier in the
particular market, which is BellSouth in a large majority of our market areas.
Incumbent carriers enjoy substantial competitive advantages arising from their
historical monopoly position in the local telephone market, including
pre-existing customer relationships with all or virtually all end-users.
Further, we are highly dependent on incumbent carriers for local network
facilities and wholesale services required in order for us to assemble our own
local retail services. We also face competition from local carriers other than
incumbent carriers, which we refer to as "competitive carriers," some of which
already have established local operations in some of our current and target
markets. In addition, incumbent carriers are expected to compete in each other's
markets in some cases. Wireless telecommunications providers are competing with
wireline local telephone service providers, which further increases competition.
Local and long distance marketing is converging, as other carriers offer
integrated retail services. For example, many competitive carriers also offer
long distance service to their customers and large long distance carriers, such
as AT&T, Sprint and WorldCom, have begun to offer local services in some
markets. We also compete with numerous direct marketers, telemarketers and
equipment vendors and installers with respect to portions of our business.
Regional Bell operating companies, such as BellSouth, are allowed to
provide outside their home regions "interLATA" long distance services, which are
long distance services that originate and terminate in different local access
and transport areas, as well as interLATA mobile services within their regions.
Under the Telecommunications Act of 1996, the regional Bell operating companies
are allowed to provide interLATA long distance services within their regions
after meeting requirements intended to foster opportunities for local telephone
competition. These companies already have extensive fiber optic cable, switching
and other network facilities in their respective regions that they can use to
provide long distance services. The regional Bell operating companies have
already obtained approval to provide in-region long distance service in many
states. As of December 31, 2002, the FCC had approved applications of BellSouth
to provide in-region long distance service throughout its region, in Alabama,
Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South
Carolina, and Tennessee. SBC Communications has been authorized to provide
in-region long distance service in Arkansas, Texas, California, Kansas, Missouri
and Oklahoma. Verizon Communications has been authorized to provide in-region
long distance service in Connecticut, Delaware, Maine, Massachusetts, New
Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont and
Virginia, and has additional applications pending in the District of Columbia,
Maryland, and West Virginia. Qwest Communications has been authorized to provide
in-region long distance service in Colorado, Idaho, Iowa, Montana, Nebraska,
North Dakota, Utah, Washington and Wyoming. By offering in-region long distance
services in our markets, BellSouth is able to offer substantially the same
integrated local and long distance services as ITC/\DeltaCom, and will have a
significant competitive advantage in marketing those services to its existing
local customers.
A continuing trend toward consolidation, mergers, acquisitions and
strategic alliances in the telecommunications
8
industry also could increase the level of competition faced by our broadband
transport customers and us. SBC Communications acquired Ameritech Corporation in
October 1999, GTE Corporation and Bell Atlantic Corporation merged to form
Verizon Communications in June 2000, Qwest acquired US WEST, Inc. in June 2000,
Time Warner, Inc. merged with America Online, Inc. to form AOL Time Warner Inc.
in January 2001, and the AT&T Broadband unit merged with Comcast Corporation in
November 2002. In addition, SBC Communications and Williams Communications, a
long distance services provider, entered into a strategic alliance in 2000
pursuant to which the two companies have agreed to supply services to each
other. The telecommunications market is very dynamic, and we believe additional
competitive changes are likely in the future.
Regulation
Overview. Our services are subject to federal, state and local regulation.
Through our wholly-owned subsidiaries, we hold numerous federal and state
regulatory authorizations. The FCC exercises jurisdiction over
telecommunications common carriers to the extent they provide, originate or
terminate interstate or international communications. The FCC also establishes
rules and has other authority over some issues related to local telephone
competition. State regulatory commissions retain jurisdiction over
telecommunications carriers to the extent they provide, originate or terminate
intrastate communications. Local governments may require us to obtain licenses,
permits or franchises in order to use the public rights-of-way necessary to
install and operate our networks.
Federal Regulation. We are classified as a non-dominant carrier by the FCC
and, as a result, are subject to relatively limited regulation of our interstate
and international services. Some general policies and rules of the FCC apply to
us, and we are subject to some FCC reporting requirements, but the FCC does not
review our billing rates. We possess the operating authority required by the FCC
to conduct our long distance business as it is currently conducted. As a
non-dominant carrier, we may install and operate additional facilities for the
transmission of domestic interstate communications without prior FCC
authorization, except to the extent that radio licenses are required.
The FCC required non-dominant long distance companies, including us, to
detariff interstate long distance domestic and international services in 2001.
In 2001, the FCC also permitted competitive local carriers, including us, to
choose either to detariff the interstate access services that we sell to long
distance companies that originate or terminate traffic from or to our local
customers, or to maintain tariffs but comply with rate caps. Tariffs set forth
the rates, terms and conditions for service and must be updated or amended when
rates are adjusted or products are added or removed. Before detariffing, we
filed tariffs with the FCC to govern our relationship with most of our long
distance customers and with long distance companies that originated or
terminated traffic from or to our local customers. The detariffing process has
required us, among other things, to post these tariffs on our web site instead
of filing them at the FCC. Because detariffing precludes us from filing our
tariffs at the FCC, we are no longer subject to the "filed rate doctrine," under
which the tariff controls all contractual disputes between a carrier and its
customers. The detariffing process has effectively required us to enter into
individual contracts with each of our customers and to notify our customers when
rates are adjusted or products are added or removed. This process increases our
costs of doing business. Detariffing may expose us to legal liabilities and
costs if we can no longer rely on the filed rate doctrine to settle contract
disputes with our customers.
The FCC's role with respect to local telephone competition arises
principally from the Telecommunications Act of 1996. The Telecommunications Act
preempts state and local laws to the extent that they prevent competition in the
provision of any telecommunications service. Subject to this limitation, state
and local governments retain telecommunications regulatory authority over
intrastate telecomunications. The Telecommunications Act imposes a variety of
duties on local carriers, including competitive carriers such as ITC/\ltaCom,
in order to promote competition in the provision of local telephone services.
These duties include requirements for local carriers to:
. complete calls originated by customers of competing carriers on a
reciprocal basis;
. permit the resale of their services;
. permit users to retain their telephone numbers when changing carriers;
and
9
. provide competing carriers access to poles, ducts, conduits and
rights-of-way at regulated prices.
Incumbent carriers also are subject to additional duties. These duties
include obligations of incumbent carriers to:
. interconnect their networks with networks or facilities of
competitors;
. offer colocation of competitors' equipment at their premises;
. make available elements of their networks, including network
facilities, features and capabilities, on non-discriminatory,
cost-based terms; and
. offer wholesale versions of their retail services for resale at
discounted rates.
Collectively, these requirements recognize that local telephone service
competition is dependent upon cost-based and non-discriminatory interconnection
with and use of some elements of incumbent carrier networks and facilities under
specified circumstances. Failure to achieve and maintain such arrangements could
have a material adverse impact on our ability to provide competitive local
telephone services. Under the Telecommunications Act, incumbent carriers are
required to negotiate in good faith with carriers requesting any or all of the
foregoing arrangements.
The FCC recently adopted changes to the rules defining the circumstances
under which incumbent carriers must make network elements available to
competitors. The FCC has released a summary of its decision, but as of March 24,
2003 had not released the full text of the order, so many details of the
decision have not been made public. The changes described in the summary could
significantly limit our access to incumbent carriers' network elements. First,
the FCC adopted rules permitting state regulators, under specified
circumstances, to impose significant limitations on the ability of competitive
carriers like us to purchase the "unbundled network element platform," or
"UNE-P," from incumbent local exchange carriers at regulated prices based on the
FCC's "Total Element Long Run Incremental Cost" or "TELRIC" methodology. The
state commissions may impose geographic limitations or time limitations on the
availability of UNE-P at TELRIC rates, and may impose time limitations or phase
out the availability of this offering over a specified time period. Second, the
FCC adopted restrictions on the availability of some broadband loops and network
elements at TELRIC rates and limited the services that competitors can provide
over those elements. In addition, the FCC is eliminating, following a transition
period, the requirement that incumbent local exchange carriers provide "line
sharing" arrangements, which some competitive local carriers use to provide
broadband telecommunications and Internet services. The FCC may further
deregulate the incumbent carriers' broadband offerings and/or restrict the
availability of those carriers' broadband facilities to competitive carriers.
Each of these policy decisions is likely to be challenged on appeal. It is
difficult to predict the length and outcome of the judicial appeal proceedings.
Finally, the FCC is likely to initiate a re-examination of its TELRIC pricing
methodology for network elements. Such a re-examination may lead to unfavorable
changes to these pricing rules. Legislation has been proposed in Congress in the
past and may be proposed in the future that would further restrict competitive
carriers' access to incumbent local carriers' network elements. Any restriction
on, or reduction of, the network elements available to us could have a material
adverse effect on our business.
Among other interconnection agreements, we entered into new interconnection
agreements with BellSouth in 1999 that have enabled us to continue to provide
local service in all nine BellSouth states on either a resale basis or by
purchasing all unbundled network elements required to provide local service on a
facilities basis, without using facilities we own. These interconnection
agreements expire in June 2003. We are arbitrating the rates and terms of a new
agreement with BellSouth. These interconnection agreements have not resolved,
and we do not expect the contemplated new BellSouth interconnection agreements
will resolve, all operational issues, including those relating to the colocation
of our equipment with that of BellSouth. We expect, but cannot assure you, that
each new BellSouth interconnection agreement to which we are a party will
provide us with the ability to provide local service in the nine BellSouth
states on a reasonable commercial basis.
In July 2001, the FCC adopted revised rules affecting its equipment
colocation requirements. In a number of ways, the FCC's revised rules are
favorable to competing carriers such as ITC/\ltaCom. In other ways, however,
10
these rules may prevent competing carriers from colocating their equipment in a
manner that best suits their business needs. We expect that the interconnection
agreements we enter into with BellSouth and with other carriers will be subject
to the FCC's revised colocation rules, but these rules may change or otherwise
operate to the advantage of incumbent carriers.
The Telecommunications Act eliminated previous prohibitions on the
provision of interLATA long distance services by the regional Bell operating
companies and GTE Corporation, which is now part of Verizon Communications. The
regional Bell operating companies are permitted to provide interLATA long
distance service outside those states in which they provide local service, or
"out-of-region long distance service," upon receipt of any necessary state and
federal regulatory approvals that are otherwise applicable to the provision of
intrastate and interstate long distance service. Under the Telecommunications
Act, the regional Bell operating companies are allowed to provide long distance
service within the regions in which they also provide local service, or
"in-region long distance service," on a state-by-state basis upon specific
approval of the FCC and satisfaction of other conditions, including a checklist
of interconnection requirements intended to open local telephone markets to
competition. BellSouth has completed the process of obtaining long distance
approval in all nine states in its region.
In the future, an important element of providing competitive local services
may be the ability to offer customers high-speed broadband local connections. As
discussed above, the FCC recently adopted significant restrictions on the
unbundled network elements that incumbent carriers must make available to
competitors to enable them to provide broadband services to customers using
incumbent carrier networks. The FCC also is considering what regulatory
treatment, if any, should be accorded to digital subscriber line services
provided by telecommunications companies and to cable modem services, which are
used by cable companies to deploy high-speed Internet access services. The FCC
has sought comment on a number of other regulatory proposals that could affect
the speed and manner in which high-speed broadband local services are deployed
by our competitors. Congress has also considered in the past and may consider in
the future legislation that would deregulate some aspects of the incumbent local
carriers' broadband services and would reduce the extent to which those carriers
must provide access to their networks to competitive local carriers for the
provision of broadband services. Several cable companies already are offering
broadband Internet access over their network facilities, and incumbent carriers
and competitive carriers also offer such service through digital subscriber line
technology. If we are unable to meet the future demands of our customers for
broadband local access on a timely basis at competitive rates, we may be at a
significant competitive disadvantage.
The FCC regulates the interstate access rates charged by incumbent carriers
for the origination and termination of interstate long distance traffic. These
access rates make up a significant portion of the cost of providing long
distance service. The FCC is in the process of implementing access policy
changes that over time are expected to reduce access rates and the cost of
providing long distance service, especially to business customers. In 2001, the
FCC continued its efforts to lower access charges. We expect further FCC action
in this area. The full impact of the FCC's decisions will not be known until its
decisions are implemented over the next several years, at which time they could
have an adverse impact on our business.
In April 2001, the FCC issued a ruling changing the compensation mechanism
for traffic exchanged between telecommunications carriers that is destined for
Internet service providers. In doing so, the FCC prescribed a new rate structure
for this traffic and prescribed gradually reduced caps for its compensation.
ITC/\DeltaCom may, in the course of its business, exchange the traffic of
Internet service providers with other carriers. The FCC's ruling in connection
with such traffic affected a large number of carriers, including ITC/\DeltaCom,
and further developments in this area could have a significant impact on the
industry and on us. While a federal court remanded that FCC decision for further
consideration, the court did not reverse the decision, so it remains in effect.
The FCC is likely to re-adopt the same substantive requirements but with a
revised rationale in response to the court's remand decision.
The FCC has granted incumbent carriers some flexibility in pricing their
interstate special and switched access services. Under this pricing scheme,
local carriers may establish pricing zones based on access traffic density and
charge different prices for access provided in each zone. The FCC recently
granted incumbent carriers additional pricing flexibility as local competition
develops in their markets. We cannot assure you that this pricing flexibility
will not place us at a competitive disadvantage, either as a purchaser of access
for our long distance operations or as
11
a vendor of access to other carriers or end-user customers.
In a related proceeding, the FCC has changed the methodology used to
subsidize universal telephone service and other public policy goals. Beginning
in April 2003, telecommunications providers like us will pay a fee calculated as
a percentage of projected revenues for the quarter of contribution in order to
support these goals. Before April 2003, the calculation was based on historical
revenues. Some states are also implementing universal service funds. The effects
of these decisions are uncertain and subject to change. In particular, the fees
we pay to subsidize universal service may increase or decrease substantially in
the future as a result of these federal and state proceedings.
The FCC continues to consider related questions regarding the applicability
of access charges and universal service fees to Internet service providers.
Currently, Internet service providers are not subject to these expenses, and a
federal court of appeals has upheld the FCC's decision not to impose such fees.
However, the incumbent carriers and other parties argue that this exemption
unfairly benefits Internet service providers, particularly when they provide
data, voice or other services in direct competition with conventional
telecommunications services. The FCC is in the process of re-examining this
issue. We are not in a position to determine how these issues regarding access
charges and universal service fees will be resolved or whether the resolution of
these issues will be harmful to our competitive position or our results of
operations.
The FCC imposes prior approval requirements on transfers of control and
assignments of radio licenses and operating authorizations. The FCC has the
authority generally to condition, modify, cancel, terminate or revoke licenses
and operating authority for failure to comply with federal laws and the rules,
regulations and policies of the FCC. Fines or other penalties also may be
imposed for such violations. The FCC or third parties may raise issues with
regard to our compliance with applicable laws and regulations.
As a general matter, we cannot provide assurance regarding how quickly or
how adequately we will be able to take advantage of the opportunities created by
the Telecommunications Act. We could be materially adversely affected if a court
decision reversing some of the FCC's rules or problems in the related
arbitration and negotiation process increase our costs of using incumbent
carrier network elements or services, or if such actions otherwise delay or
impede the development of local telephone competition.
State Regulation. We are subject to various state laws and regulations.
Most state public utility commissions require providers such as ITC/\DeltaCom to
obtain authority from the commission before initiating service in that state. In
most states, including Alabama, Georgia and Florida, we also are required to
file tariffs or price lists setting forth the terms, conditions and prices for
services that are classified as intrastate and to update or amend our tariffs
when we adjust our rates or add new products. We also are subject to various
reporting and record-keeping requirements. In addition, some states are ordering
the detariffing of services, which may impede our reliance on the filed rate
doctrine and increase our costs of doing business.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, cancelled,
terminated or revoked by state regulatory authorities for failure to comply with
state law or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such violations.
Public utility commissions or third parties may raise issues with regard to our
compliance with applicable laws or regulations.
We have authority to offer intrastate long distance services in all 50 U.S.
states and the District of Columbia. We have obtained authority to provide long
distance service in states outside of our current and target markets to enhance
our ability to attract business customers with offices, or whose employees
travel, outside of our markets.
We provide local services in our region by reselling the retail local
services of the incumbent carrier in a given territory and, in some established
markets, using incumbent network elements and our own local switching
facilities. We possess authority to provide local telephone services in Alabama,
Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina,
South Carolina, Tennessee and Texas.
12
Many issues remain open regarding how new local telephone carriers will be
regulated at the state level. For example, although the Telecommunications Act
preempts the ability of states to forbid local service competition, the
Telecommunications Act preserves the ability of states to impose reasonable
terms and conditions of service and other regulatory requirements. The scope of
state regulation will be refined through rules and policy decisions made by
public utility commissions as they address local service competition issues.
We also will be affected by state public utility commission decisions
related to the incumbent carriers despite United States Supreme Court decisions
upholding the FCC's rule-making power under the Telecommunications Act. For
example, public utility commissions have responsibility under the
Telecommunications Act to oversee relationships between incumbent carriers and
their new competitors with respect to such competitors' use of the incumbent
carriers' network elements and wholesale local services. Public utility
commissions arbitrate interconnection agreements between the incumbent carriers
and competitive carriers such as us when necessary. Important issues regarding
the scope of the authority of public utility commissions in this area and the
extent to which the commissions will adopt policies that promote local telephone
service competition remain unresolved. For example, the FCC recently decided
that state commissions would play the main role in determining whether the
elements included in the unbundled network element platform, or "UNE-P," will
continue to be made available at cost-based rates in particular geographic areas
and for purposes of serving particular classes of customers. It is unclear how
particular state commissions will exercise this authority. Moreover, state
commissions may seek to eliminate or restrict network elements or combinations
of elements that the FCC decides to retain, or to retain elements or
combinations that the FCC decides to eliminate or restrict. Any such conflicts
between regulatory authorities are likely to be decided by reviewing courts, and
it is not clear how such differences will be resolved. It is difficult to
predict how these matters will be resolved or their impact on our ability to
pursue our business plan.
States also regulate the intrastate carrier access services of the
incumbent carriers. We are required to pay access charges to the incumbent
carriers when they originate or terminate our intrastate long distance traffic.
We could be materially adversely affected by high access charges, particularly
to the extent that the incumbent carriers do not incur the same level of costs
with respect to their own intrastate long distance services. States also will be
developing intrastate universal service charges parallel to the interstate
charges created by the FCC. For example, incumbent carriers such as BellSouth
advocate the formation of state-level funds that would be supported by
potentially large payments by businesses such as ITC/\DeltaCom based on their
total intrastate revenues. Another issue is the use by some incumbent carriers,
with the approval of the applicable public utility commissions, of extended
local area calling that converts otherwise competitive intrastate toll service
to local service. States also are or will be addressing various intraLATA
dialing parity issues that may affect competition. Our business could be
materially adversely affected by these developments.
We also will be affected by how states regulate the retail prices of the
incumbent carriers with which we compete. We believe that, as the degree of
intrastate competition increases, the states will offer the incumbent carriers
increasing pricing flexibility. This flexibility may present the incumbent
carriers with an opportunity to subsidize services that compete with our
services with revenues generated from their non-competitive services, thereby
allowing incumbent carriers to offer competitive services at prices lower than
most or all of their competitors. BellSouth has obtained authority to create
affiliates that would operate on a much less regulated basis and, therefore,
could provide significant competition even if the traditional BellSouth local
business does not receive more pricing flexibility. Kentucky has placed
limitations on such affiliates, while Tennessee has refused such affiliate
applications by BellSouth. We cannot predict the extent to which these
developments may affect our business.
Local Government Authorizations and Related Rights-of-Way. We are required
to obtain street use and construction permits and licenses or franchises to
install and expand our fiber optic network using municipal rights-of-way. In
some municipalities where we have installed network equipment, we are required
to pay license or franchise fees based on a percentage of gross revenues or a
per linear foot basis. Following the expiration of existing franchises, these
fees may not remain at their current levels. In many markets, the incumbent
carriers do not pay these franchise fees or they pay fees that are substantially
less than those required to be paid by us, although the Telecommunications Act
requires that, in the future, such fees be applied in a
13
competitively neutral manner. To the extent that competitors do not pay the same
level of fees as we do, we could be at a competitive disadvantage. Termination
of the existing franchise or license agreements before their expiration dates,
or a failure to renew the franchise or license agreements, and a requirement
that we remove the corresponding portion of our facilities or abandon the
corresponding portion of our network could have a material adverse effect on us.
In addition, we would be adversely affected if we are unable to obtain
additional authorizations for any new network construction on reasonable terms.
Further, unresolved issues exist regarding the ability of new local service
providers to gain access to commercial office buildings to serve tenants.
Employees
As of December 31, 2002, we had approximately 1,830 employees, of whom
1,735 were full-time employees. None of our employees is represented by a union
or covered by a collective bargaining agreement. We believe that our
relationship with our employees is good. In connection with the construction and
maintenance of our fiber optic network and the conduct of our other business
operations, we use third-party contractors, some of whose employees may be
represented by unions or covered by collective bargaining agreements.
Risks
Our business and affairs are subject to a number of risks, including the
following:
Our adoption of fresh start reporting will make some period-to-period
comparisons of our financial condition less meaningful.
Our financial statements published for periods following the effectiveness
of our plan of reorganization under Chapter 11 of the United States bankruptcy
code will not be comparable to our financial statements published before the
effectiveness of the plan of reorganization and included elsewhere in this
report. On October 30, 2002, following the consummation of our plan of
reorganization, we implemented fresh start reporting under applicable accounting
principles. As a result, we have allocated the reorganization fair value of
ITC/\DeltaCom to our assets and liabilities, eliminated our deficit, and
reflected the reorganization transactions under stockholders' equity. Our
adoption of Statement of Position 90-7, "Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code," and fresh start reporting have had a
material effect on our financial statements.
Our wholesale services, including our broadband transport services, have been
adversely affected by network overcapacity, service cancellations, bankruptcies
and other factors.
In recent periods, we have experienced adverse trends relating to our
wholesale service offerings, including our broadband transport services, that
have resulted primarily from a reduction in rates charged to our customers due
to overcapacity in the broadband services business and from service
cancellations by some customers, including customers of our local
interconnection business. We expect that these factors will result in continued
declines in revenues and EBITDA, as adjusted, from broadband transport services
in 2003 compared to 2002, while our local interconnection revenues should
stabilize in the second quarter of 2003. EBITDA, as adjusted, represents
earnings before net interest, other income and other expenses, reorganization
items, income taxes and depreciation and amortization. As a result, we have
decreased the amount of capital we invest in our wholesale business, which could
lead to further revenue declines.
We are subject to legal proceedings that could adversely affect our ability to
provide services.
To maintain our fiber optic network, we have obtained easements,
rights-of-way, franchises and licenses from various private parties, including
actual and potential competitors, local governments, private landowners and
others. We may not be able to continue to use or have access to all of our
existing easements, rights-of-way, franchises and licenses or be able to renew
or replace them after they expire. Third parties have initiated legal
proceedings challenging some of our significant licenses to use the
rights-of-way of others, including our licenses to use the rights-of-way of
Mississippi Power Company, Florida Power Company, Gulf Power Company, Georgia
Power Company, Kansas City Southern Railroad and Illinois Central Railroad. If
some of these or similar future challenges are successful, or if we otherwise
are unsuccessful in maintaining or renewing our rights to use our network
14
easements, rights-of-way, franchises and licenses, we may be forced to abandon
significant portions of our network and possibly pay monetary damages. For
information concerning legal proceedings related to some of our rights-of-way,
see "Legal Proceedings."
Our business is subject to significant competitive pressures that could limit
our ability to grow.
Our industry is highly competitive, and the level of competition,
particularly with respect to pricing, is increasing. We may not be able to
achieve or sustain operating profitability, adequate market share or significant
revenue growth in any of our markets. The prices we charge for our retail local,
long distance and data services and for our broadband transport services have
declined significantly in recent years. Some or all of these prices may continue
to decline, which could adversely affect our ability to generate positive cash
flows from operations. We may be required to reduce further our prices for the
local, long distance or data services because BellSouth, our principal
competitor in many of the markets we serve, has been authorized to offer
in-region long distance services throughout its nine-state region. We expect to
continue to face significant pricing and product competition from BellSouth and
the other large, established telephone companies that currently are the dominant
providers of telecommunications services in our markets. We also will continue
to face significant competitive product and pricing pressures from other
companies like us that attempt to compete in the local services market.
Agreements governing our current indebtedness contain restrictive covenants that
place limits on our business activities.
We are subject to restrictions under our $156 million credit facility and
capital lease facilities with NTFC Capital Corporation and General Electric
Capital Corporation. These restrictions affect and, in some cases, significantly
limit or prohibit, among other things, our ability to incur additional
indebtedness, create liens, make investments and sell assets. For us to incur
additional indebtedness under the foregoing agreements, the indebtedness must
meet a specified minimum interest coverage ratio or qualify as one of a limited
number of specified types of permitted indebtedness. These agreements may limit
our flexibility to plan for, or react to, changes in our business, place us at a
competitive disadvantage relative to our competitors who have less debt, make us
more vulnerable to a downturn in our business or the economy generally, and
require us to use a substantial portion of our cash flow from operations to pay
principal and interest on our debt, rather than for working capital and capital
expenditures.
We will have to generate substantial operating cash flow to meet our obligations
under our debt agreements.
Our ability to make scheduled principal and interest payments under our
$156 million senior credit facility and principal capital lease facilities,
incur additional indebtedness and continue to comply with our loan covenants
will depend primarily on our success in generating substantial operating cash
flow. Our failure to comply with our loan covenants might cause our lenders to
accelerate our repayment obligations under our senior credit facility and under
our principal capital lease facilities, which may be declared payable
immediately based on a senior credit facility default. We will be required
through June 30, 2006 to repay an increasing amount of our $156 million of
outstanding borrowings under our senior credit facility. To remain in compliance
with our senior credit facility covenants, we must comply with financial
covenants and ratios based on our levels of capital expenditures, secured and
total debt, and cash flow. For more information about these covenants and
ratios, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources."
We may be required to make change of control payments totaling approximately
$19.7 million under one of our rights-of-way agreements, which would
significantly reduce the funds we can invest in our business.
We have obtained a portion of our rights-of-way under an agreement with
Southern Telecom, Inc. and its affiliates that provides for significant annual
fixed payments by us through 2020. 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. In January
2003, Southern Telecom initiated suit against us, claiming that our October 2002
reorganization resulted in a change of control of ITC/\DeltaCom under the
agreement. As a
15
result, Southern Telecom has claimed that we became obligated to pay it a total
of approximately $19.7 million. We do not believe we are obligated to make this
payment. Nevertheless, if we are required to make the payment, the funds we have
available for other uses related to the operation or expansion of our business
would be significantly reduced.
If we are unable to interconnect with BellSouth and other incumbent carriers on
acceptable terms, our ability to offer competitively priced local telephone
services will be adversely affected.
In order to provide local telephone services, we must interconnect with and
resell the services of the incumbent carriers to supplement our own network
facilities. Our interconnection agreements with BellSouth expire in June 2003,
and we are arbitrating the rates and terms of new agreements with BellSouth. We
may not be able to enter into new interconnection agreements with BellSouth or
other carriers on favorable terms, in a timely manner, or at all. Further,
federal regulators have adopted substantial modifications to the requirements
that obligate BellSouth and other former monopoly local telephone companies to
provide to us at regulated rates the elements of their telephone networks that
enable us to offer many of our services at competitive rates. If we are unable
to enter into or maintain favorable interconnection agreements in our markets,
our ability to provide local services on a competitive and profitable basis may
be materially adversely affected. Any successful effort by the incumbent
carriers to deny or substantially limit our access to their network elements or
wholesale services also would have a material adverse effect on our ability to
provide local telephone services.
Our operating performance will suffer if we are not offered competitive rates
for the access services we need to provide our long distance services.
We depend on other telecommunications companies to originate and terminate
a significant portion of the long distance traffic initiated by our customers.
Our operating performance will suffer if we are not offered these access
services at rates that are substantially equivalent to the rates charged to our
competitors and permit profitable pricing of our long distance services. The
charges for access services historically have made up a significant percentage
of our overall cost of providing long distance service. Some of our
Internet-based competitors generally are exempt from these charges, which could
give them a significant cost advantage in this area.
Our inability to maintain our network infrastructure, portions of which we do
not own, could adversely affect our operating results.
We have effectively extended our network with minimal capital expenditures
by entering into marketing and management agreements with public utility
companies to sell long-haul private line services on the fiber optic networks
owned by these companies. Under these agreements, we generally earn a commission
based upon a percentage of the gross revenues generated by the sale of capacity
on the utility's networks. Cancellation or non-renewal of any of these
agreements, or any future failure by us to acquire and maintain similar network
agreements in these or other markets as necessary, could materially adversely
affect our operations. In addition, some of our agreements with the public
utility companies are nonexclusive, and our business would suffer from any
reduction in the amount of capacity that is made available to us.
Our ability to provide service also could be materially adversely affected
by a cable cut or equipment failure along our fiber optic network. A significant
portion of our fiber optic network is not protected by electronic redundancy or
geographical diverse routing. Lack of these safeguards could result in our
inability to reroute traffic to another fiber in the same fiber sheath in the
event of a partial fiber cut or electronics failure or to an entirely different
fiber optic route, assuming capacity is available, in the event of a total cable
cut or if we fail to maintain our rights-of-way on some routes.
We may not be able to retain the few large customers on which we depend for a
significant percentage of our revenues.
We may not be able to retain our large customers or we may be required to
lower significantly our prices to retain these customers. The table below sets
forth the approximate percentages of our total revenues generated in 2002, 2001
and 2000 by our five largest retail services customers and our three largest
broadband transport services
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customers:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- -----
Five largest retail services customers .......................... 6.4% 6.3% 7.5%
Three largest broadband transport services customers ............ 10.8% 12.6% 15.2%
WorldCom, Inc. and its subsidiaries accounted for approximately 7.4%
of our broadband transport services revenues in 2000, approximately 6.4% of
our broadband transport services revenues in 2001 and approximately 5.6%
of our broadband transport services revenues in 2002. WorldCom filed for
protection under Chapter 11 of the United States bankruptcy code in July 2002
and has recently requested that we reduce the prices for the broadband transport
services we provide to it. We expect that these developments may result in
reduced revenue generation by our broadband transport services business for 2003
and, possibly, future periods.
The local and long distance industries are subject to significant government
regulation, which may change in a manner that is harmful to our business.
We are required to comply with telecommunications regulations implemented
by federal, state and local governments. We are required to obtain
authorizations from the FCC and state public utility commissions to offer some
of our telecommunications services, to file tariffs for many of our services and
to comply with local license, franchise or permit requirements relating to
installation and operation of our network. Many of these regulations continue to
change. Any of the following events related to the manner in which our business
is regulated could limit the types of services we provide or the terms on which
we provide these services:
. our failure to maintain proper federal and state tariffs;
. our failure to maintain proper state certifications;
. our failure to comply with federal, state or local laws and
regulations;
. our failure to obtain and maintain required licenses, franchises and
permits;
. the imposition of burdensome license, franchise or permit requirements
to operate in public rights-of-way; and
. the occurrence of burdensome or adverse regulatory requirements or
developments.
Our failure to maintain adequate billing, customer service and information
systems will limit our ability to increase our services.
Our inability to identify adequately all of our information and processing
needs, to process the information adequately or accurately or to upgrade our
systems as necessary could have a material adverse effect on our operating
results. We depend on sophisticated information and processing systems to grow,
monitor costs, bill customers, provision customer orders and achieve operating
efficiencies. As we increase our provision of dial tone and other services, our
need for enhanced billing and information systems will also increase.
In addition, we have experienced problems with respect to the operations
support systems used by us and other new carriers to order and receive network
elements and wholesale services from the incumbent carriers. These systems are
necessary for new carriers like us to provide local service to customers on a
timely and competitive basis. FCC rules, together with rules adopted by state
public utility commissions, may not be implemented in a manner that will permit
us effectively to order, receive and provision network elements and other
facilities necessary for us to provide many of our services.
17
We are subject to risks associated with rapid changes in technology.
Our business could suffer from unexpected developments in technology, or
from our failure to adapt to these changes. The telecommunications industry is
subject to rapid and significant changes in technology and we may be required to
select one emerging technology over another. We will be unable to predict with
any certainty, at the time we are required to make our investments, whether the
technology we have chosen will prove to be the most economic, efficient or
capable of attracting customer usage.
Our success depends on our ability to attract and retain key personnel.
The loss of the services of our key personnel, or our inability to attract,
recruit and retain sufficient or additional qualified personnel, could hurt our
business. Our business is currently managed by a small number of key management
and operating personnel, including our executive officers. Most of our senior
management team has extensive experience in the telecommunications industry
working together as a team and has developed and directed our business strategy
since our formation. We do not maintain "key man" insurance on these employees.
Because of current market conditions, our stock incentive program may not
provide an adequate incentive to current or potential key employees to become or
remain employed by us.
One of our investors owns a significant amount of our common stock, which gives
it the ability to exercise significant influence over major corporate decisions.
Welsh, Carson, Anderson & Stowe VIII, L.P. and its affiliates have reported
that they beneficially owned 49.4% of our common stock as of December 18, 2002
and have obtained clearance under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 to acquire in excess of 50% of our voting securities, as defined in
that Act. The Welsh, Carson, Anderson & Stowe group has stated in its SEC
filings that, among other transactions, it 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,
ITC/\DeltaCom. As a result:
. the Welsh, Carson, Anderson & Stowe group will have the ability to
exercise significant influence over the election of our directors,
subject to the voting rights of the holders of our Series A preferred
stock;
. the Welsh, Carson, Anderson & Stowe group will have the ability to
exercise significant influence over other major decisions involving our
company or its assets; and
. the Welsh, Carson, Anderson & Stowe group may have interests that
differ from those of our other stockholders as a result of significant
investments by the Welsh, Carson, Anderson & Stowe group in other
telecommunications companies.
Item 2. Properties.
We own our corporate headquarters in West Point, Georgia and our data
center in Suwanee, Georgia.
We own switch sites in Anniston, Birmingham and Montgomery, Alabama and
Nashville, Tennessee and lease space for a network operations center in Arab,
Alabama. We also lease space for our switch sites in the following locations:
. Jacksonville, Ocala and West Palm Beach, Florida;
. Atlanta, Georgia;
. Gulfport, Mississippi;
. Greensboro, North Carolina;
18
. Columbia, South Carolina; and
. Houston, Texas.
The leases for these switch sites expire on various dates from 2004 to 2014.
We have constructed and own a multi-service facility in Anniston, Alabama,
which functions as a centralized switching control center for our network and as
an operator services center. In addition, we lease space to operate a customer
network operations center in Atlanta, Georgia. The lease for this space is
renewable on an annual basis.
We operate branch offices in the following locations:
. Anniston, Birmingham, Dothan, Florence, Huntsville, Mobile and
Montgomery, Alabama;
. Daytona, Ft. Lauderdale, Jacksonville, Ocala, Orlando, Pensacola,
Tallahassee and Tampa, Florida;
. Albany, Atlanta (two offices), Augusta, Columbus and Macon, Georgia;
. Baton Rouge and New Orleans, Louisiana;
. Biloxi, Hattiesburg and Jackson, Mississippi;
. Charlotte, Greensboro and Raleigh, North Carolina;
. Charleston, Columbia and Greenville, South Carolina; and
. Chattanooga, Knoxville and Nashville, Tennessee.
The leases for these branch offices expire on various dates from 2003 through
2007. We also lease office space for various administrative functions, including
accounting, legal, sales and human resources, in Huntsville, Alabama, and own an
administrative office in Arab, Alabama.
As part of our fiber optic network and switched service system, we own or
lease rights-of-way, land, office space and towers throughout the southern
United States.
See "Business-Services and Facilities-Facilities" for additional
information about our facilities.
Item 3. Legal Proceedings.
General. We are a party to legal proceedings in the ordinary course of our
business, including disputes with contractors or vendors, which we believe are
not material to our business.
Regulatory Proceedings. We are a party to numerous regulatory proceedings
affecting the segments of the communications industry in which we operate,
including regulatory proceedings before various state public utility commissions
and the FCC, particularly in connection with actions by the regional Bell
operating companies. We anticipate these companies will continue to pursue
litigation, regulations and legislation in states within our 10-state principal
operating area to reduce regulatory oversight and state regulation over their
rates and operations. These companies are also actively pursuing major changes
in the Telecommunications Act and by litigation and legislation which we believe
would adversely affect competitive telecommunications service providers,
including ITC/\DeltaCom. If adopted, these initiatives could make it more
difficult for us to compete with these companies and other incumbent carriers.
We may not succeed in our challenges to these or other similar actions that
would prevent or deter us from successfully competing with the incumbent
carriers.
19
Proceedings Affecting Rights-of-Way. To maintain our fiber optic network,
we have obtained easements, rights-of-way, franchises and licenses from various
private parties, including actual and potential competitors, local governments,
private landowners and others. We may not be able to continue to use or have
access to all of our existing easements, rights-of-way, franchises and licenses
or be able to renew or replace them after they expire. Third parties have
initiated legal proceedings challenging some of our significant licenses to use
the rights-of-way of others, including our licenses to use the rights-of-way of
Mississippi Power Company, Florida Power Company, Gulf Power Company and Georgia
Power Company. If some of these or similar future challenges are successful, or
if we otherwise are unsuccessful in maintaining or renewing our rights to use
our network easements, rights-of way, franchises and licenses, we may be forced
to abandon significant portions of our network and possibly pay monetary
damages. As indicated below or in note 11 to our audited consolidated financial
statements appearing elsewhere in this report, which is incorporated herein by
reference, the results of these challenges are uncertain and, individually or in
the aggregate, could have a material adverse effect on our results of operations
or financial position. These challenges include, but are not limited to, the
following:
Mississippi Power Company Rights-of-Way. A portion of our network runs
through fiber optic cables owned by the Mississippi Power Company over its
rights-of-way located in Jasper County, Mississippi. A proceeding involving
Mississippi Power 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. We became a party to the proceeding after the January 1999 order. The
Circuit Court of the First Judicial District of Jasper County, Mississippi has
directed us not to use that portion of our fiber optic network located on
Mississippi Power Company's rights-of-way in Jasper County, except in an
emergency, pending the outcome of the trial. We have rerouted all of the
circuits on the affected portion of our network so that we may continue to
provide services to our customers along the affected route. If the courts
ultimately agree with the landowners that the existing easements do not permit
our use, we believe our potential liability for damages may be limited to the
value of a permanent easement for that use. We cannot assure you in this
respect, however, since the landowners are seeking damages equal to the profits
or gross revenues received by us from our use of Mississippi Power Company's
rights-of-way in Jasper County and punitive damages for our use of the route.
We initiated civil suits in August 2001 and May 2002 in the United States
District Court for the Southern District of Mississippi in which we seek
declaratory judgments confirming our 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 us seeking a constructive trust upon the revenues earned on those
rights-of-way, together with compensatory and punitive damages. Both civil suits
were recently dismissed by the court. The order of dismissal in the civil action
involving the 37 parcels of land has been appealed by us to the United States
Court of Appeals for the Fifth Circuit. We intend to seek reconsideration of the
order of dismissal in the civil action involving the 63 parcels of land. Before
the dismissals, we had resolved the issue of our use of the rights-of-way with
some of the defendants.
In April and May 2002, 190 lawsuits were filed and, in October and December
2002, 30 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. The landowners have voluntarily dismissed
WorldCom from each action due to WorldCom's Chapter 11 bankruptcy filing. Each
plaintiff claims to be the owner of property over which Mississippi Power
Company has an easement from which WorldCom 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. Of the 190 lawsuits, we believe only approximately 11
involve parcels of
20
land used by us in the provision of telecommunications services. These lawsuits,
together with all other actions involving WorldCom's use of Mississippi Power
Company's rights-of-way, have been removed to the United States District Court
for the Southern District of Mississippi. Mississippi Power Company has
requested that court to transfer these actions to the United States Bankruptcy
Court for the Southern District of New York, where WorldCom's bankruptcy
proceeding is pending.
In August 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' properties. 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. These lawsuits have been removed to the United States District
Court for the Southern District of Mississippi. Mississippi Power Company has
requested that court to transfer these actions to the United States Bankruptcy
Court for the Southern District of New York, where WorldCom's bankruptcy
proceeding is pending.
In September 2002, Mississippi Power Company and we were served with a
summons and complaint filed in a civil action in the Circuit Court of Jasper
County, Mississippi. The landowners of 75 parcels of property located in various
Mississippi counties allege Mississippi Power Company and we have violated the
landowners' rights with regard to the use of Mississippi Power Company's
easements across the landowners' property similar to other rights-of-way suits
in Mississippi. The plaintiffs allege trespass, unjust enrichment, fraud and
deceit, and civil conspiracy and seek from each plaintiff $5 million in
compensatory damages, $50 million in punitive damage, disgorgement of gross
revenues, a percentage of gross revenues derived from use of the rights-of-way
and court costs. We deny all allegations. These lawsuits have been removed to
the United States District Court for the Southern District of Mississippi.
Mississippi Power Company has requested that court to transfer these actions to
the United States Bankruptcy Court for the Southern District of New York, where
WorldCom's bankruptcy proceeding is pending, although WorldCom is not a party to
this lawsuit.
In October 2001, a civil action was filed in the Chancery Court of Lamar
County, Mississippi against Mississippi Power Company and us by two plaintiffs
seeking to quiet and confirm title to real property, for ejectment and for an
accounting. The plaintiffs are joint owners of a single parcel of property
located in Lamar County, Mississippi. The plaintiffs also were defendants in our
action involving 37 parcels of land described above. The plaintiffs have not
specified the particular dollar amount of damages they are seeking.
Mississippi Power Company and Southern Company Rights-of-Way. In April
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 or 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 we have denied all of the
plaintiff's allegations.
In July 2002, nine lawsuits on behalf of 101 property owners were filed
against Mississippi Power Company, Southern Company and us in the Chancery Court
of Jones County, Mississippi. All nine complaints are identical in seeking
relief for trespass, nuisance, conversion, unjust enrichment and accounting,
fraudulent concealment, fraud, fraudulent misrepresentation and fraudulent
concealment, and rescission and equitable reformation arising from the alleged
unauthorized use of the subject rights of way in violation of the terms of the
easements held by Mississippi Power Company. The landowners are seeking
unspecified monetary damages and equitable relief. Mississippi Power Company,
Southern Company and we deny all the allegations. These lawsuits have been
removed to the United States District Court for the Southern District of
Mississippi. Mississippi Power Company has requested that court to transfer
these actions to the United States Bankruptcy Court for the Southern District of
New York, where WorldCom's bankruptcy proceeding is pending.
Gulf Power Company Rights-of-Way. We use the rights-of-way of Gulf Power
Company in Florida for a portion of our network. In the fourth quarter of 2000,
Gulf Power was sued in the Circuit Court of Gadsden County,
21
Florida, by two landowners that claim to represent a class of all landowners
over whose property Gulf Power has facilities that are used by third parties.
The landowners have alleged that Gulf Power does not have the authority to
permit us or other carriers to transmit telecommunications services over the
rights-of-way. We were made a party to this litigation in August 2001. In March
2002, the court dismissed this matter without prejudice on the basis that, among
other things, there was no additional burden on the property as a result of
third-party use of the rights-of-way for telecommunications purposes and that
the easements were broad enough in scope to permit such third-party use.
However, the court also has permitted the plaintiffs to amend their complaint to
allege additional facts to support their contention that there is an additional
burden on the property because of the maintenance requirements of the fiber
routes and the placement of buildings and other physical telecommunications
equipment on the rights-of-way.
Georgia Power Company Rights-of-Way. We use rights-of-way of Georgia Power
Company in Georgia for a portion of our network. In July 2001, a suit was 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. We were made a party to the suit in January
2002.
In November 2002, a civil action was filed by a plaintiff, claiming to be
representative of a class of all landowners over whose land Georgia Power
Company maintains facilities, in the Superior Court of Walton County, Georgia,
against Georgia Power Company and us. The plaintiff alleges the documents
granting Georgia Power Company the rights to cross the plaintiff's property do
not grant the right to Georgia Power Company to allow third parties to use the
rights-of-way for the transmission of telecommunications services of such third
parties. The civil action claims trespass and unjust enrichment. There are no
specified dollar amounts demanded in the complaint. The plaintiff seeks
compensatory damages, punitive damages, attorney fees, and injunctive relief
requiring the removal of the fiber optic facilities from the plaintiff's land.
Georgia Power Company and we deny the allegations.
Kansas City Southern Railroad and Illinois Central Railroad Rights-of-Way.
In March 2003, a civil action was filed in the United States District Court for
the Southern District of Mississippi, Jackson Division, by plaintiffs claiming
to represent a class of Mississippi property owners across which rights-of-way
of Kansas City Southern Railroad and Illinois Central Railroad run. The
plaintiffs claim that the rights-of-way of Kansas City Southern Railroad and
Illinois Central Railroad do not permit third parties, including ITC/\DeltaCom,
to install or operate telecommunication facilities of third parties within the
rights-of-way. The plaintiffs allege trespass, unjust enrichment and conversion,
and seek declaratory relief, unspecified compensatory and punitive damages,
restitution, disgorgement, attorney fees and an accounting of amounts paid to
the railroads. We deny that our use of the rights-of-way has resulted in the
alleged trespass, unjust enrichment or conversion, and we otherwise deny the
plaintiffs' allegations.
