Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2004

OR

For the transition period from                      to                     

Commission file number 0-23253

ITC^DeltaCom, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (706) 385-8000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 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 ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Table of Contents

ITC^DeltaCom, Inc.

Index

-2-

Table of Contents

PART I

FINANCIAL INFORMATION

ITC^DELTACOM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

-3-

Table of Contents

ITC^DELTACOM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

-4-

Table of Contents

ITC^DELTACOM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except share and per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

-5-

Table of Contents

ITC^DELTACOM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

-6-

Table of Contents

ITC^DELTACOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Basis of Presentation

Nature of Business

ITC^DeltaCom, Inc. (“ITC^DeltaCom” and, together with its wholly-owned subsidiaries, the “Company”) provides integrated communications services in the southeastern United States. The Company delivers a comprehensive suite of voice and data communications services, including local exchange, long distance, enhanced data, Internet, colocation and managed services, and sells customer premise equipment to the Company’s end-user customers. The Company offers these services primarily over its owned network facilities and also uses leased network facilities to extend its market coverage. In addition, the Company owns, operates and manages an extensive fiber optic network with significant transmission capacity that it uses for its own voice and data traffic and selectively sells to other communications providers on a wholesale basis.

Factors Affecting Comparability of Financial Information

On October 6, 2003, the Company completed its acquisition of BTI Telecom Corp. (“BTI”), a facilities-based integrated communications provider serving markets in the mid-Atlantic and southeastern United States. BTI’s services include local exchange service, long distance service, data services, Internet access and other enhanced services.

Comparison of the Company’s operating results is materially affected by its acquisition of BTI, whose results are included in the Company’s 2004 operating results, but are not included in the Company’s 2003 operating results until the three months ended December 31, 2003 (see Liquidity below). As a result of the significance of the BTI acquisition, the Company’s operating results for periods in 2003 are not directly comparable to the Company’s operating results for periods in 2004.

Segment Disclosure

The Company operates in one segment.

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. During 2003 and the nine months ended September 30, 2004, the Company primarily funded its operating and capital requirements and other cash needs principally through cash from operations and cash on hand. The Company also funded a portion of its operating and capital requirements during the three months ended December 31, 2003 and the nine months ended September 30, 2004 from the net proceeds of its sale, immediately prior to the closing of its acquisition of BTI, of 350,000 shares of a new issue of its 8% Series B convertible redeemable preferred stock to certain of BTI’s securityholders for a total purchase price of $35 million. The proceeds of this sale provided funds to support integration expenses and capital requirements. In connection with its acquisition of BTI, the Company assumed total BTI indebtedness of approximately $111.4 million.

During the three months ended March 31, 2004, the Company incurred expenses of approximately $1.5 million related to the structuring and marketing of a private offering of senior notes. The Company intended to use the net proceeds from the notes offering to repay or refinance approximately $281 million of the Company’s senior and junior secured credit facilities and other indebtedness and for working capital and other general corporate purposes. Due to adverse market conditions, the Company withdrew the private offering in March 2004. The expenses of the withdrawn offering are reflected in “Other expense” in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2004.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company’s management in accordance with the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments, consisting of normal recurring adjustments unless otherwise disclosed in a separate note, considered necessary for the fair presentation of the unaudited, condensed consolidated financial statements have been included, and the unaudited, condensed consolidated financial statements present fairly the financial position and results of operations for the interim periods presented. These unaudited, condensed consolidated financial statements should be read in conjunction with the audited, consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission (the “2003 Form 10-K”).

The accompanying condensed consolidated financial statements present results for the three months and nine months ended September 30, 2004. These results are not necessarily indicative of the results that may be achieved for the year ending December 31, 2004.

-7-

Table of Contents

Basis of Consolidation

The accompanying condensed consolidated financial statements include the accounts of ITC^DeltaCom and its subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made in the presentation of the financial statements for the nine months ended September 30, 2003 and for the year ended December 31, 2003 to conform with the presentation of the financial statements for the nine months ended September 30, 2004.