ITC/\DeltaCom's Suit for Rights-of-Way Indemnification. In August 2001, we
filed suit in the Superior Court of Troup County, Georgia, against Southern
Telecom, Inc., Alabama Power Company, Georgia Power Company, Mississippi Power
Company, Gulf Power Company and related entities from which we have obtained
rights to use the rights-of-way for portions of our fiber optic
telecommunications network. We seek a declaratory judgment that the defendants
are required to use their best efforts to defend and indemnify us against any
claims alleging that we do not have the right to use the rights-of-way of these
entities. In December 2001, we filed for summary judgment and, subsequently, the
defendants have filed for summary judgment, but the court has not ruled on these
motions. The defendants also have filed a counterclaim requesting, among other
items, that we reimburse them for the cost of perfecting the applicable
rights-of-way.
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
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,
22
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 responded to our petition by seeking to have the matter heard before
the Georgia Public Service Commission, rather than in Georgia state court.
BellSouth 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. BellSouth has subsequently withdrawn
this petition. 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 the reorganization,
and other relevant factors, we do not believe that BellSouth is entitled to any
amount of the deposit it has sought. If it is determined that BellSouth may
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.
Southern Telecom Change of Control Payment. In January 2003, Southern
Telecom, Inc. filed a civil action against us in Troup County, Georgia Superior
Court, alleging breach of contract by us under the Revised and Restated Fiber
Optic Facilities and Services Agreement, dated June 9, 1995, as amended, between
us and Southern Telecom, on behalf of itself and as agent for affiliated power
companies. We have obtained a significant portion of our network rights-of-way
pursuant to this agreement. Southern Telecom alleges that we breached the
agreement by failing to pay Southern Telecom approximately $125,000 by November
29, 2002 and approximately $19.6 million by January 28, 2003, for a total of
approximately $19.7 million, that it alleges became due and payable as a result
of an alleged "change of control" of ITC/\DeltaCom under the agreement. Southern
Telecom contends that such a change of control occurred on October 29, 2002,
when our plan of reorganization became effective. We have denied all of the
allegations in Southern Telecom's complaint.
Item 4. Submission of Matters to a Vote of Security Holders.
On August 26, 2002, as part of our plan of reorganization under Chapter 11
of the United States bankruptcy code that became effective on October 29, 2002,
the bankruptcy court authorized ITC/\DeltaCom to solicit acceptances of the
proposed plan of reorganization by delivering copies of the proposed plan,
related disclosure statement and other information to each creditor and interest
holder entitled to vote on the proposed plan, which included all of the former
holders of our old common stock, preferred stock, senior notes and convertible
subordinated notes. The deadline for voting on approval of the proposed plan of
reorganization was October 1, 2002. The proposed plan of reorganization was
approved by the vote of all classes of creditors and interest holders entitled
to vote.
Except as described above, there were no matters submitted to, or voted on
by, our security holders in the fourth quarter of 2002.
23
PART II
Item 5. Market Price for Registrant's Common Equity and Related Stockholder
Matters.
Market for the Common Stock. Our common stock has been listed on the OTC
Bulletin Board and has traded under the symbol "ITCD.OB" since November 6, 2002.
Our common stock was issued effective as of October 29, 2002 upon consummation
of our plan of reorganization described elsewhere in this report. Our common
stock, which was provisionally approved for listing on the NASDAQ National
Market, subject to compliance with the minimum bid price requirement and other
initial listing requirements of the NASDAQ Marketplace Rules, was quoted on the
NASDAQ National Market from October 30, 2002 through November 5, 2002. We were
notified by the NASDAQ Stock Market that the listing of our common stock would
be transferred to the OTC Bulletin Board because the common stock had failed to
achieve a minimum closing bid price of at least $5.00 on any of the five trading
days immediately following the effective date of our plan of reorganization.
During the period from October 30, 2002 through December 31, 2002, the high
and low sale prices for the common stock were $4.04 per share and $1.99 per
share. These high and low sale prices both occurred on trading days when the
common stock was quoted on the NASDAQ National Market.
There is no public trading market for the Series A preferred stock or the
warrants.
On March 21, 2003, there were approximately 1,200 record holders of the
common stock, approximately 35 record holders of the Series A preferred stock,
and approximately 35 record holders of the warrants. For information on shares
of our common stock authorized for issuance under our equity compensation plans,
see "Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters-Equity Compensation Plan Information."
The following table sets forth the high and low sale prices for our old
common stock during 2001 and during 2002 through our reorganization plan
effective date of October 29, 2002. Our old common stock was quoted on the
NASDAQ National Market through August 27, 2002 and listed on the OTC Bulletin
Board thereafter.
2001 High Low
---- ---- ---
First Quarter ................................. $ 11.44 $ 4.75
Second Quarter ................................ 6.70 2.91
Third Quarter ................................. 4.50 1.06
Fourth Quarter ................................ 1.33 0.51
2002 High Low
---- ---- ---
First Quarter ................................. $ 0.98 $ 0.26
Second Quarter ................................ 0.35 0.04
Third Quarter (through October 29, 2002) ...... 0.14 0.02
Dividend Policy. We did not declare or pay any cash dividends on our
capital stock that was outstanding before we consummated our plan of
reorganization on October 29, 2002. Future declaration and payment of dividends,
if any, on our new common stock or Series A preferred stock will be determined
in light of factors deemed relevant by our board of directors, including our
earnings, operations, capital requirements and financial condition and
restrictions in our financing agreements. The agreements governing our $156
million senior credit facility and our capital lease facilities with NTFC
Capital Corporation and General Electric Capital Corporation limit our ability
to pay cash dividends by prohibiting our operating subsidiaries from
distributing funds to ITC/\DeltaCom for this purpose. Under the certificate of
designation of our Series A preferred stock, we have the option, instead of
paying cash dividends, to pay dividends in additional shares of Series A
preferred stock.
Recent Sales of Unregistered Securities. As of October 29, 2002, under our
plan of reorganization:
. As consideration for the cancellation of all of our outstanding senior
notes, in a total principal amount of $415 million plus accrued and
unpaid interest, we issued to the former holders of those notes a total
of 40,750,000 shares of the common stock of our reorganized company.
. As consideration for the cancellation of all of our outstanding
convertible subordinated notes, in a total principal amount of $100
million plus accrued and unpaid interest, we issued to the former
holders of those notes a total of 2,500,000 shares of our new common
stock.
. As consideration for the cancellation of all of our outstanding common
stock, Series A preferred stock and Series B preferred stock, including
accumulated and undistributed dividends on the Series B preferred
stock, we issued to the former holders of those securities a total of
500,000 shares of our new common stock.
. We issued and sold in a rights offering to holders of our old common
stock and old preferred stock, for a total purchase price of $184,600,
1,846 shares of 8% Series A convertible redeemable preferred stock of
our reorganized company and warrants to purchase approximately 6,276
shares of our new common stock.
24
In connection with these issuances, we relied on the exemption from
registration under the Securities Act of 1933 provided in Section 1145(a) of the
United States bankruptcy code. We issued all of these securities pursuant to our
plan of reorganization, which was confirmed by the United States Bankruptcy
Court for the District of Delaware on October 17, 2002 and became effective on
October 29, 2002.
On October 29, 2002, in connection with our plan of reorganization, we
issued and sold in a private offering 298,154 shares of our new Series A
preferred stock, warrants to purchase approximately 1,013,724 shares of our new
common stock, and 1,000,000 shares of our new common stock for a total cash
purchase price of $29.8 million. In connection with the private offering, which
was made exclusively to accredited investors, we relied on the exemption from
registration under the Securities Act of 1933 provided in Section 4(2) of the
Securities Act and Regulation D thereunder.
Conversion of Series A Preferred Stock. If not redeemed by us before the
mandatory redemption date of October 29, 2012, each share of Series A preferred
stock is convertible at the holder's option, in whole or in part, at any time
after such share is issued, into a number of shares of common stock which is
obtained by dividing the $100 liquidation preference per share plus the amount
of any accrued and unpaid dividends accrued to, but not including, the
conversion date by the conversion price applicable to such share. The initial
conversion price of the Series A preferred stock is $5.7143 per share of common
stock. The conversion price is subject to reduction from time to time under the
circumstances described below. The right to convert shares of Series A preferred
stock called for redemption will terminate at the close of business on the last
business day before the date fixed for optional or mandatory redemption, unless
we default in paying the redemption price. We will not issue fractional shares
of common stock upon the conversion of any share of Series A preferred stock.
Instead, in our discretion, we may either round up a fractional share of common
stock to the nearest whole share of common stock or pay cash in lieu of the
fractional share based on the market price of the common stock on the business
day preceding the conversion date.
In order to prevent dilution of the foregoing conversion rights, the
conversion price of the Series A preferred stock will be subject to reduction,
subject to specified exceptions, if at any time through October 29, 2004 we
issue or sell, or we are deemed to have issued or sold, shares of common stock
for no consideration or for a consideration per share less than the exercise
price in effect on the date of issuance or sale, or deemed issuance or sale, of
such common stock. The conversion price of the Series A preferred stock will be
proportionately reduced if we subdivide the shares of common stock into a
greater number of shares by any stock split, stock dividend, recapitalization,
reorganization, reclassification or other transaction, and will be
proportionately increased if we combine the shares of common stock into a
smaller number of shares by any reverse stock split, recapitalization,
reorganization, reclassification or other transaction. We will not be required
to give effect to any adjustment of the conversion price unless and until the
net effect of one or more required adjustments will have resulted in a change of
the conversion price by at least 1%. When the cumulative net effect of more than
one adjustment will be to change the conversion price by at least 1%, we will
give effect to such change to the conversion price.
Exercise of Warrants. Each warrant is represented by a warrant certificate
which entitles the holder thereof to purchase for cash one share of common stock
at an exercise price of $5.114 per share. The warrant exercise price and the
number of shares of common stock issuable upon exercise of a warrant are subject
to adjustment on substantially the same terms as the conversion price of the
Series A preferred stock. Each warrant is exercisable at any time during the
period commencing on October 29, 2002 and ending immediately prior to 5:00 p.m.,
New York City time, on October 29, 2007. Each warrant not exercised before such
expiration date will become void and all rights of the holder in respect of such
warrant will cease as of such date.
Warrants may not be exercised by any holder for an amount of less than 100
shares of common stock unless such holder only owns, in the aggregate, such
lesser amount. We will not be required to issue fractional shares of common
stock upon the exercise of warrants. If more than one warrant is presented for
exercise in full at the same time by the same holder, the number of full shares
of common stock issuable upon the exercise of such warrants will be computed on
the basis of the aggregate number of shares purchasable upon exercise of such
warrants. If any fraction of a share of common stock would be issuable upon the
exercise of any warrants, we may, in our sole discretion, either round such
fractional share up to the nearest whole number or pay an amount in cash equal
to the market price of such share, as determined on the business day immediately
preceding the date the warrant is presented for exercise, multiplied by such
fraction, rounded up to the nearest whole cent.
Holders of warrants will be able to exercise their warrants only if a
registration statement relating to the exercise of the warrants and issuance of
the shares underlying the warrants is then effective under the Securities Act
and is available, or if the exercise of the warrants and issuance of shares upon
such exercise is exempt from the registration requirements of the Securities Act
and such shares are qualified for sale or exempt from registration or
qualification under the applicable securities laws of the states or other
jurisdictions in which the various holders of the warrants, or other persons to
whom it is proposed that such shares be issued upon the exercise of such
warrants, reside.
25
Item 6. Selected Financial Data.
The following table sets forth our selected consolidated financial data.
The selected historical income statement data for each of the years ended
December 31, 2001, 2000, 1999 and 1998 and the selected historical balance sheet
data as of the years then ended have been derived from the consolidated
financial statements that have been audited by Arthur Andersen LLP, independent
public accountants. The selected historical income statement data for the
periods from January 1, 2002 to October 29, 2002 and October 30, 2002 to
December 31, 2002, and the selected historical balance sheet data as of October
29, 2002 and December 31, 2002, have been derived from the consolidated
financial statements that have been audited by BDO Seidman, LLP, independent
public accountants. We have divided our 2002 historical income statement and
balance sheet data into these two periods as a result of our adoption, under
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," of fresh start reporting on October
30, 2002, following our emergence from Chapter 11 bankruptcy reorganization
proceedings on October 29, 2002. The selected financial and operating data as of
and for the periods ended October 29, 2002 and December 31, 2002 are generally
not comparable to the financial results for prior periods. You should read the
financial data below together with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited consolidated
financial statements, including the notes thereto, appearing elsewhere in this
report.
Successor Predecessor
--------- ------------------------------------------------------------------
Period from Period from Year Ended December 31,
--------------------------------------------------
October 30, 2002 January 1, 2002
to December 31, to October 29,
2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
(In thousands, except share data)
Income Statement Data:
Operating revenues ............................ $ 65,569 $ 352,897 $ 415,339 $ 363,648 $ 244,844 $ 171,838
----------- ----------- ----------- ----------- ----------- -----------
Expenses:
Cost of services ............................ 30,021 164,920 186,121 155,000 118,721 82,979
Inventory write-down ........................ -- -- 1,663 -- -- --
Selling, operations and administration ...... 27,108 136,472 188,712 151,050 96,854 64,901
Depreciation and amortization ............... 9,002 105,696 118,938 86,519 53,810 30,887
Loss on early termination of credit
facility and debt (a)...................... -- -- -- 1,321 -- 8,436
Special charges (b) ......................... -- 223 74,437 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total expenses ............................ 66,131 407,311 569,871 393,890 269,385 187,203
----------- ----------- ----------- ----------- ----------- -----------
Operating loss ................................ (562) (54,414) (154,532) (30,242) (24,541) (15,365)
Interest expense .............................. (2,350) (35,704) (58,833) (55,482) (45,293) (31,930)
Interest and other income (expense), net ...... 216 60 1,434 14,337 14,949 6,499
----------- ----------- ----------- ----------- ----------- -----------
Loss before reorganization items and income
taxes ....................................... (2,696) (90,058) (211,931) (71,387) (54,885) (40,796)
Reorganization items (c) ...................... -- 60,792 -- -- -- --
Income tax expense (benefit) .................. -- -- -- (512) 94 (6,454)
----------- ----------- ----------- ----------- ----------- -----------
Net loss ...................................... (2,696) (29,266) (211,931) (70,875) (54,979) (34,342)
Preferred stock dividends and accretion ....... (514) (4,210) (3,713) -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net loss applicable to common
stockholders .......................... $ (3,210) $ (33,476) $ (215,644) $ (70,875) $ (54,979) $ (34,342)
=========== =========== =========== =========== =========== ===========
Basic and diluted net loss per common share
(c)(d) ........................................ $ (0.07) $ (0.54) $ (3.46) $ (1.16) $ (0.98) $ (0.67)
=========== =========== =========== =========== =========== ===========
Basic and diluted weighted average common
shares outstanding (c) (d) .................. 44,750,000 62,364,768 62,292,085 60,928,387 56,370,269 50,972,361
Balance Sheet Data (at period end):
Working capital (deficit) ..................... $ 23,978 $ (5,860) $ (6,741) $ 85,094 $ 244,913 $ 190,118
Total assets .................................. 553,520 754,243 878,332 1,048,526 807,598 587,517
Long-term liabilities ......................... 212,946 204,347 723,874 713,869 516,907 417,934
Liabilities subject to compromise (c) ......... -- 538,147 -- -- -- --
Stockholders' equity (deficit) ................ 237,245 (139,209) (21,930) 181,053 218,162 118,200
Other Financial Data:
Capital expenditures .......................... 4,916 29,784 161,965 309,831 165,540 147,842
Cash flows provided by (used in) operating
activities .................................. 7,216 12,580 (10,524) 45,931 (5,334) 9,512
Cash flows used in investing activities ....... 4,916 29,780 154,798 305,208 149,995 118,166
Cash flows (used in) provided by financing
activities .................................. (1,977) 6,388 65,225 151,986 219,593 198,447
EBITDA, as adjusted (e) ....................... 8,440 51,282 (35,594) 56,277 29,269 23,958
Pro forma EBITDA, as adjusted (e) ............. 9,625 50,790 45,268 41,498 29,269 23,958
---------------------
26
(a) Amounts charged to income for the year ended December 31, 2000 and 1998
related to losses on the early termination of credit facility and early
termination of debt have been reclassified in accordance with SFAS No. 145.
(b) In 2002, we recorded non-recurring special charges consisting of a
write-down of impaired property and equipment of $223,000. In 2001, we
recorded non-recurring special charges consisting of a write-down of
impaired property and equipment of $23.0 million and a write-down of
goodwill and other intangible assets of $51.4 million. See note 10 to our
audited consolidated financial statements appearing elsewhere in this
report.
(c) On June 25, 2002, we filed a voluntary petition for reorganization under
Chapter 11 of the United States bankruptcy code. The plan was confirmed on
October 17, 2002 and became effective on October 29, 2002. Accordingly, we
reclassified our senior notes and convertible subordinated notes, which
were subject to compromise in the reorganization, as "liabilities subject
to compromise" before the effective date. Expenses related to the
reorganization, such as professional fees and administrative costs, are
classified as "reorganization items." On the reorganization effective date,
all shares of old common stock were cancelled and new shares of common
stock were issued. See note 3 to our audited consolidated financial
statements appearing elsewhere in this report.
(d) On September 4, 1998, we effected a two-for-one stock split of our common
stock in the form of a stock dividend. All references to number of shares,
except shares authorized, and to per share information in our audited
consolidated financial statements for 1998 have been adjusted to reflect
the stock split on a retroactive basis.
(e) EBITDA, as adjusted, represents earnings before extraordinary item, net
interest, other income and other expenses, income taxes, reorganization
items and depreciation and amortization. Pro forma EBITDA, as adjusted,
represents earnings before the foregoing items and, in addition, before
restructuring charges, special charges and the other items shown in the
table below. We use the term "EBITDA, as adjusted," because that measure
does not include non-cash expense items, extraordinary items or
reorganization items and we use the term "pro forma EBITDA, as adjusted,"
because that measure also does not include restructuring charges, special
charges or the other items shown in the table below. We evaluate and
project the performance, liquidity and cash flows of our business using
several measures, including EBITDA, as adjusted, and pro forma EBITDA, as
adjusted. We consider these measures to be important indicators of our
performance and of liquidity for our operations and cash flow improvements
between periods, because these measures eliminate some non-cash expense
items and non-recurring items. These measures should not be considered
alternatives to net income, as calculated in accordance with accounting
principles generally accepted in the United States, as a measure of
performance or to cash flows, as calculated in accordance with accounting
principles generally accepted in the United States, as a measure of
liquidity. We have included these measures because we believe they may
provide a better comparison of our performance and liquidity to the
performance and liquidity of our competitors. EBITDA, as adjusted, is not
necessarily comparable with similarly titled measures for other companies.
Neither EBITDA, as adjusted, nor pro forma EBITDA, as adjusted, is a
measurement of financial performance under accounting principles generally
accepted in the United States. We believe that operating loss is the
financial measure under such generally accepted accounting principles that
is most directly comparable to EBITDA, as adjusted, and to pro forma
EBITDA, as adjusted. The following table sets forth, for the periods
indicated, a quantitative reconciliation of the differences between EBITDA,
as adjusted, and operating loss and between pro forma EBITDA, as adjusted,
and operating loss, in each case as operating loss is calculated in
accordance with generally accepted accounting principles:
Successor Predecessor
---------------- -------------------------------------------------------------------
October 30, 2002 January 1, 2002 Year Ended December 31,
to to ------------------------------------------------
December 31, 2002 October 29, 2002 2001 2000 1999 1998
----------------- ---------------- --------- --------- --------- ---------
Operating loss .......................... $ (562) $ (54,414) $(154,532) $ (30,242) $ (24,541) $ (15,365)
Depreciation and amortization ......... 9,002 105,696 118,938 86,519 53,810 30,887
--------- --------- --------- --------- --------- ---------
EBITDA, as adjusted .................... 8,440 51,282 (35,594) 56,277 29,269 15,522
Non-recurring termination fee ......... -- (3,500) -- -- -- --
Interconnection agreement settlement .. -- -- (1,500) (16,100) -- --
Inventory write-down .................. -- -- 1,663 -- -- --
Stock-based compensation .............. 1,140 -- -- -- -- --
Restructuring charges ................. 45 2,785 6,262 -- -- --
Loss on early termination of credit
facility ............................ -- -- -- 1,321 -- 8,436
Special charges ....................... -- 223 74,437 -- -- --
--------- --------- --------- --------- --------- ---------
Pro forma EBITDA, as adjusted .......... $ 9,625 $ 50,790 $ 45,268 $ 41,498 $ 29,269 $ 23,958
========= ========= ========= ========= ========= =========
27
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
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 some non-core services,
the key elements of this strategy include reduction of our employee base,
consolidation of facilities and operations, and reduction of capital
expenditures. We also sought to eliminate a substantial portion of our existing
indebtedness and reduce our fixed interest costs so that we are able to achieve
and maintain positive cash flow from operations through the current period of
uncertainty affecting the telecommunications industry and competitive
telecommunications companies.
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. We completed our reorganization under the
plan on October 29, 2002.
As of October 29, 2002, under our plan of reorganization:
. All of our outstanding senior notes, in a total principal amount of
$415 million plus accrued and unpaid interest, were cancelled and the
former holders of those notes received in exchange a total of
40,750,000 shares, or 81.5%, of the common stock of our reorganized
company.
. All of our outstanding convertible subordinated notes, in a total
principal amount of $100 million plus accrued and unpaid interest, were
cancelled and the former holders of those notes received in exchange a
total of 2,500,000 shares, or 5%, of our new common stock.
. All of our outstanding common stock, Series A preferred stock and
Series B preferred stock, including accumulated and undistributed
dividends on the Series B preferred stock, were cancelled and the
former holders of those securities collectively received a total of
500,000 shares, or 1%, of our new common stock.
. We issued and sold in a rights offering to holders of our old common
stock and old preferred stock, for a total purchase price of $184,600,
1,846 shares of 8% Series A convertible redeemable preferred stock of
our reorganized company and warrants to purchase approximately 6,276
shares of our new common stock.
. We issued and sold in a private offering 298,154 shares of our new
Series A preferred stock, warrants to purchase approximately 1,013,724
shares of our new common stock, and 1,000,000 shares of our new common
stock for a purchase price of $29.8 million.
The foregoing ownership percentages assume the conversion of our new Series A
preferred stock into common stock as of October 29, 2002. As of January 31,
2003, we had outstanding a total of 44,848,300 shares of common stock, 304,182
shares of Series A preferred stock and warrants to purchase 1,020,000 shares of
common stock. In connection with our plan of reorganization, we also amended our
senior credit facility and our principal capital lease facilities.
We adopted the provisions of AICPA Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," upon
commencement of the bankruptcy proceedings. On October 29, 2002, we implemented
fresh start reporting under the provisions of SOP 90-7. Under SOP 90-7, the
reorganization value of ITC/\DeltaCom was allocated to our assets and
liabilities, our accumulated deficit was eliminated and our new equity was
issued in accordance with our plan of reorganization as if we were a new
reporting entity. Under fresh start reporting, we recorded reorganization
charges of $228.2 million to adjust the historical carrying value of our assets
and liabilities to fair market value, and a $312.0 million gain on the October
29, 2002 cancellation of debt under our plan of reorganization. We also recorded
expenses of $14.1 million for professional services and $8.9
28
million for the write-off of deferred financing fees and debt discounts in
connection with our reorganization.
As a consequence of our reorganization and in accordance with SOP 90-7, we
have separately presented our financial results for 2002 in the accompanying
audited consolidated financial statements and in other portions of this report
as follows: results for the period from January 1, 2002 to October 29, 2002 are
reported under "Predecessor"; and the results for the period from October 30,
2002 to December 31, 2002 are reported under "Successor." To compare our 2002
financial results, after giving effect to our reorganization, to our 2001
financial results for purposes of this management's discussion, we have combined
the periods from January 1, 2002 to October 29, 2002 and from October 30, 2002
to December 31, 2002.
Business Segments. We provide voice and data telecommunications services on
a retail basis to businesses and residential customers 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. We expect to focus our operations primarily on offerings to our
end-user, retail customers.
Retail Services. We provide our retail services individually or in a
bundled package tailored to the customer's specific needs. We derive our retail
services revenues from the following 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;
. sales of wholesale long distance services for resale by other
telecommunications carriers; and
. sales of colocation services, managed services and professional
services through our data center operations in Suwanee, Georgia.
At December 31, 2002, we provided our retail services to approximately
19,590 customers, which were served by 35 branch offices, and had sold
approximately 231,820 access lines, of which approximately 220,510 had been
installed. Of the lines we have sold, customers who purchase lines on a retail
basis purchased 177,080 lines and Internet service provider customers, who
purchase lines on a wholesale basis, purchased 54,740 lines. Of the lines in
service, 169,980 lines related to retail customers and 50,530 lines related to
Internet service provider customers.
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. As of December 31, 2002, we owned
approximately 6,143 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 3,945 route miles of network owned and operated by these
utilities.
As of December 31, 2002, our fiber optic network 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
29
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.
Segment Presentation. 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 segment information for 2001 and 2000 in this report to include
the results of the former e/\deltacom segment as part of the results of the
retail services segment. Our e/\deltacom business commenced operations in 2000.
Although sales to retail customers account for a substantial amount of the
revenues of the retail services segment, revenues reported by the retail
services segment also are generated by sales of services, including local
interconnection, wholesale long distance and wholesale data services, on a
wholesale basis.
Operating Revenues. We derive operating revenues from our offering of
retail services and broadband transport services.
Retail Services. We derive most of our retail services revenues from
recurring monthly charges that are generated by our provision of local exchange
services, long distance services, data and Internet services, colocation
services, enhanced monitoring services, managed security services, storage
management services and hardware management services. We also derive
nonrecurring revenues from the sale and installation of telephone systems and
related equipment, and from some professional service offerings.
In 2002 and 2001, we derived an increasing percentage of our revenue from
local services, primarily local services provided under our interconnection
agreements with other local telephone companies, and from data and Internet
services. We expect that gross margin as a percentage of revenues associated
with our facilities-based local, data and Internet retail services will be
slightly higher than the gross margin as a percentage of revenues associated
with our long distance retail services.
As we continue to use portions of the networks of other local telephone
companies to provide services over our network and facilities instead of
reselling services using the entire network of those companies, we expect our
gross margin on local service to improve. We believe that this improvement will
result from reduced access charges and from efficiencies realized through
increased reliance on our network. Competitive market pressures to reduce prices
for our retail services, however, could offset these expected margin
improvements.
During the first quarter of 2003, we initiated our "Grapevine" offering of
local services to residential customers. Grapevine customers receive our local
telephone services bundled with one of our long distance service plans. We
expect that the incremental revenues generated by Grapevine will augment our
existing customer base and revenue streams, although, if this offering is
successful, sales may adversely affect our gross margins, since we provide this
service primarily using the networks of other telephone companies. We have
implemented a separate billing and customer support system for this product, but
we will not use a direct sales force to market or sell the Grapevine offering.
We currently do not expect that our offering of residential services will
capture a significant share of the residential market for local telephone
service.
Rates for long distance services continued to decline in 2002, although the
rate of decline has begun to decrease. Although this decline had a negative
impact on our revenues and gross margins, our revenues from long distance
services increased during 2002 as a result of an increase in the minutes used by
our customers. We expect that rates for long distance services will stabilize in
2003 and that the minutes used by our customers will continue to increase, which
would have a positive impact on our revenues and gross margins.
During 2001, we began selling our retail services to smaller business
customers, which require fewer telephone lines than our average base of retail
customers. We expect that sales to these smaller business customers will
30
continue to provide us additional sources of revenue, although the sales of
local services to these customers may adversely impact our gross margins, since
we provide this portion of the product primarily using the networks of other
telephone companies. We use a dedicated sales force to sell this product.
We expect that a significant portion of our revenue growth will come from
our retail services business. Although we have experienced moderate success in
obtaining market share in the markets where we provide local services, we
generally do not expect that our retail services will command a significant
share of the market for telecommunications services in the southern United
States. The customer contracts for our retail services generally provide for
payment in arrears based on minutes of use for switched services and payment in
advance for local exchange, data and Internet services. The contracts generally
provide that the customer may terminate the affected services without penalty
for specified outages in service and for other defined causes. The contracts
also typically provide that the customer must use at least a minimum dollar
amount of switched long distance services per month for the term of the
contract. During the past several years, market prices for many
telecommunications services have been declining. To maintain and develop our
customer base in response to these and other competitive pressures, we have
modified some of our retail contracts to extend lower rates over longer terms to
selected customers. We may decide in the future to modify other retail customer
contracts in a similar manner to emphasize lower pricing and longer commitment
periods.
Broadband Transport Services. We derive our broadband transport services
revenues, which are generally recurring monthly charges, from the provision to
other telecommunications companies of telecommunications transmission capacity
on our network, as well as from the provision of directory assistance services.
We provide transmission capacity to other telecommunications companies on a
"take or pay" long-term basis, on an individual circuit basis, or on a
month-to-month basis after the initial term of the "take or pay" or individual
circuit contract has expired. As of December 31, 2002, we had remaining future
long-term contract commitments totaling approximately $62.7 million, of which
$23.2 million were attributable to WorldCom. These contracts expire on various
dates through 2007.
Broadband transport services also include commission revenues from the
marketing, sale and management of capacity on the portions of our network that
are owned by utilities but managed and marketed by us. Negligible incremental
costs are associated with these commissions, because we use the same marketing
and sales force in servicing the utility-owned portions of the network that we
use for the portions we own. Our commission revenues from these arrangements
amounted to approximately $9.2 million for 2002, $11.3 million for 2001 and
$10.2 million for 2000. See note 2 to our audited consolidated financial
statements appearing elsewhere in this report for additional information
regarding these commissions.
We have entered into various fiber swap and other asset swap agreements,
which we treat as like-kind exchanges. As a result, these transactions have had
no impact on our consolidated balance sheets or consolidated statement of
operations.
The average rates we charge to other telecommunication companies for our
broadband transport services continued to decline in 2002. The decreases in
average rates resulted principally from price reductions for our broadband
transport services due to industry overcapacity and from other carriers moving
traffic off of our network onto unused portions of their network. As a result of
general market conditions, including pricing pressures, especially in smaller
markets, movement of traffic off of our network, and known or forecasted service
disconnections, we expect that our broadband transport services will continue to
experience less favorable market conditions and a continued decline in annual
revenues for 2003.
Operating Expenses. Our principal operating expenses consist of cost of
services, selling, operations and administration expense, and depreciation and
amortization. As we expand our revenue base and offer new services, we expect
our cost of services to increase. We have been successful reducing our selling,
operations and administration expense through our various restructurings, which
have had a favorable impact on our operating results. We expect that these
initiatives will continue to have a favorable impact on our operating results in
2003. As
31
a result of the revaluation of our property, plant and equipment and intangible
assets, and the cancellation of our public notes, as part of our October 2002
reorganization, our depreciation and amortization expense should decrease
significantly in 2003. We expect to continue to incur operating losses at least
through the third quarter of 2003, but we expect to experience more favorable
operating results as we benefit from our restructurings and reorganization. We
expect to generate positive cash flow from operations during 2003.
Cost of Services. We currently provide our retail services by using our
network and facilities and by reselling the services of other telephone
companies. Cost of services related to our retail services consists primarily of
access charges and local facility charges that we are required to pay to other
telephone companies when we use a portion of their network or facilities in
providing services to our customers, as well as charges that we are required to
pay to other telephone companies when they originate, terminate or transport
messages sent by our customers. Cost of services related to our retail services
also include costs of third-party contract personnel, direct labor costs and
manufacturers' service contracts.
Providing local services over our network generally has reduced the amounts
we are required to pay to other telephone companies for the use of their
networks and facilities. As a result, our cost of providing local services as a
percentage of revenue decreased from 1997 through 2001. However, during 2002, as
some of our Internet service provider customers cancelled our provision of local
interconnection services, the percentage of access lines that we provide over
our network decreased. At December 31, 2002, approximately 69% of the end-user
and local interconnection access lines we had in service were provided over our
own network and facilities, compared to approximately 81% at December 31, 2001,
78% at December 31, 2000 and 57% at December 31, 1999.
As a result of the decrease in the percentage of access lines that we
provided over our network for 2002, our cost of providing local services as a
percentage of revenue increased slightly. We believe the increase was not
significant because our off-network sales to the smaller business customers we
have targeted generally have generated higher gross margins than the off-network
services we have historically provided, primarily as a result of favorable
wholesale pricing we have obtained for these off-network services from other
telephone companies. The term and volume discounts we negotiated in early 2002
regarding the purchase from the local telephone companies of network elements
that we do not own, but use to provide local services, contributed to decreases
in our cost of providing these off-network services. We expect, however, that
our cost of providing these off-network services generally will remain higher
than our costs of providing local services over our network. We were able to
achieve additional reductions in cost in 2002 through eight additional
colocations with other network providers. These additional colocations have
provided us with the advantage of unbundled network element pricing compared to
special access tariff costs in eight markets. We expect to add or upgrade a
substantial number of colocations in 2003 in an effort to achieve additional
efficiencies.
In 2001, the FCC commenced a review of its unbundled network element rules
applicable to incumbent carriers. In February 2003, the FCC voted to adopt an
order that addresses various aspects of the unbundled network element rules,
including its unbundled network element-platform, or UNE-P, rules, broadband
deregulation and rules regarding high-capacity loops. Under the order, incumbent
carriers continue to be required to make available loop and transport elements,
but the order establishes a mechanism to allow state regulatory commissions to
discontinue this requirement with respect to transport elements. The order
further presumes that UNE-P should remain available for mass-market customers
and requires state regulatory commissions to decide whether UNE-P should
continue to be available for mass-market customers. If a state should determine
that UNE-P should no longer be required, the order establishes a three-year
phase-out period. The order also removes "line sharing" and specified broadband
and high-capacity loop configurations from the list of network elements that
incumbent carriers are required to make available at cost-based rates. As of
March 24, 2003, the text of the FCC order had not been released, so many details
of the FCC's decision are not public. Various parties to the FCC proceeding have
announced their intention to appeal the FCC's order. We are evaluating the
effects this order will have on our cost of services.
We expect that, as we provide local service to more customers using our
network, our cost of providing local service as a percentage of revenue will
decrease. We expect that, as we replace the local interconnection customers that
cancelled services during 2002, the percentage of access lines that we provide
over our network will increase.
32
Any resulting improvement in our cost of providing local service as a percentage
of revenue may be offset by any increase in the number of lines we sell to
smaller businesses or residential customers using the networks of other
providers.
Our cost of services also includes charges for labor and inventory sold
related to our sale, installation and repair of telephone systems and related
equipment.
Cost of services related to our broadband transport services includes
substantially all fixed costs attributable to the following:
. the leasing of fiber under long-term operating leases;
. the leasing of capacity outside our owned or managed network, which we
refer to as "off-net capacity," to meet customer requirements for
network capacity; and
. network costs associated with the provision of signaling system 7
services, which allow us to monitor the status of lines and circuits on
the network, alert us to events occurring on the network and transmit
routing and destination signals over the network.
Selling, Operations and Administration Expense. Selling, operations and
administration expense consist of expenses of selling and marketing, field
personnel engaged in direct network maintenance and monitoring, customer service
and corporate administration. Although some components of our selling,
operations and administration expense may increase in 2003, we expect that, as a
result of our 2001 and 2002 restructuring efforts, our overall selling,
operations and administration expense will decrease in 2003 compared to 2002.
Depreciation and Amortization. Depreciation and amortization include
depreciation of our telecommunications network and equipment and, through
December 31, 2001, amortization of goodwill and other intangible assets related
to acquisitions, primarily our acquisition of DeltaCom, Inc. in 1996, our
acquisition of AvData Systems, Inc. in 1999 and our acquisition of Bay Data
Consultants, Inc. in 2000. In September 2001, we wrote off all of the goodwill
we recorded as a result of our acquisitions of AvData Systems and Bay Data
Consultants. As part of our reorganization and the adoption of fresh start
reporting, we reduced the value of our property, plant and equipment and
intangible assets by approximately $228.2 million. As a result, we will incur a
significant decrease in our depreciation and amortization expense in 2003
compared to 2002. For more information about the effects of our reorganization
efforts on our depreciation and amortization expense, see notes 3, 4, 5 and 10
to our audited consolidated financial statements appearing elsewhere in this
report.
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.
December 31,
-------------------------------------
2002 2001 2000
---- ---- ----
Branch offices ................................................ 35 35 37
Business customers served - retail services (1) ............... 19,590 15,400 13,700
Route miles ................................................... 10,088 9,980 9,640
Colocations ................................................... 185 177 176
Voice switches ................................................ 12 12 13
Frame relay/ATM switches (2) .................................. 44 80 69
"Next generation" voice switches (3) .......................... 42 42 37
Number of employees ........................................... 1,830 2,030 2,445
- -----------------
(1) Reflects the combination of multiple accounts of some customers into a
single customer account.
33
(2) Reflects the combination of asynchronous transfer mode, frame relay and
passport switches. The decrease in the number of such switches from
December 31, 2001 to December 31, 2002 resulted primarily from the removal
of 36 passport switching facilities from our network during the second
quarter of 2002.
(3) Composed of 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:
. ultimate end-users that purchase our services on a retail basis; and
. 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, and
the telephone access lines we installed for and sold to, our customers who
purchase our services on a retail basis and by our customers who purchase our
services on a wholesale basis. Because some of the customers of our retail
services business segment purchase services on a wholesale basis, 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.
Year Ended December 31,
---------------------------------------
2002 (1) 2001 2000
---------- -------- ---------
Retail customer revenues: (2)
Local (4) ..................................... $108,912 $ 83,931 $ 54,764
Long distance (4) ............................. 64,453 64,268 70,189
Enhanced data (4) ............................. 60,892 44,800 29,383
-------- -------- --------
Integrated telecom revenue ................. 234,257 192,999 154,336
Equipment and other (4) ....................... 44,023 49,911 52,278
-------- -------- --------
Total retail revenues ...................... $278,280 $242,910 $206,614
======== ======== ========
Wholesale customer revenues: (2) (3)
Broadband revenues (5) ........................ $ 84,561 $ 95,034 $ 83,336
Local/interconnection
revenues(3)(4) .............................. 36,117 55,101 36,363
Long distance and data (4) .................... 11,412 16,855 17,401
Other (4) ..................................... 4,596 3,939 3,834
-------- -------- --------
Total wholesale revenues ................... $136,686 $170,929 $140,934
======== ======== ========
Retail lines sold (6) ............................ 177,080 143,724 102,228
Wholesales lines sold (6) ........................ 54,740 153,887 201,457
-------- -------- --------
Total lines sold (6) .......................... 231,820 297,611 303,685
======== ======== ========
Retail lines installed ........................... 169,980 136,761 93,484
Wholesales lines installed ....................... 50,531 141,904 133,193
-------- -------- --------
Total lines installed ......................... 220,511 278,665 226,677
======== ======== ========
Lines installed/sold percentage:
Retail customers .............................. 96% 95% 91%
Wholesale customers ........................... 92% 92% 66%
- ------------------
(1) We completed reorganization proceedings under Chapter 11 of the United
States bankruptcy code on October 29, 2002. Results for the year ended
December 31, 2002 include the results of the pre-organization
ITC/\DeltaCom, which is referred to as the "Predecessor Company," from
January 1, 2002 to October 29, 2002 and the results of the
post-reorganization ITC/\DeltaCom, which is referred to as the "Successor
Company," from October 30, 2002 to December 31, 2002.
(2) Excludes $1.5 million related to a prior-period interconnection agreement
settlement in the year ended December 31, 2001.
(3) Excludes a non-recurring fee of $3.5 million received by us in April 2002
for the early termination of a wholesale customer contract.
34
(4) Reported in retail services segment revenues.
(5) Reported in broadband transport services segment revenues.
(6) Reported net of lines disconnected or cancelled.
The declines in wholesale customer revenues from 2001 to 2002 were
attributable to adverse trends affecting our wholesale business and resulted
primarily from the following:
. service disconnections in our local interconnection business;
. reductions in rates charged to our broadband transport customers due to
industry overcapacity;
. the shifting of traffic by some of our broadband transport customers
from our network to unused portions of their networks; and
. service cancellations by some of our local interconnection and broadband
transport customers.
As a result of general market conditions, including the foregoing factors,
especially in smaller markets, we expect that our broadband transport services
will continue to experience less favorable market conditions and a continued
decline in annual revenues for 2003. We also expect that the instability in the
local interconnection market will continue to affect negatively these revenues
through the first quarter of 2003.
35
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. Depreciation and amortization
expense in the consolidated table includes $48,000 for 2002, $82,000 for 2001
and $82,000 for 2000 related to our corporate segment. The dollar amounts are
shown in thousands.
Consolidated
2002 % 2001 % 2000 %
---- --- ---- --- ---- ---
Operating revenues .................................. $ 418,466 100 $ 415,339 100 $ 363,648 100
Cost of services .................................... 194,941 47 186,121 45 155,000 43
Inventory write-down ................................ -- -- 1,663 -- -- --
--------- ---------- ----------
Gross margin ........................................ 223,525 53 227,555 55 208,648 57
--------- ---------- ----------
Selling, operations and administration .............. 163,580 39 188,712 45 151,050 42
Depreciation and amortization ....................... 114,698 27 118,938 29 86,519 23
Loss on early termination of debt ................... -- -- -- -- 1,321 --
Special charges ..................................... 223 -- 74,437 18 -- --
--------- ---- ---------- ---------- ---
Total operating expenses ............................ 278,501 67 382,087 92 238,890 65
--------- ---- ---------- --- ---------- ---
Operating loss ...................................... $ (54,976) (13) $ (154,532) (37) $ (30,242) (8)
========= ========== ==========
EBITDA, as adjusted(3) .............................. $ 59,722 14 $ (35,594) (9) $ 56,277 15
========= ========== ==========
Pro forma EBITDA, as adjusted(3) .................... $ 60,415 14 $ 45,268 11 $ 41,498 11
========= ========== ==========
Retail Services
2002 % 2001 % 2000 %
---- --- ---- --- ---- ---
Operating revenues:
Retail customers(1) .............................. $ 278,280 83 $ 242,910 76 $ 206,614 74
Wholesale customers(2) ........................... 55,625 17 77,395 24 73,698 26
--------- ---- ---------- --- ---------- ---
Total operating revenues ...................... 333,905 100 320,305 100 280,312 100
Cost of services .................................... 186,062 56 174,918 55 145,613 52
Inventory write-down ................................ -- -- 1,663 1 -- ---
--------- ---------- ----------
Gross margin ........................................ 147,843 44 143,724 45 134,699 48
--------- ---------- ----------
Selling, operations and administration .............. 128,909 39 154,733 48 118,064 42
Depreciation and amortization ....................... 66,698 20 69,765 22 48,507 17
Special charges ..................................... 223 74,382 23 -- --
--------- ---------- ----------
Total operating expenses ............................ 195,830 59 298,880 93 166,571 59
--------- ---------- ----------
Operating loss ...................................... $ (47,987) (14) $ (155,156) (48) $ (31,872) (11)
========= ========== ==========
EBITDA, as adjusted(3) .............................. $ 18,711 6 $ (85,391) (27) $ 16,635 6
========= ========== ==========
Pro forma EBITDA, as adjusted(3) .................... $ 19,338 7 $ (4,703) (2) $ 535 --
========= ========== ==========
Broadband Transport Services
2002 % 2001 % 2000 %
---- --- ---- --- ---- ---
Operating revenues .................................. $ 84,561 100 $ 95,034 100 $ 83,336 100
Cost of services .................................... 8,879 11 11,203 12 9,387 11
--------- ---------- ----------
Gross margin ........................................ 75,682 89 83,831 88 73,949 89
--------- ---------- ----------
Selling, operations and administration .............. 34,671 41 33,979 36 32,986 40
Depreciation and amortization ....................... 47,952 56 49,091 51 37,930 45
Special charges ..................................... -- -- 55 -- -- --
--------- ---------- ----------
Total operating expenses ............................ 82,623 97 83,125 87 70,916 85
--------- ---------- ----------
Operating loss ...................................... $ (6,941) (8) $ 706 1 $ 3,033 4
========= ========== ==========
EBITDA, as adjusted(3) .............................. $ 41,011 49 $ 49,797 52 $ 40,963 49
========= ========== ==========
Pro forma EBITDA, as adjusted(3) .................... $ 41,077 49 $49,971 53 $40,963 49
========= ========== ==========
- ----------------------
(1) Represents revenues reported under our retail services business segment
that have been generated by customers that purchase the services of our
retail services segment on a retail basis. We have included this additional
revenue disclosure because we believe it provides meaningful information
about trends relating to our services based on the manner in which the
services are sold.
(2) Represents revenues reported under our retail services business segment
that have been generated by customers that purchase the services of our
retail services segment on a wholesale basis. We have included this
additional revenue disclosure because we believe it provides meaningful
information about trends relating to our services based on the manner in
which the services are sold.
(3) Neither EBITDA, as adjusted, nor pro forma EBITDA, as adjusted, is a
measurement of financial performance under accounting principles generally
accepted in the United States. We believe that the financial measure under
such generally accepted accounting principles that is most directly
comparable to EBITDA, as adjusted, and to pro forma EBITDA, as adjusted, is
operating loss. For a description of these measurements and a quantitative
reconciliation of the differences between EBITDA, as adjusted, and
operating loss and between pro forma EBITDA, as adjusted, and operating
loss, as operating loss is calculated in accordance with generally accepted
accounting principles, see note (e) to the table under "Selected Financial
Data" and "--2002 Compared to 2001-EBITDA, as adjusted" and "--2001
Compared to 2000-EBITDA, as adjusted" below.
36
2002 Compared to 2001
Operating Revenues. Total operating revenues increased $3.2 million, or
0.8%, from $415.3 million for 2001 to $418.5 million for 2002.