Stock-Based Compensation

At September 30, 2004, the Company had one stock-based employee compensation plan. 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. In accordance with the additional disclosure requirements of Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” the following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”:

2. Recent Accounting Pronouncements

The Financial Accounting Standards Board announced in October 2004 that proposed Statement 123R, “Share Based Payment,” which would require all companies to measure compensation cost for all share-based payments, including stock options, at fair value, would be effective for public companies for interim or annual periods beginning after June 15, 2005. Proposed Statement 123R eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25. The proposed statement requires the cost resulting from all employee share-based payment transactions to be recognized in the financial statements and establishes a fair-value based method of accounting for the transactions. The Company continues to apply the recognition and measurement principles of APB Opinion No. 25, but has complied with the disclosure requirements of SFAS No. 148. The Company will evaluate the requirements of the final standard, which is expected to be issued in December 2004, to determine the impact on the Company’s results of operations, and expects that adoption of the requirements will have an adverse impact on the Company’s financial results.

3. Long-Term Obligations and Capital Lease Obligations

Long-term obligations and capital lease obligations at September 30, 2004 and December 31, 2003 consisted of the following (in thousands):

-8-

Table of Contents

4. Restructuring Charges

In connection with the acquisition of BTI, the Company adjusted restructuring charge accruals in the three months ended September 30, 2004 for leased sites identified in the plan of merger whose use ceased in accordance with the plan. Those costs were reflected in the accompanying condensed consolidated balance sheets as an adjustment to goodwill acquired in the merger. The following table reflects activity associated with accrued restructuring costs related to the Company’s restructurings in 2003 and the acquisition of BTI, which are recorded in accrued liabilities from January 1, 2004 through September 30, 2004 (in thousands):

Restructuring charges have been classified as current and long-term. Current restructuring charges are reflected in “Other accrued liabilities” in the table below.

The Company expects to use the remaining restructuring accruals as it makes additional payments under the terms of office space lease and severance agreements. The Company is actively seeking to sub-lease vacant office space.

5. Commitments and Contingencies

At September 30, 2004, the Company had entered into agreements with vendors to purchase approximately $10.3 million of property, plant, equipment and services during the three months ending December 31, 2004 and the three months ending March 31, 2005 related to the improvement and installation of switches, other capacity expansion efforts and certain services.

BellSouth Interconnection Agreements

The Company’s interconnection agreements with BellSouth Telecommunications, Inc. (“BellSouth”) expired in June 2003. The Company expects to continue to operate under terms of the existing agreements until new agreements are reached. The Company is currently engaged in an arbitration process concerning the rates and terms of new agreements with BellSouth in Alabama, Florida, North Carolina, Louisiana and Tennessee. BellSouth and the Company have executed a new interconnection agreement for Georgia, which has been filed and approved by the Georgia Public Service Commission. BellSouth has appealed a portion of the Georgia Public Service Commission’s order requiring BellSouth to continue providing digital subscriber line service where the Company is the local voice service provider. Various issues remain outstanding with respect to the interconnection agreement for North Carolina, which BellSouth and the Company have submitted for review and approval by the North Carolina Utility Commission. The Company is currently unable to determine the impact, if any, the remaining arbitration proceedings will have on its results of operations and financial condition.

The Company has adopted the agreements between AT&T and BellSouth for South Carolina, Mississippi and Kentucky under which the Company has assumed the rights and obligations applicable to AT&T under such agreements. These agreements have expired, and the Company expects to continue to operate under terms of the existing agreements until new agreements are reached.

BellSouth has requested amendments to all of the Company’s existing interconnection agreements as a result of a federal appellate court’s decision described below in this Note 5 under “Regulatory Proceedings.” The Company is currently reviewing the proposed amendments and rulings issued by the Federal Communications Commission and the appellate court.

-9-

Table of Contents

Regulatory Proceedings

On March 2, 2004, a federal court of appeals vacated and remanded to the Federal Communications Commission several portions of an order the FCC issued in August 2003. In that order, the FCC adopted changes to the rules defining the circumstances under which incumbent carriers must make network elements available to competitive carries like the Company at cost-based rates. In response to the appellate court’s decision, the FCC has issued interim rules that freeze existing rates, terms and conditions for a period of six months while it develops permanent rules to address the appellate court’s decision. The FCC’s interim rules provide a two-phase plan to govern the provision of unbundled network elements (“UNE”) while the FCC considers permanent rules. Under the first phase of the plan, incumbent local exchange carriers must continue to make available three enumerated unbundled network elements in accordance with the rates, terms, and conditions set forth in their interconnection agreements as of June 15, 2004. Under the second phase of the plan, incumbent carriers would be required for an additional six months to continue to provide such unbundled network elements to requesting carriers for the embedded customer base subject to the rate increases specified in the FCC’s order. The FCC has indicated that it expects to adopt the new UNE rules prior to March 2005, although there is no assurance that it will do so, or that such new UNE rules would continue to provide the Company with the access to all UNEs, at cost-based rates, that the Company currently has. If the FCC does not adopt its new UNE rules in a timely fashion or if the new rules do not provide the Company with such access, the Company’s ability to obtain access to certain unbundled network elements and incumbent carrier network upgrades may be curtailed or become more costly in the future.

The FCC continues to urge incumbent and competitive carriers to negotiate a commercial resolution of the issues addressed in the appellate court’s decision. It is uncertain whether these commercial negotiations will be successful. The Company cannot predict how the FCC will act in any remand proceedings resulting from the appellate court’s ruling, or the extent to which the FCC’s resulting decisions will be favorable or unfavorable to the Company’s business. Based on the appellate court’s decision, it is likely that the availability of cost-based unbundled network elements to competitive carriers will be diminished in the FCC’s new UNE rules and that the overall cost to competitive carriers of using unbundled network elements will increase.

Legal Proceedings

In the normal course of its business, the Company is subject to various litigation. In addition, the Company is a party or otherwise subject to various other legal proceedings, including proceedings in which third parties have challenged some of the Company’s significant licenses to use the rights-of-way of others and other proceedings described in note 11 to the Company’s audited consolidated financial statements included in the 2003 Form 10-K. Other than such proceedings, including the proceedings described below, there are no legal proceedings pending against the Company that management believes would have a material adverse effect on the Company’s financial position, results of operations or liquidity. The following describes developments in previously disclosed proceedings and certain new claims:

Mississippi Power Company Rights-of-Way. The Company initiated civil suits in August 2001 and May 2002 in the United States District Court for the Southern District of Mississippi in which the Company seeks a declaratory judgment confirming the Company’s 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 in which they seek a constructive trust upon the revenues earned on those rights-of-way, together with compensatory and punitive damages. The Company has resolved the issue of the Company’s use of the rights-of-way with some of the defendants. The August 2001 proceeding was consolidated with another pending civil suit in the United States District Court for the Southern District of Mississippi, in which the Company was made a defendant, which was 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 grant of permission to third parties to use its rights-of-way for telecommunications purposes. The Company’s civil suits were dismissed by the District Court. The order of dismissal in the civil action involving the 37 parcels of land was appealed to the United States Court of Appeals for the Fifth Circuit, which denied the appeal. However, some claims remaining to be resolved by the District Court have also been dismissed. The Company’s request for reconsideration of the order of dismissal in the civil action involving the 63 parcels of land has been denied. The Company has appealed the dismissals in both matters to the United States Court of Appeals for the Fifth Circuit.