Operating revenues from our retail services for 2002 increased $13.6
million, or 4.3%, to $333.9 million from $320.3 million for 2001. Our retail
services operating revenues for 2002 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 2001 included a
one-time net benefit of $1.5 million related to an interconnection agreement
settlement. Excluding these one-time benefits, our retail services revenues
increased $11.6 million, or 3.6%, for 2002. 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 services of $25.0 million, primarily as a result of an increase
of $21.4 million in our offering of local exchange telephone services
to end-users, which reflected an increase of 37% in the average number
of installed local lines over 2001;
. an increase of $8.4 million in revenues generated by our Internet
access services, which represented an increase of 73% over 2001; and
. a decrease of $13.3 million in revenues generated by our provision of
local dial-up service to Internet service providers, which resulted
primarily from a decrease of 36% in the average number of installed
lines over 2001, excluding $3.5 million we received 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 2002 decreased from 2001, our revenues from this service
increased, as we experienced a continued increase in the number of minutes used.
We expect that this service will continue to experience growth in revenues in
2003 resulting from stability in the rate we charge per minute of use and
continued increases in minutes used.
Our revenues generated by local interconnection revenues in 2002 were
negatively affected by a previously reported cancellation of approximately
26,300 access lines by a large Internet service provider customer as well as the
cancellation of access lines by other Internet service provider customers. We
expect these cancellations, overall instability in the local interconnection
market and reductions in rates to have a continuing negative effect on our local
interconnection revenues through the first quarter of 2003, but believe that
this instability should stabilize in the second quarter of 2003.
We expect revenues from our local, long distance, data and Internet
services will continue to grow during 2003. Based on current economic
conditions, we do not expect significant, if any, growth from our sales of
nonrecurring equipment and services during 2003.
Operating revenues from our broadband transport services for 2002 decreased
$10.5 million, or 11.0%, to $84.5 million from $95.0 million for 2001. The
decrease in these revenues was primarily attributable to a decrease in the
average rate we generate for our transmission services of 34.5% for 2002 and
from service cancellations by some customers. The decrease in average rates
resulted principally from price reductions for our broadband transport services
and the shifting of traffic by some broadband transport customers from our
network to unused portions of their own networks.
As discussed above, we expect that our broadband transport services will
continue to experience less favorable market conditions and a continued decline
in annual revenues for 2003. Because of our expectations, we have decreased the
amount of capital we invest in our broadband transport business.
No single customer of our retail services or broadband transport services
segments represented over 10% of our
37
total operating revenues for 2002.
Cost of Services. Total cost of services of $194.9 million, or 46.6% of
total operating revenues, for 2002 represented an increase of $8.8 million over
total cost of services of $186.1 million, or 44.8% of total operating revenues,
for 2001.
Cost of services of $186.1 million for retail services for 2002 represented
an increase of $11.1 million over cost of services of $174.9 million for 2001.
Cost of services as a percentage of operating revenues from retail services
increased to 55.7% for 2002 from 54.6% for 2001. This increase was primarily
attributable to the following factors:
. an increase of $9.0 million, or 13.5%, in our facilities-based costs
incurred to support our local service offerings, which resulted from an
increase in the average number of installed lines; and
. an increase of $2.0 million, or 12.3%, 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 of $8.9 million for our broadband transport services for
2002 decreased $2.3 million from cost of services of $11.2 million for 2001.
Cost of services as a percentage of operating revenues from broadband transport
services decreased to 10.5% for 2002 from 11.8% for 2001. This decrease was
primarily attributable to a decrease in the rates we were charged for such
services, a reduction in our use of networks of other providers and a reduction
in the demand for such services.
Selling, Operations and Administration Expense. Total selling, operations
and administration expense decreased $25.1 million from $188.7 million, or 45.4%
of total operating revenues, for 2001 to $163.6 million, or 39.1% of total
operating revenues, for 2002. Based on current trends, we expect that our
selling, operations and administration expense for 2003 will decrease by
approximately 10% compared to 2002. In addition, we recently undertook a
broad-based initiative to reduce our selling, operations and administration
expense. We expect to experience further operational efficiencies as a result of
this initiative.
Selling, operations and administration expense attributable to retail
services during 2002 decreased $25.8 million to $128.9 million, or 38.6% of
retail services operating revenues, from $154.7 million, or 48.3% of retail
services operating revenues, for 2001. This decrease was 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 and September
2002. We expect that our selling, operations and administration expense will
continue to improve as we realize the effects of our restructuring.
Selling, operations and administration expense attributable to broadband
transport services during 2002 increased $692,000 to $34.7 million, or 41.0% of
broadband transport services operating revenues, from $34.0 million, or 35.8% of
broadband transport services operating revenues, for 2001. This increase
resulted primarily from an increase in operator services personnel and in taxes
and licensing expenses.
Depreciation and Amortization. Total depreciation and amortization expense
of $114.7 million for 2002 represented a decrease of $4.2 million from total
depreciation and amortization expense of $118.9 million for 2001. Our retail
services accounted for $3.1 million of the decrease in 2002. Our broadband
transport services operations accounted for $1.1 million of the decrease in
2002. These decreases resulted from a decrease in depreciation expense caused by
a revaluation of our assets in connection with our October 2002 reorganization.
The revaluation resulted in a write-down of $198.8 million of property, plant
and equipment and $29.4 million of intangibles, including goodwill. In addition,
we ceased to amortize goodwill on January 1, 2002 in accordance with applicable
accounting rules, while we amortized $5.1 million of goodwill in 2001. Our
depreciation and amortization expense will decrease significantly in 2003 as a
result of our reorganization.
38
Special Charges. We incurred total special charges of $223,000 during 2002
and $74.4 million during 2001. The charges for 2002 were primarily attributable
to our write-down of impaired assets. The charges for 2001 were primarily
attributable to our write-down of impaired assets and goodwill.
Interest Expense. Total interest expense of $38.1 million for 2002
represented a decrease of $20.8 million from total interest expense of $58.8
million for 2001. This decrease resulted from our suspension of interest
payments on our senior notes and convertible subordinated notes in the second
quarter of 2002 and the subsequent cancellation of those notes in connection
with our reorganization. We expect our interest expense to decrease
significantly in 2003 as a result of the cancellation of $515 million principal
amount of our notes as part of our reorganization.
Interest Income. Total interest income from the temporary investment of
available cash balances decreased from $2.1 million for 2001 to $565,000 for
2002.
EBITDA, as adjusted. EBITDA, as adjusted, represents earnings before
extraordinary item, net interest, other income and other expenses, income taxes,
reorganization items and depreciation and amortization. Pro forma EBITDA, as
adjusted, represents earnings before the foregoing items and, in addition,
before restructuring charges, special charges and the other items shown in the
tables below.
The following tables present for the years ended December 31, 2002 and
2001, EBITDA, as adjusted, and pro forma EBITDA, as adjusted. The tables also
set forth for these periods a quantitative reconciliation of the differences
between EBITDA, as adjusted, and operating loss (income) and between pro forma
EBITDA, as adjusted, and operating loss (income), as operating loss (income) is
calculated in accordance with generally accepted accounting principles. The
amounts shown are in thousands.
Consolidated:
Year Ended December 31,
-----------------------
2002 2001
---- ----
Operating loss ................................... $ (54,976) $ (154,532)
Depreciation and amortization .................... 114,698 118,938
---------- ----------
EBITDA, as adjusted ........................... 59,722 (35,594)
Non-recurring termination fee .................... (3,500) --
Interconnection agreement settlement ............. -- (1,500)
Inventory write-down ............................. -- 1,663
Stock-based compensation ......................... 1,140 --
Restructuring charges ............................ 2,830 6,262
Special charges .................................. 223 74,437
---------- ----------
Pro forma EBITDA, as adjusted ................. $ 60,415 $ 45,268
========== ==========
Retail Services:
Year Ended December 31,
-----------------------
2002 2001
---- ----
Operating loss ................................... $ (47,987) $ (155,156)
Depreciation and amortization .................... 66,698 69,765
--------- ----------
EBITDA, as adjusted .............................. 18,711 (85,391)
Non-recurring termination fee .................... (3,500) --
Interconnection agreement settlement ............. -- (1,500)
Inventory write-down ............................. -- 1,663
Stock-based compensation ......................... 1,140 --
Restructuring charges ............................ 2,764 6,143
Special charges .................................. 223 74,382
--------- ----------
Pro forma EBITDA, as adjusted .................... $ 19,338 $ (4,703)
========= ==========
39
Broadband Transport Services:
Year Ended December 31,
-----------------------
2002 2001
---- ----
Operating (loss) income .......................... $(6,941) $ 706
Year Ended December 31,
-----------------------
2002 2001
---- ----
Depreciation and amortization ...................... 47,952 49,091
-------- --------
EBITDA, as adjusted ................................ 41,011 49,797
Restructuring charges .............................. 66 119
Special charges .................................... -- 55
-------- --------
Pro forma EBITDA, as adjusted ...................... $ 41,077 $ 49,971
======== ========
The increase in EBITDA, as adjusted, for our retail services was primarily
attributable to the following factors:
. an increase of $13.6 million related to an increase in our operating
revenues, including revenues from a non-recurring contract termination
fee and interconnection agreement settlement;
. an increase, excluding restructuring expenses, of $25.8 million
resulting from a decrease in our selling, operations and administration
expense; and
. a decrease of $11.1 million related to an increase in our cost of
services.
The decrease in EBITDA, as adjusted, for our broadband transport services
was primarily attributable to a decline in the revenues generated by this
business. The decline resulted primarily from a reduction in rates charged to
our customers due to industry overcapacity and from service cancellations by
some customers.
2001 Compared to 2000
Operating Revenues. Total operating revenues increased $51.7 million, or
14.2%, from $363.6 million for 2000 to $415.3 million for 2001.
Revenues from our retail services increased $40.0 million, or 14.3%, from
$280.3 million for 2000 to $320.3 million for 2001. The change in these revenues
was primarily attributable to the following factors:
. an increase of $37.6 million in revenues generated by our local
telephone services and local dial-up services provided to Internet
service providers, which were affected by an increase in the average
number of installed lines;
. an increase of $10.3 million in revenues generated by our sales of
enhanced data and Internet access services, which resulted primarily
from an increase of 27.1% in our revenues from sales of private line
services and an increase of 168.2% in our revenues from sales of
Internet access services;
40
. an increase of $11.4 million in access-related revenues, which resulted
from an increase in the minutes used;
. a decrease of $6.3 million in our long distance revenues, which was
attributable to a 19.3% decrease in the average rate we charge per
minute and was partially offset by an 13.0% increase in average actual
minutes used;
. a decrease of $15.4 million in our reciprocal compensation revenues,
which reflected a decrease of $14.6 million in one-time net benefits
from interconnection agreement settlements recognized in 2001 compared
to 2000 and a decrease of 75.6% in our average reciprocal compensation
rate;
. a decrease of $1.5 million in the nonrecurring sales of equipment and
software as a result of reduced demand; and
. an increase of $4.9 million from professional services and equipment
sales related to our e/\deltacom business.
Revenues from our broadband transport services increased $11.7 million, or
14.0%, from $83.3 million for 2000 to $95.0 million for 2001. The change in
these revenues was primarily attributable to the following factors:
. an increase of $8.5 million in revenues generated by the use of our
owned and operated network, which resulted primarily from a 66.9%
increase in the average capacity of our fiber optic transmission
facilities and was partially offset by a 28.7% decrease in the average
rate we charge;
. an increase of $1.1 million in commissions we generate from the
management and marketing of transmission services provided by other
communications services; and
. an increase of $2.1 million in revenues we generate from providing
directory and operator assistance, which was primarily attributable to
an increase in the number of calls served.
No single customer of our retail services or broadband transport services
segments represented over 10% of our total operating revenues for 2001.
Cost of Services. Total cost of services increased $31.1 million from
$155.0 million for 2000 to $186.1 million for 2001.
Cost of services for our retail services increased $29.3 million from
$145.6 million for 2000 to $174.9 million for 2001. Cost of services as a
percentage of revenues from our retail services increased to 55% for 2001 from
52% for 2000. The increase in our cost of services as a percentage of revenues
for 2001 was primarily attributable to our recognition during 2000 of an
additional $14.6 million in one-time revenues from prior-period interconnection
agreement settlements, which had little, if any, associated costs. The increase
in cost of services also reflected an increase of $45.4 million, or 62.9%, in
costs associated with the sale of facilities-based services, which became a
significantly greater component of our retail services in 2001 as a result of
our increased use of our network, including an increase of 76.9% in our
facilities-based local exchange costs and an increase of 47.6% in our
facilities-based long distance costs. This increase was partially offset by the
following factors:
. a decrease of $3.3 million, or 8.3%, in our costs to use the networks
of other carriers to provide long distance services, which resulted
primarily from rate decreases;
. a decrease of $15.1 million, or 56.3%, in our costs to provide local
services as a result of the decrease in the amount of resale services
we purchased; and
. a decrease of $1.9 million, or 23.8%, in our costs to provide satellite
services, which resulted primarily from decreased demand.
41
Inventory Write-Down. During 2001, we incurred a charge for the write-down
of approximately $1.7 million of inventory of telephone systems and related
equipment used to provide retail services as the result of a decline in demand
for this equipment. See note 10 to our audited consolidated financial statements
appearing elsewhere in this report for additional information about this
inventory write-down.
Selling, Operations and Administration Expense. Total selling, operations
and administration expense increased $37.7 million from $151.1 million, or 42%
of total operating revenue, for 2000 to $188.7 million, or 45% of total
operating revenue, for 2001.
Selling, operations and administration expense attributable to our retail
services increased $36.7 million from $118.1 million, or 42% of revenue, for
2000 to $154.7 million, or 48% of revenue, for 2001. These increases were
primarily attributable to the following factors:
. an increase of $17.6 million in sales, other personnel and associated
expenses related to an increase in our average number of employees;
. an increase of $4.8 million in maintenance and related costs, which
resulted primarily from an increase in our number of switch sites;
. an increase of $2.9 million in taxes and insurance, and in consulting
and associated expenses, which was related primarily to an increase in
our property, plant and equipment;
. $4.8 million in employee severance and occupancy costs we incurred in
connection with our restructuring in September 2001; and
. an increase of $13.1 million in expenses related to our data center,
which resulted primarily from the realization of a full year of
expenses for 2001 compared to a partial year of expenses for 2000.
The increases were partially offset by a decrease of $1.2 million in
occupancy-related expenses as a result of office closures and a decrease of $4.9
million in costs of information systems and research and development activity.
Selling, operations and administration expense attributable to our
broadband transport services increased $1.0 million from $33.0 million, or 40%
of revenue, for 2000 to $34.0 million, or 36% of revenue, for 2001. This
increase resulted primarily from increases in bad debt expense, taxes, licensing
expenses and maintenance expenses.
Depreciation and Amortization. Total depreciation and amortization
increased $32.4 million from $86.5 million for 2000 to $118.9 million for 2001.
Of the increase, our retail services accounted for $21.2 million and our
broadband transport services accounted for $11.2 million. The increase
attributable to retail services was primarily related to a full year of
depreciation on new central office and telecommunications equipment added to our
network during 2000, and to a full year of depreciation on the data center we
placed in service in 2000 and to depreciation of telecommunications and other
equipment added to our network during 2001. The increase attributable to
broadband transport services primarily reflected a full year of depreciation
on fiber and telecommunications equipment installed in 2000 and to
depreciation on fiber and telecommunications equipment installed in 2001.
Special Charges. Total special charges were $74.4 million in 2001. We did
not incur similar special charges in 2000. The special charges we incurred in
2001 were as follows (in thousands):
Broadband
Transport Retail
Services Services
-------- --------
Impaired property and equipment .................................. $ 55 $22,967
Impaired goodwill and other intangible assets .................... -- 51,415
------- -------
Total ....................................................... $ 55 $74,382
======= =======
42
We incurred the special charges in connection with our restructuring in
September 2001, which included the evaluation and subsequent write-down of some
assets to their respective values. See note 10 to our audited consolidated
financial statements appearing elsewhere in this report for additional
information about these special charges.
Interest Expense. Total interest expense increased $3.3 million from $55.5
million for 2000 to $58.8 million for 2001. The increase was primarily
attributable to an increase in our average outstanding debt balances as a result
of our drawdown in April 2000 of $160 million in borrowings under our senior
secured credit facility and our closing in December 2000 on $28.5 million of
capital lease financing.
Interest Income. Total interest income from the temporary investment of
available cash balances decreased $12.7 million from $14.8 million for 2000 to
$2.1 million for 2001.
Other Income (Expense). In connection with the mark-to-market of an
interest rate swap, we recognized expense of approximately $632,000 for 2001 and
$426,000 for 2000.
EBITDA, as adjusted. EBITDA, as adjusted, represents earnings before
extraordinary item, net interest, other income and other expenses, income taxes,
reorganization items and depreciation and amortization. Pro forma EBITDA, as
adjusted, represents earnings before the foregoing items and, in addition,
before restructuring charges, special charges and the other items shown in the
tables below.
The following tables presents for the years ended December 31, 2001 and
2000, EBITDA, as adjusted, and pro forma EBITDA, as adjusted. The tables also
set forth for these periods a quantitative reconciliation of the differences
between EBITDA, as adjusted, and operating loss (income) and between pro forma
EBITDA, as adjusted, and operating loss (income), as operating loss (income) is
calculated in accordance with generally accepted accounting principles. The
amounts shown are in thousands.
Consolidated:
- ------------
Year Ended December 31,
----------------------
2001 2000
--------- ---------
Operating loss ..................................... $(154,532) $ (30,242)
Depreciation and amortization ...................... 118,938 86,519
--------- ---------
EBITDA, as adjusted ............................. (35,594) 56,277
Interconnection agreement settlement ............... (1,500) (16,100)
Inventory write-down ............................... 1,662 --
Stock-based compensation ........................... -- --
Restructuring charges .............................. 6,263 --
Loss on early termination of credit facility ....... -- 1,321
Special charges .................................... 74,437
--------- ---------
Pro forma EBITDA, as adjusted ................... $ 45,268 $ 41,498
========= =========
Retail Services:
- ---------------
Year Ended December 31,
----------------------
2001 2000
--------- ---------
Operating loss ..................................... $(155,156) $ (31,872)
Depreciation and amortization ...................... 69,765 48,507
--------- ---------
EBITDA, as adjusted ................................ (85,391) 16,635
Non-recurring termination fee ...................... -- --
Interconnection agreement settlement ............... (1,500) (16,100)
Inventory write-down ............................... 1,663 --
Stock-based compensation ........................... -- --
Restructuring charges .............................. 6,143 --
Special charges .................................... 74,382 --
--------- ---------
Pro forma EBITDA, as adjusted ...................... $ (4,703) $ 535
========= =========
Broadband Transport Services:
- ----------------------------
Year Ended December 31,
----------------------
2001 2000
--------- ---------
Operating (loss) income ............................ $ 706 $ 3,033
Depreciation and amortization ...................... 49,091 37,930
--------- ---------
EBITDA, as adjusted ................................ 49,797 40,963
Restructuring charges .............................. 119 --
Special charges .................................... 55 --
--------- ---------
Pro forma EBITDA, as adjusted ...................... $ 49,971 $ 40,963
========= =========
The decrease in EBITDA, as adjusted, for our retail services was primarily
attributable to the following factors:
. a $1.7 million write-down of telephone systems and related equipment
inventory;
. a $14.6 million decrease in prior-period amounts for interconnection
agreement settlements, which had resulted primarily from settlements of
reciprocal compensation issues; and
. a $74.4 million write-down of impaired property and equipment and
goodwill and other intangible assets.
The increase in EBITDA, as adjusted, for our broadband transport services
was primarily attributable to a 66.9% increase in the average efficiency of our
fiber optic facilities providing transmission services, which allowed us to
provide more capacity over existing lines. The effects of the increase were
partially offset by a 28.7% decrease in the average rates we charge for our
broadband transport services.
Liquidity and Capital Resources
As of February 28, 2003, we had $48.4 million of cash and cash equivalents,
including $18.5 million of restricted 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 United States 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 "--Overview-Plan of Reorganization" above,
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
43
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 the Series A preferred stock on October 29, 2002.
On October 29, 2002, 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 each of
September 2005, December 2005 and March 2006 and $136.6 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. The credit agreement is secured by the assets of Interstate
FiberNet, Inc. and its subsidiaries. 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 succeeding six-month period.
We may use the amounts in the account solely to pay any amounts for which we may
be liable upon the occurrence of a change of control of ITC/\DeltaCom under, and
as defined in, our agreement with Southern Telecom, Inc. described below.
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 plus
an applicable eurodollar rate margin, which is initially fixed at 4%. The
eurodollar rate is based on LIBOR. 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 limited 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%
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%. EBITDA for these purposes
is not the same measure as EBITDA, as adjusted, which we use elsewhere in this
report. Based on our ratio of Senior Debt to LTM EBITDA at December 31, 2002, we
expect the 2003 first quarter interest rate will be LIBOR plus 4.00%.
The new credit agreement has added the following two new financial
covenants:
. The first financial covenant generally limits our annual capital
expenditures, as defined in the agreement, to $42 million for 2002 and,
for periods after 2002, 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.
44
. 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
December 31, 2002, and to 4.0 thereafter. Our compliance with these
ratios will be measured on a quarterly basis. As of December 31, 2002,
our ratio of Senior Debt to LTM EBITDA, with these adjustments, was
less than 3.25.
Solely for the purposes of calculating the ratio of Senior Debt to LTM
EBITDA, EBITDA may be adjusted upward to account for any reduction in EBITDA
resulting from lost revenue, to the extent lost revenue exceeds new revenue,
from our local interconnection or broadband transport business related to the
sale of capacity along our network during the period from December 31, 2002 to
June 30, 2004. This amount will be determined on the last day of each fiscal
quarter during such period, for the period of the four consecutive fiscal
quarters then ended, in an aggregate amount not to exceed the amount set forth
opposite such date below:
Period Amount
------ ------
December 31, 2002 $ 1,900,000
March 31, 2003 $ 3,900,000
June 30, 2003 $ 5,800,000
September 30, 2003 $ 10,000,000
December 31, 2003 $ 7,800,000
March 31, 2004 $ 7,300,000
June 30, 2004 $ 3,100,000
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. Our ability to
comply with covenants under our senior credit facility is subject to the risks
of our business, including those discussed in this report under
"Business--Risks."
On October 29, 2002, 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.
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 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 United States
bankruptcy code on June 25, 2002, we were in default under our senior credit
facility and some of our principal 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, and the lenders
have waived any rights to pursue any remedies based on those defaults.
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 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
45
$10 million deposit with BellSouth as security for future payment for services
to be rendered to us by BellSouth. BellSouth responded to our petition by
seeking to have the matter heard before the Georgia Public Service Commission,
rather than in Georgia state court. BellSouth 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. BellSouth
has subsequently withdrawn this petition. 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 the reorganization, and other relevant factors, we do not believe that
BellSouth is entitled to any amount of the deposit it has sought. If it is
determined that BellSouth may 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 its customers.
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. Our
amended credit facility allows us to issue up to $2 million in bonds and other
security to various entities. The amount allowable for bonds and other security
interests may be increased by up to $3 million, for a total of $5 million, if we
prepay principal amounts, in increments of $500,000 plus accrued and unpaid
interest on such amounts, owing under the senior secured credit facility. For
more information about our surety obligations, see note 11 to the audited
consolidated financial statements appearing elsewhere in this report.
We have obtained a portion of our rights-of-way under an agreement with
Southern Telecom, Inc. and its affiliates 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 in the agreement, can
cause termination of the annual payment provisions and require us to make a
one-time payment. The total amount of this one-time payment would be
approximately $19.7 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. In December 2002, we received a notice from Southern
Telecom under this agreement, in which Southern Telecom claimed that our October
2002 reorganization resulted in a change of control of ITC/\DeltaCom under the
agreement. In January 2003, Southern Telecom filed a civil action against us
alleging that we breached the agreement by failing to pay Southern Telecom
approximately $125,000 by November 29, 2002 and approximately $19.6 million by
January 28, 2003, for a total of approximately $19.7 million, that it alleges
became due and payable as a result of the change of control it claims resulted
from our reorganization. In our response, we have denied that a change of
control, as defined in the agreement, has occurred and further denied that we
owe the amounts specified in the complaint. Under our credit facility 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 October 29,
2002, which may be reduced to $9.25 million for the succeeding six-month period.
We may use the amounts in the account solely to pay any amounts for which we may
become liable upon the occurrence of a change of control under our agreement
with Southern Telecom. If we are required to make a change of control payment
under the agreement, the funds we have available for other uses related to the
operation or expansion of our business would be significantly reduced.
During 2002, 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 $19.8 million in 2002,
$(10.5) million in 2001 and $45.9 million in 2000. Cash provided by operating
activities in 2002 of $19.8 million includes the effects of approximately $13.2
million of payments for items related to our reorganization. Changes in working
capital were $9.6 million in
46
2002, $2.8 million in 2001 and $27.3 million in 2000.
. The change in 2002 was primarily attributable to a decrease in accounts
receivable and other current assets and an increase in accrued
interest, the effects of which were partially offset by a decrease in
accounts payable and unearned revenue.
. The change in 2001 was primarily attributable to a decrease in accounts
receivable and other current assets and an increase in accrued
compensation and other accrued liabilities, the effect of which was
partially offset by a decrease in accounts payable, accrued interest
and unearned revenue. The decrease in unearned revenue resulted
primarily from a decrease, from $24 million for 2001 to $17.6 million
for 2002, in the amount prepaid by BellSouth for reciprocal
compensation.
. The change in 2000 was primarily attributable to an increase in
accounts payable, accrued interest, unearned revenue and accrued
compensation and other accrued liabilities, the effect of which was
partially offset by an increase in accounts receivable. The increase in
unearned revenue was primarily related to a $24 million prepayment by
BellSouth for forecasted reciprocal compensation during 2001.
Cash used for investing activities was $34.7 million in 2002, $154.8
million in 2001 and $305.2 million in 2000. The cash used in these periods was
primarily applied to fund capital expenditures.
We made capital expenditures of $34.7 million in 2002, $162.0 million in
2001 and $309.8 million in 2000.
. Of the $34.7 million of capital expenditures in 2002, $30.3 million
related to our retail services segment and $4.4 million related to our
broadband transport services segment.
. Of the $162.0 million of capital expenditures in 2001, $117.7 million
related to our retail services segment and $44.3 million related to our
broadband transport services segment.
. Of the $309.8 million of capital expenditures in 2000, $188.2 million
related to our retail services segment and $121.6 million related to
our broadband transport services segment.
Cash provided by financing activities was $4.4 million in 2002, $65.2
million in 2001 and $152.0 million in 2000.
. Net cash provided by financing activities in 2002 consisted primarily
of proceeds from the issuance of new Series A preferred stock,
including the related common stock and common stock warrants, net of
issuance costs, of $29.6 million, less cash restricted for a specified
contingency of $18.5 million and repayments of other long-term debt and
capital lease obligations of $6.6 million.
. Net cash provided by financing activities in 2001 consisted primarily
of proceeds of $67.2 million, net of issuance costs, from the issuance
of our Series B preferred stock and proceeds of $1.3 million from the
exercise of options to purchase common stock, reduced by a net
repayment of other long-term debt and capital lease obligations of $2.4
million.
. Net cash provided by financing activities in 2000 consisted primarily
of net proceeds of $157.4 million from our $160 million senior secured
credit facility, of which $7.0 million was restricted for capital
expenditures at December 31, 2000, and $3.1 million from the exercise
of options to purchase common stock, reduced by $1.5 million from the
net repayment of other long-term debt and capital lease obligations.
We have various contractual obligations and commercial commitments. The
following table sets forth, in thousands, the annual payments, exclusive of
interest payments, we are required to make under contractual cash obligations
and other commercial commitments at December 31, 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
47
facilities discussed above.
Payments Due by Period
----------------------
Total 2003 2004 2005 2006 2007 After 2007
--------- -------- -------- -------- --------- -------- ----------
Long-term debt - Credit facility ...... $ 155,600 $ 1,600 $ 1,600 $ 10,800 $ 141,600 $ -- $ --
Capital lease obligations ............. 46,771 1,103 12,012 15,246 10,408 473 7,529
Other long-term liabilities ........... 10,575 3,250 3,518 3,807 -- -- --
Operating leases ...................... 60,459 13,747 11,206 8,772 7,535 6,244 12,955
Unconditional purchase obligations .... 2,578 2,578 -- -- -- -- --
--------- -------- -------- -------- --------- -------- ----------
Totals ............................. $ 275,983 $ 22,278 $ 28,336 $ 38,625 $ 159,543 $ 6,717 $ 20,484
========= ======== ======== ======== ========= ======== ==========
We do not have off-balance sheet financing arrangements other than our
operating leases. See note 6 to our audited consolidated financial statements
appearing elsewhere in this report for additional information regarding our
financing arrangements.
At December 31, 2002, we had entered into agreements with vendors to
purchase approximately $2.6 million of property, plant and equipment and
services in 2003 related primarily to the improvement and installation of
telecommunications facilities and information technology equipment and services.
In 2002, we made net capital expenditures of approximately $34.7 million,
primarily for the 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
2003 will total approximately $40.0 million, including the $2.6 million in
commitments as of December 31, 2002.
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 into 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. If we purchase less
than $250 million of equipment and services before a deadline that has been
extended to April 4, 2003, 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 may require us to pay $6.6 million in 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 $2.6 million as of December 31, 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 Nortel Networks and us, 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. As a result of our agreement with Nortel Networks,
we recorded other long-term liabilities totaling approximately $10.6 million as
of December 31, 2002.
48
Critical Accounting Policies, Estimates, Risks and Uncertainties
Our audited consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States, which
require us to make estimates and assumptions. We believe that, of our
significant accounting policies described in note 2 to our audited consolidated
financial statements appearing elsewhere in this report, the following policies
may involve a higher degree of judgment and complexity.
The policies discussed below are not intended to constitute a comprehensive
list of all of our accounting policies. In many cases, the accounting treatment
of a particular transaction is specifically dictated by accounting principles
generally accepted in the United States, with no need for us to judge their
application. There are also areas in which our judgment in selecting any
available alternative would not produce a materially different result. See our
audited consolidated financial statements and related notes thereto appearing
elsewhere in this report, which contain accounting policies and other
disclosures required by accounting principles generally accepted in the United
States.
Revenue Recognition. We generate recurring or multi-year operating
revenues, as well as nonrecurring operating revenues. We recognize revenues in
accordance with SEC Staff Accounting Bulletin, or ("SAB"), No. 101, "Revenue
Recognition in Financial Statements," as amended by SAB Nos. 101A and 101B. SAB
No. 101 requires that the following four basic criteria must be satisfied before
revenues can be recognized:
. there is persuasive evidence that an arrangement exists;
. delivery has occurred or services rendered;
. the fee is fixed and determinable; and
. collectibility is reasonably assured.
We base our determination of the third and fourth criteria above on our judgment
regarding the fixed nature of the fee we have charged for the services rendered
and products delivered, and the prospects that those fees will be collected. If
changes in conditions should cause us to determine that these criteria likely
will not be met for future transactions, revenue recognized for any reporting
period could be materially adversely affected.
We generate recurring revenues from our offering of local exchange
services, long distance services, data and Internet services, which include
Internet access, hosting and colocation services, and the sale of transmission
capacity to other telecommunications carriers. Revenues from these sources are
recognized as services are provided. Advance billings or cash payments received
in advance of services performed are recorded as deferred revenue.
We generate nonrecurring revenues from the sale of telephone systems, other
equipment, software and professional services. Revenues from these sources are
recognized upon installation or as services are performed. Nonrecurring revenues
such as the sale of telephone systems may be part of multiple element
arrangements. We estimate the fair value of the separate elements of a multiple
element arrangement and recognize revenues for any separate element that has
been delivered only after all of the remaining separate elements of the multiple
element arrangement have been delivered.
We recognize some revenues net as an agent versus gross as principal. We
applied the guidance provided in Emerging Issues Task Force, or EITF, 99-19 to
classify and record such amounts. We recorded revenues net as an agent of $11.1
million during 2002, $16.3 million during 2001 and $16.6 million during 2000.
See note 2 to our audited consolidated financial statements appearing elsewhere
in this report for additional information regarding revenues we recognize net as
an agent.
Allowance for Doubtful Accounts. We record an allowance for doubtful
accounts based on specifically identified amounts that we believe to be
uncollectible. We also use estimates based on our aged receivables to determine
an additional allowance for bad debts. These estimates are based on our
historical collection experience,
49
current trends, credit policy and a percentage of our revenue. In determining
these percentages, we look at historical write-offs of our receivables, but our
history is limited. We also look at current trends in the credit quality of our
customer base as well as changes in the credit policies. The following table
identifies the amounts we had reserved as of the dates indicated.
December 31,
---------------------------------------------
2002 2001 2000
---- ---- ----
Retail Services ............................ $ 5,755,000 $ 4,057,000 $ 2,837,000
Broadband Transport Services ............... 1,589,000 1,632,000 166,000
------------- ------------- ------------
Total .................................. $ 7,344,000 $ 5,689,000 $ 3,003,000
============= ============= ============
We have attempted to reserve for expected losses based on the foregoing
factors and believe our reserves are adequate. It is possible, however, that the
accuracy of our estimation process could be materially affected as the
composition of our receivables changes over time. We continually review and
refine the estimation process to take account of these changes, but we cannot
guarantee that we will be able to estimate credit losses accurately on our
receivables.
Valuation of Long-Lived and Intangible Assets and Goodwill. We assess the
impairment of identifiable intangibles, long-lived assets and related goodwill
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable in accordance with Statement of Financial Accounting
Standards, or "SFAS," No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and, beginning January 1,
2002, SFAS No. 144, "Accounting for the Impairment and Disposal of Long-Lived
Assets". Factors we consider important and that could trigger an impairment
review include the following:
. significant underperformance of our assets relative to expected
historical or projected future operating results;
. significant changes in the manner in which we use our assets or in our
overall business strategy;
. significant negative industry or economic trends;
. a significant decline in our common stock price for a sustained period;
and
. our market capitalization relative to net book value.
When we determine that the carrying value of intangibles, long-lived assets
and goodwill may not be recoverable based upon the existence of one or more of
the foregoing indicators of impairment, we measure impairment based on an
estimate of fair value. Estimates may be based on the projected discounted cash
flow method using a discount rate we determine to be commensurate with the risk
inherent in our current business model, or estimates may be based on other
methods. Net intangible assets, long-lived assets and goodwill amounted to
$442.6 million as of December 31, 2002 and $747.0 million as of December 31,
2001.
We wrote down some of our long-lived assets and goodwill because we
determined impairment existed during 2002 and 2001. We recognized losses in
connection with the write-downs of $223,000 during 2002 and $74.4 million during
2001. As part of our adoption of fresh start reporting on October 30, 2002,
substantially all property, plant and equipment was revalued to estimated fair
value, which became our new cost basis. In conformity with fresh start
accounting principles, we recorded a $228.2 million reorganization charge to
adjust the historical carrying value of our assets and liabilities to fair
market value. Of this charge, we wrote down our property, plant and equipment by
$198.8 million. See notes 3 and 10 to our consolidated financial statements
appearing elsewhere in this report for additional information regarding these
write-downs. We cannot assure you that other write-downs will not occur in
subsequent periods.
50
As a result of our reorganization, all goodwill recorded in our audited
consolidated balance sheets was written off as of the October 29, 2002 effective
date of our reorganization. Before this write-off and effective on January 1,
2002, we accounted for goodwill in accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets." As a result of our adoption of SFAS No. 142, we ceased
amortizing approximately $59.7 million of goodwill that we had recorded as of
December 31, 2001. We had recorded approximately $2.0 million of amortization on
these amounts during 2001 and would have recorded approximately $2.0 million of
amortization in 2002. In lieu of amortization, we performed an initial
impairment review of our goodwill in 2002. We completed the transitional test as
of January 1, 2002 and determined that goodwill was not impaired. As of December
31, 2002, no goodwill is recorded on the audited consolidated balance sheets
appearing elsewhere in this report.
Adoption of Fresh Start Reporting
As of October 30, 2002, we implemented fresh start reporting under the
provisions of SOP 90-7. Under SOP 90-7, the reorganization fair value of
ITC/\DeltaCom and its subsidiaries was allocated to our assets and liabilities,
our deficit was eliminated, and our stockholders' equity reflects the
transactions under our plan of reorganization. The adoption of SOP 90-7 and
fresh start reporting had 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.
The following presents the effects of our fresh start reporting as of
October 30, 2002. The amounts are based on a reorganization value of $555.6
million. See note 3 to our audited consolidated financial statements appearing
elsewhere in this report for more information about our fresh start reporting.
All amounts are shown in thousands.
Effects of Plan of Reorganization
October 30, 2002
Fresh Start
Predecessor Effects of Plan Accounting Successor
Company of Reorganization Adjustments Company
------- ----------------- ----------- -------
Current assets (including restricted assets) ...... $ 85,645 $ 29,554 $ -- $115,199
Long-term assets .................................. 668,598 -- (228,179) 440,419
--------- -------- --------- --------
Total assets ................................... $ 754,243 $ 29,554 $(228,179) $555,618
========= ======== ========= ========
Current liabilities ............................... $ 91,505 $ -- $ -- $ 91,505
Long-term liabilities ............................. 200,109 -- -- 200,109
--------- -------- --------- --------
Total liabilities .............................. 291,614 -- -- 291,614
--------- -------- --------- --------
Liabilities subject to compromise ................. 538,147 (538,147) -- --
New Series A convertible redeemable
preferred stock ................................. -- 24,433 -- 24,433
Series B redeemable convertible preferred
stock ........................................... 63,691 (63,691) -- --
Stockholders' equity .............................. (139,209) 606,959 (228,179) 239,571
--------- -------- --------- --------
Total liabilities and stockholders' equity ..... $ 754,243 $ 29,554 $(228,179) $555,618
========= ======== ========= ========
The senior notes and convertible subordinated notes and related accrued
interest are included as liabilities subject to compromise in the table above.
Current assets of the Successor Company in the table above include $18.5
million of restricted assets.
Effects of Our Reorganization on Our Accumulated Tax Credits
We estimate that we have accumulated over $444 million in net operating
loss carryforwards, which we could have used in part to reduce any future income
tax payments we may be required to make. As a result of our reorganization under
Chapter 11 of the United States bankruptcy code, we will be required under the
Internal
51
Revenue Code to reduce our net operating loss carryforwards by the amount of
gain we recognize from the cancellation of our debt. In addition, we believe our
reorganization is deemed to have caused a change in control of ITC/\DeltaCom, as
defined for purposes of the Internal Revenue Code, which significantly limits
our ability to use any remaining net operating loss carryforwards. Such a
reduction and limitation will increase our income tax payments once we begin to
generate taxable income.
Effects of New Accounting Standards
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 specified tangible long-lived assets. This statement is effective
for fiscal years beginning after June 15, 2002. We implemented this statement,
as required by SOP 90-7, as part of our fresh start reporting upon completion of
our bankruptcy proceedings, with no material impact on our audited 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 in which
the extinguishment of debt can be treated as an extraordinary item in the
statement of operations. This statement also requires reclassification of all
prior period extraordinary items related to the extinguishment of debt. We
implemented this statement, as required by SOP 90-7, as part of our fresh start
reporting upon completion of our bankruptcy proceedings, with no material impact
on our audited consolidated financial statements.
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. We
implemented this statement, as required by SOP 90-7, as part of our fresh start
reporting upon completion of our bankruptcy proceedings, with no material impact
on our audited consolidated financial statements.
SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure" was issued in December 2002. This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation." The provisions of this statement are
effective for interim and annual financial statements for fiscal years ending
after December 15, 2002. This statement provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. Also, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We continue to apply APB 25 recognition and measurement principles and
have complied with the new disclosure requirements of this statement.
Consolidation of Retail and Broadband Transport Businesses.
As a result of cost-reducing measures we implemented in connection with our
reorganization and the changing environment of the telecommunications business,
we expect, beginning with the first quarter of 2003, to consolidate our
broadband transport services segment into our retail services segment, which
will be managed and reported as a single business segment. We expect to continue
to provide detailed revenue disclosure concerning our end-user, retail customers
and our wholesale customers.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to minimal market risks. We manage the sensitivity of our
results of operations to these risks by maintaining an investment portfolio
consisting primarily of short-term, interest-bearing securities and by entering
into long-term debt obligations with appropriate pricing and terms. We do not
hold or issue derivative, derivative commodity or other financial instruments
for trading purposes. We do not have any material foreign currency exposure.
52
Our major market risk exposure is to changing interest rates on borrowings
we use to fund our business, including $155.6 million of borrowings outstanding
under our senior credit facility as of December 31, 2002. Our policy is to
manage interest rates through a combination of fixed-rate and variable-rate
debt. All $155.6 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 $155.6 million of variable-rate debt at
December 31, 2002 would result in a fluctuation of approximately $1.6 million in
our annual interest expense.
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements listed in Item 15 are filed as part
of this report and appear on pages F-2 through F-41.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
On August 5, 2002, we received a letter from the SEC advising us that
Arthur Andersen LLP, our former independent accountants, had informed the SEC
that it was unable to perform future audit services for us because of the
publicly announced wind-down of Arthur Andersen's business. The SEC advised us
in its letter that, as a result of this notification, Arthur Andersen's
relationship with us had been effectively terminated. As of August 5, 2002,
Arthur Andersen had not resigned or declined to stand for re-election as our
independent accountant, nor had our board of directors or audit committee
dismissed Arthur Andersen.
On September 6, 2002, we engaged BDO Seidman, LLP to succeed Arthur
Andersen as our independent accountants. The decision to engage BDO Seidman was
approved by a duly constituted committee of our board of directors and by the
bankruptcy court.
Arthur Andersen's reports on our audited consolidated financial statements
for the fiscal years ended December 31, 2001, 2000 and 1999 were unqualified,
but the report for the fiscal year ended December 31, 2001 stated that our
ability to continue as a going concern was uncertain. Except to the extent
described in the preceding sentence, none of these reports contained an adverse
opinion or disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles.
In connection with the audits of our consolidated financial statements for
the fiscal years ended December 31, 2001, 2000 and 1999, and during fiscal year
2002 prior to the termination of Arthur Andersen's relationship with us, we had
no disagreements with Arthur Andersen on matters of accounting principles or
practices, financial statement disclosures, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Arthur Andersen,
would have caused Arthur Andersen to make reference to the subject matter of
such disagreements in connection with its report on our consolidated financial
statements for such periods.
53
PART III
Item 10. Directors and Executive Officers of the Registrant.
The table below shows information about our directors and executive
officers as of January 31, 2003:
Name Age Positions with Company
- ----- --- ----------------------
Larry F. Williams.................. 60 Chairman, Chief Executive Officer and Director
Andrew M. Walker................... 61 President, Chief Operating Officer and Director
Douglas A. Shumate................. 37 Senior Vice President-Chief Financial Officer
Steven D. Moses.................... 53 Senior Vice President-Network Services
J. Thomas Mullis................... 59 Senior Vice President-Legal and Regulatory, General Counsel and
Secretary
Roger F. Woodward.................. 50 Senior Vice President-Sales
Thomas P. Schroeder................ 55 Senior Vice President-Large Account Sales
Sara L. Plunkett................... 53 Vice President-Finance
Donald W. Burton................... 58 Director
John J. DeLucca.................... 59 Director
Campbell B. Lanier, III............ 52 Director
R. Gerald McCarley................. 64 Director
Robert C. Taylor, Jr............... 43 Director
William B. Timmerman............... 56 Director
Larry F. Williams has served as our Chairman and Chief Executive Officer
since July 2001 and was appointed to our board of directors in February 2001.
From September 2000 to January 2002, Mr. Williams acted as a consultant to
telecommunications companies. From December 1994 to September 2000, Mr. Williams
served as Chief Executive Officer of AAPT Ltd., a publicly traded
telecommunications carrier in Australia. From January 1992 to December 1994, he
served as Chief Financial Officer and Chief Operating Officer of AAPT Ltd. and
as a Vice President of MCI Communications Corporation. Mr. Williams was
Executive Vice President, Vice President and Chief Financial Officer of
Telecom*USA (SouthernNet) from October 1987 to August 1990, when that company
was acquired by MCI Communications Corporation. From August 1990 to January
1992, Mr. Williams served as Vice President of Finance and Administration of MCI
Communications Southern division. From November 1980 to October 1987, Mr.
Williams served as Vice President, Treasurer and Chief Financial Officer of John
H. Harland Co. Mr. Williams currently serves as a director of Learn.net, Inc., a
hosted e-learning service provider.
Andrew M. Walker has served as our Chief Operating Officer since July 2001,
our President since April 2000 and our Vice Chairman from April 1998 through
July 2001. From March 1997 to July 2001, Mr. Walker served as our Chief
Executive Officer. He served as President and Chief Executive Officer of the
managing partner of Interstate FiberNet and Gulf States FiberNet, predecessors
to Interstate FiberNet, Inc., a wholly-owned subsidiary of ITC/\DeltaCom, from
November 1994 until March 1997, and as Chief Executive Officer and President of
KNOLOGY Broadband, Inc., a broadband telecommunications services company
formerly known as KNOLOGY Holdings, Inc., from July 1996 to February 1997.
Douglas A. Shumate has served as our Senior Vice President-Chief Financial
Officer since March 1997. He served as Chief Financial Officer of the Managing
Partners of Interstate FiberNet and Gulf States FiberNet from January 1995 until
March 1997. From May 1991 to January 1995, he served as Vice President-Finance
and Chief Financial Officer of Interstate Telephone Company, a local telephone
service provider and wholly-owned subsidiary of ITC Holding Company, Inc., an
investor in and operator of service businesses in the southeastern United
States. From December 1986 through April 1991, Mr. Shumate was employed as a
C.P.A. at the accounting firm of Arthur Andersen LLP.
Steven D. Moses has served as our Senior Vice President-Network Services
since March 1997. He served as Vice President of Interstate FiberNet from
January 1992 until April 1995 and Chief Operating Officer of Interstate FiberNet
from April 1995 until March 1997. From May 1991 to January 1992, Mr. Moses was
Director-Special
54
Projects of Interstate Telephone and Valley Telephone Company, a local telephone
service provider and a wholly owned-subsidiary of ITC Holding Company.