Since 2002, over 220 lawsuits, including eight lawsuits filed in 2004, have been filed by a single counsel in the Circuit Court for Harrison County, Mississippi, against Mississippi Power Company and the Company. Each plaintiff claims to be the owner of property over which Mississippi Power Company has an easement and that MCI WorldCom and/or the Company have benefited by using the easement to provide telecommunications services. The Company believes that approximately 30 of the lawsuits involve property over which the Company provides telecommunications services using the Mississippi Power Company easements. 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 MCI WorldCom and the Company of the cable over the easements, a percentage of gross profits obtained

-10-

Table of Contents

from the use of the cable, and the plaintiffs’ costs to prosecute the action. Mississippi Power Company has reached a preliminary settlement with the plaintiffs resolving these lawsuits in a manner that would allow the Company to use a fiber optic cable installed over the properties to provide telecommunications services. A dispute has arisen between the Company and Mississippi Power Company regarding the terms of a release between the Company and Mississippi Power Company relating to the subject matter of the settlement. It is uncertain if the settlement will be implemented if the dispute between the Company and Mississippi Power Company is not resolved.

In 2002, a lawsuit on behalf of five property owners was filed against Mississippi Power Company and Southern Company in the Circuit Court of Forrest County, Mississippi, seeking relief for trespass, nuisance, conversion, unjust enrichment, fraud, fraudulent misrepresentation and fraudulent concealment. In May 2004, the Company was added upon the Court’s order as a defendant in the lawsuit. The plaintiffs seek 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 plaintiffs also seek an accounting, unspecified monetary damages and equitable relief. In September 2004, the Court granted Mississippi Power Company’s motion for partial summary judgment and issued a final order that the plaintiff is not entitled to any compensation for trespass damages. The plaintiff has not appealed this ruling.

Kansas City Southern Railroad and Illinois Central Railroad Rights-of-Way. 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 and Illinois Central Railroad are located. Under agreements with Kansas City Southern Railroad and Illinois Central Railroad, the Company uses certain fiber optic cable within the rights-of-way of Kansas City Southern Railroad and Illinois Central Railroad across Mississippi. The plaintiffs claim that the documents granting the rights-of-way of Kansas City Southern Railroad and Illinois Central Railroad do not permit the installation and operation of telecommunications 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’s fees, an accounting of amounts paid to Kansas City Southern Railroad and Illinois Central Railroad and declaratory relief regarding the parties’ rights. The Company has denied the allegations, but has counter-claimed for the certification of a class of counter-defendants. The Company seeks a declaration that it has the right to use the rights-of-way or, alternatively, to condemn such rights. In September 2004, the District Court found that neither the class requested by the plaintiffs nor the class of counter-defendants should be certified. The Company has appealed the District Court’s refusal to certify the class of counter-defendants to the United States Court of Appeals for the Fifth Circuit. The plaintiffs have not appealed the denial of their requested class certification.

A lawsuit was filed against the Company in Richland Parish, Louisiana, in July 2003 and removed to the United States District Court, Western District of Louisiana, Monroe Division, in August 2003. The plaintiffs, claiming to be representatives of a class of plaintiffs, allege that they are owners of the land which underlies or abuts the Kansas City Southern Railroad corridor in Louisiana. Under agreements with Kansas City Southern Railroad and Illinois Central Railroad, the Company uses certain fiber optic cable within the rights-of-way of Kansas City Southern Railroad and Illinois Central Railroad in Louisiana. The plaintiffs claim that the documents granting the rights-of-way to Kansas City Southern Railroad and Illinois Central Railroad do not permit the installation and operation of telecommunications facilities of third parties within the rights-of-way. The plaintiffs allege trespass, unjust enrichment, conversion, civil conspiracy, negligence, infringement and misappropriation, and seek the imposition of a constructive trust, an accounting of all compensation paid or received for use of the real property involved in the litigation, restitution, disgorgement, actual, compensatory and consequential damages, and attorney’s fees. In July 2004, the Court found that the class should not be certified. One plaintiff voluntarily dismissed his claim when discovery revealed that he had no rights in the property identified in the complaint. The only remaining named plaintiff asserts a claim based on ownership of less than one mile of property over which the Company uses fiber optic cable within the rights-of-way of Kansas City Southern Railroad or Illinois Central Railroad.