J. Thomas Mullis has served as our Senior Vice President-Legal and
Regulatory, General Counsel and Secretary since March 1997. Mr. Mullis served as
General Counsel and Secretary of DeltaCom, Inc., the predecessor of
ITC/\DeltaCom Communications, Inc. that was a provider of long distance
telecommunications services, from May 1985 to March 1997 and as Executive Vice
President of DeltaCom from January 1994 to November 1996. From November 1996 to
March 1997, he also served as Senior Vice President of DeltaCom. From January
1990 to December 1993, Mr. Mullis was President, General Counsel and Secretary
of Southern Interexchange Services, Inc., a switched services carrier, and
Southern Interexchange Facilities, Inc., a private line carriers' carrier.
Roger F. Woodward has served as our Senior Vice President-Sales since
October 1996. He also served as our Senior Vice President-Sales, Customer
Support and Account Services from March 1998 to July 2001. Mr. Woodward was
Senior Vice President-Sales and Marketing from October 1996 until March 1998.
From March 1990 until July 1996, Mr. Woodward served in a variety of positions,
including Regional Sales Director and Vice President-Sales, with Allnet
Communications, Inc., which was acquired by Frontier Communications Corporation
in August 1995.
Thomas P. Schroeder has served as our Senior Vice President-Large Account
Sales since April 2000. He served as Senior Vice President-Carrier Sales of
ITC/\DeltaCom from April 1999 until April 2000 and as Vice President-Carrier
Sales of ITC/\DeltaCom from March 1997 until April 1999. From June 1995 until
March 1997, Mr. Schroeder served as Vice President-Sales and Marketing of
Interstate FiberNet and, from April 1994 to June 1995, as the Director of Sales
and Marketing of Interstate FiberNet.
Sara L. Plunkett has served as our Vice President-Finance since March 1997.
She also served as our Treasurer from March 1997 through March 2000. Ms.
Plunkett was Vice President-Finance of DeltaCom, Inc. from October 1996 until
March 1997. From May 1989 through October 1996, she served as Chief Financial
Officer of DeltaCom.
Donald W. Burton has served on our board of directors since 1997.
Mr. Burton has served as the Managing General Partner of South Atlantic Venture
Funds, a venture capital partnership, since 1983 and as the General Partner of
The Burton Partnership, Limited Partnership, an investor in public and private
businesses, since 1979. Since 1981, he has served as President of South Atlantic
Capital Corporation. Mr. Burton serves as a director of ITC Holding Company,
KNOLOGY Broadband, Inc. and several privately held companies. Mr. Burton also
serves as a trustee of the Merrill Lynch Cluster A group of mutual funds.
John J. DeLucca has served on our board of directors since October 29,
2002, which was the effective date of our plan of reorganization. Mr. DeLucca
has served as Executive Vice President, Finance and Administration, and Chief
Financial Officer of Coty Inc., a manufacturer and marketer of personal
fragrances, since 1999. Mr. DeLucca serves as a member of the Executive
Committee of the Board of Directors of Coty Inc. Mr. DeLucca also serves as a
director of Edison Controls Corporation, Elliott Company, Enzo Biochem, Inc. and
Horizon Natural Resources. Mr. DeLucca served as Senior Vice President and
Treasurer of RJR Nabisco Inc., an international consumer products company, from
1993 to 1998. Mr. DeLucca also has previously served, among other positions, as
Managing Director and Chief Financial Officer of Hascoe Associates, President
and Chief Financial Officer of the Lexington Group, and Senior Vice
President-Finance and Managing Director of The Trump Group.
Campbell B. Lanier, III has served on our board of directors since 1997 and
as Vice Chairman since July 2001. Mr. Lanier also served as our Chairman from
March 1997 through July 2001. Mr. Lanier has served as Chairman of the Board and
Chief Executive Officer of ITC Holding Company, or its predecessor company,
since its inception in 1985. Mr. Lanier is an officer and director of several
ITC Holding Company subsidiaries and a director of KNOLOGY Broadband, Inc. Mr.
Lanier also has served as a Managing Director of South Atlantic Private Equity
Fund IV, Limited Partnership since 1997.
55
R. Gerald McCarley served on our board of directors from January 2002 to
October 2002. He was reappointed as a director in January 2003. Mr. McCarley is
a retired partner of the accounting firm of Deloitte & Touche LLP. He retired
from that firm in June 1999 after having served as an accounting and audit
partner since 1980. Mr. McCarley joined a predecessor of Deloitte & Touche in
1967 and served in various positions before he was appointed a partner in 1980.
Robert C. Taylor, Jr. has served on our board of directors since October
29, 2002, which was the effective date of our plan of reorganization. Mr. Taylor
has served as the Chairman, President and a director of Focal Communications
Corporation, a national communications provider of local phone and data
services, since its founding in 1996. Mr. Taylor also served as the Chief
Executive Officer of Focal Communications from 1996 until May 2002 and is that
company's co-founder. Mr. Taylor is a Senior Advisor to Chanin Capital Partners,
an investment banking firm, and the Executive Vice Chairman of the Association
for Local Telecommunications Services, an organization representing
facilities-based competitive local exchange carriers. Mr. Taylor previously
served as Chairman of that organization. Mr. Taylor is also a member of the
Board of Directors of the Information Technology Association of America. Mr.
Taylor was recently named by Chairman Powell and the Federal Communications
Commission to be on the Network Reliability and Interoperability Council. Mr.
Taylor was a director of iPlan Networks, a competitive local exchange carrier
based in Argentina, and Madison River Communications, a rural telephone company.
Mr. Taylor has held positions with MFS Communications, most recently as Vice
President of Global Accounts. Prior to joining MFS Communications in 1994, Mr.
Taylor was one of the original senior executives at McLeodUSA. Mr. Taylor has
also held management positions with MCI and Ameritech.
William B. Timmerman has served on our board of directors since 1997. Mr.
Timmerman has served since 1978 in a variety of management positions at SCANA
Corporation, a diversified utility company, including Chief Executive Officer
and President. Mr. Timmerman is also a director of SCANA Corporation and Liberty
Corporation, a broadcasting company, and has served as a director of ITC Holding
Company, or its predecessor company, since 1996.
All of our directors and executive officers, other than Messrs. DeLucca and
Taylor, served in their current positions with us before we filed for protection
from creditors under Chapter 11 of the United States bankruptcy code on June 25,
2002.
Board of Directors
Plan of Reorganization. Our plan of reorganization provided that our board
of directors immediately following the reorganization would be composed of seven
directors, selected as follows:
. four directors selected by a committee of our unsecured creditors,
including former holders of our senior notes and convertible
subordinated notes, two of whom were required to be independent
directors;
. two directors selected by the investors in our October 29, 2002 private
offering of Series A preferred stock; and
. our chairman and chief executive officer.
Donald W. Burton, John J. DeLucca, Robert C. Taylor and John R. Myers were
selected by the creditors' committee. Mr. Myers resigned from the board of
directors in January 2003. Campbell B. Lanier, III and William B. Timmerman were
selected by the investors in our private offering of Series A preferred stock.
Mr. Williams continued on the board of directors as our chairman and chief
executive officer. The appointment of these directors was approved by our board
of directors as constituted before the effective date of our plan of
reorganization.
Election. Each holder of shares of our common stock is entitled to cast one
vote for each outstanding share of common stock held upon any matter, including
the election of directors, that is properly considered and
56
acted upon by the stockholders.
Beginning with the first annual meeting of our stockholders following the
consummation of our plan of reorganization on October 29, 2002, for so long as
at least 66-2/3% or more of the shares of Series A preferred stock issued by us
are outstanding, the holders of such shares will be entitled, voting as a
separate class, exclusive of all other stockholders, to elect two directors to
serve on our board of directors. If the percentage of such outstanding shares
decreases to below 66-2/3% but remains in excess of 33-1/3%, such holders will
be entitled, voting as a separate class, exclusive of all other stockholders, to
elect one director. If the percentage of such outstanding shares decreases to or
below 33-1/3%, the right of such holders to elect directors as a separate class,
exclusive of all other stockholders, will terminate, and such holders will
thereafter be entitled to vote in the election of directors on an
"as-if-converted" basis together with the holders of the common stock.
Committees of the Board of Directors. The board of directors currently has
a standing audit committee and a standing compensation committee.
The audit committee currently consists of Robert C. Taylor, Jr., John J.
DeLucca and R. Gerald McCarley. The audit committee is responsible, among its
other duties, for engaging, overseeing, evaluating and replacing our independent
auditors, pre-approving all audit and non-audit services by the independent
auditors, reviewing the scope of the audit plan and the results of each audit
with management and the independent auditors, reviewing the internal audit
function, reviewing the adequacy of our system of internal accounting controls
and disclosure controls and procedures, reviewing the financial statements and
other financial information included in our annual and quarterly reports filed
with the SEC, and exercising oversight with respect to our policies and
procedures regarding adherence with legal requirements.
The current members of the compensation committee are Donald W. Burton,
Robert C. Taylor and R. Gerald McCarley. The compensation committee is
responsible for establishing the compensation and benefits of the executive
officers, monitoring compensation arrangements for management employees for
consistency with corporate objectives and stockholders' interests, and
administering our stock incentive plan.
Director Compensation. Effective as of the consummation of our plan of
reorganization on October 29, 2002, directors who are not employees of our
company receive fees of $30,000 annually plus fees of $1,000 for each board
meeting attended in person, $500 for each board meeting attended by conference
telephone and $500 for each committee meeting attended, whether in person or by
conference telephone. In addition, each non-employee director has received
options to purchase 10,000 shares of our common stock. Employee directors
receive no fees related to their board service. All directors are entitled to
reimbursement for their reasonable out-of-pocket expenditures.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and executive officers and persons who own more than 10% of a registered class
of our equity securities to file with the SEC initial reports of ownership and
reports of changes in ownership of our common stock and other equity securities.
The reporting persons are required by rules of the SEC to furnish us with copies
of all Section 16(a) reports they file. Mr. Moses did not file one report, with
respect to a disposition of common stock pursuant to a Rule 10b5-1 trading plan,
on a timely basis. Based solely upon a review of Section 16(a) reports furnished
to us for fiscal 2002 or written representations that no other reports were
required, we believe that our Section 16(a) reporting persons otherwise complied
with all filing requirements for fiscal 2002.
57
Item 11. Executive Compensation.
The following table sets forth the compensation paid to our chief executive
officer and to each of our four other most highly compensated executive officers
for fiscal 2002, who are referred to collectively as the "named executive
officers":
Summary Compensation Table
Long Term Compensation
-----------------------------
Annual
Compensation Awards
------------------- -----------------------------
Securities
Restricted Stock Underlying All Other
Unit Awards Options Compensation
Name and Principal Position Year Salary($) Bonus($) ($)(3) (4) ($)(5)
- --------------------------- -------- ---------- ----------------------------------------- --------------
Larry F. Williams(1) .................. 2002 250,000 225,000 1,430,000 411,379 45,807
Chairman and Chief Executive Officer 2001 100,000 110,274 -- 1,000,000 7,543
2000 -- -- -- -- --
Andrew M. Walker(2) ................... 2002 230,000 136,000 520,000 307,218 15,762
President and Chief Operating Officer 2001 230,000 94,010 -- 148,472 21,451
2000 212,601 136,510 -- 6,652 20,245
Douglas A. Shumate .................... 2002 196,000 87,660 156,000 197,074 23,053
Senior Vice President-Chief Financial 2001 184,923 53,862 -- 64,236 18,929
Officer 2000 152,688 59,422 -- 3,562 19,310
Steven D. Moses ....................... 2002 164,560 46,077 130,000 167,634 8,078
Senior Vice President-Network 2001 163,157 36,401 -- 64,236 9,053
Services 2000 149,574 51,392 -- 3,252 13,589
J. Thomas Mullis ...................... 2002 169,703 48,083 130,000 167,634 13,637
Senior Vice President-Legal and 2001 168,256 31,282 -- 56,336 12,596
Regulatory 2000 159,601 44,165 -- 3,180 12,452
- ---------------------
(1) Mr. Williams was appointed Chairman and Chief Executive Officer on July 24,
2001.
(2) Mr. Walker served as President and Chief Executive Officer until July 24,
2001. Upon Mr. Walker's resignation as Chief Executive Officer, he was
appointed to the additional position of Chief Operating Officer.
(3) Represents the dollar value of restricted stock unit awards made in 2002.
The dollar value is calculated by multiplying the closing market price of
our common stock on the date of grant by the number of shares subject to
the restricted stock units awarded. This valuation does not take into
account the diminution in value attributable to the restrictions applicable
to the common stock subject to the restricted stock units. Subject to the
executive's continued employment by us, the restricted stock unit awards
vest with respect to one third of the shares subject to such awards on the
date of grant of the award and on each of the second and third
anniversaries of the date of grant. The restricted stock unit awards will
fully vest upon the termination of an executive's employment by us as a
result of the executive's death or disability. Any unvested portion of a
restricted stock unit award will be forfeited upon the termination of an
executive's employment by us for any other reason. Holders of restricted
stock units will be entitled to receive, upon any payment by us of a cash
dividend on the outstanding common stock, a cash payment for each
restricted stock unit held as of the record date for the dividend equal to
the per-share dividend paid on the common stock. As of December 31, 2002,
the total holdings of restricted stock units of the named executive
officers (with one unit deemed equivalent to the value of one share of
common stock) and the market value of such holdings based on the closing
price of our common stock on the OTC Bulletin Board on December 31, 2002
were as follows: Mr. Williams: 550,000 units ($1,281,500); Mr. Walker:
200,000 units ($466,000); Mr. Shumate: 60,000 units ($139,800); Mr. Moses:
50,000 units ($116,500); and Mr. Mullis: 50,000 units ($116,500).
(4) Represents, for 2001 and 2000, options to purchase our old common stock
granted under the ITC/\DeltaCom, Inc. 1997 Stock Option Plan. Represents,
for 2002, options granted under the 1997 Stock Option Plan and options to
purchase our
58
new common stock granted after October 29, 2002 under the ITC/\DeltaCom,
Inc. Stock Incentive Plan. Under our plan of reorganization, all
unexercised options under the 1997 Stock Option Plan were cancelled as of
October 29, 2002, the effective date of the plan. Holders did not receive
any distribution in exchange for their cancelled options.
(5) The amounts shown in the "All Other Compensation" column consist of the
following: (a) for Mr. Williams $3,516 in fiscal 2002 and $982 in fiscal
2001 in life insurance premiums; $6,806 in fiscal 2002 in matching
contributions to our 401(k) retirement savings plan, referred to below as
the "401(k) Plan"; relocation assistance amounts in 2002 of $19,231; a
travel allowance of $11,454 in fiscal 2002 and $4,641 in fiscal 2001; and
an automobile allowance of $4,800 in fiscal 2002 and $1,920 in fiscal 2001;
(b) for Mr. Walker, $3,629 in fiscal 2002, $4,404 in fiscal 2001 and $2,529
in fiscal 2000 in life insurance premiums; $7,333 in fiscal 2002, $7,000 in
fiscal 2001 and $6,800 in fiscal 2000 in matching contributions to our
401(k) Plan; a travel allowance of $247 in fiscal 2001 and $6,116 in fiscal
2000; an automobile allowance of $4,800 in fiscal 2002, $4,800 in fiscal
2001 and $4,800 in fiscal 2000; and an executive benefit for estate
planning assistance of $5,000 in fiscal 2001; (c) for Mr. Shumate, $482 in
fiscal 2002, $432 in fiscal 2001 and $348 in fiscal 2000 in life insurance
premiums; $7,333 in fiscal 2002, $7,000 in fiscal 2001 and $6,800 in fiscal
2000 in matching contributions to the 401(k) Plan; a travel allowance of
$10,438 in fiscal 2002, $5,507 in fiscal 2001 and $3,552 in fiscal 2000; an
automobile allowance of $4,800 in fiscal 2002, $4,800 in fiscal 2001 and
$4,800 in fiscal 2000; and an executive benefit for estate planning
assistance of $1,190 in fiscal 2001 and $3,810 in fiscal 2000; (d) for
Mr. Moses, $1,048 in fiscal 2002, $1,038 in fiscal 2001 and $905 in fiscal
2000 in life insurance premiums; $6,000 in fiscal 2002, $5,250 in fiscal
2001 and $5,250 in fiscal 2000 in matching contributions to the 401(k)
Plan; a travel allowance of $2,497 in fiscal 2001 and $2,291 in fiscal
2000; the value of the personal use of a company vehicle, as calculated
under regulations of the Internal Revenue Service, of $1,030 in fiscal
2002, $268 in fiscal 2001 and $143 in fiscal 2000; and an executive benefit
for estate planning assistance of $5,000 in fiscal 2000; (e) for
Mr. Mullis, $1,977 in fiscal 2002, $1,796 in fiscal 2001 and $1,652 in
fiscal 2000 for life insurance premiums; $6,860 in fiscal 2002, $6,000 in
fiscal 2001 and $6,000 in fiscal 2000 in matching contributions to the
401(k) Plan; and an automobile allowance of $4,800 in fiscal 2002, $4,800
in fiscal 2001 and $4,800 in fiscal 2000.
Stock Option Grants in Fiscal 2002
The following table sets forth information concerning all stock options
granted during fiscal 2002 to the named executive officers. Under our plan of
reorganization, all options outstanding as of October 29, 2002, which was the
effective date of the plan, were cancelled as of that date.
Option Grants in Last Fiscal Year
Individual Grants Potential Realizable Value at
------------------------------------------------------------- Assumed Annual Rates of
Number of Percent of Stock Price Appreciation
Shares Total Options for Option Term (6)
Underlying Granted to Exercise ------------------------------
Options Employees in Price Expiration
Name Granted Fiscal Year(%) ($/Share) Date 5% ($) 10% ($)
- ---- ------------ ---------------- ---------- ------------- ---------- ------------
Larry F. Williams 186,379(1) 3.46 0.51 1/29/12(4) -- --
50,000(2) 0.93 5.28 11/20/12(5) 430,028 684,748
50,000(2) 0.93 6.08 11/20/12(5) 495,184 788,498
50,000(2) 0.93 6.86 11/20/12(5) 558,711 889,654
75,000(3) 1.39 2.60 11/20/12(5) 317,634 505,780
Andrew M. Walker 194,718(1) 3.61 0.51 1/29/12(4) -- --
25,000(2) 0.46 5.28 11/20/12(5) 215,014 342,374
25,000(2) 0.46 6.08 11/20/12(5) 247,592 394,249
25,000(2) 0.46 6.86 11/20/12(5) 279,355 444,827
37,500(3) 0.70 2.60 11/20/12(5) 158,817 252,890
Douglas A. Shumate 122,074(1) 2.26 0.51 1/29/12(4) -- --
16,667(2) 0.31 5.28 11/20/12(5) 143,346 228,254
16,667(2) 0.31 6.08 11/20/12(5) 165,065 262,838
16,666(2) 0.31 6.86 11/20/12(5) 186,230 296,539
25,000(3) 0.46 2.60 11/20/12(5) 105,87 168,593
Steven D. Moses 100,134(1) 1.86 0.51 1/29/12(4) -- --
15,000(2) 0.28 5.28 11/20/12(5) 129,008 205,424
15,000(2) 0.28 6.08 11/20/12(5) 148,555 236,549
59
Potential Realizable Value at
Individual Grants Assumed Annual Rates of
------------------------------------------------------------- Stock Price Appreciation
Number of Percent of for Option Term (6)
Shares Total Options ------------------------------
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Granted Fiscal Year(%) ($/Share) Date 5% ($) 10% ($)
- ---- ------------ ---------------- ---------- ------------- ---------- ------------
15,000(2) 0.28 6.86 11/20/12(5) 167,613 266,896
22,500(3) 0.42 2.60 11/20/12(5) 95,290 151,734
J. Thomas Mullis 100,134(1) 1.86 0.51 1/29/12(4) -- --
15,000(2) 0.28 5.28 11/20/12(5) 129,008 205,424
15,000(2) 0.28 6.08 11/20/12(5) 148,555 236,549
15,000(2) 0.28 6.86 11/20/12(5) 167,613 266,896
22,500(3) 0.42 2.60 11/20/12(5) 95,290 151,734
- -----------------
(1) These options were granted under the ITC/\DeltaCom, Inc. 1997 Stock Option
Plan and were exercisable for shares of our old common stock. These options
generally would have become exercisable with respect to 50% of the shares
subject to such options on the second anniversary of the date of grant and
with respect to 25% of the shares subject to such options on each of the
third and fourth anniversaries of the date of grant. Under our plan of
reorganization, all options outstanding as of October 29, 2002, which was
the effective date of the plan, were cancelled as of that date. Holders did
not receive any distribution in exchange for their cancelled options.
(2) These options were granted under the ITC/\DeltaCom, Inc. Stock Incentive
Plan and are exercisable for shares of our new common stock. These options
became exercisable with respect to one-third of the shares subject to such
options on the date of grant and will become exercisable with respect to an
additional one-third of the shares subject to such options on each of the
first and second anniversaries of the date of grant.
(3) These options were granted under the ITC/\DeltaCom, Inc. Stock Incentive
Plan and are exercisable for shares of our new common stock. These options
become exercisable with respect to 50% of the shares subject to such
options on the second anniversary of the date of grant and will become
exercisable with respect to 25% of the shares subject to such options on
each of the third and fourth anniversaries of the date of grant.
(4) The term of each of these options generally could not have exceeded ten
years. Under our plan of reorganization, all options outstanding as of
October 29, 2002, which was the effective date of the plan, were cancelled
as of that date.
(5) The term of each of these options generally may not exceed ten years.
(6) The potential realizable value is calculated in accordance with the rules
and regulations of the SEC based on the fair market value on the date of
grant, which was equal to the exercise price of the option and assumes that
the shares appreciate in value from the option grant date compounded
annually until the end of the option term at the rate specified, 5% or 10%,
and that the option is exercised and sold on the last day of the option
term for the appreciated share price. Under our plan of reorganization, all
options outstanding under the ITC/\DeltaCom, Inc. 1997 Stock Option Plan as
of October 29, 2002, which was the effective date of the plan, were
cancelled as of that date.
Stock Option Exercises in Fiscal 2002
The following table sets forth information concerning all stock options
exercised during fiscal 2002 and unexercised stock options held at the end of
that fiscal year by the named executive officers:
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year-End In-the-Money Options
(#) at Fiscal Year-End ($)(1)
Shares Value ------------------------------- ---------------------------
Acquired on Realized
Name Exercise (#) ($) Exerciseable Unexerciseable Exerciseable Unexerciseable
- ---- -------------- -------- ------------- -------------- ------------ --------------
Larry F. Williams ......... -- -- 50,000 175,000 -- --
Andrew M. Walker .......... -- -- 25,000 87,500 -- --
Douglas A. Shumate ........ -- -- 16,667 58,333 -- --
Steven D. Moses ........... -- -- 15,000 52,500 -- --
J. Thomas Mullis .......... -- -- 15,000 52,500 -- --
60
- --------------
(1) Represents the difference between the exercise price and the closing price
of our old common stock on the OTC Bulletin Board on December 31, 2002,
which was the last trading day in fiscal 2002.
Employment and Retention Agreements
We have entered into employment and retention agreements as of October 29,
2002, which was the effective date of our plan of reorganization, with the
following executive officers pursuant to which each such executive officer is
employed by us in the capacity identified below:
Name Position
---- --------
Larry F. Williams .......... Chairman and Chief Executive Officer
Andrew M. Walker ........... President and Chief Operating Officer
Douglas A. Shumate ......... Senior Vice President-Chief Financial Officer
Steven D. Moses ............ Senior Vice President-Network Services
J. Thomas Mullis ........... Senior Vice President-Legal and Regulatory, and
General Counsel
Roger F. Woodward .......... Senior Vice President-Sales
Thomas P. Schroeder ........ Senior Vice President-Large Account Sales
Each agreement has an initial three-year term, which will be automatically
extended for one year on each anniversary date unless either ITC/\DeltaCom or
the executive officer provides notice of non-renewal, or unless employment
terminates because the executive officer dies or becomes disabled, is terminated
by us, or resigns. Under the agreements, each executive officer is entitled to
receive a base salary not less than his base salary immediately before June 25,
2002, which was the date on which we filed for protection from creditors under
Chapter 11 of the United States bankruptcy code. Each agreement further provides
that, in addition to the executive officer's annual base salary, the executive
officer may earn an annual bonus in cash and stock-based incentives in an amount
not less than his maximum bonus opportunity for 2002 in effect immediately
before June 25, 2002.
Each agreement provides for the payment of severance benefits to the
executive officer if we terminate the executive officer's employment without
cause or the executive officer resigns for good reason. For this purpose, "good
reason" includes a material reduction in the executive officer's position,
authority, duties or responsibilities, specified relocations of the executive
officer's place of employment, a reduction in the executive officer's
compensation, and notification to the executive officer that his employment will
be terminated otherwise than as permitted by the agreement. Upon such a
termination, the executive officer will be entitled to receive the following:
(1) a lump-sum payment equal to the executive officer's annual base salary
through the date of termination plus a pro rata bonus for the year of
termination and any previously deferred compensation and accrued
vacation pay;
(2) a lump-sum payment equal to:
. in the case of Mr. Williams, three times the sum of his annual
base salary as in effect at the date of termination plus his
highest specified target bonus opportunity, excluding the value
of stock-based incentives;
. in the case of Mr. Walker, (a) two times the sum of his annual
base salary as in effect at the date of termination plus his
highest specified target bonus opportunity, excluding the value
of stock-based incentives, if the termination date occurs while
Mr. Williams is serving as either our chief executive officer or
our chairman, or (b) three times such sum, if the termination
date occurs after Mr. Williams has ceased service as both our
chief executive officer and our chairman; or
61
. in the case of each executive officer other than Messrs. Williams
and Walker, (a) the sum of the executive officer's annual base
salary as in effect at the date of termination plus the executive's
highest specified target bonus opportunity, excluding the value of
stock-based incentives, if the termination date occurs while Mr.
Williams is serving as either our chief executive officer or our
chairman, or (b) two times such sum, if the termination date occurs
after Mr. Williams has ceased service as both our chief executive
officer and our chairman; and
(3) continued medical, prescription, dental and life insurance benefits
until at least age 65, in the case of Messrs. Williams and Walker, and
for a minimum of three years, in the case of each other executive
officer.
In addition, upon such termination, all stock options, awards of restricted
stock and restricted stock units, and other equity-based awards granted to the
executive shall vest and become exercisable, and all restrictions and conditions
applicable to such awards shall be deemed to have lapsed or been fully
satisfied.
If an executive is terminated with cause or the executive resigns without
good reason, the executive will be entitled to receive only compensation accrued
through the date of termination and any compensation previously deferred by the
executive.
Compensation Committee Interlocks and Insider Participation
James H. Black, Jr., Donald W. Burton, William T. Parr, William H. Scott,
III, O. Gene Gabbard, John R. Myers and Robert C. Taylor served as members of
the compensation committee of our board of directors during some or all of
fiscal 2002. Mr. Gabbard resigned as a member of the board of directors and the
compensation committee in February 2002, Messrs Black, Parr and Scott ceased to
serve as members of our board of directors and the compensation committee upon
consummation of our plan of reorganization on October 29, 2002 and Mr. Myers
resigned as a member of the board of directors and the compensation committee in
January 2003. Before his appointment to the board of directors in July 2000,
Mr. Black served as a Senior Vice President of ITC/\DeltaCom from July 1999
through July 2000. For a description of transactions between our company and
entities with which members of the compensation committee in 2002 are affiliated
or associated, see the discussion of such transactions and relationships in
"Certain Relationships and Related Transactions," which is incorporated herein
by reference.
62
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information presented below regarding beneficial ownership of our
common stock and Series A preferred stock has been presented in accordance with
the rules of the SEC and is not necessarily indicative of ownership for any
other purpose. Under these rules, a person is deemed to be a "beneficial owner"
of a security if that person has or shares the power to vote or direct the
voting of the security or the power to dispose or direct the disposition of the
security. Under these rules, a person is deemed to own beneficially any security
as to which the person has the right to acquire sole or shared voting or
investment power within 60 days through the conversion or exercise of any
convertible security, warrant, option or other right. More than one person may
be deemed to be a beneficial owner of the same securities.
The number of shares of common stock we show as beneficially owned as of
January 31, 2003 includes the number of shares of common stock the beneficial
owner would acquire as a result of the exercise of the warrants and the
conversion of the Series A preferred stock beneficially owned as of that date.
Warrants are exercisable at any time for shares of common stock on a one-for-one
basis at the holder's option. Shares of our Series A preferred stock are
convertible at any time at the holder's option into shares of common stock
according to a formula specified in the certificate of designation of the Series
A preferred stock. In addition, we have the right, instead of paying cash
dividends, to issue additional shares of Series A preferred stock as
payment-in-kind dividends on the Series A preferred stock. We have not included
in the following tables any shares of Series A preferred stock that we may issue
after January 31, 2003 as payment-in-kind dividends or any additional shares of
common stock that would be issuable by us upon conversion of the Series A
preferred stock as payment of accrued and unpaid dividends. The information
presented below assumes that any fractional shares of common stock otherwise
issuable upon exercise of the warrants or conversion of the Series A preferred
stock will be rounded up to the nearest whole share of common stock.
As of January 31, 2003, there were 44,848,300 shares of common stock and
304,208 shares of Series A preferred stock outstanding. Except with respect to
the election of directors, holders of the Series A preferred stock are entitled
to vote on an "as-if-converted" basis together with the holders of the common
stock as a single class on all matters presented for a vote to the holders of
the common stock. Until the date on which the holders of the Series A preferred
stock cease to have the right, voting as a separate class, exclusive of all
other stockholders, to elect at least one director, those holders otherwise will
not be entitled to vote upon the election of directors.
Principal Stockholders
Beneficial Ownership of Common Stock and Series A Preferred Stock. The
following table presents, as of January 31, 2003, information based upon our
records and filings with the SEC regarding each person, other than a director or
executive officer of ITC/\DeltaCom, known to us to be the beneficial owner of
more than 5% of the common stock or Series A preferred stock:
Common Stock Series A Preferred Stock
--------------------------- -----------------------------
Amount and Amount and
Nature of Nature of Total Combined
Name and Address of Beneficial Percent of Beneficial Percent of Voting Power as
Beneficial Owner Ownership(1) Class (%) Ownership(1) Class (%) Single Class (%)(2)
---------------- ------------ ---------- ------------- --------- -------------------
James Smith Lanier, II ................... 991,389 2.2 22,045.3571 7.2 2.0
c/o J. Smith Lanier & Co., Street,
P.O. Box 70, 300 West Tenth
West Point, GA 31833
ITC Holding Company, Inc. ................ 3,605,069 8.0 -- -- 7.2
3300 20/th/ Avenue
Valley, Alabama 36854
SCANA Corporation ........................ 3,718,309 7.7 151,168.1628 49.7 7.3
63
Common Stock Series A Preferred Stock
--------------------------- -----------------------------
Amount and Amount and
Nature of Nature of Total Combined
Name and Address of Beneficial Percent of Beneficial Percent of Voting Power as
Beneficial Owner Ownership(1) Class (%) Ownership(1) Class (%) Single Class (%) (2)
---------------- ------------ ---------- ------------- --------- --------------------
1426 Main Street, Columbia,
South Carolina 29201
Welsh, Carson, Anderson &
Stowe VIII, L.P. .................... 22,107,085 49.3 -- -- 44.1
320 Park Avenue,
Suite 2500,
New York, NY 10022
- -----------
(1) The percentage of beneficial ownership as to any person as of a particular
date is calculated by dividing the number of shares beneficially owned by
such person, which includes the number of shares as to which such person
has the right to acquire voting or investment power within 60 days, by the
sum of the number of shares outstanding as of such date plus the number of
shares as to which such person has the right to acquire voting or
investment power within 60 days. Consequently, the denominator for
calculating beneficial ownership percentages may be different for each
beneficial owner. Except as we otherwise indicate below and under
applicable community property laws, we believe that the beneficial owners
of the securities listed below have sole voting and investment power with
respect to the shares shown.
(2) The percentage of total combined voting power as a single class with
respect to any beneficial owner is calculated by dividing the number of
shares of common stock beneficially owned by that beneficial owner by the
sum of (a) the total number of votes represented by all outstanding
securities, or approximately 50,171,931 votes as of January 31, 2003, plus
(b) the additional number of votes such beneficial owner has the right to
acquire within 60 days through the conversion or exercise of any
convertible security, warrant, option or other right.
The securities shown as beneficially owned by J. Smith Lanier, II include
the following: 2,015.5755 shares of Series A preferred stock, 6,758.1572
warrants and 86,596 shares of common stock held of record by or for the account
of J. Smith Lanier & Co., Inc., and a total of 42,032 shares of common stock
issuable upon conversion or exercise of such shares of Series A preferred stock
and warrants; 4,157.1245 shares of Series A preferred stock, 13,938.6995
warrants and 13,750 shares of common stock held of record by Mr. Lanier's
spouse, Elizabeth W. Lanier, and a total of 86,689 shares of common stock
issuable upon conversion or exercise of such shares of Series A preferred stock
and warrants; 277,771 shares of common stock issuable upon conversion of the
Series A preferred stock and 53,221 shares of common stock issuable upon
exercise of warrants held of record by Mr. Lanier; 3,420 shares of common stock
held of record by the J. Smith Lanier, II Charitable Remainder Trust; and 157
shares of common stock held in Mr. Lanier's individual retirement account. Mr.
Lanier is the Chairman and a significant stockholder of J. Smith Lanier & Co.
Mr. Lanier shares voting and investment power with respect to the shares held of
record by his spouse and the J. Smith Lanier, II Charitable Remainder Trust.
The information concerning ITC Holding Company, Inc. is based upon a
statement on Schedule 13D/A filed with the SEC on November 8, 2002. ITC Holding
Company reports that it shares voting and investment power with respect to all
of the shares shown with its indirect wholly-owned subsidiary, ITC Telecom
Ventures, Inc.
The information concerning SCANA Corporation above is based upon our
records and a Schedule 13D filed with the SEC on November 8, 2002. The
securities shown as beneficially owned by SCANA Corporation include the
following: 151,168.1628 shares of Series A preferred stock and 566,010 shares of
common stock held of record by its wholly-owned subsidiary, SCANA Communications
Holdings, Inc.; and a total of 3,152,299 shares of common stock issuable upon
conversion of such shares of Series A preferred stock and upon exercise of
506,861.8 warrants held of record by SCANA Communications Holdings.
SCANA Corporation reports that it shares voting and investment power with
respect to all of the foregoing securities with SCANA Communications, Inc.,
a wholly-owned subsidiary, and SCANA Communications Holdings.
The information concerning Welsh, Carson, Anderson & Stowe VIII, L.P. is
based upon a statement on Schedule 13D filed with the SEC on November 1, 2002
and statements on Schedule 13D/A filed with the SEC on November 8, 2002,
December 18, 2002 and December 26, 2002. Welsh, Carson, Anderson & Stowe
64
VIII reports that it shares voting and investment power with respect to all of
the shares shown with WCAS VIII Associates, L.L.C., its sole general partner,
and the managing members of the general partner, Patrick J. Welsh, Russell L.
Carson, Bruce K. Anderson, Thomas E. McInerney, Robert A. Minicucci, Anthony J.
deNicola, Paul B. Queally, Jonathan M. Rather, D. Scott Mackesy, John D. Clark,
James R. Matthews and Sanjay Swani. Of the outstanding shares of common stock
shown, 21,054,451 shares are directly owned by Welsh, Carson, Anderson & Stowe
VIII, L.P., 192,948 shares are directly owned by Patrick J. Welsh, 192,948
shares are directly owned by Russell L. Carson, 192,948 shares are directly
owned by Bruce K. Anderson, 192,948 shares are directly owned by Thomas E.
McInerney, 68,211 shares are directly owned by Robert A. Minicucci, 22,737
shares are directly owned by Anthony J. deNicola, 13,579 shares are directly
owned by Paul B. Queally, 4,526 shares are directly owned by Jonathan M. Rather,
2,316 shares are directly owned by D. Scott Mackesy, 1,368 shares are directly
owned by James R. Matthews and 6,737 shares are directly owned by Sanjay Swani.
In addition, employees of affiliates of the general partner own 13,578 shares of
common stock and former employees of affiliates of the general partner own
150,001 shares of common stock.
Security Ownership of Directors and Executive Officers
The following table presents, as of January 31, 2002, information regarding
the beneficial ownership of the common stock and Series A preferred stock by the
following persons:
. each director;
. our chief executive officer and each other executive officer named in
the summary compensation table under "Executive Compensation" above;
and
. all of our directors and executive officers as a group.
The shares of common stock shown as beneficially owned by each of the
directors and executive officers and by all directors and executive officers as
a group do not include the shares of common stock underlying the portions of the
following restricted stock units that have not vested and will not vest within
60 days after January 31, 2003: 500,000 stock units awarded to Larry F.
Williams, of which 166,667 have vested or will vest within 60 days after
January 31, 2003; 200,000 stock units awarded to Andrew M. Walker, of which
66,667 have vested or will vest within 60 days after January 31, 2003; 60,000
stock units awarded to Douglas A. Shumate, of which 20,000 have vested or will
vest within 60 days after January 31, 2003; 50,000 stock units awarded to each
of Steven D. Moses and J. Thomas Mullis, of which 16,667 have vested or will
vest within 60 days after January 31, 2003; and 45,000 stock units awarded to
each of Thomas P. Schroeder and Roger F. Woodward, of which 15,000 have vested
or will vest within 60 days after January 31, 2003. Each stock unit represents
the equivalent of a share of our common stock, but a holder of a stock unit does
not have any rights as a stockholder of ITC/\DeltaCom until the holder receives
shares of common stock underlying the award. After any portion of a stock unit
has vested, the holder will be entitled to receive the underlying shares of
common stock upon the earlier of the date on which the holder's employment by
ITC/\DeltaCom ceases and the third anniversary of the date upon which the stock
unit was granted.
% Total
Common Stock Series A Preferred Stock Combined
------------------------------------- --------------------------------------- Voting Power
Name of Amount and Nature of Percent of Amount and Nature of Percent of as Single
Beneficial Owner Beneficial Ownership(1) Class (%) Beneficial Ownership(1) Class(%) Class(2)
----------------- ----------------------- ----------- ------------------------- ----------- -------------
Donald W. Burton ............. 1,492,888 3.3 20,155.7551 6.6 3.0
John J. DeLucca .............. -- -- -- -- --
Campbell B. Lanier, III ...... 876,912 1.9 36,295.1736 11.9 1.7
R. Gerald McCarley ........... -- -- -- -- --
Steven D. Moses .............. 33,224 * -- -- *
J. Thomas Mullis ............. 38,599 * -- -- *
Douglas A. Shumate ........... 85,705 * 2,015.5755 * *
Robert C. Taylor, Jr ......... -- -- -- -- --
William B. Timmerman ......... -- -- -- -- --
65
% Total
Common Stock Series A Preferred Stock Combined
------------------------------------- --------------------------------------- Voting Power
Name of Amount and Nature of Percent of Amount and Nature of Percent of as Single
Beneficial Owner Beneficial Ownership(1) Class (%) Beneficial Ownership(1) Class(%) Class(2)
----------------- ----------------------- ----------- ------------------------- ----------- -------------
Andrew M. Walker .......... 98,034 * -- -- *
Larry F. Williams ......... 505,617 1.1 -- -- 1.0
All executive officers
and directors as a 6.9
group (14 persons) ...... 3,204,692 58,466.5042 19.2 6.3
- -----------
* Less than one percent.
(1) The percentage of beneficial ownership as to any person as of a particular
date is calculated by dividing the number of shares beneficially owned by
such person, which includes the number of shares as to which such person
has the right to acquire voting or investment power within 60 days, by the
sum of the number of shares outstanding as of such date plus the number of
shares as to which such person has the right to acquire voting or
investment power within 60 days. Consequently, the denominator for
calculating beneficial ownership percentages may be different for each
beneficial owner. Except as we otherwise indicate below and under
applicable community property laws, we believe that the beneficial owners
of the securities listed below have sole voting and investment power with
respect to the shares shown.
(2) The percentage of total combined voting power as a single class
with respect to any beneficial owner is calculated by dividing the number
of shares of common stock beneficially owned by the beneficial owner by the
sum of (a) the total number of votes represented by all outstanding
securities, or approximately 50,171,931 votes as of January 31, 2003, plus
(b) the additional number of votes such beneficial owner has the right to
acquire within 60 days through the conversion or exercise of any
convertible security, warrant, option or other right.
The securities shown as beneficially owned by Mr. Burton include the
following: 5,038.9388 shares of Series A preferred stock held of record by The
Burton Partnership, Limited Partnership, 15,116.8163 shares of Series A
preferred stock held of record by The Burton Partnership (QP), Limited
Partnership, and a total of 352,725 shares of common stock issuable upon
conversion of such shares of Series A preferred stock; 16,896 shares of common
stock issuable upon exercise of warrants held of record by The Burton
Partnership, Limited Partnership and 50,687 shares of common stock issuable upon
exercise of warrants held of record by The Burton Partnership (QP), Limited
Partnership; 301,992 shares of common stock held of record by The Burton
Partnership, Limited Partnership; and 770,587 shares of common stock held of
record by The Burton Partnership (QP), Limited Partnership. Mr. Burton is the
general partner of The Burton Partnership, Limited Partnership and The Burton
Partnership (QP), Limited Partnership.
The securities shown as beneficially owned by Campbell B. Lanier, III
include the following: 1,765 shares of common stock held of record by Brown
Investment Partners, L.P., of which Mr. Lanier serves as general partner;
533.4826 shares of Series A preferred stock held of record by Brown Investment
Partners, L.P.; a total of 11,125 shares of common stock issuable upon
conversion of such shares of Series A preferred stock and upon exercise of
1,788.7492 warrants held of record by Brown Investment Partners, L.P.; 625,829
shares of common stock issuable upon conversion of the Series A preferred stock
and 119,908 shares of common stock issuable upon exercise of warrants held of
record by Mr. Lanier; and 12 shares of common stock held of record by Mr.
Lanier's spouse, for which Mr. Lanier shares voting and investment power.
The shares of common stock shown as beneficially owned by Steven D. Moses
include 15,000 shares that Mr. Moses has the right to purchase within 60 days
after January 31, 2003 pursuant to the exercise of stock options and 16,667
shares of common stock subject to restricted stock units that have vested or
will vest within 60 days after January 31, 2003. The shares of common stock
shown as beneficially owned by Mr. Moses for which he shares voting and
investment power include two shares held of record by his wife, 18 shares held
of record by his minor son and 1,483 shares credited to his participant account
in our 401(k) retirement savings plan, which are voted by the plan's trustees.
The shares of common stock shown as beneficially owned by J. Thomas Mullis
include 15,000 shares that Mr. Mullis has the right to purchase within 60 days
after January 31, 2003 pursuant to the exercise of stock options and
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16,667 shares of common stock subject to restricted stock units that have vested
or will vest within 60 days after January 31, 2003. The shares of common stock
shown as beneficially owned by Mr. Mullis for which he shares voting and
investment power include 6,868 shares credited to Mr. Mullis' participant
account in our 401(k) retirement savings plan, which are voted by the plan's
trustees.
The shares of common stock shown as beneficially owned by Douglas A.
Shumate include the following: 35,273 shares of common stock issuable upon
conversion of the Series A preferred stock and 6,759 shares of common stock
issuable upon exercise of warrants held of record by Mr. Shumate; 16,667 shares
of common stock that Mr. Shumate has the right to purchase within 60 days after
January 31, 2003 pursuant to the exercise of stock options; 14 shares of common
stock owned of record by Mr. Shumate's spouse; and 33 shares of common stock
credited to Mr. Shumate's participant account in our 401(k) retirement savings
plan, which are voted by the plan's trustees. Mr. Shumate shares voting and
investment power with respect to the shares held of record by his spouse.
The shares of common stock shown as beneficially owned by Andrew M. Walker
include the following: 66,667 shares of common stock subject to restricted stock
units that have vested or will vest within 60 days after January 31, 2003;
25,000 shares of common stock that Mr. Walker has the right to purchase within
60 days after January 31, 2003 pursuant to the exercise of stock options; 5,257
shares of common stock credited to his participant account in our 401(k)
retirement savings plan, which are voted by the plan's trustees; and one share
held of record by Mr. Walker's wife, for which Mr. Walker shares voting and
investment power.
The shares of common stock shown as beneficially owned by Larry F. Williams
include the following: 271,999 shares held of record by Mr. Williams' wife, for
which Mr. Williams shares voting and investment power; 183,333 shares of common
stock subject to restricted stock units that have vested or will vest within 60
days after January 31, 2003; and 50,000 shares of common stock that Mr. Williams
has the right to purchase within 60 days after January 31, 2003 pursuant to the
exercise of stock options.
The shares of common stock shown as beneficially owned by all directors and
executive officers as a group include the following: a total of 333,332 shares
of common stock subject to restricted stock units that have vested or will vest
within 60 days after January 31, 2003; a total of 165,001 shares of common stock
that all directors and executive officers as a group have the right to purchase
within 60 days after January 31, 2003 pursuant to the exercise of stock options;
a total of 13,791 shares of common stock credited to the executive officers'
participant accounts in our 401(k) retirement savings plan, which are voted by
the plan's trustees; a total of 1,023,164 shares of common stock that all
directors and executive officers as a group have the right to acquire within 60
days after January 31, 2003 pursuant to the conversion of Series A preferred
stock; and a total of 224,553 shares of common stock that all directors and
executive officers as a group have the right to purchase within 60 days after
January 31, 2003 pursuant to the exercise of warrants.
Equity Compensation Plan Information
The table below provides information relating to our equity compensation
plans as of December 31, 2002. As of that date, our sole equity compensation
plan was the ITC/\DeltaCom, Inc. Stock Incentive Plan, which was adopted as of
October 29, 2002 pursuant to our plan of reorganization.
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
------------- ------------------------ -------------------- --------------------------
Equity compensation plans approved
by security holders -- -- --
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Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
------------- ------------------- ------------------- -------------------------
Equity compensation plans not
approved by security holders..... 4,060,000(1) $4.8658(2) 440,000(3)
Total........................... 4,060,000(1) $4.8658(2) 440,000(3)
- ----------------------
(1) Represents 3,060,000 shares of common stock subject to options outstanding
as of December 31, 2002 under the ITC/\DeltaCom, Inc. Stock Incentive Plan
and 1,000,000 shares of common stock represented by restricted stock units
outstanding as of December 31, 2002 under the Stock Incentive Plan.
(2) Solely reflects the weighted-average exercise price of the options to
purchase 3,060,000 shares of common stock outstanding as of December 31,
2002.
(3) Represents shares of common stock remaining available for future issuance
pursuant to awards under the Stock Incentive Plan as of December 31, 2002.
Stock Incentive Plan
General. Before our reorganization, we maintained several stock option
plans for our employees and directors. Under our plan of reorganization, each of
these plans was terminated as of October 29, 2002, the effective date of the
plan.
In accordance with our plan of reorganization, our board of directors
adopted the ITC/\DeltaCom, Inc. Stock Incentive Plan, effective October 29,
2002. The purpose of the stock incentive plan is to enable us to recruit,
reward, retain and motivate officers, employees, directors and consultants who
are providing services to us or our affiliates on a basis competitive with
industry practices. Under the stock incentive plan, in accordance with our plan
of reorganization, we may issue up to 4,500,000 shares of common stock, of which
1,000,000 shares may be issued pursuant to awards of restricted stock or stock
units and 3,500,000 shares may be issued pursuant to the exercise of options.
The board of directors amended the stock incentive plan in December 2002 to
increase the total number of shares of common we may issue under the plan to
4,700,000 and to authorize the issuance of up to 200,000 of these as awards of
unrestricted stock.
The compensation committee of our board of directors administers our stock
incentive plan and has the authority to designate eligible participants and
determine the types of awards to be granted and the conditions and limitations
applicable to those awards. Our board of directors may authorize amendments to
the stock incentive plan without stockholder approval except in circumstances
prescribed by applicable law or regulation. The stock incentive plan will
terminate ten years after its effective date.
Options. Except as required in accordance with our plan of reorganization,
the compensation committee will determine who will be granted stock options
under the plan, when and how the stock options will be granted, and the type and
terms of the stock options granted, including the exercise period and the number
of shares subject to the stock options. We intend each option we grant under the
stock incentive plan to be a nonqualified stock option for income tax purposes,
unless we specifically designate the option as an "incentive stock option" under
Section 422 of the Internal Revenue Code. The maximum number of shares of common
stock subject to options that may be awarded under the stock incentive plan to
any person is 500,000 shares per year.
The option price for any option granted, other than in accordance with our
plan of reorganization, may not be less than 100% of the fair market value of
the stock covered by the option on the date of grant, except that, in the
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case of an incentive stock option, the option price may not be less than 110% of
such fair market value if the optionee is the beneficial owner of 10% or more of
our voting capital stock. In any case, the option price may not be less than the
par value of the stock.
Each option will become vested and exercisable at the times and under the
conditions determined by the compensation committee. However, no stock option
may be exercisable for more than ten years after the option grant date, or five
years in the case of an incentive stock option granted to a beneficial owner of
10% or more of our voting capital stock.
During the optionee's lifetime, only the optionee may exercise an incentive
stock option. No optionee may assign or transfer any incentive stock option,
except that, in the event of the optionee's death, the option may be transferred
by will or the laws of descent and distribution. An optionee may transfer all or
part of a nonqualified option to a family member or a family trust, provided
that no consideration is received for the transfer and the transferee enters
into a written agreement to be bound by the terms of the stock incentive plan
and the option agreement.
Stock Units. A stock unit is a right that represents the equivalent of a
share of our common stock. A stock unit is similar to restricted stock in that
we may establish terms and conditions in an underlying award agreement that must
be satisfied before the holder can receive the ownership benefit of the stock
underlying the stock unit. That ownership benefit is a payment in the form of
shares of common stock. When the holder satisfies the terms and conditions of
the award, the holder will become vested in the shares subject to the stock
units and, upon delivery of the shares, will have ownership of the shares.
The holders of stock units must satisfy continuous service requirements
before the stock units will become wholly vested. If the holder's employment
terminates before the holder has satisfied these requirements, the holder will
forfeit the shares of stock subject to stock units that are not vested.
An award of stock units does not give the holder any rights as a
stockholder of ITC/\DeltaCom.
No holder may assign or transfer any stock units before the holder
satisfies the applicable conditions with respect to such award, except that the
holder may transfer stock units subject to such conditions by gift to one or
more family members or to a family trust.
Unrestricted Stock. Unrestricted stock consists of shares of common stock
that are not subject to conditions other than restrictions on transfers, if any,
under federal and state securities laws. If the employment of a holder of
unrestricted stock is terminated for cause, as "cause" is defined in the stock
incentive plan, the holder will be required to forfeit to us an amount equal to
the aggregate value of all shares of common stock we delivered to the holder
pursuant to unrestricted stock awards during the 12-month period preceding the
employment termination date.
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Item 13. Certain Relationships and Related Transactions.
The following is a summary of some transactions during 2002 among
ITC/\DeltaCom and our directors, executive officers, beneficial owners of more
than 5% of any class of our current or former voting securities, and entities
with which the foregoing persons are affiliated or associated. Since our
inception in 1997, we have followed a policy which requires that any material
transactions between ITC/\DeltaCom and persons or entities affiliated with our
directors, executive officers or principal stockholders be on terms no less
favorable to us than we reasonably could have obtained in arm's-length
transactions with independent third parties.
Transactions with ITC Holding Company, Inc. and Affiliates
We entered into the transactions with ITC Holding Company, Inc., its
subsidiaries and its affiliates described below. ITC Holding Company was our
sole stockholder before we completed our initial public offering of common stock
in October 1997. Three of our current directors, Campbell B. Lanier, III, Donald
W. Burton and William B. Timmerman, were also directors of ITC Holding Company.
In addition, the following four directors of ITC Holding Company were directors
of our company at various periods between January 1, 2000 and the consummation
of our plan of reorganization on October 29, 2002: Robert A. Dolson, O. Gene
Gabbard, William T. Parr and William H. Scott, III. Mr. Lanier also has served
as Chairman and Chief Executive Officer of ITC Holding Company, or its
predecessor company, since 1985 and Mr. Scott has served as President of ITC
Holding Company, or its predecessor company, since 1991. ITC Holding Company was
the beneficial owner of more than 5% of our old common stock, our Series B-1
preferred stock and our Series B-2 preferred stock. On October 29, 2002, in
exchange for the cancellation of these securities and our senior notes under our
plan of reorganization, ITC Holding Company was issued over 5% of our new common
stock. See "Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters" for information concerning ITC Holding Company's
current beneficial ownership of our common stock.
Redemption of ITC Holding Company Securities. Under a purchase agreement
dated as of August 22, 2002, as amended, among ITC/\DeltaCom, the investors in
our October 29, 2002 private offering of Series A preferred stock, other than
SCANA Corporation, and ITC Holding Company, ITC Holding Company agreed to
purchase from some of those investors up to a total of $15 million of the
capital stock of ITC Holding Company held by those investors to enable them to
have sufficient funds to purchase our common stock, Series A preferred stock and
warrants under the private offering, which was completed in connection with our
plan of reorganization. On October 29, 2002, under this agreement, ITC Holding
Company purchased its capital stock from such investors for a total price of
approximately $13.2 million. Donald W. Burton, Campbell B. Lanier, III, William
H. Scott and Douglas A. Shumate were among the investors in the private
offering.
Series B Preferred Stock Investment. Under an investment agreement dated as
of February 27, 2001 between ITC/\DeltaCom and ITC Holding Company, ITC Holding
Company committed, subject to specified closing conditions, to purchase up to
$150 million in Series B preferred stock and related warrants to purchase our
old common stock in multiple closings to occur before June 20, 2002. Under an
amendment to the investment agreement dated as of May 29, 2001, ITC Holding
Company reduced its purchase commitment to $100 million by assigning $25 million
of its $150 million purchase commitment to each of SCANA Corporation and HBK
Master Fund L.P. During 2001, ITC Holding Company, SCANA and HBK Master Fund
purchased shares of our Series B-1 cumulative convertible preferred stock and
Series B-2 cumulative convertible preferred stock under the investment
agreement. We also issued to these investors during 2001 additional shares of
Series B-1 preferred stock and Series B-2 preferred stock as payment-in-kind
dividends on the outstanding Series B preferred stock.
In addition, on January 15, 2002, we issued to ITC Holding Company 410.842
shares of Series B-1 preferred stock as payment-in-kind dividends on the Series
B-1 preferred stock for the quarterly dividend period ended on December 31, 2001
and 687.343 shares of Series B-2 preferred stock as payment-in-kind dividends on
the Series B-2 preferred stock for the dividend period from September 5, 2001
through December 31, 2001. On April 15, 2002, we issued to ITC Holding Company
410.263 shares of Series B-1 preferred stock as payment-in-kind dividends on the
Series B-1 preferred stock for the quarterly dividend period ended on March 31,
2002 and 537.521 shares of Series B-2 preferred stock as payment-in-kind
dividends on the Series B-2 preferred stock for the quarterly dividend
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ended March 31, 2002.
In April 2002, we notified ITC Holding Company and the other investors
under the investment agreement that we had exercised our right to require these
investors to purchase additional securities under the investment agreement. We
received a response from the investors asserting that the investors were not
obligated to purchase additional securities at a third closing because we
allegedly had failed to satisfy specified closing conditions under the
investment agreement. Under our plan of reorganization, we were deemed to have
released, waived and discharged any claims that could have been asserted by us
against ITC Holding Company or its officers, directors, employees and
affiliates, including any claims or causes of action arising under or in
connection with the investment agreement. On October 29, 2002, ITC Holding
Company provided a substantially identical release for our benefit and the
benefit of our officers, directors, employees and affiliates.
All of the Series B preferred stock was cancelled on October 29, 2002 under
our plan of reorganization.
Telecommunications Services Transactions. We sell or have sold capacity on
our fiber optic network to several entities that are or, at various times, were
subsidiaries or affiliates of ITC Holding Company. These entities include
KNOLOGY Broadband, Inc. and Interstate Telephone Company. We also provide or
have provided long distance and carrier switched long distance service to
several subsidiaries and affiliates of ITC Holding Company, including KNOLOGY,
InterCall, Inc., Interstate Telephone Company, Valley Telephone Company and In
View. We also earn commissions by serving as agent for some interexchange
carriers doing business with InterCall. Under these agreements, we contract with
the interexchange carrier and re-bill the appropriate access charges plus a
margin to InterCall. We provide directory assistance and operator service to
Interstate Telephone, Valley Telephone, Globe Telecommunications, Inc. and
KNOLOGY. Revenues recorded by us for all of these services were approximately
$4.6 million for 2002.
We purchased feature group access and other services from Interstate
Telephone, Valley Telephone, Globe Telecommunications and KNOLOGY totaling
approximately $703,000 for 2002.
InterCall provides conference calling services to us. We paid approximately
$107,000 for such services for 2002.
ITC Service Company, a subsidiary of ITC Holding Company, provides us and
our subsidiaries with air travel services. We paid approximately $433,000
for such services for 2002.
Transactions with SCANA Corporation and Affiliates
We entered into the transactions with SCANA Corporation and its
subsidiaries described below. Mr. Timmerman, a director of ITC/\DeltaCom, is
also Chairman, President and Chief Executive Officer of SCANA. Before our
reorganization, SCANA was the beneficial owner of more than 5% of our old common
stock, our old Series A convertible preferred sock, our Series B-1 preferred
stock and our Series B-2 preferred stock. On October 29, 2002, in exchange for
the cancellation of these securities under our plan of reorganization, and as a
result of the Series A preferred stock investment described below, SCANA became
the beneficial owner of more than 5% of our new common stock and Series A
preferred stock. See "Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters" for information concerning SCANA's
current beneficial ownership of our securities.
Series A Preferred Stock Investment. On October 29, 2002, under a purchase
agreement with us dated as of August 22, 2002, as amended, SCANA, through a
wholly-owned subsidiary, acquired 149,077 shares of the Series A preferred
stock, warrants to purchase 506,861.8 shares of our new common stock and 500,000
shares of the new common stock in a private offering for a total purchase price
of approximately $14.9 million. The purchase price of $100 per share of Series A
preferred stock was equal to the stated liquidation value of $100 per share. We
issued SCANA the 500,000 shares of new common stock as consideration for its
commitment to participate in the Series A preferred stock investment, which was
an important term of our plan of reorganization. On January 1, 2003, we issued
to
71
SCANA 2,091.1628 shares of Series A preferred stock as payment-in-kind dividends
on the Series A preferred stock for the initial dividend period ended on
December 31, 2002.
Under our purchase agreement with SCANA, we agreed to pay up to $75,000 of
the reasonable fees and expenses incurred by SCANA in connection with its
investment. We paid approximately $56,000 under this provision in October 2002.
Our purchase agreement with SCANA was substantially identical to the purchase
agreement referred to below among us, ITC Holding Company and the remaining
private Series A preferred stock investors other than SCANA, pursuant to which
we issued such other investors the same total amount of common stock, Series A
preferred stock and warrants in connection with our plan of reorganization. As
part of the transaction, we also granted shelf, demand and piggyback
registration rights to SCANA and the other private Series A preferred stock
investors with respect to their investment securities.
Series B Preferred Stock Investment. On May 29, 2001, ITC Holding Company
assigned $25 million of its $150 million purchase commitment under the Series B
preferred stock investment agreement described above to SCANA Corporation.
During 2001, SCANA, ITC Holding Company and HBK Master Fund purchased shares of
our Series B-1 cumulative convertible preferred stock and Series B-2 cumulative
convertible preferred stock under the investment agreement. We also issued to
these investors during 2001 additional shares of Series B-1 preferred stock and
Series B-2 preferred stock as payment-in-kind dividends on the outstanding
Series B preferred stock.
In addition, on January 15, 2002, we issued to SCANA 102.710 shares of
Series B-1 preferred stock as payment-in-kind dividends on the Series B-1
preferred stock for the quarterly dividend period ended on December 31, 2001 and
171.849 shares of Series B-2 preferred stock as payment-in-kind dividends on the
Series B-2 preferred stock for the dividend period from September 5, 2001
through December 31, 2001. On April 15, 2002, we issued to SCANA 102.566 shares
of Series B-1 preferred stock as payment-in-kind dividends on the Series B-1
preferred stock for the quarterly dividend period ended on March 31, 2002 and
134.391 shares of Series B-2 preferred stock as payment-in-kind dividends on the
Series B-2 preferred stock for the quarterly dividend ended March 31, 2002.
In April 2002, we notified SCANA and the other investors under the
investment agreement that we had exercised our right to require these investors
to purchase additional securities under the investment agreement. We received a
response from the investors asserting that the investors were not obligated to
purchase additional securities at a third closing because we allegedly had
failed to satisfy specified closing conditions under the investment agreement.
Under our plan of reorganization, we were deemed to have released, waived and
discharged any claims that could have been asserted by us against SCANA or its
officers, directors, employees and affiliates, including any claims or causes of
action arising under or in connection with the investment agreement.
Retail Services. We provide retail services, including local and long
distance telephone services, data services and Internet access, to SCANA and
some of SCANA's subsidiaries. We billed those entities for such services a total
of approximately $1.5 million for 2002.
Access Services. We purchased long-haul services from SCANA totaling
approximately $1.4 million for 2002.
Leases. We lease office space and space for telecommunications switching
equipment at various locations in Columbia, South Carolina from a subsidiary of
SCANA. Under the lease agreements, we paid approximately $263,000 for 2002.
Transactions with Directors, Executive Officers and Affiliates
Series A Preferred Stock Investment. On October 29, 2002, under a purchase
agreement dated as of August 22, 2002, as amended, among us, ITC Holding
Company, three of our current or former directors during 2002, Donald W. Burton,
Campbell B. Lanier, III and William H. Scott, III, one of our current executive
officers, Douglas A. Shumate, and some of their affiliates acquired the
following securities from us in a private offering in connection with our plan
of reorganization:
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Shares of Series A No. of Shares of Common Aggregate
Name Preferred Stock Warrants Stock Purchase Price ($)
---- --------------- -------- ----- ------------------
Donald W. Burton ........... 19,876.9333 67,581.5732 66,667 1,987,693.33
Campbell B. Lanier, III .... 35,793.0895 121,696.5043 120,048 3,579,308.95
William H. Scott, III ...... 4,969.2333 16,895.3932 16,667 496,923.33
Douglas A. Shumate ......... 1,987.6933 6,758.1572 6,667 198,769.33
The purchase price of $100 per share of Series A preferred stock was equal
to the stated liquidation value of $100 per share. We issued the shares of new
common stock as consideration for the commitment of these investors to
participate in the Series A preferred stock investment, which was an important
term of our plan of reorganization. In addition, on January 1, 2003, we issued
to Messrs. Burton, Lanier, Scott and Shumate, and some of their affiliates,
278.8218, 502.041, 69.7055 and 27.8822 shares of Series A preferred stock,
respectively, as payment-in-kind dividends on the Series A preferred stock for
the initial dividend period ended on December 31, 2002.
The other investors also received a proportionate number of these
commitment shares. Under the purchase agreement, which was substantially
identical to our purchase agreement with SCANA described above, we agreed to pay
up to $150,000 of the reasonable fees and expenses incurred by these investors
in connection with their investment. We paid $150,000 under this provision in
October 2002. As part of the transaction, we also granted shelf, demand and
piggyback registration rights to these investors and the other private Series A
preferred stock investors with respect to their investment securities.
Transactions with Affiliates of HBK Investments
We entered into the Series B preferred stock investment transaction with
HBK Master Fund L.P., an affiliate of HBK Investments L.P., and the beneficial
owner during part of 2002 of more than 5% of our old common stock, Series B-1
preferred stock and Series B-2 preferred stock. Following consummation of our
plan of reorganization on October 29, 2002, HBK Investments owns less than 5% of
each class of our voting securities.
During 2001, HBK Master Fund, SCANA Corporation and ITC Holding Company
purchased shares of our Series B-1 preferred stock and Series B-2 preferred
stock under the investment agreement. We also issued to these investors during
2001 additional shares of Series B-1 preferred stock and Series B-2 preferred
stock as payment-in-kind dividends on the outstanding Series B preferred stock.
On January 15, 2002, we issued to HBK Master Fund 102.710 shares of Series
B-1 preferred stock as payment-in-kind dividends on the Series B-1 preferred
stock for the quarterly dividend period ended on December 31, 2001 and 171.849
shares of Series B-2 preferred stock as payment-in-kind dividends on the Series
B-2 preferred stock for the dividend period from September 5, 2001 through
December 31, 2001. On April 15, 2002, we issued to HBK Master Fund 102.566
shares of Series B-1 preferred stock as payment-in-kind dividends on the Series
B-1 preferred stock for the quarterly dividend period ended on March 31, 2002
and 134.391 shares of Series B-2 preferred stock as payment-in-kind dividends on
the Series B-2 preferred stock for the quarterly dividend ended March 31, 2002.
In April 2002, we notified HBK Master Fund and the other investors under
the investment agreement that we had exercised our right to require these
investors to purchase additional securities under the investment agreement. We
received a written response from the investors asserting that the investors were
not obligated to purchase additional securities at a third closing in accordance
with our notice because we allegedly had failed to satisfy specified closing
conditions under the investment agreement.
Transactions with J. Smith Lanier, II and Affiliate
We entered into the transactions with J. Smith Lanier, II described below.
Before consummation of our reorganization, Mr. Lanier was the beneficial owner
of more than 5% of our common stock. Mr. Lanier also is the beneficial owner of
more than 5% of our Series A preferred stock, and the Chairman and a significant
stockholder of J. Smith Lanier & Co. William T. Parr, a director of
ITC/\DeltaCom before our reorganization, serves as Vice Chairman of J. Smith
Lanier & Co.
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Series A Preferred Stock Investment. In connection with our plan of
reorganization, Mr. Lanier acquired, for a total purchase price of approximately
$1.6 million, 15,653.0850 shares of Series A preferred stock, 53,220.489
warrants and 52,500 shares of new common stock, Mr. Lanier's spouse acquired,
for a total purchase price of $409,961.75, 4,099.6175 shares of Series A
preferred stock, 13,938.6995 warrants and 13,750 shares of new common stock, and
J. Smith Lanier & Co. acquired, for a total purchase price of $198,769.33,
1,987.6933 shares of Series A preferred stock, 6,758.1572 warrants and 6,667
shares of new common stock. We issued these securities in a private offering on
the terms described above under the purchase agreement dated as of August 22,
2002, as amended, among us, ITC Holding Company and the investors other than
SCANA referred to above. In addition, on January 1, 2003, we issued to these
investors a total of 304.9613 shares of Series A preferred stock as
payment-in-kind dividends on the Series A preferred stock for the initial
dividend period ended on December 31, 2002.
Insurance Brokerage Services. J. Smith Lanier & Co., an insurance placement
company, has provided us with insurance brokerage services, including the
negotiation and acquisition on our behalf of various insurance policies with
third-party insurers. J. Smith Lanier & Co. generally receives a commission on
the gross premium of these insurance policies ranging from 5% to 7%. For 2002,
this gross premium totaled $1.5 million. J. Smith Lanier & Co. also has
performed risk management services for us for no additional consideration.
Retail Services. We provide retail services, including local and long
distance telephone services and data and Internet services, to J. Smith Lanier &
Co. Revenue attributable to J. Smith Lanier & Co. for our provision of these
services during 2002 totaled approximately $500,000.
Item 14. 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 ITC/\DeltaCom (including its consolidated subsidiaries)
required to be included in our periodic filings with the SEC.
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.
74
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) The following consolidated financial statements of ITC/\DeltaCom
appear on pages F-2 through F-41 of this report and are incorporated by
reference in Part II, Item 8:
Report of Independent Public Accountants.
Consolidated Balance Sheets:
Successor ITC/\DeltaCom - December 31, 2002
Predecessor ITC/\DeltaCom - December 31, 2001
Consolidated Statements of Operations:
Successor ITC/\DeltaCom - for the period from October 30, 2002 to
December 31, 2002
Predecessor ITC/\DeltaCom - for the period from January 1, 2002 to
October 29, 2002
Predecessor ITC/\DeltaCom - for the years ended December 31, 2001
and 2000
Consolidated Statements of Stockholders' (Deficit) Equity:
Successor ITC/\DeltaCom - for the period from October 30, 2002 to
December 31, 2002
Predecessor ITC/\DeltaCom - for the period from January 1, 2002 to
October 29, 2002
Predecessor ITC/\DeltaCom - for the years ended December 31, 2001
and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000:
Successor ITC/\DeltaCom - for the period from October 30, 2002 to
December 31, 2002
Predecessor ITC/\DeltaCom - for the period from January 1, 2002 to
October 29, 2002
Predecessor ITC/\DeltaCom - for the years ended December 31, 2001
and 2000
Notes to Consolidated Financial Statements.
(a)(2) The following financial statement schedule is filed as part of this
report and is attached hereto on pages S-1 through S-3:
Report of Independent Public Accountants as to Schedule.
Schedule II--Valuation and Qualification Accounts.
All other schedules for which provision is made in the applicable
accounting regulations of the SEC either have been included in the consolidated
financial statements of ITC/\DeltaCom or the notes thereto, are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(a)(3) The following exhibits are either filed with this Form 10-K or are
incorporated herein by reference. Our Securities Exchange Act file number is
0-23253.
75
Exhibit
Number Exhibit Description
------ -------------------
2.1 ITC/\DeltaCom, Inc. Plan of Reorganization Under Chapter 11 of
the Bankruptcy Code, As Further Revised, dated October 15, 2002.
Filed as part of Exhibit 1 to Amendment No. 2 to Registration
Statement on Form 8-A of ITC/\DeltaCom, Inc., dated October 29,
2002 (the "Form 8-A"), and incorporated herein by reference.
3.1 Restated Certificate of Incorporation of ITC/\DeltaCom, Inc.
(including the Certificate of Designation of the Powers,
Preferences and Relative, Participating and Other Special Rights
of 8% Series A Convertible Redeemable Preferred Stock and
Qualifications, Limitations or Restrictions Thereof). Filed as
Exhibit 2 to Form 8-A and incorporated herein by reference.
3.2 Amended and Restated Bylaws of ITC/\DeltaCom, Inc. Filed as
Exhibit 3 to Form 8-A and incorporated herein by reference.
4.1 Specimen representing the Common Stock of ITC/\DeltaCom, Inc.
Filed as Exhibit 4 to Form 8-A and incorporated herein by
reference.
*4.2 Specimen representing the 8% Series A Convertible Redeemable
Preferred Stock, par value $0.01 per share, of ITC/\DeltaCom,
Inc.
*4.3 Warrant Agreement, dated as of October 29, 2002, between
ITC/\DeltaCom, Inc. and Mellon Investors Services LLC, as Warrant
Agent.
10.1 Capacity Agreement dated as of February 1, 1997 between
Interstate FiberNet, Inc. and Entergy Technology Company. Filed
as Exhibit 10.1 to Registration Statement on Form S-4, as amended
(File No. 333-31361) (the "1997 Form S-4"), and incorporated
herein by reference.
10.2 License Agreement dated February 1, 1997 between Interstate
FiberNet, Inc. and Metropolitan Atlanta Rapid Transit Authority.
Filed as Exhibit 10.2 to 1997 Form S-4 and incorporated herein by
reference.
10.3 Term Agreement dated as of August 11, 1994 between Gulf States
FiberNet and Illinois Central Railroad Company. Filed as Exhibit
10.14 to 1997 Form S-4 and incorporated herein by reference.
10.4.1 Revised and Restated Fiber Optic Facilities and Services
Agreement dated as of June 9, 1995 among Southern Development and
Investment Group, Inc., on behalf of itself and as agent for
Alabama Power Company, Georgia Power Company, Gulf Power Company,
Mississippi Power Company, Savannah Electric and Power Company,
Southern Electric Generating Company and Southern Company
Services, Inc. and MPX Systems, Inc., which was assigned in part
by MPX Systems, Inc. to Gulf States FiberNet pursuant to an
Assignment dated as of July 25, 1995. Filed as Exhibit 10.15 to
1997 Form S-4 and incorporated herein by reference.
10.4.2 Release, Waiver, and Assumption Agreement, dated as of December
31, 1997, between Southern Development Investment Group, Inc., on
behalf of itself and as agent for Alabama Power Company, Georgia
Power Company, Gulf Power Company, Mississippi Power Company,
Savannah Electric and Power Company, Southern Electric Generating
Company and Southern Company Services, Inc. and Interstate
FiberNet, Inc. and Gulf States Transmission Systems, Inc. Filed
as Exhibit 10.15.1 to Annual Report on Form 10-K for the year
ended December 31, 1997 (the "1997 Form 10-K") and incorporated
herein by reference.
76
Exhibit
Number Exhibit Description
------ -------------------
10.4.3 Amendment to the Revised and Restated Fiber Optic Facilities and
Services Agreement, dated as of January 1, 1998, by and among
Southern Company Energy Solutions, Inc. (f/k/a Southern Development
Group, Inc.), on behalf of itself and as agent for Alabama Power
Company, Georgia Power Company, Gulf Power Company, Mississippi
Power Company, Savannah Electric and Power Company, Southern
Electric Generating Company and Southern Company Services, Inc. and
Interstate FiberNet, Inc. Filed as Exhibit 10.15.2 to Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998 and
incorporated herein by reference.
10.4.4 First Amendment to Revised and Restated Fiber Optic Facilities and
Services Agreement dated as of July 24, 1995 between Southern
Development and Investment Group, Inc. on behalf of itself and as
agent for others and MPX Systems, Inc. Filed as Exhibit 10.16 to
1997 Form S-4 and incorporated herein by reference.
10.4.5 Partial Assignment and Assumption of Revised and Restated Fiber
Optic Facilities and Services Agreement dated July 25, 1995 between
MPX Systems, Inc. and Gulf States FiberNet. Filed as Exhibit 10.17
to 1997 Form S-4 and incorporated herein by reference.
+10.4.6 Amendment to Revised and Restated Fiber Optic Facilities and
Services Agreement, dated July 15, 1997, by and among Southern
Development and Investment Group, Inc., on behalf of itself and its
agent for Alabama Power Company, Georgia Power Company, Gulf Power
Company, Mississippi Power Company, Savannah Electric and Power
Company, Southern Electric Generating Company and Southern Company
Services, Inc. (collectively "SES"), ITC Transmission Systems, Inc.
(as managing partner of Interstate Fibernet) and Gulf States
Transmission Systems, Inc. Filed as Exhibit 10.17.1 to 1997 Form S-4
and incorporated herein by reference.
10.4.7 Consent for Assignment of Interest dated February 20, 1997 among
SCANA Communications, Inc., Gulf States FiberNet, Gulf States
Transmission Systems, Inc. and Southern Development and Investment
Groups, Inc. Filed as Exhibit 10.18 to 1997 Form S-4 and
incorporated herein by reference.
10.4.8 Second Partial Assignment and Assumption of Revised and Restated
Fiber Optic Facilities and Services Agreement dated March 27, 1997
between SCANA Communications, Inc. and ITC Holding Company, Inc.
Filed as Exhibit 10.19 to 1997 Form S-4 and incorporated herein by
reference.
+10.4.9 Amendment, effective as of August 1, 2000, between Southern Telecom,
Inc., on behalf of itself and as agent for the other parties
specified therein, and Interstate FiberNet, Inc. to the Revised and
Restated Fiber Optics Facilities and Services Agreement made as of
June 9, 1995. Filed as Exhibit 10.1 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000 and incorporated herein by
reference.
10.5.1 Fiber System Lease Agreement dated January 30, 1996 between CSW
Communications, Inc. and Gulf States FiberNet. Filed as Exhibit
10.20 to 1997 Form S-4 and incorporated herein by reference.
10.5.2 Consent for Acquisition and Assignment dated January 13, 1997
between CSW Communications, Inc. and Gulf States FiberNet. Filed as
Exhibit 10.21 to 1997 Form S-4 and incorporated herein by reference.
10.6 Network Operating Agreement dated March 25, 1996 among Gulf States
FiberNet, TriNet, Inc., Hart Communications, Inc. and SCANA
Communications, Inc. (f/k/a MPX Systems, Inc.). Filed as Exhibit
10.25 to 1997 Form S-4 and incorporated herein by reference.
77
Exhibit
Number Exhibit Dscription
- ------ ------------------
10.7.1 Agreement for the Provision of Fiber Optic Facilities and Services
dated March 29, 1990 between Alabama Power Company and Southern
Interexchange Facilities, Inc. Filed as Exhibit 10.26 to 1997 Form
S-4 and incorporated herein by reference.
10.7.2 Amendment to the Agreement for Provision of Fiber Optic Facilities
and Services dated March 29, 1990 between Alabama Power Company and
Southern Interexchange Facilities, Inc. Filed as Exhibit 10.27 to
1997 Form S-4 and incorporated herein by reference.
10.7.3 First Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated March 22, 1991 between Alabama Power
Company and Southern Interexchange Facilities, Inc. Filed as Exhibit
10.28 to 1997 Form S-4 and incorporated herein by reference.
10.7.4 Second Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated December 1, 1991 between Alabama Power
Company and Southern Interexchange Facilities, Inc. Filed as Exhibit
10.29 to 1997 Form S-4 and incorporated herein by reference.
10.7.5 Third Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated September 23, 1992 between Alabama
Power Company and Southern Interexchange Facilities, Inc. Filed as
Exhibit 10.30 to 1997 Form S-4 and incorporated herein by reference.
10.7.6 Fourth Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated January 1, 1994 between Alabama Power
Company and Southern Interexchange Facilities, Inc. Filed as Exhibit
10.31 to 1997 Form S-4 and incorporated herein by reference.
10.8.1 Agreement dated March 6, 1990 between Tennessee Valley Authority and
Consolidated Communications Corporation (predecessor to DeltaCom,
Inc.). Filed as Exhibit 10.32 to 1997 Form S-4 and incorporated
herein by reference.
10.8.2 Supplement Agreement; Leased Fiber Pathways, dated as of September
26, 1997, by and between Tennessee Valley Authority and DeltaCom,
Inc. Filed as Exhibit 10.32.1 to 1997 Form 10-K and incorporated
herein by reference.
10.9 Master Equipment Lease Agreement dated October 30, 1995 between AT&T
Systems Leasing Co. and DeltaCom, Inc. Filed as Exhibit 10.36 to
1997 Form S-4 and incorporated herein by reference.
10.10 Agreement dated January 14, 1997 between DeltaCom, Inc. and SCANA
Communications, Inc., for switch location in Columbia, South
Carolina. Filed as Exhibit 10.41 to 1997 Form S-4 and incorporated
herein by reference.
+10.11.1 Network Products Purchase Agreement No. ITC 2000NPPA between Nortel
Networks Inc. and Interstate FiberNet, Inc. and its subsidiary
ITC/\DeltaCom Communications, Inc., effective as of November 8, 2000
(the "Nortel Purchase Agreement"). Filed as Exhibit 10.18 to Annual
Report on Form 10-K for the year ended December 31, 2000 (the "2000
Form 10-K") and incorporated herein by reference.
+10.11.2 Schedule D: Data and Internet Products: Ethernet Port Commitment and
Services Payment Program to the Nortel Purchase Agreement. Filed as
Exhibit 10.12.2 to Annual Report on Form 10-K for the year ended
December 31, 2001 (the "2001 Form 10-K") and incorporated herein by
reference.
78
Exhibit
Number Exhibit Dscription
- ------ ------------------
+10.11.3 Professional Services Attachment, Exhibit P, to the Nortel Purchase
Agreement. Filed as Exhibit 10.8.2 to Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 and incorporated herein by
reference.
+10.11.4 Product Attachment, Exhibit Q, eBusiness Solutions Products, to the
Nortel Purchase Agreement. Filed as Exhibit 10.8.3 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001 and
incorporated herein by reference.
+10.12 Fiber Optic Facilities Agreement, dated November 15, 1996, by and
between Interstate FiberNet and Florida Power Corporation. Filed as
Exhibit 10.45 to 1997 Form S-4 and incorporated herein by reference.
+10.13.1 Fiber Optic Capacity Marketing and Operating Agreement, dated March
21, 1996, by and between Interstate FiberNet and Florida Power &
Light Company. Filed as Exhibit 10.46 to 1997 Form S-4 and
incorporated herein by reference.
+10.13.2 Addendum to Fiber Optic Capacity Marketing and Operating Agreement,
dated July 10, 1997, by and between Interstate FiberNet and Florida
Power & Light Company. Filed as Exhibit 10.47 to 1997 Form S-4 and
incorporated herein by reference.
+10.14 Sprint Communications Company Facilities and Services Agreement,
dated January 26, 1995, by and between Interstate FiberNet and
Sprint Communications Company L.P. Filed as Exhibit 10.50 to 1997
Form S-4 and incorporated herein by reference.
+10.15 Fiber Optic Facility Lease Agreement, dated as of January 31, 1997,
by and between Interstate FiberNet, Inc. and Southern Telecom 1,
Inc. Filed as Exhibit 10.51 to 1997 Form S-4 and incorporated herein
by reference.
10.16 First Assignment and Assumption of Fiber Optic Facility Lease
Agreement, dated February 1, 1997, by and between Interstate
FiberNet, Inc. and Gulf States FiberNet. Filed as Exhibit 10.52 to
1997 Form S-4 and incorporated herein by reference.
+10.17.1 Telecommunications System Agreement, dated January 26, 1995, by and
between Interstate FiberNet, Inc. and Sprint Communications Company
L.P. Filed as Exhibit 10.53 to 1997 Form S- 4 and incorporated
herein by reference.
10.17.2 Amendment to Telecommunications System Agreement, dated July 25,
1995, by and between Gulf States FiberNet and Sprint Communications
Company L.P. Filed as Exhibit 10.54 to 1997 Form S-4 and
incorporated herein by reference.
+10.17.3 Amendment No. 2 to Telecommunications System Agreement, dated August
8, 1996, by and between Gulf States FiberNet and Sprint
Communications Company L.P. Filed as Exhibit 10.55 to 1997 Form S-4
and incorporated herein by reference.
+10.17.4 Assignment of the Telecommunications System Agreement, dated July
25, 1995, between Interstate FiberNet, Inc., Gulf States FiberNet
and Sprint Communications Company L.P. Filed as Exhibit 10.56 to
1997 Form S-4 and incorporated herein by reference.
79
Exhibit
Number Exhibit Dscription
- ------ ------------------
+10.17.5 Assignment of the Telecommunications System Agreement, dated
February 27, 1997, between Sprint Communications Company L.P., Gulf
States FiberNet and Gulf States Transmission Systems, Inc. Filed as
Exhibit 10.57 to 1997 Form S-4 and incorporated herein by reference.
10.18 Fixed Fee Agreement for Exchange of Use and Maintenance of Six (6)
Fiber Optic Fibers with an Option of Two (2) Additional Fiber Optic
Fibers, dated July 25, 1997, by and between Interstate FiberNet,
Inc., Gulf States Transmission Systems, Inc. and ALLTEL Telephone
Services Corporation. Filed as Exhibit 10.58 to 1997 Form S-4 and
incorporated herein by reference.
10.19.1 Amended and Restated Credit Agreement (the "Credit Agreement"),
dated as of October 29, 2002, among ITC/\DeltaCom, Inc., Interstate
FiberNet, Inc., the subsidiary guarantors listed on the signature
pages thereto, the banks, financial institutions and other
institutional lenders listed on the signature pages thereto as the
Initial Lenders, Morgan Stanley Senior Funding, Inc. ("Morgan
Stanley"), as administrative agent for the Lender Parties (as
defined therein), Morgan Stanley & Co. Incorporated, as collateral
agent, Bank of America Securities LLC and Morgan Stanley, as joint
lead arrangers and joint book runners, and Bank of America, N.A., as
syndication agent. Filed as Exhibit 99.3 to Current Report on Form
8-K filed on November 1, 2002 and incorporated herein by reference.
*10.19.2 Amended and Restated Security Agreement, dated October 29, 2002,
made by Interstate FiberNet, Inc., ITC/\DeltaCom, Inc., and the
other Persons listed on the signature pages thereof and the
Additional Grantors (as defined in Section 23(b) thereof) to Morgan
Stanley & Co. Incorporated, as collateral agent for the Secured
Parties (as defined in the Credit Agreement).
*10.20.1 ITC/\DeltaCom, Inc. Stock Incentive Plan.
10.20.2 Form of ITC/\DeltaCom, Inc. Stock Incentive Plan Nonqualified Stock
Option Agreement. Filed as Exhibit 4.2 to Form S-8 filed on November
5, 2002 (File No. 333-101007) (the "2002 Form S-8") and incorporated
herein by reference.
10.20.3 Form of ITC/\DeltaCom, Inc. Stock Incentive Plan Incentive Stock
Option Agreement. Filed as Exhibit 4.3 to 2002 Form S-8 and
incorporated herein by reference.
10.20.4 Form of ITC/\DeltaCom, Inc. Stock Incentive Plan Restricted Stock
Agreement. Filed as Exhibit 4.4 to 2002 Form S-8 and incorporated
herein by reference.
10.20.5 Form of ITC/\DeltaCom, Inc. Stock Incentive Plan Stock Unit
Agreement. Filed as Exhibit 4.1 to 2002 Form S-8 and incorporated
herein by reference.
10.21 Description of ITC/\DeltaCom, Inc. Bonus Plan. Filed as Exhibit
10.92 to 1997 Form S-1 and incorporated herein by reference.
10.22 Form of Indemnity Agreement between ITC/\DeltaCom, Inc. and certain
of its Directors and Officers. Filed as Exhibit 10.93 to 1997 Form
S-1 and incorporated herein by reference.
10.23.1 Sale and Purchase Agreement, dated as of March 11, 1997, by and
between SCANA Corporation and ITC Holding Company, Inc. Filed as
Exhibit 10.94 to 1997 Form S-1 and incorporated herein by reference.
80
Exhibit
Number Exhibit Dscription
- ------ ------------------
10.23.2 First Amendment to Sale and Purchase Agreement. Among SCANA
Corporation, SCANA Communications, Inc., and ITC Holding Company,
Inc., dated as of October 16, 1997, among SCANA Corporation, SCANA
Communications, Inc., ITC Holding Company, Inc. and ITC/\DeltaCom,
Filed as Exhibit 10.95 to 1997 Form S-1 filed and incorporated
herein by reference.
10.24.1 Master Lease Agreement, dated as of December 29, 2000, between NTFC
Capital Corporation, as Lessor, and ITC/\DeltaCom Communications,
Inc. and Interstate FiberNet, Inc., as Lessees (the "Master Lease
Agreement"). Filed as Exhibit 10.47.1 to 2000 Form 10-K and
incorporated herein by reference.
10.24.2 Form of Equipment Schedule to the Master Lease Agreement. Filed as
Exhibit 10.47.2 to 2000 Form 10-K and incorporated herein by
reference.
10.24.3 Guaranty, dated as of December 29, 2000, between Interstate
FiberNet, Inc. and NTFC Capital Corporation. Filed as Exhibit
10.47.3 to 2000 Form 10-K and incorporated herein by reference.
10.24.4 Amendment No. 1, dated as of June 18, 2001, to the Financial
Covenants and Reporting Requirements Annex to the Master Lease
Agreement. Filed as Exhibit 10.6 to Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 and incorporated herein by
reference.
10.24.5 Amendment No. 2, dated as of June 18, 2001, to the Financial
Covenants and Reporting Requirements Annex to the Master Lease
Agreement. Filed as Exhibit 10.37.5 to 2001 Form 10-K and
incorporated herein by reference.
10.24.6 Amendment to the Schedules and the Leases, dated as of October 29,
2002, among Interstate FiberNet, Inc., as a lessee, ITC/\DeltaCom
Communications, Inc., as a lessee, and NFTC Capital Corporation and
General Electric Capital Corporation, as lessors. Filed as Exhibit
99.4 to Current Report on Form 8-K filed on November 1, 2002 and
incorporated herein by reference.
10.25 Interconnection Agreement, dated February 9, 2001, by and between
BellSouth Telecommunications, Inc. and ITC/\DeltaCom Communications,
Inc. d/b/a/ ITC/\DeltaCom. Filed as Exhibit 10.48 to 2000 Form 10-K
and incorporated herein by reference.
10.26.1 Interconnection Agreement, dated as of June 5, 2000, by and between
BellSouth Telecommunications, Inc. and ITC/\DeltaCom Communications,
Inc. d/b/a/ ITC/\DeltaCom. Filed as Exhibit 10.49.1 to 2000 Form
10-K and incorporated herein by reference.
10.26.2 First Amendment to the Interconnection Agreement by and between
BellSouth Telecommunications, Inc. and ITC/\DeltaCom Communications,
Inc., dated as of August 21, 2000, between ITC/\DeltaCom
Communications, Inc. and BellSouth Telecommunications, Inc. Filed as
Exhibit 10.49.2 to 2000 Form 10-K and incorporated herein by
reference.
10.26.3 Amendment to the Interconnection Agreement by and between BellSouth
Telecommunications, Inc. and ITC/\DeltaCom Communications, Inc.,
dated as of February 14, 2001, by and between ITC/\DeltaCom
Communications, Inc. and BellSouth Telecommunications, Inc. Filed as
Exhibit 10.49.3 to 2000 Form 10-K and incorporated herein by
reference.
10.27 Interconnection Agreement, effective as of July 1, 1999, by and
between ITC/\DeltaCom Communications, Inc. and BellSouth
Telecommunications, Inc. Filed as Exhibit 10.50 to 2000 Form 10-K
and incorporated herein by reference.
81
Exhibit
Number Exhibit Description
- ------ ------------------
10.28.1 Master Lease Agreement, dated as of December 31, 2001, between
General Electric Capital Corporation, as Lessor, and ITC/\DeltaCom
Communications, Inc., as Lessee (the "GECC Master Lease Agreement").
Filed as Exhibit 10.42.1 to 2001 Form 10-K and incorporated herein
by reference.
10.28.2 Form of Equipment Schedule to the GECC Master Lease Agreement. Filed
as Exhibit 10.42.2 to 2001 Form 10-K and incorporated herein by
reference.
*10.29.1 Purchase Agreement, dated as of August 22, 2002, as amended, among
ITC/\DeltaCom, Inc. the several Purchasers named therein and ITC
Holding Company, Inc.
*10.29.2 Purchase Agreement, dated as of August 22, 2002, as amended, between
ITC/\DeltaCom, Inc. and SCANA Corporation.
*10.29.3 Registration Rights Agreement, dated as of October 29, 2002, among
ITC/\DeltaCom, Inc. and the other Holders from time to time
thereunder.
*10.30.1 Executive Employment and Retention Agreement, dated as of October
29, 2002, between ITC/\DeltaCom, Inc. and Larry F. Williams.
*10.30.2 Executive Employment and Retention Agreement, dated as of October
29, 2002, between ITC/\DeltaCom, Inc. and Andrew M. Walker.
*10.30.3 Executive Employment and Retention Agreement, dated as of October
29, 2002, between ITC/\DeltaCom, Inc. and Douglas A. Shumate.
*10.30.4 Executive Employment and Retention Agreement, dated as of October
29, 2002, between ITC/\DeltaCom, Inc. and J. Thomas Mullis.