Company’s Suit for Rights-of-Way Indemnification. 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 obtained use of rights-of-way for its fiber optic telecommunications networks. 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. A motion for summary judgment was filed by the Company in December 2001 and thereafter by the defendants. The defendants also have filed a counterclaim requesting, among other relief, that the Company reimburse them for the cost of perfecting the applicable rights-of-way. In September 2004, the Court issued an order denying both the Company’s and the defendant’s motions for summary judgments and staying the litigation until final determination of the landowner litigation which underlies the Company’s claims in this matter. The Company has appealed this order to the Georgia Supreme Court.

        Claim Relating to Sale of Account Receivable. In the first quarter of 2003, the Company sold for approximately $1.0 million approximately $2.2 million of accounts receivable owed to the Company by WorldCom before WorldCom filed for bankruptcy under Chapter 11 of the Bankruptcy Code in 2002. In November 2004, the Company received a notice from the assignee of the accounts receivable demanding that the Company repurchase for $830,000 approximately $1.5 million of such accounts receivable. The Company expects that, if it makes payment on such claim to the assignee, it would have to seek recovery on such claim in the WorldCom bankruptcy proceeding. The Company is unable to predict what amount of such claim, if any, it would be able to recover in such event.

-11-

Table of Contents

6. Proposed Mergers and Related Transactions

On September 8, 2004, the Company entered into a merger agreement with Florida Digital Network, Inc. (“FDN”) and certain FDN stockholders pursuant to which the Company will acquire all of the outstanding common stock and preferred stock of FDN in exchange for 31,300,000 shares of the Company’s common stock. A total of 3,356,606 of these shares will be held in an escrow account until the later of March 15, 2006 or the first anniversary of the merger closing to satisfy any indemnification claims by the Company for specified breaches of the merger agreement. The exchange ratios of the FDN common stock and preferred stock will be determined at the time of the merger in accordance with the terms of FDN’s charter. A newly formed subsidiary of the Company will be merged with and into FDN, which will be the surviving corporation of the merger and will become a wholly-owned subsidiary of the Company.

Also on September 8, 2004, the Company entered into a merger agreement with NT Corporation (“NTC”) and certain NTC stockholders pursuant to which the Company will acquire all of the outstanding common stock and preferred stock of NTC. The Company will issue a maximum of 8,850,000 shares of its common stock to the NTC stockholders minus the number of shares payable to participants in an NTC management employee retention plan which the Company will assume in the merger. The number of shares of the Company’s common stock issuable to NTC stockholders will be reduced if NTC fails to meet any of three performance targets specified in the merger agreement. The exchange ratios of the NTC common stock and preferred stock will be determined at the time of the merger in accordance with the terms of NTC’s charter. It is not expected that the NTC common stockholders will receive any merger consideration. Approximately 20% of the Company’s shares issued in the merger will be held in an escrow account until the second anniversary of the merger closing to satisfy any indemnification claims by the Company for specified breaches of the merger agreement. A newly formed subsidiary of the Company will be merged with and into NTC, which will be the surviving corporation of the merger and will become a wholly-owned subsidiary of the Company. ITC^DeltaCom’s completion of the FDN merger is a condition to its completion of the NTC merger.

At or prior to the merger closings, the Company, the existing majority stockholders of the Company, a director who is a stockholder of the Company, the Chief Executive of the Company (who is also a stockholder) and the principal FDN and NTC stockholders will become parties to a governance agreement which will amend and restate the Company’s existing governance agreement to modify some provisions and terminate other provisions of the existing agreement related to corporate governance and to restrictions on the disposition of the Company’s securities held by the stockholder parties. Upon completion of the mergers, the board of directors will have thirteen members, including three members designated by the principal FDN stockholders and one member designated by the principal NTC stockholders.