*10.30.5 Executive Employment and Retention Agreement, dated as of October
29, 2002, between ITC/\DeltaCom, Inc. and Steven D. Moses.
*10.30.6 Executive Employment and Retention Agreement, dated as of October
29, 2002, between ITC/\DeltaCom, Inc. and Roger F. Woodward.
*10.30.7 Executive Employment and Retention Agreement, dated as of October
29, 2002, between ITC/\DeltaCom, Inc. and Thomas P. Schroeder.
*21.1 Subsidiaries of ITC/\DeltaCom, Inc.
*++23.1 Consent of BDO Seidman, LLP.
*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.
+ Confidential treatment has been granted for this exhibit. The copy filed as
an exhibit omits the information subject to the confidential treatment
request.
++ The Registrant's consolidated balance sheet as of December 31, 2001 and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years ended December 31, 2001 included in
this report have been audited by Arthur Andersen, as stated in their report
dated February 15, 2002. After reasonable efforts, the Registrant has been
unable to obtain Arthur Andersen's consent to the incorporation by
reference into its registration statement on Form S-8 (No. 333-101007) of
Arthur Andersen's report with respect to these financial statements. Under
these circumstances, Rule 437a under the Securities Act permits the
Registrant to file such registration statement without a written consent
from Arthur Andersen. The absence of such consent may limit recovery by
investors on certain claims. In particular, and without limitation,
investors will not be able to assert claims against Arthur Andersen under
Section 11 of the Securities Act for any untrue statements of material fact
contained, or any omissions to state a material fact required to be stated,
in those audited financial statements. In addition, the ability of Arthur
Andersen to satisfy any claims (including claims arising from Arthur
Andersen's provision of auditing and other services to the Registrant) may
be limited as a practical matter due to recent events involving Arthur
Andersen.
82
(b) Reports on Form 8-K.
ITC/\DeltaCom filed the following Current Reports of Form 8-K during
the fourth quarter of 2002.
Filing Date of Report Item Reported
--------------------- -------------
November 1, 2002 Item 3 (confirmation and effectiveness of
plan of reorganization).
November 6, 2002 Item 9 (transfer of common stock listing to
OTC Bulletin Board)
83
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants ................................................ F-2
Consolidated Balance Sheets:
Successor ITC/\DeltaCom - December 31, 2002 ................................................. F-4
Predecessor ITC/\DeltaCom - December 31, 2001 ............................................... F-4
Consolidated Statements of Operations:
Successor ITC/\DeltaCom - for the period from October 30, 2002 to December 31, 2002 ......... F-6
Predecessor ITC/\DeltaCom - for the period from January 1, 2002 to October 29, 2002 ......... F-6
Predecessor ITC/\DeltaCom - for the years ended December 31, 2001 and 2000 .................. F-6
Consolidated Statements of Stockholders' Equity (Deficit):
Successor ITC/\DeltaCom - for the period from October 30, 2002 to December 31, 2002 ......... F-7
Predecessor ITC/\DeltaCom - for the period from January 1, 2002 to October 29, 2002 ......... F-7
Predecessor ITC/\DeltaCom - for the years ended December 31, 2001 and 2000 .................. F-7
Consolidated Statements of Cash Flows:
Successor ITC/\DeltaCom - for the period from October 30, 2002 to December 31, 2002 ......... F-8
Predecessor ITC/\DeltaCom - for the period from January 1, 2002 to October 29, 2002 ......... F-8
Predecessor ITC/\DeltaCom - for the years ended December 31, 2001 and 2000 .................. F-8
Notes to Consolidated Financial Statements ........................................................ F-9
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of ITC/\DeltaCom, Inc.:
We have audited the accompanying consolidated balance sheet of
ITC/\DeltaCom, Inc. and subsidiaries as of December 31, 2002 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the period from October 30, 2002 through December 31, 2002 (Successor
Company) and the period from January 1, 2002 through October 29, 2002
(Predecessor Company). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
Company's consolidated financial statements as of December 31, 2001, and for
each of the two years in the period ended December 31 2001, prior to the
adjustments discussed in the summary of significant accounting policies, were
audited by auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those consolidated financial statements in their report
dated February 15, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
As discussed in Note 3 - Chapter 11 Bankruptcy Proceedings in the Notes to
Consolidated Financial Statements, the Predecessor Company emerged from
bankruptcy on October 29, 2002, pursuant to a Plan of Reorganization confirmed
by the Bankruptcy Court by order dated October 17, 2002. Accordingly, the
accompanying financial statements of the Successor Company have been prepared in
conformity with fresh start accounting provisions of the AICPA's Statement of
Position ("SOP") 90-7, Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code, issued November 19, 1990. In accordance with the
requirements of SOP 90-7, the Successor Company has been accounted for as a new
entity with assets, liabilities and a capital structure having carrying values
not comparable with any prior periods of the Predecessor Company.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
ITC/\DeltaCom, Inc. and subsidiaries as of December 31, 2002 and the
consolidated results of their operations and their cash flows for the period
from October 30, 2002 through December 31, 2002 (Successor Company) and the
period from January 1, 2002 through October 29, 2002 (Predecessor Company) in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 2, the Company changed the manner in which it accounts
for goodwill and other intangible assets upon adoption of the accounting
standards in Statement of Financial Accounting Standards ("SFAS") No. 142 on
January 1, 2002.
As discussed above, the financial statements of ITC/\DeltaCom, Inc. and
subsidiaries as of December 31, 2001, and for each of the two years in the
period ended December 31, 2001, were audited by other auditors who have ceased
operations. As described in Note 2, we also audited the adjustments reflected in
the transitional disclosures required by SFAS No. 142. In our opinion, all such
adjustments are appropriate and have been properly applied. However, we were not
engaged to audit, review or apply any procedures to the 2001 or 2000 financial
statements of the Company, other than with respect to such adjustments and,
accordingly, we do not express an opinion or any other form of assurance on the
2001 or 2000 financial statements taken as a whole.
/s/ BDO Seidman, LLP
- --------------------
BDO Seidman, LLP
Atlanta, Georgia
February 24, 2003
F-2
THE FOLLOWING REPORT IS A COPY OF A PREVIOUSLY ISSUED REPORT BY ARTHUR
ANDERSEN LLP AND IT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. ARTHUR
ANDERSEN LLP HAS NOT CONSENTED TO ITS INCORPORATION BY REFERENCE INTO
ITC/\DELTACOM, INC.'S PREVIOUSLY FILED REGISTRATION STATEMENT FILE NO:
333-101007; THEREFORE, AN INVESTOR'S ABILITY TO RECOVER ANY POTENTIAL DAMAGE MAY
BE LIMITED.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ITC/\DeltaCom, Inc.:
We have audited the accompanying consolidated balance sheets of
ITC/\DELTACOM, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' (deficit) equity, and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements (pages F-3 - F-31) referred to
above present fairly, in all material respects, the financial position of
ITC/\DeltaCom, Inc. and subsidiaries as of December 31, 2001 and 2000 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses and negative
cash flows from operations and has limited access to additional capital, which
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts, or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 15, 2002
F-3
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Successor Predecessor
--------- -----------
(Notes 1 and 3) (Notes 1 and 3)
--------------- ---------------
December 31,
----------------------
2002 2001
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 30,554 $ 41,043
Restricted cash (Note 6) ................................................ 9,285 --
Accounts receivable:
Customer, net of allowance for uncollectible accounts of
$7,344 and $5,689 in 2002 and 2001, respectively .................. 48,157 62,099
Affiliates (Note 13) ................................................. 3,375 4,889
Inventory ............................................................... 4,572 6,301
Prepaid expenses ........................................................ 3,542 4,193
--------------- ---------------
Total current assets .............................................. 99,485 118,525
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT, net (Note 4) ............................... 417,144 691,037
--------------- ---------------
OTHER LONG-TERM ASSETS:
Intangible assets, net (Note 5) ......................................... 25,453 55,946
Restricted cash (Note 6) ................................................ 9,250 --
Other long-term assets .................................................. 2,188 12,824
--------------- ---------------
Total other long-term assets ...................................... 36,891 68,770
--------------- ---------------
Total assets ...................................................... $ 553,520 $ 878,332
=============== ===============
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Successor Predecessor
--------- -----------
(Notes 1 and 3) (Notes 1 and 3)
--------------- ---------------
December 31,
------------
2002 2001
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable:
Trade ................................................................................. $ 34,622 $ 38,779
Construction .......................................................................... 2,004 8,613
Accrued interest ........................................................................ 598 8,844
Accrued compensation .................................................................... 6,671 6,554
Unearned revenue (Note 11) .............................................................. 15,736 35,851
Other accrued liabilities ............................................................... 19,173 19,914
Current portion of other long-term liabilities (Note 6) ................................. 3,250 --
Current portion of long-term debt and capital lease obligations (Note 6) ................ 2,703 6,711
--------- ---------
Total current liabilities ......................................................... 84,757 125,266
--------- ---------
LONG-TERM LIABILITIES:
Other long-term liabilities (Note 6) .................................................... 7,325 --
Long-term debt and capital lease obligations (Note 6) ................................... 199,668 717,163
--------- ---------
Total long-term liabilities ....................................................... 206,993 717,163
--------- ---------
CONVERTIBLE REDEEMABLE PREFERRED STOCK (Note 8):
Par value $0.01; 665,000 shares designated Series A in 2002; 300,000 shares issued and
outstanding in 2002; entitled to redemption value of $100 per share, plus accrued and
unpaid dividends ......................................................................... 24,525 --
Par value $0.01; 67,000 shares designated Series B-1 in 2001; 30,673 shares issued
and outstanding in 2001; entitled to redemption value of $1,000 per share, plus accrued
and unpaid dividends; all shares cancelled on October 29, 2002 ........................... -- 24,121
Par value $0.01; 90,000 shares designated Series B-2 in 2001; 40,000 shares issued and
outstanding in 2001; entitled to redemption value of $1,000 per share, plus accrued
and unpaid dividends; all shares cancelled on October 29, 2002 ........................... -- 33,712
--------- ---------
Total convertible redeemable preferred stock ....................................... 24,525 57,833
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 1, 6 and 11)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $0.01 par value; 5,000,000 shares authorized Series A
Preferred Stock, $7.40 liquidation preference per share;
1,480,771 shares issued and outstanding in 2001; all shares cancelled on
October 29, 2002 (Note 9) ............................................................ -- 15
Common stock, $0.01 par value; 250,000,000 shares authorized; 44,750,000 shares
issued and outstanding in 2002 (Note 9)............................................... 447 --
Common stock, $0.01 par value; 200,000,000 shares authorized; 62,364,768 shares
issued and outstanding in 2001; all shares cancelled on October 29, 2002 (Note 9) .... -- 624
Additional paid-in capital .............................................................. 237,886 356,839
Warrants outstanding (Note 8) ........................................................... 2,122 11,441
Deficit ................................................................................. (3,210) (390,849)
--------- ---------
Total stockholders' equity (deficit) .............................................. 237,245 (21,930)
--------- ---------
Total liabilities and stockholders' equity (deficit) .............................. $ 553,520 $ 878,332
========= =========
The accompanying notes are an integral part of these consolidated
balance sheets.
F-5
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
Successor Predecessor
------------------- -----------------------------------------------
October 30, 2002 to January 1, 2002 to Year Ended December 31,
----------------------------
December 31, 2002 October 29, 2002 2001 2000
----------------- ---------------- ------------ ------------
OPERATING REVENUE ......................................... $ 65,569 $ 352,897 $ 415,339 $ 363,648
COST OF SERVICES (exclusive of items shown separately
below) ................................................ 30,021 164,920 186,121 155,000
INVENTORY WRITE-DOWN ...................................... -- -- 1,663 --
------------ ------------ ------------ ------------
GROSS MARGIN .............................................. 35,548 187,977 227,555 208,648
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, operations, and administration ................ 27,108 136,472 188,712 151,050
Depreciation and amortization .......................... 9,002 105,696 118,938 86,519
Special charges (Note 10) .............................. -- 223 74,437 --
Loss on early termination of credit facility
(Notes 2 and 6) ....................................... -- -- -- 1,321
------------ ------------ ------------ ------------
Total operating expenses ........................ 36,110 242,391 382,087 238,890
------------ ------------ ------------ ------------
OPERATING LOSS ............................................ (562) (54,414) (154,532) (30,242)
------------ ------------ ------------ ------------
OTHER (EXPENSE) INCOME:
Interest expense, net of amounts capitalized ........... (2,350) (35,704) (58,833) (55,482)
Interest income ........................................ 216 349 2,066 14,763
Other expense .......................................... -- (289) (632) (426)
------------ ------------ ------------ ------------
Total other expense, net .......................... (2,134) (35,644) (57,399) (41,145)
------------ ------------ ------------ ------------
LOSS BEFORE REORGANIZATION ITEMS AND INCOME TAXES ......... (2,696) (90,058) (211,931) (71,387)
REORGANIZATION ITEMS (Note 3) ............................. -- 60,792 -- --
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX BENEFIT ............................ (2,696) (29,266) (211,931) (71,387)
INCOME TAX BENEFIT ........................................ -- -- -- (512)
------------ ------------ ------------ ------------
NET LOSS .................................................. (2,696) (29,266) (211,931) (70,875)
PREFERRED STOCK DIVIDENDS AND ACCRETION ................... (514) (4,210) (3,713) --
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ............... $ (3,210) $ (33,476) $ (215,644) $ (70,875)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE APPLICABLE TO
COMMON STOCKHOLDERS .................................... $ (0.07) $ (0.54) $ (3.46) $ (1.16)
============ ============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (Note 9) ................................... 44,750,000 62,364,768 62,292,085 60,928,387
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
Preferred Stock Common Stock Additional
------------------- -------------------- Paid-in Warrants
Shares Amount Shares Amount Capital Outstanding
---------- ------- ----------- ------ ------------ -----------
BALANCE, December 31, 1999........................ 1,480,771 $ 15 59,556,775 $ 595 $ 321,882 $ --
Issuance of common stock under
AvData earn-out provisions.................... -- -- 123,757 1 4,282 --
Issuance of common stock for Bay Data
acquisition (Note 14)......................... -- -- 837,942 8 26,209 --
Deferred compensation........................... -- -- -- -- 145 --
Exercise of common stock options................ -- -- 1,121,198 12 3,109 --
Net loss........................................ -- -- -- -- -- --
---------- ------- ----------- ------ ------------ -----------
BALANCE, December 31, 2000........................ 1,480,771 15 61,639,672 616 355,627 --
Issuance of common stock under
AvData earn-out provisions.................... -- -- 121 -- -- --
Retirement of common stock...................... -- -- (22,629) -- (175) --
Deferred compensation........................... -- -- -- -- 120 --
Exercise of common stock options................ -- -- 747,604 8 1,267 --
Issuance of warrants for common stock........... -- -- -- -- -- 11,441
Accretion of differences between carrying
value and redemption value of Series B
preferred stock............................... -- -- -- -- -- --
Stock dividends declared and accrued on
Series B preferred stock...................... -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- --
---------- ------- ----------- ------ ------------ -----------
BALANCE, December 31, 2001........................ 1,480,771 15 62,364,768 624 356,839 11,441
Accretion of differences between carrying
value and redemption value of Series B
preferred stock............................... -- -- -- -- -- --
Stock dividends declared and accrued on
Series B preferred stock...................... -- -- -- -- -- --
Cancellation of old preferred and common
stock and warrants pursuant to the Plan
(Note 3)....................................... (1,480,771) (15) (62,364,768) (624) (356,839) (11,441)
Issuance of new common stock pursuant to
the Plan (Note 3)............................. -- -- 43,750,000 437 234,002 --
Issuance of new common stock and warrants
pursuant to issuance of new Series A
preferred stock (Note 3)....................... -- -- 1,000,000 10 3,000 2,122
Net loss........................................ -- -- -- -- -- --
Elimination of deficit upon adoption of
Fresh Start Reporting (Note 3)................. -- -- -- -- -- --
---------- ------- ----------- ------ ------------ -----------
BALANCE, October 29, 2002......................... -- -- 44,750,000 447 237,002 2,122
Common stock units issued....................... -- -- -- -- 884 --
Accretion of differences between carrying
value and redemption value of new Series A
preferred stock (Note 8)...................... -- -- -- -- -- --
Stock dividends declared and accrued on new
Series A preferred stock...................... -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- --
---------- ------- ----------- ------ ------------ -----------
BALANCE, December 31, 2002........................ -- $ -- 44,750,000 $ 447 $ 237,886 $ 2,122
========== ======= =========== ====== ============ ===========
Total
Stockholders'
Equity
Deficit (Deficit)
---------- --------------
BALANCE, December 31, 1999........................ $ (104,330) $ 218,162
Issuance of common stock under
AvData earn-out provisions.................... -- 4,283
Issuance of common stock for Bay Data
acquisition (Note 14)......................... -- 26,217
Deferred compensation........................... -- 145
Exercise of common stock options................ -- 3,121
Net loss........................................ (70,875) (70,875)
---------- --------------
BALANCE, December 31, 2000........................ (175,205) 181,053
Issuance of common stock under
AvData earn-out provisions.................... -- --
Retirement of common stock...................... -- (175)
Deferred compensation........................... -- 120
Exercise of common stock options................ -- 1,275
Issuance of warrants for common stock........... -- 11,441
Accretion of differences between carrying
value and redemption value of Series B
preferred stock............................... (1,392) (1,392)
Stock dividends declared and accrued on
Series B preferred stock...................... (2,321) (2,321)
Net loss........................................ (211,931) (211,931)
---------- --------------
BALANCE, December 31, 2001........................ (390,849) (21,930)
Accretion of differences between carrying
value and redemption value of Series B
preferred stock............................... (1,417) (1,417)
Stock dividends declared and accrued on
Series B preferred stock...................... (2,793) (2,793)
Cancellation of old preferred and common
stock and warrants pursuant to the Plan
(Note 3)....................................... -- (368,919)
Issuance of new common stock pursuant to
the Plan (Note 3)............................. -- 234,439
Issuance of new common stock and warrants
pursuant to issuance of new Series A
preferred stock (Note 3)....................... -- 5,132
Net loss........................................ (29,266) (29,266)
Elimination of deficit upon adoption of
Fresh Start Reporting (Note 3)................. 424,325 424,325
---------- --------------
BALANCE, October 29, 2002......................... -- 239,571
Common stock units issued....................... -- 884
Accretion of differences between carrying
value and redemption value of new Series A
preferred stock (Note 3)...................... (93) (93)
Stock dividends declared and accrued on new
Series A preferred stock...................... (421) (421)
Net loss........................................ (2,696) (2,696)
---------- --------------
BALANCE, December 31, 2002........................ $ (3,210) $ 237,245
========== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Successor Predecessor
------------------- ----------------------------------------------
October 30, 2002 to January 1, 2002 to Year Ended December 31,
December 31, 2002 October 29, 2002 2001 2000
------------------- ------------------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,696) $ (29,266) $ (211,931) $ (70,875)
----------------- -------------- ---------- ----------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
(excluding the effects of acquisitions):
Depreciation and amortization ........................ 9,002 105,696 118,938 86,519
Amortization of bond issuance costs .................. 95 1,659 2,341 2,221
Special charges and other ............................ -- -- 77,301 --
Reorganization items (Note 3) ........................ -- (74,318) -- --
Deferred income taxes ................................. -- -- -- (512)
Extraordinary item--loss on early termination ......... -- -- -- 1,321
of credit facility ...................................
Changes in current operating assets and
liabilities:
Accounts receivable, net ........................... 6,536 7,727 9,351 (26,127)
Other current assets ............................... 1,136 1,252 2,452 (3,321)
Accounts payable ................................... (2,891) (1,377) (2,332) 18,270
Accrued interest ................................... (621) 15,522 (3,776) 4,339
Unearned revenue ................................... (4,524) (15,591) (7,659) 29,287
Accrued compensation and other accrued
liabilities ....................................... 1,179 1,276 4,791 4,809
----------------- -------------- ---------- -----------
Total adjustments ................................ 9,912 41,846 201,407 116,806
----------------- -------------- ---------- -----------
Net cash provided by (used in) operating
activities ..................................... 7,216 12,580 (10,524) 45,931
----------------- -------------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................... (5,325) (25,202) (134,770) (337,123)
Change in accounts payable-construction ................. 409 (4,582) (27,195) 27,292
Change in restricted cash, net ........................ -- -- 6,982 6,741
Payment for acquisitions, net of cash received ..........
(Note 14) ............................................. -- -- -- (2,218)
Other ................................................... -- 4 185 100
----------------- -------------- ---------- -----------
Net cash used in investing activities ............ (4,916) (29,780) (154,798) (305,208)
----------------- -------------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from $160 million senior secured credit facility,
net of issuance costs ................................ -- -- -- 157,434
Cash from $160 million senior secured credit facility,
restricted for capital expenditures .................. -- -- -- (6,982)
Repayment of other long-term debt and capital lease
obligations .......................................... (1,976) (4,625) (2,368) (1,535)
Proceeds from issuance of Series B preferred stock and
common stock warrants, net of issuance costs ......... -- -- 67,208 --
Proceeds from issuance of new Series A preferred stock,
common stock and common stock warrants, net of
issuance costs ...................................... -- 29,554 -- --
Cash from issuance of new Series A preferred stock,
restricted for contingencies
(Note 11) ......................................... -- (18,535) -- --
Proceeds from exercise of common stock options ......... -- -- 1,275 3,121
Retirement of common stock ............................. -- -- (175) --
Other .................................................. (1) (6) (715) (52)
----------------- -------------- ---------- -----------
Net cash (used in) provided by financing activities .... (1,977) 6,388 65,225 151,986
----------------- -------------- ---------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS ........................ 323 (10,812) (100,097) (107,291)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........... 30,231 41,043 141,140 248,431
----------------- -------------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 30,554 $ 30,231 $ 41,043 $ 141,140
================= ============== ========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest (net of amount capitalized) ..... $ 2,876 $ 18,525 $ 65,063 $ 53,264
================= ============== ========== ===========
Cash paid (refunds received) for income taxes, net ..... $ (1) $ (190) $ 3 $ (143)
================= ============== ========== ===========
Cash paid for reorganization items ..................... $ 2,939 $ 10,247 $ -- $ --
================= ============== ========== ===========
NONCASH TRANSACTIONS:
Network equipment and property rights acquired under
capital lease obligations ............................. $ -- $ -- $ 12,751 $ 38,496
================= ============== ========== ===========
Network equipment acquired under other long-term
liabilities ........................................... $ 10,575 $ -- $ -- $ --
================= ============== ========== ===========
Preferred stock dividends and accretion ................ $ 514 $ 4,210 $ 3,713 $ --
================= ============== ========== ===========
Acquisitions:
Issuance of common stock ............................. $ -- $ -- $ -- $ 30,500
================= ============== ========== ===========
The accompanying notes are an integral part of these
consolidated statements.
F-8
ITC/\DELTACOM, INC. AND SUBSIDIARIES
NOTES TO 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 customer premise equipment sales,
installation and repair. As part of its retail services, the Company also
provides colocation, Web server hosting and other services integral to operating
important business applications over the Internet. In connection with these
services, the Company owns, operates or manages an extensive fiber optic
network, which extends throughout ten southern states.
Factors Affecting Comparability of Financial Information
As a consequence of the implementation of fresh start reporting effective
on October 30, 2002 (Note 3), the financial information presented in the
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the period from October 30, 2002 to December 31, 2002 is generally not
comparable to the financial results for prior periods. The presentation of
financial information of the "Predecessor Company" represents the Company's
financial information for the specified periods prior to the Company's adoption
of fresh start reporting. The presentation of financial information of the
"Successor Company" represents the Company's financial information for the
specified period following the Company's adoption of fresh start reporting.
Segment Disclosure
Beginning in 2002, the Company 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 15). One segment consists of the Company's retail services business and
the other 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. Segment information for 2001 and
2000 has been restated to reflect this change.
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. Accordingly, the Company
expects that its cost of services will continue to increase and that its capital
expenditures will be significant. In addition, the Company may further 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 restructurings, 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. The Company is also subject
to operating lease, capital lease and other long-term commitments (Note 6).
Basis of Presentation
The accompanying consolidated financial statements are prepared on the
accrual basis of accounting in
F-9
accordance with accounting principles generally accepted in the United States.
All material intercompany accounts and transactions have been eliminated in
consolidation.
2. Summary of Significant Accounting Policies
Sources of Supplies
The Company primarily uses two vendors for transmission equipment used in
its network. However, if these vendors were unable to meet the Company's needs,
management believes that the Company could obtain this equipment from other
vendors on comparable terms and that its operating results would not be
materially adversely affected. If the Company had to purchase another
manufacturer's equipment, the Company would incur significant initial costs to
integrate the equipment into its network and to train personnel to use the new
equipment, which may have a material adverse effect on the Company's financial
condition and results of operations.
Credit Risk and Significant Customers
The Company's accounts receivable subject the Company to credit risk, as
collateral is generally not required. The Company limits its risk of loss by
billing some customers in advance for services and by terminating access on
delinquent accounts. The large number of customers mitigates the concentration
of credit risk. No customer represented more than 10% of the Company's
consolidated operating revenues during any of the following periods: October 30,
2002 to December 31, 2002; January 1, 2002 to October 29, 2002; for the year
ended December 31, 2001; or for the year ended December 31, 2000.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts based on
specifically identified amounts that it believes to be uncollectible. The
Company also records an additional allowance based on certain percentages of its
aged receivables, which are determined based on its experience and assessment of
the general financial conditions affecting its customer base. If the Company's
actual collections experience changes, revisions to its allowance may be
required. The Company has a large number of customers with individually small
amounts due at any given balance sheet date. Any unanticipated change in one of
those customer's creditworthiness or other matters affecting the collectibility
of amounts due from such customers, would not have a material effect on the
Company's results of operations in the period in which such changes or events
occur. After all attempts to collect a receivable have failed, the receivable is
written-off against the allowance.
Regulation
The Company is subject to certain regulations and requirements of the
Federal Communications Commission and various state public service commissions.
Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates as
a result of changes in estimates used to record accounts receivable, property,
plant and equipment, intangible assets, accrued liabilities and deferred
revenue.
Cash and Cash Equivalents
The Company considers all short-term highly liquid investments with an
original maturity date of three months
F-10
or less to be cash equivalents.
Inventory
Inventory consists primarily of customer premise equipment held for resale
and is valued at the lower of cost or market, using the first-in, first-out
method.
Property, Plant and Equipment
As part of fresh start reporting (Note 3), substantially all property,
plant and equipment was revalued to estimated fair value, which became the
Company's new cost basis, as of October 29, 2002, the effective date of the
Company's plan of reorganization. In addition, depreciable lives of some assets
were changed. All capital additions made subsequent to October 29, 2002 are
stated at cost.
On January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). This statement requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by comparison of the
carrying amount of an asset to the future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized to the extent that the carrying amount
of the asset exceeds the fair value of the asset. Assets to be disposed of are
reported at the lower of the asset's carrying amount or fair value, less the
cost to sell.
Depreciation begins when property, plant and equipment are placed in
service. The cost to maintain, repair and replace minor items of property, plant
and equipment is charged to selling, operations and administration expenses as
the cost is incurred. Depreciation of property, plant and equipment is provided
using the straight-line method over the following estimated useful lives:
Years
-----
Buildings and towers ................................ 35 to 40
Fiber optic network ................................. 15 to 20
Furniture, fixtures and office equipment ............ 7 to 10
Transmission equipment and electronics .............. 5 to 10
Vehicles ............................................ 3 to 5
Computer hardware and software ...................... 3 to 5
Applicable interest charges incurred during the construction of new
facilities are capitalized as elements of cost and are depreciated over the
assets' estimated useful lives. Interest capitalized during the periods from
October 30, 2002 to December 31, 2002, from January 1, 2002 to October 29, 2002
and for the years ended December 31, 2001 and 2000 was $0, $0, $4.8 million and
$4.1 million, respectively.
Intangible Assets
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). Upon adoption of this statement,
amortization of goodwill and indefinite life intangibles ceased, and accumulated
amortization as of December 31, 2001 reduced the carrying value of these assets.
See Note 5 for more information regarding the Company's intangible assets.
Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired in business combinations accounted for as purchases. As
a result of the Company's reorganization, all goodwill recorded in the Company's
balance sheet was written off as of the October 29, 2002 effective date. The
book value of goodwill was $0 and $53.9 million at December 31, 2002 and 2001,
respectively. Included in the accompanying Consolidated Statement of Operations
is amortization expense related to goodwill of approximately $5.1 million and
$5.2 million
F-11
for the years ended December 31, 2001 and 2000, respectively. When goodwill
exists on the Company's balance sheet, the Company evaluates goodwill on an
annual basis and whenever events or circumstances indicate that goodwill might
be impaired. The Company determines impairment by comparing the net assets of
each reporting unit, identified as a business segment, to the respective fair
value. In the event a unit's net assets exceed its fair value, an implied fair
value of goodwill must be determined by assigning the unit's fair value to each
asset and liability of the unit. The excess of the fair value of the reporting
unit over the amounts assigned to its assets and liabilities is the implied fair
value of goodwill. An impairment loss is measured by the difference between the
goodwill carrying value and the implied fair value.
The Company identified its trade name as an indefinite life intangible. The
book value of indefinite life intangible was $5.6 million and $0 at December 31,
2002 and 2001, respectively. The increase in value from 2001 to 2002 was caused
by the revaluation of the Company's assets and liabilities as a result of its
reorganization. The Company evaluates the recoverability of indefinite-lived
intangible assets on an annual basis and whenever events or circumstances
indicate that these assets might be impaired. The Company determines impairment
by comparing an asset's respective carrying value to estimates of fair value
using the best information available, which requires the use of estimates,
judgments and projections. In the event impairment exists, a loss is recognized
based on the amount by which the carrying value exceeds the fair value of the
asset.
Definite life intangibles include the value associated with customer bases
acquired. The Company evaluates the recoverability of definite life intangible
assets when events or circumstances indicate that these assets might be
impaired. The Company determines impairment by comparing an asset's respective
carrying value to estimates of the sum of the future cash flows expected to
result from the Company's asset, undiscounted and without interest charges. If
the carrying amount is less than the recoverable amount, a loss is recognized
based on the amount by which the carrying value exceeds the fair value of the
asset. Definite life intangibles are amortized over their useful lives, which at
December 31, 2002 was 8 years.
Concurrently with the adoption of SFAS No. 142, the Company evaluated for
impairment its goodwill and indefinite life intangibles and completed the
transitional test as of January 1, 2002. The Company determined that these
assets had not been impaired.
Other Long-Term Assets
Other long-term assets primarily consist of debt issuance costs that are
amortized using the effective interest rate method over the lives of the related
debt.
Long-Lived Assets
The Company reviews its long-lived assets for impairment at each balance
sheet date and whenever events or changes in circumstances indicate that the
carrying amount of an asset should be assessed. To determine if an impairment
exists, the Company estimates the future undiscounted cash flows expected to
result from the use of the asset being reviewed for impairment. If the sum of
these expected future cash flows is less than the carrying amount of the asset,
the Company recognizes an impairment loss in accordance with SFAS No. 144. The
amount of the impairment recognized is determined by estimating the fair value
of the assets and recording a loss for the excess of the carrying value over the
fair value.
Unearned Revenue
Unearned revenue includes the liability for advance billings to customers
for use of the Company's fiber-optic network, recurring monthly charges for
local and data services and estimated reciprocal compensation billings (Note
11).
F-12
Unbilled Revenue
ITC/\DeltaCom Communications, Inc., a wholly-owned subsidiary of
ITC/\DeltaCom, records revenue for long-distance services provided, but not yet
billed, to customers. Approximately $6.1 million and $6.8 million in unbilled
revenue is included in accounts receivable in the accompanying Consolidated
Balance Sheets at December 31, 2002 and 2001, respectively.
Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred taxes are determined based on the
difference between the financial and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse.
Revenue Recognition
The Company generates recurring revenues from its offering of local
exchange services, long distance services, data and Internet services, which
includes Internet access, Web hosting and colocation services, and the sale of
transmission capacity to other telecommunications carriers. Revenues from these
sources, which generally consist of recurring monthly charges for such services,
are recognized as services are provided. Advance billings and cash received in
advance of services performed are recorded as deferred revenue.
The Company generates nonrecurring revenues from the sale of telephone
systems, other equipment, software and professional services. Revenues from
these sources are recognized upon installation or as services are performed.
Nonrecurring revenues, such as the sale of telephone systems, may be part of
multiple element arrangements. The Company estimates the fair value of the
separate elements and recognizes revenues for a delivered element only when the
remaining elements in the arrangement are delivered. These non-recurring
revenues as a percentage of total revenue were approximately 7% in the period
from October 30, 2002 to December 31, 2002, 6% in the period from January 1,
2002 to October 29, 2002, 6% in the year ended December 31, 2001 and 7% in the
year ended December 31, 2000.
In accordance with the guidance provided in Emerging Issues Task Force
("EITF") Issue 99-19, "Reporting Revenue Gross as Principal Versus Net as an
Agent," the Company recognizes some revenue net as an agent and other revenue
gross as a principal. For each revenue source, the Company has analyzed the
features of the applicable arrangements and the presence or absence of
indicators of net versus gross reporting in those arrangements. The Company has
agreements for such arrangements as discussed in the following paragraphs.
Under an agency agreement, the Company receives an equipment order from its
customer and arranges for the delivery of the equipment to the customer and
earns a margin. Revenue equal to the net margin is recognized when the equipment
is delivered. Under this agreement, the Company recorded revenues of $0, $0,
$3.2 million and $5.6 million for the periods from October 30, 2002 to December
31, 2002, from January 1, 2002 to October 29, 2002 and for the years ended
December 31, 2001 and 2000, respectively.
On behalf of other telecommunications carriers that are the Company's
customers, the Company procures certain telecommunications services from major
interexchange carriers. The Company also administers for these customers the
contracts to which these telecommunications services are subject. The Company
recognizes revenue equal to the net margin it earns under this arrangement as
the third-party carriers provide services. For these services, the Company
recorded revenues of $287,000, $1.7 million, $1.8 million and $847,000 for the
periods from the October 30, 2002 to December 31, 2002, from January 1, 2002 to
October 29, 2002 and for the years ended December 31, 2001 and 2000,
respectively.
The Company sells customers broadband transport capacity on facilities
owned by utilities under marketing and management agreements with the utilities.
As compensation for these services, the Company receives a percentage of the
gross revenue generated by the traffic of these customers on the facilities of
the utilities. Revenue equal to this
F-13
margin is recognized as services are provided. For these services, the Company
recorded revenues of $1.5 million, $7.7 million, $11.3 million and $10.2 million
for the periods from October 30, 2002 to December 31, 2002, from January 1, 2002
to October 29, 2002 and for the years ended December 31, 2001 and 2000,
respectively.
Fair Value of Financial Instruments
The carrying values of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, investments held-to-maturity,
accounts payable and the senior credit facility, approximate their fair values
as of December 31, 2002 and 2001, except for the outstanding notes in 2001 (Note
6). Based on their quoted market prices, such notes had fair values at December
31, 2001 as follows (in thousands):
Predecessor Company 2001 2001
- -------------------
Instrument Fair Value Carrying Value
- ---------- ---------- --------------
11% Senior Notes due 2007 ...................... $ 54,600 $130,000
8-7/8% Senior Notes due 2008 ...................... 59,200 159,901
9-3/4% Senior Notes due 2008 ...................... 46,250 125,000
4-1/2% Convertible Subordinated Notes due 2006..... 23,750 100,000
-------- --------
Totals ....................................... $183,800 $514,901
======== ========
Earnings per Share
The Company computes net loss per share in accordance with the provisions
of SFAS No. 128, "Earnings per Share." Under the provisions of SFAS No. 128,
basic and diluted EPS are computed by dividing net income available to common
stockholders by the weighted average number of shares of common stock and common
stock equivalents outstanding during the period. Basic EPS excludes the effect
of potentially dilutive securities while diluted EPS reflects the potential
dilution that would occur if securities or other contracts to issue common stock
were exercised for, converted into or otherwise resulted in the issuance of
common stock. Common stock equivalents consist of common stock issuable under
the assumed exercise of stock options, restricted stock awards and warrants,
computed based on the treasury stock method, and the assumed conversion of the
Company's issued and outstanding preferred stock. Common stock equivalents are
not included in diluted EPS calculations to the extent their inclusion would be
anti-dilutive. The Company has equity securities that may have had a dilutive
effect on earnings per share had the Company generated income during the periods
from October 30, 2002 to December 31, 2002, from January 1, 2002 to October 29,
2002 and the years ended December 31, 2001 and 2000.
Stock-based Compensation
At December 31, 2002, the Company had one stock-based employee compensation
plan, which is described more fully in Note 9. The Company accounts for its plan
under the intrinsic value recognition and measurement principles of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Based on the additional disclosure
requirements of SFAS No. 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure," the following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123,
Successor Predecessor
--------- -----------
Year Ended
October 30 to January 1 to December 31,
December 31, October 29, ------------------------
Net loss (in thousands) 2002 2002 2001 2000
----------------------- ------------- ------------ --------- ----------
As reported ............................... $(3,210) $(33,476) $(215,644) $(70,875)
Add: total stock based employee
compensation expense included in net loss 1,140 -- -- --
Less: total stock based employee
compensation expense determined under
F-14
fair value based method for all awards ...... (2,340) (4,475) (3,388) (29,996)
-------- --------- ---------- ----------
Pro forma ...................................... $ (4,410) $ (37,951) $ (219,032) $ (100,871)
======== ========= ========== ==========
Basic and diluted net loss per share
------------------------------------
As reported .................................... $ (0.07) $ (0.54) $ (3.46) $ (1.16)
Pro forma ...................................... $ (0.10) $ (0.61) $ (3.52) $ (1.66)
Advertising Costs
The Company's advertising costs, which were immaterial for all periods
presented, are expensed as incurred.
Derivatives
The Company accounts for its derivatives in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was issued
in June, 1998, and its amendments, SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133" and SFAS No. 138, "Accounting for Derivative Instruments and
Certain Hedging Activities," issued in June 1999 and June 2000, respectively. As
a result, the Company recognizes its interest rate swap in the consolidated
financial statements at fair value. Changes in the fair value of the interest
rate swap are recognized in the Consolidated Statements of Operations. The net
amounts paid or received and net amounts accrued through the end of the
accounting period under the Company's interest rate swap were included in
interest expense.
Reclassifications
Amounts charged to income for the year ended December 31, 2000 related to
the Company's loss on the early termination of a credit facility has been
reclassified within the Consolidated Statements of Operations in accordance with
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, an amendment of
FASB Statement No. 13, and Technical Corrections."
Recent Accounting Pronouncements
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. The Company implemented this
statement, as required by SOP 90-7, as part of its fresh start reporting upon
completion of the bankruptcy proceedings with no material impact on its
consolidated financial statements.
SFAS No. 145 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 implemented this statement, as
required by SOP 90-7, as part of its fresh start reporting upon completion of
the bankruptcy proceedings with no material impact on its consolidated financial
statements.
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 being applied to exit or disposal activities initiated upon the
Company's emergence from the bankruptcy proceedings on October 29, 2002.
SFAS No. 148 was issued in December 2002. This statement amends SFAS No.
123. The provisions of this statement are effective for interim and annual
financial statements for fiscal years ending after December 15, 2002. This
statement provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
This statement also amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The
F-15
Company continues to apply APB 25 recognition and measurement principles, but
has complied with the new disclosure requirements of this statement. The
adoption of this statement had no material impact on the consolidated financial
statements.
3. Chapter 11 Bankruptcy Proceedings
To conserve liquidity for its business, ITC/\DeltaCom did not pay the
scheduled May 15, 2002 interest payments due on its 9-3/4% senior notes due 2008
and on its 4-1/2% convertible subordinated notes due 2006 or the scheduled June
1, 2002 interest payment due on its 11% senior notes due 2007. The scheduled May
15, 2002 payments totaled approximately $6.1 million on the 9-3/4% senior notes
and approximately $2.3 million on the 4-1/2% convertible subordinated notes. The
scheduled June 1, 2002 payment totaled approximately $7.2 million.
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"). Under the Bankruptcy Code, interest on the outstanding senior notes and
convertible subordinated notes and the 8% annual dividends on the Series B-1
cumulative convertible preferred stock (the "Series B-1 preferred stock") and
Series B-2 cumulative convertible preferred stock (the "Series B-2 preferred
stock" and, together with the Series B-1 preferred stock, the "Series B
preferred stock"), ceased to accrue during the Bankruptcy Proceedings.
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 having a total
principal amount of $415 million, plus accrued and unpaid interest,
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,
having a total principal amount of $100 million, plus accrued and
unpaid interest, 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 convertible
preferred stock and Series B redeemable convertible 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 $29.6
million, 298,154 shares of the new Series A preferred stock, warrants
to purchase approximately 1,013,724 shares of the new common stock and
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.
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 consisted of the following (in
thousands):
F-16
Professional fees and related expenses .............. $ (14,074)
Write-off of deferred financing fees ................ (8,849)
Write-off of debt discounts. ........................ (88)
Loss from write-down of assets ...................... (228,179)
Gain from cancellation of debt ...................... 311,982
-----------
$ 60,792
===========
Professional fees and related expenses represent legal, financial advisory
and other expenses directly related to the bankruptcy proceedings.
Fresh Start Reporting
On October 30, 2002, the Company adopted fresh start reporting in
accordance with the provisions of Statement of Position (SOP) 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code." Fresh start
reporting resulted in a new operating entity with assets and liabilities
adjusted to fair value and beginning retained earnings set to zero. Under SFAS
No. 141, "Business Combinations," fair value is defined as the amount at which
an asset (or liability) could be bought (or incurred) or sold (or settled) in a
current transaction, other than a forced or liquidation sale. Pursuant SFAS No.
141, the Company used the purchase method of accounting to allocate its
reorganization value to its net assets, with the excess recorded as goodwill on
the basis of fair value estimates. The reorganization value was determined to be
$555.6 million as of October 30, 2002 and was developed by an independent
financial advisor, which applied the following three valuation methodologies:
. Income approach. The income approach measures the present worth of
anticipated future economic benefit, in terms of net income or net
cash flow. The net income or cash flow is forecasted over an
appropriate period and discounted using the appropriate discount rate.
. Market approach. The market approach measures the estimated value of
assets by compiling and analyzing data with respect to actual,
purchase-and-sale market transactions for, and listings of, similar
assets. Adjustments to the market values of the similar assets are
made to compensate for differences in location, time of sale,
profitability and physical characteristics between the subject assets
and the similar assets, and to indicate a fair value for the subject
assets.
. Cost approach. The cost approach considers the cost of replacing an
asset as an indicator of the asset's value, under the theory that a
prudent investor would pay no more for an asset than the amount for
which he could replace the asset new. In the cost approach, an
estimate of replacement cost new ("RCN") is made. RCN represents the
cost of current labor and materials necessary to construct or acquire
a new asset of similar utility to the subject asset. "Similar utility"
represents similar economic satisfaction and means that the new asset
would be perceived by the investor or user as being equivalent to the
subject asset. Normally, over time, an asset will become less than a
perfect replacement for itself. In the case of buildings, for example,
piecemeal construction results in the incorporation of excess walls
and uneconomical space utilization. Therefore, adjustments are made to
the RCN to represent losses in value resulting from physical
deterioration and from functional and economic obsolescence.
Whether an approach was used and the extent to which an approach was relied upon
depended on the nature of the asset, the context of the valuation and the
quality and quantity of information available. General procedures used to
perform the fair value analysis included the following:
. Discussions with management and site engineers concerning the
fixed assets, customers, company structure, strategy, technology
and trade name;
. Industry analysis specifically related to customer turnover,
profitability, growth and other key variables relating to the
valuation of the customer relationships, technology and trade
name; and
F-17
. Historical financial analysis of the Company to compare operating and
financial data of the Company to the those of the industry.
The Company's reorganization value represented the value of the reorganized
consolidated entity. This value was viewed as the fair value of the Company's
capital, comprising the value of long-term capital investment, including both
long-term debt and equity, and the approximate amount a willing buyer would have
paid for the Company's net assets immediately after the reorganization was
completed. The calculated reorganization value was based upon a variety of
estimates and assumptions about circumstances and events, not all of which have
taken place to date. These estimates and assumptions are inherently subject to
significant economic and competitive uncertainties beyond the Company's control,
including, but not limited to, the Company's ability to obtain and perform new
contracts in a profitable manner.