7. Subsequent Event

On November 11, 2004, ITC^DeltaCom exercised its right under the BTI merger agreement to require Welsh, Carson, Anderson & Stowe VIII, L.P. and its affiliates and associates (the “Welsh Carson securityholders”), who currently own capital stock representing a majority of ITC^DeltaCom’s voting power, to purchase 150,000 additional shares of ITC^DeltaCom’s 8% Series B convertible redeemable preferred stock for an aggregate purchase price of $15 million. It was a condition to the obligation of the Welsh Carson securityholders to purchase these shares that the Company have unrestricted cash of less than $20 million. As provided in the BTI merger agreement, the Company may apply the proceeds of the sale of this Series B preferred stock only for expenditures for the cost of services, selling, operations and administration expenses, capital expenditures not to exceed $65 million in any 12-month period following October 6, 2003 (other than capital expenditures incurred in connection with a business combination transaction), payment of contingencies and other purposes which could reasonably be expected to be incurred by the Company in connection with its ongoing activities in the ordinary course. ITC DeltaCom completed the sale of the Series B preferred stock on November 12, 2004.

The shares of Series B preferred stock which ITC DeltaCom issued pursuant to its exercise of its drawdown right under the BTI merger agreement have the same terms as the currently outstanding shares of Series B preferred stock, all of which are owned by the Welsh Carson securityholders and their affiliates and associates. Those terms were negotiated by ITC DeltaCom and the Welsh Carson securityholders at the date of execution of the BTI merger agreement on July 2, 2003.

If the additional 150,000 shares of Series B preferred stock had been outstanding for the three months ended September 30, 2004, net loss applicable to common stockholders would have increased from $10.8 million to $11.1 million, and basic and diluted net loss per common share would have been unchanged at $(0.21) per share.

-12-

Table of Contents

This management’s discussion and analysis includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions as they relate to ITC^DeltaCom, Inc. or our management are intended to identify these forward-looking statements. All statements by us regarding our expected financial position, revenues, liquidity, cash flow and other operating results, cost savings and other expected benefits of our acquisition of BTI Telecom Corp. and our proposed mergers with Florida Digital Network, Inc. and NT Corporation, business strategy, financing plans, forecasted trends related to the markets in which we operate, legal proceedings and similar matters are forward-looking statements.

We cannot assure you that our expectations expressed or implied in our forward-looking statements will turn out to be correct. Our actual results could be materially different from our expectations because of various risks. These risks, some of which are discussed below and under the caption “Business–Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2003, include our dependence on new product development, rapid technological and market change, our dependence upon rights of way and other third-party agreements, debt service and other cash requirements, liquidity constraints and risks related to future growth and rapid expansion. Other important risk factors that could cause actual events or results to differ from those contained or implied in the forward-looking statements include, without limitation, costs, delays and other difficulties related to the pending merger transactions, failure of the parties to the pending merger transactions to satisfy closing conditions and other merger agreement terms, our inability to integrate acquired companies successfully, customer reductions in services, delays or difficulties in deployment and implementation of colocation arrangements and facilities, appeals of or failures by third parties to comply with rulings of governmental entities, inability to meet installation schedules, general economic and business conditions, failure to maintain underlying service/vendor arrangements, competition, adverse changes in the regulatory or legislative environment, and various other factors beyond our control.

Unless we indicate otherwise, references below to “we,” “us,” “our” and “ITC^DeltaCom” mean ITC^DeltaCom, Inc. and its subsidiaries. Unless we indicate otherwise, we have rounded dollar amounts over $1 million to the nearest hundred thousand dollars and dollar amounts of less than $1 million to the nearest one thousand dollars.

This management’s discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2003 and the financial statements and related notes included in that report.