The effects of the plan of reorganization and the application of fresh
start reporting on the Company's consolidated balance sheet as of October 29,
2002 are as follows (in thousands):
Fresh Start
Predecessor Effects of Plan Accounting Successor
Company Of Reorganization Adjustments Company
------- ----------------- ----------- -------
Current assets:
Cash and cash equivalents ................ $ 19,210 $ 29,554 (a) $ -- $ 48,764
Accounts receivable, customer ............ 53,387 -- -- 53,387
Accounts receivable, affiliates .......... 3,798 -- -- 3,798
Inventory ................................ 4,481 -- -- 4,481
Prepaid expenses ......................... 4,769 -- -- 4,769
----------- --------- ----------- ----------
Total current assets .................. 85,645 29,554 -- 115,199
----------- --------- ----------- ----------
Property, plant and equipment, net .......... 611,036 -- (198,782) (h) 412,254
----------- --------- ----------- ----------
Other long-term assets:
Intangible assets ........................ 55,278 -- (29,397) (i) 25,881
Other long-term assets ................... 2,284 -- -- 2,284
----------- --------- ----------- ----------
Total other long-term assets .......... 57,562 -- (29,397) 28,165
----------- --------- ----------- ----------
Total assets .......................... $ 754,243 $ 29,554 $ (228,179) $ 555,618
=========== ========= =========== ==========
Current liabilities:
Accounts payable - trade ................. $ 37,513 $ -- $ -- $ 37,513
Accounts payable - construction .......... 4,031 -- -- 4,031
Accrued interest ......................... 1,219 -- -- 1,219
Accrued compensation ..................... 5,238 -- -- 5,238
Unearned revenue ......................... 20,260 -- -- 20,260
Other accrued liabilities ................ 19,006 -- -- 19,006
Current portion of long-term debt and
capital lease obligations ............. 4,238 -- -- 4,238
----------- --------- ----------- ----------
Total current liabilities ............. 91,505 -- -- 91,505
----------- --------- ----------- ----------
Long-term debt and capital lease
obligations .............................. 200,109 -- -- 200,109
----------- --------- ----------- ----------
Liabilities subject to compromise ........... 538,147 (538,147) (b) -- --
----------- --------- ----------- ----------
Redeemable convertible preferred stock:
Successor - preferred Series A ........... -- 24,433 (a) -- 24,433
Predecessor - preferred Series B-1 ....... 26,708 (26,708) (c) -- --
Predecessor - preferred Series B-2 ....... 36,983 (36,983) (c) -- --
----------- --------- ----------- ----------
63,691 (39,258) -- 24,433
----------- --------- ----------- ----------
Stockholders' equity (deficit):
Predecessor - preferred Series A ......... 15 (15) (d) -- --
Predecessor - common stock ............... 624 (624) (d) -- --
Successor - common stock ................. -- 447 (a) -- 447
(e)
Additional paid in capital ............... 356,839 (119,837) (e) -- 237,002
F-18
Fresh Start
Predecessor Effects of Plan Accounting Successor
Company Of Reorganization Adjustments Company
------- ----------------- ----------- -------
Warrants ................................... 11,441 (9,319) (a) -- 2,122
(f)
Deficit .................................... (508,128) 736,307 (g) (228,179) --
---------- ----------------- ----------- ----------
Total stockholders' equity (deficit)..... (139,209) 606,959 (228,179) 239,571
---------- ----------------- ----------- ----------
Total liabilities and stockholders'
equity ................................. $ 754,243 $ 29,554 $ (228,179) $ 555,618
========== ================= =========== ==========
(a) Represents the purchase price of the new Series A preferred stock, net of
issuance costs and value assigned to the warrants and common stock issued
as part of the transaction.
(b) Represents the discharge of indebtedness in accordance with the plan of
reorganization as follows (in thousands):
Senior notes ................................... $ 415,000
Convertible subordinated notes ................. 100,000
Accrued interest ............................... 23,147
---------
Total ........................................ $ 538,147
=========
(c) Represents the cancellation of the Series B-1 preferred stock and Series
B-2 preferred stock of the Predecessor Company in accordance with the plan
of reorganization.
(d) Represents the cancellation of the Series A convertible preferred stock and
common stock of the Predecessor Company in accordance with the plan of
reorganization.
(e) Represents the issuance of the new common stock in accordance with the plan
of reorganization.
(f) Represents the cancellation of the warrants of the Predecessor Company and
the assignment of the
value of the warrants to the Successor Company.
(g) Represents the elimination of historical accumulated deficit and adjusts
stockholders' equity to reflect the fair value of the Successor Company's
total equity.
(h) Represents an adjustment to property, plant and equipment to fair value and
a write-off of previously-recorded accumulated depreciation.
(i) Represents the elimination of goodwill and other intangibles of the
Predecessor Company.
4. Property, Plant and Equipment
Balances of major classes of property, plant and equipment and the related
accumulated depreciation as of December 31, 2002 and 2001 were as follows (in
thousands):
Successor Predecessor
------------- --------------
2002 2001
------------- --------------
Land ......................................... $ 6,554 $ 6,744
Buildings and towers ......................... 58,782 127,412
Furniture, fixtures and office equipment ..... 29,554 63,460
Vehicles ..................................... 1,968 6,166
Fiber optic network .......................... 56,023 190,778
Transmission equipment and electronics ....... 269,929 568,716
------------- --------------
422,810 963,276
Less accumulated depreciation ................ (8,470) (295,746)
------------- --------------
414,340 667,530
Assets under construction .................... 2,804 23,507
------------- --------------
Property, plant and equipment, net ........... $ 417,144 $ 691,037
============= ==============
In accordance with the adoption of fresh start reporting (Note 3), the
Company revalued its property, plant and equipment to estimated fair value at
October 29, 2002. See Note 10 for a discussion related to the write-down of
F-19
certain property, plant and equipment during the year ended December 31, 2001.
Depreciation expense was $8.5 million, $105.0 million, $112.9 million and $80.2
million for the periods from October 30, 2002 to December 31, 2002, from January
1, 2002 to October 29, 2002 and for the years ended December 31, 2001 and 2000,
respectively.
5. Intangible Assets
Intangible assets and the related accumulated amortization as of December
31, 2002 and 2001 were as follows (in thousands):
Successor Predecessor
--------- -----------
2002 2001
------------- -------------
Goodwill ........................................... $ -- $ 59,700
Customer base ...................................... 20,316 9,644
Noncompete agreements .............................. -- 727
Trademark .......................................... 5,564 40
Other .............................................. -- 431
------------- -------------
25,880 70,542
Less accumulated amortization ...................... (427) (14,596)
------------- -------------
Intangible assets, net ............................. $ 25,453 $ 55,946
============= =============
See Note 3 for a discussion of the write-down of intangible assets in 2002
related to the adoption of fresh start reporting. See Note 10 for a discussion
related to the write-down of certain intangible assets during the year ended
December 31, 2001. Amortization expense was $427,000, $700,000, $6.0 million and
$6.2 million for the periods from October 30, 2002 to December 31, 2002, from
January 1, 2002 to October 29, 2002 and for the years ended December 31, 2001
and 2000, respectively. Amortization expense for the next five years is
estimated to be $2.5 million per year.
6. Financing Obligations
Long-Term Debt
Long-term debt at December 31, 2002 and 2001 consisted of the following (in
thousands):
Successor Predecessor
--------- -----------
2002 2001
---- ----
11% Senior Notes due 2007 ..................................................... $ -- $ 130,000
8-7/8% Senior Notes due 2008, net of unamortized discount of $99 in 2001 ...... -- 159,901
9-3/4% Senior Notes due 2008 .................................................. -- 125,000
4-1/2% Convertible Subordinated Notes due 2006 ................................ -- 100,000
Senior Secured Credit Facility ................................................ 155,600 157,200
--------------- -------------
155,600 672,101
Less current maturities ....................................................... (1,600) (1,600)
--------------- -------------
Long-term debt, net of current portion ........................................ $ 154,000 $ 670,501
=============== =============
Maturities of long-term debt at December 31, 2002 were as
follows:
2003 ...................................................... $ 1,600
2004 ...................................................... 1,600
2005 ...................................................... 10,800
2006 ...................................................... 141,600
---------------
$ 155,600
===============
See Note 3 for information related to the cancellation of the senior notes
and convertible subordinated notes under the Company's plan of reorganization.
F-20
Lease Obligations
The Company has entered into various operating and capital leases for
facilities and equipment used in its operations. Aggregate future minimum rental
commitments under noncancelable operating leases with original or remaining
periods in excess of one year and maturities of capital lease obligations as of
December 31, 2002 were as follows (in thousands):
Operating Capital
Leases Leases
------------- ------------
2003 ................................................... $ 13,747 $ 5,300
2004 ................................................... 11,206 15,664
2005 ................................................... 8,772 17,767
2006 ................................................... 7,535 11,494
2007 ................................................... 6,244 1,265
Thereafter ............................................. 12,955 12,500
------------- ------------
$ 60,459 63,990
============= (17,219)
Less amounts representing interest .......................... ------------
Present value of net minimum lease payments ................. 46,771
Less current portion ........................................ (1,103)
------------
Obligations under capital leases, net of current portion .... $ 45,668
============
Rent expense charged to operations for the periods from October 30, 2002 to
December 31, 2002, from January 1, 2002 to October 29, 2002 and for the years
ended December 31, 2001 and 2000 was $2.7 million, $13.5 million, $15.7 million
and $13.0 million, respectively.
The Company's assets under capital lease had a gross book value of $43.0
million and $54.4 million as of December 31, 2002 and 2001, respectively.
Accumulated depreciation on these capital leases was $888,000 and $13.3
million at December 31, 2002 and 2001, respectively.
Other Long-term Liabilities
In December 2002, the Company reached an agreement in principle with Nortel
Networks to modify the Company's obligations under its existing agreement with
Nortel Networks. The existing agreement provides for specified volume discounts
if the Company purchases at least $250 million of equipment and services from
Nortel Networks before a specified deadline, which has been extended to April
2003. The agreement in principle, once reflected in a new definitive agreement,
will restructure the purchase commitment under the existing agreement and will
specify that the Company will not be required to pay any penalty for purchasing
less than $250 million under that agreement. The new definitive agreement would
require the Company to pay $1 million quarterly beginning in 2003 for twelve
quarters. As a result of these events, and based on the proposed terms for the
new agreement, the Company recorded a long-term liability of $7.3 million and a
short-term liability of $3.3 million in 2002. See Note 11 for more information.
Amended and Restated Senior Secured Credit Facility
On October 29, 2002, the Company entered into a senior secured credit
facility with Morgan Stanley Senior Funding, Inc. and other lenders which
amended and restated the $156 million senior secured credit facility in effect
since April 5, 2000. Under the amended 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 $136.6 million on the facility
termination date, which will occur no later than June 30, 2006. The new credit
agreement
F-21
requires the Company to maintain in a segregated account cash and cash
equivalents in an amount of approximately $18.5 million for the twelve-month
period following October 29, 2002, which may be reduced to $9.25 million for the
succeeding six-month period. 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. The credit agreement is secured by the assets
of Interstate FiberNet, Inc. and its subsidiaries.
In connection with the completion of the senior secured credit facility in
April 2000, the Company terminated its $50 million credit facility. In
connection with the termination of the $50 million credit facility, the Company
expensed $1.3 million of unamortized debt issuance costs, which is reflected in
the accompanying Consolidated Statements of Operations as a component of loss
from operations. No amounts were borrowed under the $50 million credit facility.
The following discussion of the senior notes and the convertible
subordinated notes, as defined below, relates to the balances at December 31,
2001, and to amounts outstanding during 2002 prior to filing the plan of
reorganization. The senior notes and convertible subordinated notes were
cancelled on October 29, 2002.
Notes Offerings
On June 3, 1997, the Company completed the issuance of $200 million
principal amount of 11% Senior Notes due 2007 (the "1997 Notes"). Interest on
the 1997 Notes was payable semiannually on June 1 and December 1. On March 3,
1998, the Company completed the issuance of $160 million principal amount of
8-7/8% Senior Notes due 2008 at a price of 99.9% (the "March 1998 Notes") for an
effective yield of 8.88%. Interest on the March 1998 Notes was payable
semiannually on March 1 and September 1. On November 5, 1998, the Company
completed the issuance of $125 million principal amount of 9-3/4% Senior Notes
due 2008 (the "November 1998 Notes"). Interest on the November 1998 Notes was
payable semiannually on May 15 and November 15. On May 12, 1999, the Company
completed the issuance of $100 million principal amount of 4 1/2% Convertible
Subordinated Notes due 2006 (the "1999 Notes"). Interest on the 1999 Notes was
payable semiannually on May 15 and November 15.
The 1997 Notes, the March 1998 Notes and the November 1998 Notes
(collectively, the "Senior Notes") were general, unsubordinated and unsecured
senior obligations of the Company. The Company's subsidiaries had no obligation
to pay amounts due on the Senior Notes and did not guarantee the Senior Notes;
therefore, the Senior Notes were effectively subordinated to all liabilities of
the Company's subsidiaries, including trade payables. Any rights of the Company
and its creditors, including holders of the Senior Notes, to participate in the
assets of any subsidiary of the Company upon any liquidation or reorganization
of any such subsidiary were subject to the prior claims of that subsidiary's
creditors. The Senior Notes were subject to negative covenants that, among other
things, restricted the ability of the Company and its subsidiaries to incur
additional indebtedness, pay dividends or make distributions.
The 1999 Notes were unsecured general obligations of the Company and were
convertible into common stock any time after August 10, 1999 at a conversion
price of $26.67 per share, subject to adjustment in specified events. The
Company had the right to redeem the 1999 Notes or make the 1999 Notes
nonconvertible under specified circumstances before May 17, 2002. No shares of
common stock were issued upon conversion of the 1999 Notes before cancellation.
Interest Rate Swap Agreement
Prior to 1997, the Company held a 36% ownership interest in, and was the
managing partner of, Gulf States
F-22
FiberNet ("Gulf States"), a Georgia general partnership. In connection with the
acquisition of the remaining 64% interest in Gulf States in March 1997, the
Company refinanced Gulf States' outstanding indebtedness of approximately $41.6
million with a bridge facility (the "Bridge Facility"). The Bridge Facility,
which bore interest at LIBOR plus 2.25%, matured on July 25, 1997, the date the
proceeds from the Company's offering of the 1997 Notes were released. The
Company did not retire a forward-starting interest rate swap agreement (the
"Swap"), which swapped the variable interest rate with a fixed rate of 8.25%,
held by Gulf States in connection with this refinancing. In 2002, the Company
received a demand notice to terminate the Swap. The Company does not believe it
is required to terminate the Swap based on the terms of the original agreement.
The amount of interest that would have been payable through December 31, 2002
was $303,000. At December 31, 2002, the Swap had a notional amount of
approximately $8.9 million. At December 31, 2002, the Company would have been
required to pay approximately $610,000 to terminate the Swap. The Company made
payments totaling approximately $0, $370,000, $622,000 and $404,000 during the
periods from October 30, 2002 to December 31, 2002, from January 1, 2002 to
October 29, 2002 and for the years ended December 31, 2001 and 2000,
respectively, in connection with the Swap, which are included in other (expense)
income in the accompanying Consolidated Statements of Operations. The Swap
expires in December 2003.
Upon receipt of the proceeds from the March 1998 Notes, the Company ceased
accounting for the Swap as a hedge of an anticipated transaction and began
accounting for the Swap as a trading security. The Swap is marked to market at
each balance sheet date and the related (loss) gain is included in other
(expense) income. For the periods from October 30, 2002 to December 31, 2002,
from January 1, 2002 to October 29, 2002 and for the years ended December 31,
2001 and 2000, the Company recorded expense in the accompanying Consolidated
Statements of Operations of approximately $0, $120,000, $632,000 and $426,000,
respectively, related to the Swap.
Leases
In August 2000, the Company amended an agreement with a significant
provider of rights-of-way to replace future variable payments with specified
future fixed payments annually through 2020 and to modify certain rights under
the contract. The present value of the future payments, consisting of annual
payments of $750,000 through 2015 and annual payments of $500,000 through 2020,
is included in the accompanying Consolidated Balance Sheets as a capital lease
obligation in the amount of approximately $10.0 million. In the event of a
change in control of the Company, as defined in the amended agreement, the
future annual payment obligations of the Company will terminate and the Company
will be required to pay any remaining present value of the $750,000 annual
payment obligation and a one-time payment ranging from $12 million in 2002 to
$20 million in 2005 and thereafter during the term of the agreement (Note 11).
Upon expiration in 2020, this agreement is renewable for up to two ten-year
terms.
In December 2000, the Company obtained a $40 million capital lease
facility. The facility has been used to finance equipment for expansion of the
Company's network. The initial funding of the facility, which occurred in
December 2000, was for approximately $28.5 million. The Company funded an
additional $10.5 million of equipment in 2001 under this facility. Each funding
under the facility has a five-year term.
On the effective date of the plan of reorganization, the Company entered
into an amendment to its existing capital lease facilities 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 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.
The Company is subject to restrictions under its $156 million senior
secured credit facility and under its capital lease facilities. These
restrictions affect and, in some cases, significantly limit or prohibit, among
other things, the Company's ability to incur additional indebtedness. In order
to incur additional indebtedness under the foregoing agreements, the Company
must meet minimum specified leverage and interest coverage ratios based on its
operating cash flow.
F-23
7. Income Taxes
Details of the income tax (benefit) expense for the periods from October
30, 2002 to December 31, 2002, from January 1, 2002 to October 29, 2002 and for
the years ended December 31, 2001 and 2000 are as follows (in thousands):
Year Ended December 31,
October 30, 2002 to January 1, 2002 to ------------------------
December 31, 2002 October 29, 2002 2001 2000
----------------- ---------------- ------------ -----------
Current:
Federal ....................... $ 0 $ 0 $ 0 $ 0
State ......................... 0 0 0 0
------------ ------------ ------------ -----------
Total current ............ 0 0 0 0
------------ ------------ ------------ -----------
Deferred:
Federal ....................... (4,490) (28,416) (51,428) (24,335)
State ......................... (528) (3,343) (6,050) (2,352)
Increase in valuation allowance .... 5,018 31,759 57,478 26,175
------------ ------------ ------------ -----------
Total deferred ........... 0 0 0 (512)
------------ ------------ ------------ ------------
Total (benefit) expense .. $ 0 $ 0 $ 0 $ (512)
============ ============ ============ ============
The tax effects of temporary differences between the carrying amounts of
assets and liabilities in the consolidated financial statements and their
respective tax bases, which give rise to deferred tax assets and liabilities, as
of December 31, 2002 and 2001 are as follows (in thousands):
Successor Predecessor
2002 2001
-------------- ---------------
Deferred tax assets:
Net operating loss carryforwards .................... $ 68,708 $ 150,484
Alternative minimum tax credit carryforward ......... 0 350
Interest rate swap .................................. 809 855
Other ............................................... 2,237 2,216
--------------- ---------------
71,754 153,905
--------------- ---------------
Deferred tax liabilities:
Property ............................................ (41,388) (38,690)
Other ............................................... (900) (375)
--------------- ----------------
(42,288) (39,065)
--------------- ----------------
Net deferred tax assets .................................. 29,466 114,840
Valuation allowance ...................................... (29,466) (114,840)
--------------- ----------------
Net deferred tax liabilities ............................. $ 0 $ 0
=============== ================
The Company estimates that the Predecessor Company will have generated tax
loss carryforwards consisting of federal and state losses of approximately
$444.1 million and $487.0 million, respectively. The carryforwards expire
primarily in the years 2018 through 2022. Because the Company is unable to
conclude that it is more likely than not that it will be able to realize the
benefit of its deferred tax assets, it has provided a valuation allowance
against the net amount of such assets at each balance sheet date. Additionally,
certain carryforwards have been reduced upon emergence from bankruptcy due to
the rules and regulations in the Internal Revenue Code related to the
cancellation of indebtedness income that is excluded from taxable income. These
adjustments are included in the net operating loss values detailed above.
Because the Company's plan of reorganization provided for substantial changes in
the Company's ownership, there are annual limitations on the amount of federal
and certain of the state carryforwards which the Company may be able to utilize
on its income tax returns. This annual limitation is an amount equal to the
value of the stock of the Company immediately before the ownership change
adjusted to reflect the increase in value of the Company resulting from the
cancellation of creditors' claims, multiplied by a federally-mandated long-term,
tax-exempt rate. The annual limitation is currently estimated to be
approximately $11.3 million. The annual limitation may be increased by certain
transactions which result in recognition of "built-in" gains, which are
unrecognized gains existing as of the date the Company emerged from bankruptcy.
In addition, because the Company's plan of reorganization provided for a
write-down in the book value of its assets and substantial changes
F-24
in the Company's ownership, there may be limitations on the amount of income tax
depreciation expense that the Company will be able to deduct on its income tax
returns. These limitations will last for five years and are determined on an
asset-by-asset basis.
The Company estimates that the Successor Company will have generated tax
loss carryforwards consisting of federal and state loss carryforwards of $13.2
million, which expire at various dates through 2022. The carryforwards are
available for reduction of future income tax liabilities of the Company and its
subsidiaries, and should not be subject to the annual limitations mentioned
above for financial statement purposes. Because the Company is unable to
conclude that it is more likely than not that it will be able to realize the
benefit of its deferred tax assets, it has provided a valuation allowance
against the net amount of such assets at December 31, 2002. The Company's
reorganization has resulted in a significantly modified capital structure
requiring the Company to apply fresh start accounting under SOP 90-7. Under
fresh start accounting, reversals of valuation reserves recorded against
deferred tax assets that existed as of the emergence date will first reduce any
excess reorganization value until exhausted, then will reduce other intangibles
until exhausted and, thereafter, will be reported as additional paid-in capital.
The Company realized the benefit of non-qualified stock compensation
expense for tax purposes in excess of stock compensation expense for book
purposes of approximately $2.3 million and $9.0 million for the years ended
December 31, 2001 and 2000, respectively. No benefits were realized in the
period from October 30, 2002 to December 31, 2002 or from January 1, 2002 to
October 29, 2002. These amounts have been credited directly against additional
paid-in capital, net of a full valuation allowance.
A reconciliation of the federal statutory income tax rate to the effective
income tax rate for the periods presented is as follows:
October 30, 2002 to January 1, 2002 to
December 31, 2002 October 29, 2002 2001 2000
----------------- ---------------- ---- ----
Federal statutory rate ...................... (34)% (34)% (34)% (34)%
State income taxes, net of federal benefit .. (4) (4) (4) (3)
Permanent differences ....................... 14 (74) 11 (1)
Increase in valuation allowance ............. 24 112 27 37
----- ------ ---- ----
Effective income tax rate ................... 0 % 0 % 0 % (1)%
===== ====== ==== ====
8. Convertible Redeemable Preferred Stock
On the October 29, 2002 effective date of the plan of reorganization, the
Company issued 300,000 shares of new Series A preferred stock with a redemption
value of $30.0 million, yielding proceeds, net of issuance costs, to the Company
of approximately $29.6 million. 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
difference between the redemption value and the recorded value of the Series A
preferred stock recorded in the financial statements is
F-25
being accreted over a ten-year period from the date of issuance. During the
period from October 30, 2002 to December 31, 2002, the Company accreted $93,000
of value to the new Series A preferred stock as a result of this difference.
In connection with the issuance of the new Series A preferred stock, the
Company issued 1,000,000 shares of new common stock and warrants to purchase new
common stock at a ratio of 3.40 warrants for each share of new Series A
preferred stock. The warrants have a five-year term. Each warrant is initially
exercisable for one share of common stock at an exercise price of $5.114 per
share. The warrant exercise 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 estimated the fair
value of the new Series A preferred stock, new common stock and warrants in
accordance with EITF 00-27, "Application of Issue No. 98-5 to Certain
Convertible Instruments." The total fair value of the new common stock and
warrants issued was computed as approximately $3.0 million and $2.1 million,
respectively, which was allocated from the original $29.6 million of net
proceeds from the new Series A preferred stock. The Company computed the value
of the warrants using the Black-Scholes pricing model.
Upon the effective date of the plan of reorganization, all shares of the
Company's Series B-1 preferred stock and B-2 preferred stock were cancelled.
The new Series A preferred stock accrued $421,000 of dividends during 2002,
none of which became due and payable in 2002. From January 1, 2002 to October
29, 2002, the Company paid dividends in-kind on the Series B-1 preferred stock
and Series B-2 preferred stock of $1.2 million and $1.6 million, respectively.
The Series B-1 preferred stock accrued $1.3 million of dividends during 2001,
which were paid in-kind in October 2001 and January 2002. The Series B-2
preferred stock accrued $1.0 million of dividends during 2001, which were paid
in-kind in January 2002.
9. Other Equity Interests
Effects of Plan of Reorganization
Before the Company's reorganization, it had the following equity interests
outstanding:
. 1,480,771 shares of Series A Convertible Preferred Stock (the "old
Series A preferred stock");
. 62,364,768 shares of common stock (the "old common stock"); and
. options to purchase 13,704,758 shares of common stock issued under
various stock option plans (the "old option plans").
On October 29, 2002, the effective date of the plan of reorganization, the
Company's old Series A preferred stock, old common stock and all options granted
under its old stock option plans were cancelled.
New Common Stock
The authorized common stock consists of 250,000,000 shares, $0.01 par value
(the "new common stock"), of which 44,750,000 were issued and outstanding at
December 31, 2002. Of such shares, the Company issued 43,750,000 shares under
its plan of reorganization and 1,000,000 shares to purchasers of its new Series
A preferred stock.
ITC/\DeltaCom, Inc. Stock Incentive Plan
Before its reorganization, the Company maintained several stock option
plans for its employees and directors. Under the Company's plan of
reorganization, each of these plans was terminated as of October 29, 2002, the
effective date of the plan. In connection with the Company's reorganization, its
board of directors adopted the ITC/\DeltaCom, Inc. Stock Incentive Plan,
effective October 29, 2002 (the "new stock incentive plan"). Under the new stock
incentive plan, the Company may issue up to 4,700,000 shares of common stock, of
which up to 200,000
F-26
shares may be issued pursuant to awards of unrestricted common stock, up to
1,000,000 shares may be issued pursuant to awards of restricted stock or
restricted stock units and up to 3,500,000 shares may be issued pursuant to the
exercise of options.
On November 20, 2002, in accordance with the Company's plan of
reorganization, the Company granted options to purchase 2,000,000 shares of its
common stock to its employees, including its executive officers, with exercise
prices of $5.28 per share for one-third of the shares subject to such options,
$6.08 per share for one-third of the shares subject to such options and $6.86
per share for one-third of the shares subject to such options. These stock
options are vested as to one-third of the shares subject to the award as of the
grant date and will vest as to an additional one-third of the shares subject to
the award on each of the first and second anniversaries of the grant date. On
November 20, 2002, the Company granted to the same participants, options to
purchase an additional 1,000,000 shares of its common stock with an exercise
price of $2.60 per share, the fair market value as of the grant date. These
stock options will vest as to one-half of the shares subject to the award on the
second anniversary of the grant date and will vest as to one-quarter of the
shares subject to the award on each of the third and fourth anniversaries of the
grant date. The Company also granted options to purchase 10,000 shares to each
of its six non-employee directors, with an exercise price of $2.60 per share.
These stock options will vest according to the same schedule as the options for
1,000,000 shares granted on the same date.
On November 20, 2002, in accordance with its plan of reorganization, the
Company granted to its executive officers restricted stock units for a total of
1,000,000 shares of its common stock. These stock units vest as to one-third of
the shares subject to the award as of the grant date and will vest as to an
additional one-third of the shares subject to the award on each of the first and
second anniversaries of the grant date. Compensation expense in the amount of
$883,000 related to the grant of these stock units was charged to income for the
period from October 30, 2002 to December 31, 2002. The remaining expense of $1.8
million will be recognized ratably over the subsequent eight quarters.
On January 13, 2003, the Company awarded 98,300 shares of unrestricted
common stock to non-management employees of the Company that were employees of
the Company during the Company's reorganization process. Compensation expense in
the amount of $257,000 related to these awards was charged to income for the
period from October 30, 2002 to December 31, 2002.
The compensation committee will determine who will be granted stock options
under the plan, when and how the stock options will be granted, and the type and
terms of the stock options granted, including the exercise period and the number
of shares subject to the stock option. The Company intends each option it grants
under the stock incentive plan to be a nonqualified stock option for income tax
purposes, unless it specifically designates the option as an "incentive stock
option" under Section 422 of the Internal Revenue Code. All of the stock options
the Company granted on November 20, 2002 are nonqualified stock options. The
maximum number of shares of common stock subject to options that may be awarded
under the stock incentive plan to any person is 500,000 shares per year.
The option price for any option granted other than in accordance with the
Company's plan of reorganization may not be less than 100% of the fair market
value of the stock covered by the option on the date of grant, except that, in
the case of an incentive stock option, the option price may not be less than
110% of such fair market value if the optionee is the beneficial owner of 10% or
more of the Company's voting capital stock. In any case, the option price may
not be less than the par value of the stock.
Statement of Financial Accounting Standards No. 123
The Company accounts for its stock based compensation plans under APB No.
25 under which no compensation cost is recognized for options granted with a per
share exercise price equal to the fair market value of the Company's common
stock at the grant date. The Company has computed, for pro forma disclosure
purposes, the value of all options to purchase shares of common stock granted to
employees of the Company using the Black-Scholes option pricing model and the
following weighted average assumptions:
F-27
Successor Predecessor
-------------- ---------------------------------------
October 30, to January 1, to Year Ended
December 31, October 29, December 31,
2002 2002 2001 2000
-------------- ------------- ---------- -----------
Risk-free interest rate .... 3.13% 4.35% 4.38% 6.20%
Expected dividend yield .... 0% 0% 0% 0%
Expected lives ............. Five years Five years Five years Seven years
Expected volatility ........ 84.93% 196.97% 97.72% 190.90%
The weighted-average fair value of options granted under the Company's
stock options plans during the period from the October 30, 2002 to December 31,
2002, from January 1, 2002 to October 29, 2002 and during the years ended
December 31, 2001 and 2000 was $1.53, $0.49, $2.96 and $23.16 per share,
respectively. The total fair value of options for common stock granted to
employees of the Company during the period from October 30, 2002 to December 31,
2002 was computed as approximately $4.6 million, of which the portion related to
the grant of 2,000,000 options would be amortized on a pro forma basis over the
two-year vesting period of those options and the portion related to the grant of
1,060,000 options would be amortized on a pro forma basis over the four-year
vesting period of those options. The total fair value of options for common
stock granted to employees of the Company during the period from January 1, 2002
to October 29, 2002, and during the years ended December 31, 2001 and 2000 was
computed as approximately $985,000, $5.2 million and $81.9 million,
respectively, which would be amortized on a pro forma basis over the four-year
vesting period of the options. If the Company had accounted for these options in
accordance with SFAS No. 123, "Accounting for Stock Based Compensation," the
Company's net loss for the period from October 30, 2002 to December 31, 2002,
from January 1, 2002 to October 29, 2002 and for the years ended December 31,
2001 and 2000 would have increased as follows:
Successor Predecessor
------------- -------------------------------------------
October 30 to January 1 to Year Ended
December 31, October 29, December 31,
Net loss (in thousands) 2002 2002 2001 2000
- ----------------------- ------------- ------------ ----------- ------------
As reported .................................... $ (3,210) $ (33,476) $ (215,644) $ (70,875)
Add: total stock based employee
compensation expense included in net loss ... 1,140 -- -- --
Less: total stock based employee
compensation expense determined under
fair value based method for all awards ...... (2,340) (4,475) (3,388) (29,996)
------------ ----------- ------------ ------------
Pro forma ...................................... $ (4,410) $ (37,951) $ (219,032) $ (100,871)
============ =========== ============ ============
Basic and diluted net loss per share
------------------------------------
As reported .................................... $ (0.07) $ (0.54) $ (3.46) $ (1.16)
Pro forma ...................................... $ (0.10) $ (0.61) $ (3.52) $ (1.66)
A summary of the status of options issued under the Successor Company and
Predecessor Company's plans for the periods indicated is as follows:
Weighted Average
Exercise Price
Shares Per Option
------ ----------
Predecessor Company:
Outstanding at December 31, 2000 ..... 11,610,318 $ 12.81
Granted ......................... 5,750,022 4.28
Exercised ....................... (747,971) 1.70
Forfeited ....................... (3,577,725) 22.56
----------
Outstanding at December 31, 2001 ..... 13,034,644 7.02
Granted ......................... 2,425,205 0.48
Exercised ....................... -- --
Forfeited ....................... (1,755,091) 5.57
F-28
Weighted Average
Exercise Price
Shares Per Option
------ ----------
Predecessor Company:
Cancellation of stock options in connection
with the plan of reorganization .............. (13,704,758) 5.57
-----------
Successor Company:
Outstanding at October 30, 2002 ...................... -- --
Granted ......................................... 3,060,000 4.89
Exercised ....................................... -- --
Forfeited ....................................... -- --
-----------
Outstanding at December 31, 2002 ..................... 3,060,000 4.89
===========
The following table sets forth the exercise price range, number of shares,
weighted average exercise price and remaining contractual lives by groups of
similar price and grant date at December 31, 2002:
Outstanding Weighted Average Exercisable
Range of as of Remaining Weighted Average as of Weighted Average
Exercise Prices Dec. 31, 2002 Contractual Life Exercise Price Dec. 31, 2002 Exercise Price
- --------------------- ------------- ---------------- -------------- ------------- --------------
$ 2.60 - $ 2.60 1,060,000 9.8 $ 2.60 -- $ --
$ 5.28 - $ 6.86 2,000,000 9.8 $ 6.07 666,667 $ 5.28
At December 31, 2002, options to purchase 666,667 shares of the Company's
common stock with a weighted-average exercise price of $5.28 per share were
exercisable by employees of the Company.
At December 31, 2002, options to purchase 440,000 shares remained available
for grant under the Company's stock incentive plan.
10. Restructuring and Special Charges
In September 2001, the Company announced changes to its business plan and
other actions intended to reduce its operating expenses through a 20% reduction
in its workforce and to reduce non-personnel operating expenses and planned
capital expenditures. As a result of this restructuring, the Company in
September 2001 recorded $4.8 million in restructuring costs, which were included
as components of selling, operations and administration expenses. Restructuring
charges included the Company's estimate of employee severance and related costs
for employees terminated as a result of the revised business plan. The
restructuring charges also included estimates of office space lease commitments
where the Company closed offices, net of any sublease rentals, and other exit
costs. In connection with the restructuring, the Company closed an
administrative office, retail services offices and an e/\deltacom office.
Restructuring costs were accrued in accordance with EITF 94-3, "Liability
Recognition for Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." The Company terminated some employees in certain departments
and did not specifically identify the termination of an entire function or
department.
In connection with the foregoing restructuring, the Company recorded
impairment charges of $74.4 million related to net book value of property and
equipment removed from service less expected salvage totaling $1.8 million,
$21.2 million of impaired assets relating to the e/\deltacom data center, and
$51.4 million of intangible assets consisting of goodwill and customer lists
related to e/\deltacom, the AvData Systems network solutions business and IT
Group Communications. These impairment charges are recorded as special charges
in the accompanying Consolidated Statement of Operations for the year ended
December 31, 2001. The impairment of property and equipment removed from service
relates to assets that the Company no longer plans to use as a result of its
restructuring. Based on market conditions and operating results of e/\deltacom,
the Company tested its e/\deltacom assets for impairment. The Company determined
that an impairment existed and wrote the related assets down to estimated fair
value. The Company wrotedown goodwill of $23.9 million related to e/\deltacom
and $21 million of e/\deltacom property and equipment. Fair value was determined
based on estimates of market values for
F-29
comparable properties.
Based on the Company's forecast for its AvData Systems network solutions
business and the expected operating results from customers acquired in the
acquisition of IT Group Communications in 1998, the Company tested the related
assets for impairment in 2001. The Company determined that an impairment existed
and expensed $24.4 million of goodwill and $1.6 million of customer base assets
related to the AvData Systems network solutions business and $1.6 million of
customer base assets related to former customers of IT Group Communications
during the year ended December 31, 2001. These charges are reflected in the
table below under "Retail Services."
In September 2001, the Company also recorded a total of $2.9 million of
other special charges, including a $1.7 million write-down of its retail
services inventory of telephone systems and related equipment as a result of a
decline in demand for those systems. These charges are included as a component
of cost of services. The Company also recorded additional bad debt expense of
$1.2 million, which is included in selling, operations and administration
expenses. Of this amount, $809,000 was associated with disputed access charge
revenues billed to interexchange carriers by the retail services segment and
$392,000 was associated with a discontinued service in the e/\deltacom business.
The following table summarizes restructuring and special charges the
Company recorded in connection with the September 2001 restructuring (in
thousands):
Broadband
Transport
Services Retail Services e/\deltacom Total
--------- --------------- ----------- ----------
Cost of services:
Inventory write-down ................................ $ - $ 1,663 $ - $ 1,663
Selling, general and administration:
Restructuring charges:
Employee severance ............................. 120 2,048 1,638 3,806
Office space leases ............................ - 1,114 88 1,202
Other exit costs ............................... - 54 - 54
Bad debts ......................................... - 809 392 1,201
Special charges:
Impaired property and equipment ................... 55 1,793 21,174 23,022
Impaired goodwill and other
intangible assets ............................. - 27,565 23,850 51,415
--------- --------------- ----------- ----------
Total ............................................... $ 175 $ 35,046 $ 47,142 $ 82,363
========= =============== ========== ==========
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 restructuring costs of approximately $1.8
million in April 2002, related to its data center operations, and of
approximately $943,000 in September 2002, primarily related to its retail
services, 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 94-3. The Company also recorded impairment
charges of approximately $223,000 in April 2002 that related to the net book
value, less expected salvage value, of software removed from service from in 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,
which forms a part of its retail services business. In September 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.
F-30
Following is a summary by segment of the restructuring and impairment
charges that were recorded in 2002 (in thousands):
Retail Services Broadband Transport 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 December 31, 2002, which are recorded in
accrued liabilities (in thousands):
Predecessor Company Successor Company
Balance at Balance at
December 31, 2001 Accruals Write-offs/Payments December 31, 2002
----------------- -------- ------------------- -----------------
Restructuring charges:
Employee severance ................... $ 216 $ 2,361 $ 2,545 $ 32
Office space leases .................. 1,067 297 667 697
Contract termination costs ........... -- 308 308 --
------- ------- -------- ------
Total ................................... $ 1,283 $ 2,966 $ 3,520 $ 729
======= ======= ======== ======
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 2003 as additional payments are made under the
terms of employee severance and office space lease agreements.
11. Commitments and Contingencies
Purchase Commitments
At December 31, 2002, the Company had entered into agreements with vendors
to purchase approximately $2.6 million of equipment during 2003 related to the
improvement and installation of switches, other network equipment and certain
services.
In November 2000, the Company entered into 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 before a
deadline that has been extended to April 2003. 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 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 may be required to pay $6.6 million in 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
F-31
quarter of 2003 through the fourth quarter of 2005. As a result of the agreement
in principle, the Company recorded other long-term liabilities totaling
approximately $10.6 million in the accompanying Consolidated Balance Sheets at
December 31, 2002 (Note 6).
Surety bonds
Some of the Company's customers, especially government entities, require
that the Company obtain surety bonds as a condition to its provision of service
to them. In February 2002, because of the Company's financial condition, its
surety cancelled all outstanding surety bonds that contained cancellation
clauses. At the time the surety bonds were cancelled, the Company's surety bond
portfolio had a face value of approximately $1.9 million in outstanding
obligations, of which approximately $1.2 million were cancelled. The surety
cancelled an additional $405,000 of bonds during 2002 by not renewing the bonds.
As of December 31, 2002, none of the cancelled bonds had been replaced. The
remaining bonds, valued at $282,000, are noncancellable, unless the Company no
longer needs them or does not perform its obligations under the bonds. The
surety also refuses to underwrite any new surety bonds unless the Company
provides 100% collateral for such bonds. The Company is actively working with
the existing obligees of the bonds to provide the security they require, and
another surety has offered to underwrite new bonds or replace cancelled bonds
for the Company if the Company provides 100% collateral for each bond. The
Company's inability to provide surety bonds to replace the cancelled surety
bonds or issue new surety bonds will have an adverse impact on its ability to
provide service to some customers, especially government entities or other
entities that generally require surety bonds. In addition, the requirement to
provide 100% collateral for any bond issued may have an adverse impact on the
funds available for capital expenditures if the Company chooses to purchase the
surety bond and provide the collateral. To maintain the Company's existing
surety obligations would require approximately $1.6 million of available funds
and, depending on the perception of the Company's financial condition, could
increase the demand on the Company of additional surety bonds and therefore
further restrict the Company's available funds. The Company's amended credit
facility allows the Company to issue up to $2 million in bonds and other
security to various entities. The amount allowable for bonds and other security
interests may be increased by up to $3 million, for a total of $5 million, if
the Company prepays principal amounts, in increments of $500,000 plus accrued
and unpaid interest on such amounts, owing under the senior secured credit
facility.
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 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 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 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. BellSouth has
subsequently withdrawn this petition. 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. If it is determined that 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.
F-32
BellSouth Interconnection Agreement
The Company's interconnection agreements with BellSouth expire in June
2003. The Company is currently arbitrating the rates and terms of new agreements
with BellSouth. The Company will continue to operate under terms of the existing
agreements until new agreements are reached. The Company is unable to determine
the impact, if any, these arbitration proceedings 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 provide 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 Company cannot reasonably estimate the amount of
any potential loss that may result from this proceeding.
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 was consolidated with
another pending civil suit in the U.S. District Court for the Southern District
of Mississippi, in which the Company was 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. Recently, both civil suits were dismissed by the
Court. The order of dismissal in the civil action involving the 37 parcels of
land has been appealed to the United States Court of Appeals for the Fifth
Circuit. The Company intends to seek reconsideration of the order of dismissal
in the civil action involving the 63 parcels of land. The Company cannot
reasonably estimate the amount of any potential loss that may result from these
proceedings.
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
F-33
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 that may result from this proceeding.
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 that may result from
this proceeding.
In August 2001, the Company filed suit in the Superior Court of Troup
County, Georgia against Southern Telecom, Inc., Alabama Power Company, Georgia
Power Company, Mississippi Power Company, Gulf Power Company and related
entities from which the Company has obtained use of rights-of-way for its fiber
optic telecommunications network. The Company seeks a declaratory judgment that
the defendants are legally required to use their best efforts to defend against
any claims that the Company does not have the right to use the rights-of-way
granted to these entities and to defend, indemnify and hold the Company harmless
against all such claims. In December 2001, the Company filed for summary
judgment and, subsequently, the defendants have filed a motion for summary
judgment, but the court has not ruled on these motions. The defendants also have
filed a counterclaim requesting, among other items, that the Company reimburse
them for the cost of perfecting the applicable rights-of-way. The Company cannot
reasonably estimate the amount of any potential loss if the defendants'
counterclaim is successful or if the court rules that we are not entitled to
some or all of the rights to indemnification we are seeking.
In October 2001, a civil action was filed in the Chancery Court of Lamar
County, Mississippi against Mississippi Power Company and the Company by two
plaintiffs seeking to quiet and confirm title to real property, for ejectment
and for accounting. The plaintiffs are joint owners of a single parcel of
property located in Lamar County, Mississippi. Both plaintiffs were also
defendants in the civil action filed by the Company against the owners of 37
parcels of land as described above. The plaintiffs have not specified a
particular dollar amount they are seeking in damages. The Company cannot
reasonably estimate the amount of any potential loss that may result from this
proceeding.
In April and May 2002, 190 lawsuits were filed and, in October and December
2002, 30 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 that may result from these
proceedings.
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
F-34
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 that may result from this proceeding.
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 that may result from these proceedings.
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 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
that may result from this proceeding.
In September 2002, Mississippi Power Company and the Company were served
with a summons and complaint filed in a civil action in the Circuit Court of
Jasper County, Mississippi. The landowners of seventy-five parcels of property
located in various Mississippi counties allege Mississippi Power Company and the
Company have violated the landowners' rights with regard to the use of
Mississippi Power Company's easements across the landowners' property similar to
other rights-of-way suits in Mississippi. The plaintiffs allege trespass, unjust
enrichment, fraud and deceit, and civil conspiracy and seek for each plaintiff
$5 million in compensatory damages, $50 million in punitive damages,
disgorgement of gross revenues, a percentage of gross revenues derived from use
of the rights of way and court costs. The Company denies all allegations.
Although WorldCom is not a party to this action, Mississippi Power Company has
removed this action 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 that may result from this proceeding.
In November 2002, a civil action was filed in the Superior Court of Walton
County, Georgia, against Georgia Power Company and the Company. The plaintiff,
claiming to be representative of a class of all landowners over which Georgia
Power Company has facilities, alleges the documents granting Georgia Power
Company the rights to cross the plaintiff's property do not grant the right to
Georgia Power Company to allow third parties to use the rights-of-way for the
transmission of telecommunications services of such third parties. The civil
action claims trespass and unjust enrichment. There are no specified dollar
amounts demanded in the complaint, but the relief sought includes compensatory
damages, punitive damages, attorney fees, and injunctive relief requiring the
removal of the fiber optic
F-35
facilities from the land of the plaintiff. Georgia Power Company and the Company
deny the allegations. The Company cannot reasonably estimate the amount of any
potential loss that may result from this proceeding.
In December 2002, two civil actions were filed against Mississippi Power
Company and the Company in the Circuit Court of Smith County, Mississippi, by a
single attorney alleging trespass in that the documents granting Mississippi
Power Company the rights to cross the plaintiffs' property do not grant the
right to Mississippi Power Company to allow third parties to use the
rights-of-way for the transmission of telecommunications services of such third
parties and that such use by third parties is prohibited under state law. The
plaintiffs allege that the Company is using such rights-of-way across the
plaintiffs' property, but the Company does not have sufficient information from
the complaint or otherwise to determine where the plaintiffs' property is
located. The Company does not utilize rights-of-way in Smith County,
Mississippi, where these civil actions were filed. The Company cannot reasonably
estimate the amount of any potential loss that may result from these
proceedings.
On March 11, 2003, a complaint was filed against the Company in the United
States District Court for the Southern District of Mississippi. The plaintiffs,
claiming to be representatives of a class of plaintiffs, claim to be owners of
the land across which certain rights of way of Kansas City Southern Railroad
("KSC") and Illinois Central Railroad ("IC") are located. Pursuant to certain
agreements with KSC and IC, the Company utilizes certain fiber optic cable
within the rights of way of KSC and IC across Mississippi. The plaintiffs claim
that the documents granting the rights of way to KCS and IC do not permit the
installation and operation of telecommunication facilities of third parties
within the rights of way. The plaintiffs allege trespass, unjust enrichment and
conversion and seek unspecified amounts of compensatory and punitive damages,
restitution, disgorgement, attorney fees, an accounting of amounts paid to KSC
and IC and declaratory relief regarding the parties' respective rights. The
Company denies the allegations. The Company cannot reasonably estimate the
amount of any potential loss that may result from this proceeding.
Other Rights-of-Way Contingency
The Company has obtained a portion of its rights-of-way under an agreement
with Southern Telecom, Inc. and its affiliates 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 $19.7 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. On January
24, 2003, Southern Telecom filed a civil action against the Company in the
Circuit Court of Troup County, Georgia alleging that the Company breached the
Southern Telecom agreement by failing to make payments to Southern Telecom of
$123,288 by November 29, 2002 and $19,615,178 by January 28, 2003, for a total
of approximately $19.7 million, that were triggered by an alleged "change of
control" of ITC/\DeltaCom, as that term is defined in agreement. Southern
Telecom contends that a "change of control" occurred on October 29, 2002, when
the Company's plan of reorganization became effective. In its answer to the
complaint, the Company denied that a "change of control," as defined in the
agreement, occurred and further denied that the amounts claimed by Southern
Telecom are due under the Agreement. The Company cannot reasonably estimate the
amount of any potential loss.
Reciprocal Interconnection Charges
In September 2000, the Company reached a settlement with BellSouth
Telecommunications, Inc. ("BellSouth") related to the Company's long-standing
dispute over BellSouth's payment of reciprocal compensation for local calls
placed by customers of BellSouth and terminated to customers of the Company,
including calls terminated to the Company's Internet service provider customers
(the "Settlement Agreement"). The Settlement Agreement provides for the
settlement of all amounts claimed by the Company to be due for past reciprocal
compensation at rates consistent with or in excess of amounts previously
recognized by the Company as operating revenue, as well as establishes rates for
all reciprocal compensation traffic on the Company's network for 2001 and 2002.
The Company recognized a one-time net benefit of approximately $14.3 million for
the year ended December 31, 2000 related to prior-period amounts of reciprocal
compensation.
F-36
The Settlement Agreement provided for a cash payment of approximately $53
million, which BellSouth made in October 2000. This payment represented payment
for reciprocal compensation amounts previously billed to BellSouth and for
estimated reciprocal compensation billings for the period from the date of the
Settlement Agreement through December 31, 2000 and for 2001. The portion of the
payment related to 2001 was subject to reconciliation procedures. Under the
initial reconciliation procedure that occurred in July 2001, the Company repaid
$5.5 million to BellSouth, which represented the difference between the
forecasted amount of reciprocal compensation upon which the prepayment was based
and the actual amount of reciprocal compensation generated by BellSouth during
the first six months of 2001 and a revised forecasted amount for the last six
months of 2001. This repayment had no effect on the Company's recorded revenues
for 2001, because the Company recognizes reciprocal compensation revenue as it
is earned. The repayment was recorded as a reduction to deferred revenue. The
portion of the prepayment related to 2001 reciprocal compensation was subject to
additional reconciliation procedures covering the last six months of 2001. The
Company was not required to repay additional amounts to BellSouth as a result of
the additional 2001 reconciliation procedures.
The Settlement Agreement also provided for the prepayment by BellSouth of
an additional amount to the Company in December 2001 related to expected
reciprocal compensation traffic levels in 2002. The Company received a
prepayment from BellSouth of $17.6 million in December 2001 related to this
provision of the Settlement Agreement. This additional amount was subject to
quarterly reconciliation procedures based upon the actual amount of reciprocal
compensation traffic during 2002. As a result, the Company repaid $1.8 million
of the 2002 reciprocal compensation prepayment. The Company is disputing
BellSouth's claim that an additional $1.8 million repayment is due under the
reconciliation procedures.
The Company agreed to limit reciprocal compensation payments by BellSouth
to $27.5 million in 2001 and $29.5 million in 2002.
12. Employee Benefit Plans
Employees of the Company participate in the Company's 401(k) defined
contribution plan. The Company offers matching of employee contributions at a
rate of 100% of up to the first 2% of employee contributions and 50% of up to
the next 4% of employee contributions. Beginning in 2003, the Company changed
its rate of matching employee contributions to provide matching at a rate of 50%
on the first 4% of employee contributions. Total matching contributions made to
the Company's plan and charged to expense by the Company for the periods from
October 30, 2002 to December 31, 2002, from January 1, 2002 to October 29, 2002
and for the years ended December 31, 2001 and 2000 were $258,000, $1.8 million,
$2.4 million and $1.8 million, respectively. No discretionary contributions were
made for 2002, 2001 and 2000.
13. Related Party Transactions
As described below, certain affiliates of the Company and other related
parties have provided the Company with various services, and the Company has
provided some of these entities with telecommunications and related services. In
management's opinion, the Company's transactions with the entities described
below are generally representative of arm's-length transactions.
ITC Holding Company and Affiliates
Each of the companies described below is, or during one or more of the
years ended December 31, 2002, 2001 and 2000 was, a subsidiary or affiliate of
ITC Holding Company. During the years ended December 31, 2002, 2001 and 2000,
directors of ITC Holding Company constituted a majority of the Company's Board
of Directors and certain of such directors of the Company also served as
directors or executive officers of certain of the companies described below. In
2001, as a result of its investment in the Series B preferred stock, ITC Holding
Company acquired beneficial ownership of voting securities of the Company
representing over 5% of the total voting power of
F-37
the Company's voting securities. On October 29, 2002, in exchange for the
cancellation of these securities and the Company's senior notes under its plan
of reorganization, ITC Holding Company was issued over 5% of the Company's new
common stock (Note 3).
The current or former subsidiaries or affiliates of ITC Holding Company
that provided the Company with various services and/or received services
provided by the Company include KNOLOGY Broadband, Inc. ("KNOLOGY"), which
provides local exchange and long-distance telephone services and cable
television services; InterCall, Inc. ("InterCall"), which provides conference
calling services; InterServ Services Corporation ("InterServ"), which provides
operator services for "800" customer service numbers and full-service marketing
research in the telecommunications industry and other industries; Powertel,
Inc., which provides cellular services; and MindSpring Enterprises, Inc. and its
successor, Earthlink, Inc. (collectively, "Earthlink"), which is a provider of
Internet access.
For the periods from October 30, 2002 to December 31, 2002, from January 1,
2002 to October 29, 2002 and for the years ended December 31, 2001 and 2000, the
Company received services from these affiliated entities in the amounts of
$49,000, $605,000, $820,000, and $781,000, respectively, which are reflected in
selling, operations and administration expenses in the accompanying Consolidated
Statements of Operations. In addition, for the periods from October 30, 2002 to
December 31, 2002, from January 1, 2002 to October 29, 2002 and for the years
ended December 31, 2001 and 2000, the Company received services from these
affiliated entities in the amounts of $97,000, $492,000, $663,000 and $780,000,
respectively, which are reflected in cost of services in the accompanying
Consolidated Statements of Operations.
The Company provides operator and directory assistance services and leases
capacity on certain of its fiber routes to affiliated entities. The Company also
provides long-distance and related services to ITC Holding Company and some of
the foregoing affiliated entities and acts as an agent for InterCall in
contracting with major interexchange carriers to provide origination and
termination services. Under this agency agreement, the Company contracts with
the interexchange carrier and rebills the appropriate access charges plus a
margin to InterCall, so that only the margin is included in the Company's
consolidated revenues. Total affiliated revenues related to the foregoing
entities included in the accompanying Consolidated Statements of Operations for
the periods from the October 30, 2002 to December 31, 2002, from January 1, 2002
to October 29, 2002 and for the years ended December 31, 2001 and 2000 were
$722,000, $3.8 million, $12.1 million and $21.4 million, respectively. As a
result of changes in the composition of affiliated entities, the revenues earned
from such entities decreased from 2000 to 2002.
SCANA Corporation and Affiliates
The Company entered into the transactions with SCANA Corporation ("SCANA")
and its subsidiaries described below. Mr. Timmerman, a director of the Company,
is also Chairman, President and Chief Executive Officer of SCANA. SCANA is the
beneficial owner of voting securities of the Company representing over 5% of the
total voting power of the Company's voting securities.
The Company provides retail services, including local and long distance
telephone services, data services and Internet access, to SCANA and some of
SCANA's subsidiaries. Total revenues attributable to SCANA and its subsidiaries
included in the accompanying Consolidated Statements of Operations for the
periods October 30, 2002 to December 31, 2002, from January 1, 2002 to October
29, 2002 and for the years ended December 31, 2001 and 2000 were $241,000, $1.3
million, $1.5 million and $1.7 million, respectively. The Company leases office
space and space for telecommunications switching equipment at various locations
in Columbia, South Carolina from a subsidiary of SCANA. Under the lease
agreements, the Company paid $33,000, $230,000, $157,000 and $113,000 for the
periods from October 30, 2002 to December 31, 2002, from January 1, 2002 to
October 29, 2002 and for the years ended December 31, 2001 and 2000,
respectively. The Company also purchased local access services from SCANA
totaling $212,000, $1.2 million, $711,000 and $0 for the periods from October
30, 2002 to December 31, 2002, from January 1, 2002 to October 29, 2002 and for
the years ended December 31, 2001 and 2000, respectively.
F-38
J. Smith Lanier & Co.
J. Smith Lanier & Co., an insurance placement company, has provided the
Company with insurance brokerage services, including the negotiation and
acquisition on the Company's behalf of various insurance policies with
third-party insurers. J. Smith Lanier & Co. also has performed risk management
services for the Company. The Company paid $0, $1.5 million, $767,000 and
$624,000 for gross insurance premiums for the periods from October 30, 2002 to
December 31, 2002, from January 1, 2002 to October 29, 2002 and for the years
ended December 31, 2001 and 2000, respectively. J. Smith Lanier generally
receives a commission on the gross premium ranging from 5% to 7%. The Company
provides retail services, including local and long distance telephone services
and data and Internet services, to J. Smith Lanier & Co. Total revenues
attributable to J. Smith Lanier & Co. included in the accompanying Consolidated
Statements of Operations for the periods from October 30, 2002 to December 31,
2002, from January 1, 2002 October 29, 2002 and for the years ended December 31,
2001 and 2000 were $114,000, $389,000, $307,000 and $166,000, respectively.
Prior to October 29, 2002, J. Smith Lanier, II was the beneficial owner of more
than 5% of the Company's common stock. Mr. Lanier also is the Chairman and a
significant stockholder of J. Smith Lanier & Co. William T. Parr, a director of
the Company until October 29, 2002, serves as Vice Chairman of J. Smith Lanier &
Co.
14. Acquisition
Acquisition of Bay Data
In May 2000, the Company completed its acquisition, by merger, of Bay Data,
a privately-owned information systems solutions company headquartered in
Atlanta, Georgia. The Company paid cash of $2.0 million and issued 837,942
shares of common stock valued at $26.2 million to consummate the transaction. Of
such shares, 111,725 shares were held in escrow for two years to protect against
specified contingencies. These shares were released during 2002.
The purchase price of Bay Data was allocated to the underlying assets
purchased and liabilities assumed based on their estimated fair values at the
date of acquisition. The following table summarizes the net assets purchased in
connection with this acquisition and the amount attributable to costs in excess
of net assets acquired (in thousands):
Property, plant and equipment .... $ 1,807
Working capital .................. (1,375)
Noncurrent liabilities ........... 0
Intangible assets ................ 27,785
-------
Purchase price ................... $28,217
=======
15. 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 and 2000
segment information to include the results of the former e/\deltacom segment as
part of the results of its retail services segment. The Company evaluates
segment performance based on operating revenue, gross margin, selling, operation
and administration expense and depreciation and amortization expense. The
accounting policies of the business segments are the same as those described in
the summary of significant accounting policies (Note 2). All intercompany
transactions between segments have been eliminated. Summarized financial data by
business segment as of and for the periods from October 30, 2002 to December 31,
2002, from January 1, 2002 to October 29, 2002 and for the years ended December
31, 2001 and 2000 are as follows (in thousands):
F-39
Successor Period from October 30 to December 31, 2002
----------------------------------------------------------------
Broadband
Retail Transport Corporate
Segment Segment Segment Consolidated
----------------------------------------------------------------
Operating revenues ..................... $ 51,995 $ 13,574 $ -- $ 65,569
Gross margin ........................... 23,350 12,198 -- 35,548
Selling, operations and
administration ........................ 21,735 5,373 -- 27,108
Depreciation and amortization .......... 5,559 3,443 -- 9,002
Other income (expense), net ............ 216
Interest expense ....................... (2,350)
------------
Loss before income taxes ............... $(2,696)
============
Identifiable assets .................... $ 310,559 $ 242,638 $ 323 $ 553,520
============ ============ ============ ============
Intangible assets, net ................. $ 5,564 $ 19,889 $ -- $ 25,453
============ ============ ============ ============
Capital expenditures, net .............. $ 4,809 $ 107 $ - $ 4,916
============ ============ ============ ============
Predecessor Period from January 1 to October 29, 2002
----------------------------------------------------------------
Broadband
Retail Transport Corporate
Segment Segment Segment Consolidated
----------------------------------------------------------------
Operating revenues ..................... $ 281,910 $ 70,987 $ -- $ 352,897
Gross margin ........................... 124,493 63,484 -- 187,977
Selling, operations and
administration ........................ 107,174 29,298 -- 136,472
Depreciation and amortization .......... 61,139 44,509 48 105,696
Special charges ........................ 223 -- -- 223
Other income (expense), net ............ 60
Interest expense ....................... (35,704)
Reorganization items ................... 60,792
------------
Loss before income taxes ............... $ (29,266)
============
Identifiable assets .................... $ 313,978 $ 240,583 $ 1,057 $ 555,618
============ ============ ============ ============
Intangible assets, net ................. $ 1,089 $ 286 $ -- $ 1,375
============ ============ ============ ============
Goodwill, net .......................... $ 45,292 $ 8,611 $ -- $ 53,903
============ ============ ============ ============
Capital expenditures, net .............. $ 25,520 $ 4,264 $ -- $ 29,784
============ ============ ============ ============
Predecessor 2001
------------------------------------------------------------------
Broadband
Retail Transport Corporate
Segment Segment Segment Consolidated
------------------------------------------------------------------
Operating revenues ..................... $ 320,305 $ 95,034 $ -- $ 415,339
Gross margin ........................... 143,724 83,831 -- 227,555
Selling, operations and
administration ........................ 154,733 33,979 -- 188,712
Depreciation and amortization .......... 69,765 49,091 82 118,938
Special charges ........................ 74,382 55 -- 74,437
Other income (expense), net ............ 1,434
Interest expense ....................... (58,833)
------------
Loss before income taxes ............... $ (211,931)
============
Identifiable assets .................... $ 519,505 $ 347,729 $ 11,098 $ 878,332
============ ============ ============ ============
Intangible assets, net ................. $ 1,735 $ 308 $ -- $ 2,043
============ ============ ============ ============
Goodwill, net .......................... $ 45,292 $ 8,611 $ -- $ 53,903
============ ============ ============ ============
Capital expenditures, net .............. $ 117,679 $ 44,286 $ -- $ 161,965
============ ============ ============ ============
Predecessor 2000
------------------------------------------------------------------
Broadband
Retail Transport Corporate
Segment Segment Segment Consolidated
------------------------------------------------------------------
Operating revenues ..................... $ 280,312 $ 83,336 $ - $ 363,648
Gross margin ........................... 134,699 73,949 - 208,648
F-40
Predecessor 2000
----------------------------------------------------------------
Broadband
Retail Transport Corporate
Segment Segment Segment Consolidated
----------------------------------------------------------------
Selling, operations and
administration ........................ 118,064 32,986 - 151,050
Depreciation and amortization .......... 48,507 37,930 82 86,519
Loss on early termination of credit
facility .............................. 1,321
Other income (expense), net ............ 14,337
Interest expense ....................... (55,482)
------------
Loss before income taxes ............... $ (71,387)
============
Identifiable assets .................... $ 555,011 $ 457,637 $ 35,878 $ 1,048,526
============ ============ ============ ============
Intangible assets, net ................. $ 5,769 $ 334 $ -- $ 6,103
============ ============ ============ ============
Goodwill, net .......................... $ 98,366 $ 8,869 $ -- $ 107,235
============ ============ ============ ============
Capital expenditures, net .............. $ 188,243 $ 121,588 $ - $ 309,831
============ ============ ============ ============
16. Quarterly Financial Data (Unaudited)
The following table has been prepared from the financial records of the
Company, without audit, and reflects all adjustments that are, in the opinion of
management, necessary for a fair presentation of the results of operations for
the interim periods presented (in thousands, except per share amounts). The sum
of the per share amounts do not equal the annual amounts because of the changes
in the weighted-average number of shares outstanding during the year.
Predecessor Successor
----------- ---------
Period from Period from
October 1 to October 30 to
October 29, December 31,
2002 (a) 1st Qtr 2nd Qtr 3rd Qtr 2002 (b) 2002 (b) Total (c)
-------- ------------- ------- -------- ------------ ------------ -----------
Operating revenues ...................... $109,348 $ 108,611 $101,021 $ 33,917 $ 65,569 $418,466
Gross margin ............................ 58,359 58,364 53,169 18,085 35,548 223,525
Net (loss) income applicable to common
stockholders. (32,896) (34,754) (34,758) 68,932 (3,210) (36,686)
Basic and diluted net (loss) income per
common share. (0.53) (0.56) (0.56) 1.11 (0.07) N/A
Predecessor
2001 (a) 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr (b) Total
-------- ---------- ------- --------- ------- ------------
Operating revenues ...................... $102,207 $ 106,034 $102,482 $ 104,616 $415,339
Gross margin ............................ 58,769 59,938 53,418 55,430 227,555
Net loss applicable to common stockholders (29,820) (31,103) (119,942) (34,779) (215,644)
Basic and diluted net loss per common share (0.48) (0.50) (1.92) (0.56) (3.46)
(a) See Notes 3 and 10 for descriptions of special charges affecting
quarters.
(b) The Company's weighted average outstanding shares for the periods from
October 30, 2002 to December 31, 2002, from October 1, 2002 to October
29, 2002 and the fourth quarter of 2001 was 44,750,000, 62,364,768 and
62,364,768, respectively.
(c) Basic and diluted net loss per common share is not comparable on a
full year basis for 2002 as a result of the Company's reorganization.
F-41
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders
of ITC/\DeltaCom, Inc.
The audit referred to in our report dated February 24, 2003 relating to the
consolidated financial statements of ITC/\DeltaCom, Inc. and Subsidiaries, which
is contained in Item 8 of this Form 10-K included the audit of the financial
statement schedules listed in the accompanying index. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statement schedules based upon our
audit.
In our opinion such financial statement schedules present fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
- -----------------------------
BDO Seidman, LLP
Atlanta, Georgia
February 24, 2003
S-1
THE FOLLOWING REPORT IS A COPY OF A PREVIOUSLY ISSUED REPORT BY ARTHUR
ANDERSEN LLP AND IT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. ARTHUR
ANDERSEN LLP HAS NOT CONSENTED TO ITS INCORPORATION BY REFERENCE INTO
ITC/\DELTACOM, INC.'S PREVIOUSLY FILED REGISTRATION STATEMENT FILE
NO: 333-101007; THEREFORE, AN INVESTOR'S ABILITY TO RECOVER ANY POTENTIAL
DAMAGE MAY BE LIMITED.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of ITC/\DELTACOM, INC.
and SUBSIDIARIES included in this Form 10-K and have issued our report thereon
dated February 15, 2002. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in the index is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/S/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 15, 2002
S-2
ITC/\DELTACOM, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFICATION ACCOUNTS
(In thousands)
Balance at Additions Deduction Balance
------------------------- ---------
Beginning Charged to Charged to at End of
Description: of Period Income Other Accounts Period
- ------------ --------- ------ -------------- ------
Provision for uncollectible accounts
Year Ended December 31, 2000 .............. 1,524 3,009 0 1,530 (1) 3,003
Year Ended December 31, 2001 .............. 3,003 5,230 0 2,544 (1) 5,689
Period from January 1, to October 29, 2002 5,689 3,595 0 2,359 (1) 6,925
Period from October 30 to December 31, 2002 6,925 1,184 0 765 (1) 7,344
Valuation allowance for deferred tax assets
Year Ended December 31, 2000 .............. 31,187 17,176 8,999 (2) 0 57,362
Year Ended December 31, 2001 .............. 57,362 55,203 2,275 (2) 0 114,840
Period from January 1, to October 29, 2002 114,840 32,884 0 0 147,724
Period from October 30 to December 31, 2002 147,724 646 0 (118,904)(3) 29,466
(1) Represents the write-off of accounts considered to be uncollectible, less
recoveries of amounts previously written off.
(2) Represents the increase in the valuation allowance related to stock option
compensation deductible for income tax purposes, but not for financial
accounting purposes, and charged to additional paid-in capital, net of a
full valuation allowance.
(3) Represents the reduction in the Company's net operating loss carryforwards
as a result of its reorganization.
S-3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 31st day of
March 2003.
ITC/\DELTACOM, INC.
By: /s/ LARRY F. WILLIAMS
------------------------------------------
Larry F. Williams
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 31, 2003.
Signature Title
----------------------------- ----------------------
/s/ LARRY F. WILLIAMS Chairman, Chief Executive Officer and Director (Principal
------------------------------------- Executive Officer)
Larry F. Williams
/s/ DOUGLAS A. SHUMATE Senior Vice President-Chief Financial Officer (Principal
------------------------------------- Financial Officer and Principal Accounting Officer)
Douglas A. Shumate
/s/ CAMPBELL B. LANIER, III Director
-------------------------------------
Campbell B. Lanier, III
/s/ DONALD W. BURTON Director
-------------------------------------
Donald W. Burton
/s/ JOHN J. DELUCCA Director
-------------------------------------
John J. DeLucca
/s/ R. GERALD MCCARLEY Director
-------------------------------------
R. Gerald McCarley
/s/ ROBERT C. TAYLOR Director
-------------------------------------
Robert C. Taylor, Jr.
/s/ WILLIAM B. TIMMERMAN Director
-------------------------------------
William B. Timmerman
CERTIFICATIONS
I, Larry F. Williams, certify that:
1. I have reviewed this annual report on Form 10-K of IT/\DeltaCom, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
annual report (the "Evaluation Date"); and
c) Presented in this annual 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
annual 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: March 31, 2003 /s/ Larry F. Williams
------------------------- ---------------------------------------
Larry F. Williams
Chairman and Chief Executive Officer
I, Douglas A. Shumate, certify that:
1. I have reviewed this annual report on Form 10-K of IT/\DeltaCom, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
annual report (the "Evaluation Date"); and
c) Presented in this annual 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
annual 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: March 31, 2003 /s/ Douglas A. Shumate
-------------------- --------------------------------------
Douglas A. Shumate
Senior Vice President - Chief Financial
Officer
EXHIBIT INDEX
Exhibit
Number Exhibit Description
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2.1 ITC/\DeltaCom, Inc. Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code, As Further Revised, dated October 15, 2002. Filed as
part of Exhibit 1 to Amendment No. 2 to Registration Statement on
Form 8-A of ITC/\DeltaCom, Inc., dated October 29, 2002 (the "Form
8-A"), and incorporated herein by reference.
3.1 Restated Certificate of Incorporation of ITC/\DeltaCom, Inc. (including
the Certificate of Designation of the Powers, Preferences and Relative,
Participating and Other Special Rights of 8% Series A Convertible
Redeemable Preferred Stock and Qualifications, Limitations or
Restrictions Thereof). Filed as Exhibit 2 to Form 8-A and incorporated
herein by reference.
3.2 Amended and Restated Bylaws of ITC/\DeltaCom, Inc. Filed as Exhibit 3
to Form 8-A and incorporated herein by reference.
4.1 Specimen representing the Common Stock of ITC/\DeltaCom, Inc. Filed as
Exhibit 4 to Form 8-A and incorporated herein by reference.
*4.2 Specimen representing the 8% Series A Convertible Redeemable
Preferred Stock, par value $0.01 per share, of ITC/\DeltaCom, Inc.
*4.3 Warrant Agreement, dated as of October 29, 2002, between ITC/\DeltaCom,
Inc. and Mellon Investors Services LLC, as Warrant Agent.
10.1 Capacity Agreement dated as of February 1, 1997 between Interstate
FiberNet, Inc. and Entergy Technology Company. Filed as Exhibit 10.1 to
Registration Statement on Form S-4, as amended (File No. 333-31361)
(the "1997 Form S-4"), and incorporated herein by reference.
10.2 License Agreement dated February 1, 1997 between Interstate FiberNet,
Inc. and Metropolitan Atlanta Rapid Transit Authority. Filed as
Exhibit 10.2 to 1997 Form S-4 and incorporated herein by reference.
10.3 Term Agreement dated as of August 11, 1994 between Gulf States
FiberNet and Illinois Central Railroad Company. Filed as Exhibit
10.14 to 1997 Form S-4 and incorporated herein by reference.
10.4.1 Revised and Restated Fiber Optic Facilities and Services Agreement
dated as of June 9, 1995 among Southern Development and Investment
Group, Inc., on behalf of itself and as agent for Alabama Power
Company, Georgia Power Company, Gulf Power Company, Mississippi
Power Company, Savannah Electric and Power Company, Southern
Electric Generating Company and Southern Company Services, Inc. and
MPX Systems, Inc., which was assigned in part by MPX Systems, Inc.
to Gulf States FiberNet pursuant to an Assignment dated as of July
25, 1995. Filed as Exhibit 10.15 to 1997 Form S-4 and incorporated
herein by reference.
Exhibit
Number Exhibit Description
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10.4.2 Release, Waiver, and Assumption Agreement, dated as of December 31,
1997, between Southern Development Investment Group, Inc., on behalf
of itself and as agent for Alabama Power Company, Georgia Power
Company, Gulf Power Company, Mississippi Power Company, Savannah
Electric and Power Company, Southern Electric Generating Company and
Southern Company Services, Inc. and Interstate FiberNet, Inc. and
Gulf States Transmission Systems, Inc. Filed as Exhibit 10.15.1 to
Annual Report on Form 10-K for the year ended December 31, 1997 (the
"1997 Form 10-K") and incorporated herein by reference.
10.4.3 Amendment to the Revised and Restated Fiber Optic Facilities and
Services Agreement, dated as of January 1, 1998, by and among
Southern Company Energy Solutions, Inc. (f/k/a Southern Development
Group, Inc.), on behalf of itself and as agent for Alabama Power
Company, Georgia Power Company, Gulf Power Company, Mississippi
Power Company, Savannah Electric and Power Company, Southern
Electric Generating Company and Southern Company Services, Inc. and
Interstate FiberNet, Inc. Filed as Exhibit 10.15.2 to Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998 and
incorporated herein by reference.
10.4.4 First Amendment to Revised and Restated Fiber Optic Facilities and
Services Agreement dated as of July 24, 1995 between Southern
Development and Investment Group, Inc. on behalf of itself and as
agent for others and MPX Systems, Inc. Filed as Exhibit 10.16 to
1997 Form S-4 and incorporated herein by reference.
10.4.5 Partial Assignment and Assumption of Revised and Restated Fiber
Optic Facilities and Services Agreement dated July 25, 1995 between
MPX Systems, Inc. and Gulf States FiberNet. Filed as Exhibit 10.17
to 1997 Form S-4 and incorporated herein by reference.
+10.4.6 Amendment to Revised and Restated Fiber Optic Facilities and
Services Agreement, dated July 15, 1997, by and among Southern
Development and Investment Group, Inc., on behalf of itself and its
agent for Alabama Power Company, Georgia Power Company, Gulf Power
Company, Mississippi Power Company, Savannah Electric and Power
Company, Southern Electric Generating Company and Southern Company
Services, Inc. (collectively "SES"), ITC Transmission Systems, Inc.
(as managing partner of Interstate Fibernet) and Gulf States
Transmission Systems, Inc. Filed as Exhibit 10.17.1 to 1997 Form S-4
and incorporated herein by reference.
10.4.7 Consent for Assignment of Interest dated February 20, 1997 among
SCANA Communications, Inc., Gulf States FiberNet, Gulf States
Transmission Systems, Inc. and Southern Development and Investment
Groups, Inc. Filed as Exhibit 10.18 to 1997 Form S-4 and
incorporated herein by reference.
10.4.8 Second Partial Assignment and Assumption of Revised and Restated
Fiber Optic Facilities and Services Agreement dated March 27, 1997
between SCANA Communications, Inc. and ITC Holding Company, Inc.
Filed as Exhibit 10.19 to 1997 Form S-4 and incorporated herein by
reference.
+10.4.9 Amendment, effective as of August 1, 2000, between Southern Telecom,
Inc., on behalf of itself and as agent for the other parties
specified therein, and Interstate FiberNet, Inc. to the Revised and
Restated Fiber Optics Facilities and Services Agreement made as of
June 9, 1995. Filed as Exhibit 10.1 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000 and incorporated herein by
reference.
10.5.1 Fiber System Lease Agreement dated January 30, 1996 between CSW
Communications, Inc. and Gulf States FiberNet. Filed as Exhibit
10.20 to 1997 Form S-4 and incorporated herein by reference.
Exhibit
Number Exhibit Description
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10.5.2 Consent for Acquisition and Assignment dated January 13, 1997 between
CSW Communications, Inc. and Gulf States FiberNet. Filed as Exhibit
10.21 to 1997 Form S-4 and incorporated herein by reference.
10.6 Network Operating Agreement dated March 25, 1996 among Gulf States
FiberNet, TriNet, Inc., Hart Communications, Inc. and SCANA
Communications, Inc. (f/k/a MPX Systems, Inc.). Filed as Exhibit
10.25 to 1997 Form S-4 and incorporated herein by reference.
10.7.1 Agreement for the Provision of Fiber Optic Facilities and Services
dated March 29, 1990 between Alabama Power Company and Southern
Interexchange Facilities, Inc. Filed as Exhibit 10.26 to 1997 Form
S-4 and incorporated herein by reference.
10.7.2 Amendment to the Agreement for Provision of Fiber Optic Facilities
and Services dated March 29, 1990 between Alabama Power Company and
Southern Interexchange Facilities, Inc. Filed as Exhibit 10.27 to
1997 Form S-4 and incorporated herein by reference.
10.7.3 First Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated March 22, 1991 between Alabama Power
Company and Southern Interexchange Facilities, Inc. Filed as Exhibit
10.28 to 1997 Form S-4 and incorporated herein by reference.
10.7.4 Second Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated December 1, 1991 between Alabama Power
Company and Southern Interexchange Facilities, Inc. Filed as Exhibit
10.29 to 1997 Form S-4 and incorporated herein by reference.
10.7.5 Third Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated September 23, 1992 between Alabama
Power Company and Southern Interexchange Facilities, Inc. Filed as
Exhibit 10.30 to 1997 Form S-4 and incorporated herein by reference.
10.7.6 Fourth Amendment to the Agreement for the Provision of Fiber Optic
Facilities and Services dated January 1, 1994 between Alabama Power
Company and Southern Interexchange Facilities, Inc. Filed as Exhibit
10.31 to 1997 Form S-4 and incorporated herein by reference.
10.8.1 Agreement dated March 6, 1990 between Tennessee Valley Authority and
Consolidated Communications Corporation (predecessor to DeltaCom,
Inc.). Filed as Exhibit 10.32 to 1997 Form S-4 and incorporated
herein by reference.
10.8.2 Supplement Agreement; Leased Fiber Pathways, dated as of September
26, 1997, by and between Tennessee Valley Authority and DeltaCom,
Inc. Filed as Exhibit 10.32.1 to 1997 Form 10-K and incorporated
herein by reference.
10.9 Master Equipment Lease Agreement dated October 30, 1995 between AT&T
Systems Leasing Co. and DeltaCom, Inc. Filed as Exhibit 10.36 to
1997 Form S-4 and incorporated herein by reference.
10.10 Agreement dated January 14, 1997 between DeltaCom, Inc. and SCANA
Communications, Inc., for switch location in Columbia, South
Carolina. Filed as Exhibit 10.41 to 1997 Form S-4 and incorporated
herein by reference.
Exhibit
Number Exhibit Description
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+10.11.1 Network Products Purchase Agreement No. ITC 2000NPPA between Nortel
Networks Inc. and Interstate FiberNet, Inc. and its subsidiary ITC/\
DeltaCom Communications, Inc., effective as of November 8, 2000 (the
"Nortel Purchase Agreement"). Filed as Exhibit 10.18 to Annual
Report on Form 10-K for the year ended December 31, 2000 (the "2000
Form 10-K") and incorporated herein by reference.
+10.11.2 Schedule D: Data and Internet Products: Ethernet Port Commitment and
Services Payment Program to the Nortel Purchase Agreement. Filed as
Exhibit 10.12.2 to Annual Report on Form 10-K for the year ended
December 31, 2001 (the "2001 Form 10-K") and incorporated herein by
reference.
+10.11.3 Professional Services Attachment, Exhibit P, to the Nortel Purchase
Agreement. Filed as Exhibit 10.8.2 to Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 and incorporated herein by
reference.
+10.11.4 Product Attachment, Exhibit Q, eBusiness Solutions Products, to the
Nortel Purchase Agreement. Filed as Exhibit 10.8.3 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001 and
incorporated herein by reference.
+10.12 Fiber Optic Facilities Agreement, dated November 15, 1996, by and
between Interstate FiberNet and Florida Power Corporation. Filed as
Exhibit 10.45 to 1997 Form S-4 and incorporated herein by reference.
+10.13.1 Fiber Optic Capacity Marketing and Operating Agreement, dated March
21, 1996, by and between Interstate FiberNet and Florida Power &
Light Company. Filed as Exhibit 10.46 to 1997 Form S-4 and
incorporated herein by reference.
+10.13.2 Addendum to Fiber Optic Capacity Marketing and Operating Agreement,
dated July 10, 1997, by and between Interstate FiberNet and Florida
Power & Light Company. Filed as Exhibit 10.47 to 1997 Form S-4 and
incorporated herein by reference.
+10.14 Sprint Communications Company Facilities and Services Agreement,
dated January 26, 1995, by and between Interstate FiberNet and
Sprint Communications Company L.P. Filed as Exhibit 10.50 to 1997
Form S-4 and incorporated herein by reference.
+10.15 Fiber Optic Facility Lease Agreement, dated as of January 31, 1997,
by and between Interstate FiberNet, Inc. and Southern Telecom 1,
Inc. Filed as Exhibit 10.51 to 1997 Form S-4 and incorporated herein
by reference.
10.16 First Assignment and Assumption of Fiber Optic Facility Lease
Agreement, dated February 1, 1997, by and between Interstate
FiberNet, Inc. and Gulf States FiberNet. Filed as Exhibit 10.52 to
1997 Form S-4 and incorporated herein by reference.
+10.17.1 Telecommunications System Agreement, dated January 26, 1995, by and
between Interstate FiberNet, Inc. and Sprint Communications Company
L.P. Filed as Exhibit 10.53 to 1997 Form S- 4 and incorporated
herein by reference.
10.17.2 Amendment to Telecommunications System Agreement, dated July 25,
1995, by and between Gulf States FiberNet and Sprint Communications
Company L.P. Filed as Exhibit 10.54 to 1997 Form S-4 and
incorporated herein by reference.
Exhibit
Number Exhibit Description
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+10.17.3 Amendment No. 2 to Telecommunications System Agreement, dated August
8, 1996, by and between Gulf States FiberNet and Sprint
Communications Company L.P. Filed as Exhibit 10.55 to 1997 Form S-4
and incorporated herein by reference.
+10.17.4 Assignment of the Telecommunications System Agreement, dated July
25, 1995, between Interstate FiberNet, Inc., Gulf States FiberNet
and Sprint Communications Company L.P. Filed as Exhibit 10.56 to
1997 Form S-4 and incorporated herein by reference.
+10.17.5 Assignment of the Telecommunications System Agreement, dated
February 27, 1997, between Sprint Communications Company L.P., Gulf
States FiberNet and Gulf States Transmission Systems, Inc. Filed as
Exhibit 10.57 to 1997 Form S-4 and incorporated herein by reference.
10.18 Fixed Fee Agreement for Exchange of Use and Maintenance of Six (6)
Fiber Optic Fibers with an Option of Two (2) Additional Fiber Optic
Fibers, dated July 25, 1997, by and between Interstate FiberNet,
Inc., Gulf States Transmission Systems, Inc. and ALLTEL Telephone
Services Corporation. Filed as Exhibit 10.58 to 1997 Form S-4 and
incorporated herein by reference.
10.19.1 Amended and Restated Credit Agreement (the "Credit Agreement"),
dated as of October 29, 2002, among ITC/\DeltaCom, Inc., Interstate
FiberNet, Inc., the subsidiary guarantors listed on the signature
pages thereto, the banks, financial institutions and other
institutional lenders listed on the signature pages thereto as the
Initial Lenders, Morgan Stanley Senior Funding, Inc. ("Morgan
Stanley"), as administrative agent for the Lender Parties (as
defined therein), Morgan Stanley & Co. Incorporated, as collateral
agent, Bank of America Securities LLC and Morgan Stanley, as joint
lead arrangers and joint book runners, and Bank of America, N.A., as
syndication agent. Filed as Exhibit, 99.3 to Current Report on Form
8-K filed on November 1, 2002 and incorporated herein by reference.
*10.19.2 Amended and Restated Security Agreement, dated October 29, 2002,
made by Interstate FiberNet, Inc., ITC/\DeltaCom, Inc., and the
other Persons listed on the signature pages thereof and the
Additional Grantors (as defined in Section 23(b) thereof) to Morgan
Stanley & Co. Incorporated, as collateral agent for the Secured
Parties (as defined in the Credit Agreement).
*10.20.1 ITC/\DeltaCom, Inc. Stock Incentive Plan.
10.20.2 Form of ITC/\DeltaCom, Inc. Stock Incentive Plan Nonqualified Stock
Option Agreement. Filed as Exhibit 4.2 to Form S-8 filed on November
5, 2002 (File No. 333-101007) (the "2002 Form S-8") and incorporated
herein by reference.
10.20.3 Form of ITC/\DeltaCom, Inc. Stock Incentive Plan Incentive Stock
Option Agreement. Filed as Exhibit 4.3 to 2002 From S-8 and
incorporated herein by reference.
10.20.4 Form of ITC/\DeltaCom, Inc. Stock Incentive Plan Restricted Stock
Agreement. Filed as Exhibit 4.4 to 2002 Form S-8 and incorporated
herein by reference.
10.20.5 Form of ITC/\DeltaCom, Inc. Stock Incentive Plan Stock Unit
Agreement. Filed as Exhibit 4.1 to 2002 Form S-8 and incorporated
herein by reference.
10.21 Description of ITC/\DeltaCom, Inc. Bonus Plan. Filed as Exhibit
10.92 to 1997 Form S-1 and incorporated herein by reference.
Exhibit
Number Exhibit Description
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10.22 Form of Indemnity Agreement between ITC/\DeltaCom, Inc. and certain
of its Directors and Officers. Filed as Exhibit 10.93 to 1997 Form
S-1 and incorporated herein by reference.
10.23.1 Sale and Purchase Agreement, dated as of March 11, 1997, by and
between SCANA Corporation and ITC Holding Company, Inc. Filed as
Exhibit 10.94 to 1997 Form S-1 and incorporated herein by reference.
10.23.2 First Amendment to Sale and Purchase Agreement. Among SCANA
Corporation, SCANA Communications, Inc., and ITC Holding Company,
Inc., dated as of October 16, 1997, among SCANA Corporation, SCANA
Communications, Inc., ITC Holding Company, Inc. and ITC/\DeltaCom,
Filed as Exhibit 10.95 to 1997 Form S-1 filed and incorporated
herein by reference.
10.24.1 Master Lease Agreement, dated as of December 29, 2000, between NTFC
Capital Corporation, as Lessor, and ITC/\DeltaCom Communications,
Inc. and Interstate FiberNet, Inc., as Lessees (the "Master Lease
Agreement"). Filed as Exhibit 10.47.1 to 2000 Form 10-K and
incorporated herein by reference.
10.24.2 Form of Equipment Schedule to the Master Lease Agreement. Filed as
Exhibit 10.47.2 to 2000 Form 10-K and incorporated herein by
reference.
10.24.3 Guaranty, dated as of December 29, 2000, between Interstate
FiberNet, Inc. and NTFC CapitalCorporation. Filed as Exhibit 10.47.3
to 2000 Form 10-K and incorporated herein by reference.
10.24.4 Amendment No. 1, dated as of June 18, 2001, to the Financial
Covenants and Reporting Requirements Annex to the Master Lease
Agreement. Filed as Exhibit 10.6 to Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 and incorporated herein by
reference.
10.24.5 Amendment No. 2, dated as of June 18, 2001, to the Financial
Covenants and Reporting Requirements Annex to the Master Lease
Agreement. Filed as Exhibit 10.37.5 to 2001 Form 10-K and
incorporated herein by reference.
10.24.6 Amendment to the Schedules and the Leases, dated as of October 29,
2002, among Interstate FiberNet, Inc., as a lessee, ITC/\DeltaCom
Communications, Inc., as a lessee, and NFTC Capital Corporation and
General Electric Capital Corporation, as lessors. Filed as Exhibit
99.4 to Current Report on Form 8-K filed on November 1, 2002 and
incorporated herein by reference.
10.25 Interconnection Agreement, dated February 9, 2001, by and between
BellSouth Telecommunications, Inc. and ITC/\DeltaCom Communications,
Inc. d/b/a/ ITC/\DeltaCom. Filed as Exhibit 10.48 to 2000 Form 10-K
and incorporated herein by reference.
10.26.1 Interconnection Agreement, dated as of June 5, 2000, by and between
BellSouth Telecommunications, Inc. and ITC/\DeltaCom Communications,
Inc. d/b/a/ ITC/\DeltaCom. Filed as Exhibit 10.49.1 to 2000 Form
10-K and incorporated herein by reference.
10.26.2 First Amendment to the Interconnection Agreement by and between
BellSouth Telecommunications, Inc. and TC/\DeltaCom Communications,
Inc., dated as of August 21, 2000, between ITC/\DeltaCom
Communications, Inc. and BellSouth Telecommunications, Inc. Filed as
Exhibit 10.49.2 to 2000 Form 10-K and incorporated herein by
reference.
Exhibit
Number Exhibit Description
- ------ -------------------
10.26.3 Amendment to the Interconnection Agreement by and between BellSouth
Telecommunications, Inc. and ITC/\DeltaCom Communications, Inc.,
dated as of February 14, 2001, by and between ITC/\DeltaCom
Communications, Inc. and BellSouth Telecommunications, Inc. Filed as
Exhibit 10.49.3 to 2000 Form 10-K and incorporated herein by
reference.
10.27 Interconnection Agreement, effective as of July 1, 1999, by and
between ITC/\DeltaCom Communications, Inc. and BellSouth
Telecommunications, Inc. Filed as Exhibit 10.50 to 2000 Form 10-K
and incorporated herein by reference.
10.28.1 Master Lease Agreement, dated as of December 31, 2001, between
General Electric Capital Corporation, as Lessor, and ITC/\DeltaCom
Communications, Inc., as Lessee (the "GECC Master Lease Agreement").
Filed as Exhibit 10.42.1 to 2001 Form 10-K and incorporated herein
by reference.
10.28.2 Form of Equipment Schedule to the GECC Master Lease Agreement. Filed
as Exhibit 10.42.2 to 2001 Form 10-K and incorporated herein by
reference.
*10.29.1 Purchase Agreement, dated as of August 22, 2002, as amended, among
ITC/\DeltaCom, Inc. the several Purchasers named therein and ITC
Holding Company, Inc.
*10.29.2 Purchase Agreement, dated as of August 22, 2002, as amended, between
ITC/\DeltaCom, Inc. and SCANA Corporation.
*10.29.3 Registration Rights Agreement, dated as of October 29, 2002, among
ITC/\DeltaCom, Inc. and the other Holders from time to time
thereunder.
*10.30.1 Executive Employment and Retention Agreement, dated as of October
29,2002, between ITC/\DeltaCom, Inc. and Larry F. Williams.
*10.30.2 Executive Employment and Retention Agreement, dated as of October
29, 2002, between ITC/\DeltaCom, Inc. and Andrew M. Walker.
*10.30.3 Executive Employment and Retention Agreement, dated as of October
29, 2002, between ITC/\DeltaCom, Inc. and Douglas A. Shumate.
*10.30.4 Executive Employment and Retention Agreement, dated as of October
29, 2002, between ITC/\DeltaCom, Inc. and J. Thomas Mullis.
*10.30.5 Executive Employment and Retention Agreement, dated as of October
29, 2002, between ITC/\DeltaCom, Inc. and Steven D. Moses.
*10.30.6 Executive Employment and Retention Agreement, dated as of October
29, 2002, between ITC/\DeltaCom, Inc. and Roger F. Woodward.
*10.30.7 Executive Employment and Retention Agreement, dated as of October
29, 2002, between ITC/\DeltaCom, Inc. and Thomas P. Schroeder.
*21.1 Subsidiaries of ITC/\DeltaCom, Inc.
*++23.1 Consent of BDO Seidman, LLP.
Exhibit
Number Exhibit Description
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*99.1 Written Statement of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of he Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
- ----------------
* Filed herewith.
+ Confidential treatment has been granted for this exhibit. The copy filed
as an exhibit omits the information subject to the confidential treatment
request.
++ The Registrant's consolidated balance sheet as of December 31, 2001 and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years ended December 31, 2001 included in
this report have been audited by Arthur Andersen, as stated in their report
dated February 15, 2002. After reasonable efforts, the Registrant has been
unable to obtain Arthur Andersen's consent to the incorporation by
reference into its registration statement on Form S-8 (No. 333-101007) of
Arthur Andersen's report with respect to these financial statements. Under
these circumstances, Rule 437a under the Securities Act permits the
Registrant to file such registration statement without a written consent
from Arthur Andersen. The absence of such consent may limit recovery by
investors on certain claims. In particular, and without limitation,
investors will not be able to assert claims against Arthur Andersen under
Section 11 of the Securities Act for any untrue statements of material fact
contained, or any omissions to state a material fact required to be stated,
in those audited financial statements. In addition, the ability of Arthur
Andersen to satisfy any claims (including claims arising from Arthur
Andersen's provision of auditing and other services to the Registrant) may
be limited as a practical matter due to recent events involving Arthur
Andersen.