Overview

We are one of the largest providers of integrated communications services in the southeastern United States. We deliver a comprehensive suite of voice and data communications services, including local exchange, long distance, enhanced data, Internet, colocation and managed services, and sell customer premise equipment to our end-user customers. We offer these services primarily over our owned network facilities and also use leased network facilities to extend our market coverage. In addition, we own, operate and manage an extensive fiber optic network with significant transmission capacity that we use for our own voice and data traffic and selectively sell to other communications providers on a wholesale basis. We believe that we are the largest facilities-based competitive provider of integrated communications services in our primary eight-state market, which encompasses Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee.

During the three months ended September 30, 2004, we:

-13-

Table of Contents

Recent Regulatory Developments

Our future operating results will be affected by the decision of a federal court of appeals on March 2, 2004 to vacate and remand to the Federal Communications Commission several portions of an order the FCC issued in August 2003. In its August 2003 order, the FCC adopted changes to the rules defining the circumstances under which incumbent carriers must make network elements available to competitive carriers like us at cost-based rates. The FCC adopted rules which, among other things, permit state regulators, under specified circumstances, to impose significant limitations on the ability of competitive carriers 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” methodology. The appellate court vacated certain portions of the August 2003 order that were beneficial to us, including those portions requiring incumbent carriers to continue to make available mass market switching and dedicated transport facilities at cost-based rates, and those portions delegating certain responsibilities to the states to determine which of these elements should continue to be made available. The court also upheld several portions of the order that could result in increased costs for us, including limiting the local loops and enterprise switching elements that must be made available to competitive carriers at cost-based rates.

In response to the appellate court’s decision, the FCC has issued interim rules that freeze existing rates, terms and conditions for a period of six months while it develops permanent rules to address the appellate court’s decision. The FCC’s interim rules provide a two-phase plan to govern the provision of unbundled network elements while the FCC considers permanent rules. Under the first phase of the plan, incumbent local exchange carriers must continue to make available three enumerated unbundled network elements in accordance with the rates, terms, and conditions set forth in their interconnection agreements as of June 15, 2004. Under the second phase of the plan, incumbent carriers would be required for an additional six months to continue to provide such unbundled network elements to requesting carriers for the embedded customer base subject to the rate increases specified in the FCC’s order. The FCC has indicated that it expects to adopt the new UNE rules prior to March 2005, although there is no assurance that it will do so, or that such new UNE rules would continue to provide us access to all UNEs, at cost-based rates, that we have today. If the FCC does not adopt its new UNE rules in a timely fashion or if the new rules do not provide us with such access, our ability to obtain access to certain unbundled network elements and incumbent carrier network upgrades may be curtailed or become more costly in the future.

The FCC continues to urge incumbent and competitive carriers to negotiate a commercial resolution of the issues addressed in the appellate court’s decision. It is uncertain whether these commercial negotiations will be successful. We cannot predict how the FCC will act in any remand proceedings resulting from the appellate court’s ruling, or the extent to which the FCC’s resulting decisions will be favorable or unfavorable to our business. Based on the appellate court’s decision, it is likely that the availability of cost-based unbundled network elements to competitive carriers will be diminished in the FCC’s new UNE rules and that the overall cost to competitive carriers of using unbundled network elements will increase.

Proposed Mergers

As previously announced, on September 8, 2004, we entered into a merger agreement with Florida Digital Network, Inc., or FDN, and certain FDN stockholders pursuant to which we will acquire FDN, a privately held competitive carrier headquartered in

-14-

Table of Contents

Florida. FDN offers a comprehensive line of communications services primarily to small and medium-sized businesses in markets in Florida and Georgia.

As previously announced, on September 8, 2004, we also entered into a merger agreement with NT Corporation, or NTC, and certain NTC stockholders pursuant to which we will acquire NTC, a privately held communications company headquartered in Florida. NTC serves primarily small and medium-sized business customers in 27 metropolitan areas in eight states in the southeastern United States. Completion of the FDN merger is a condition to our completion of the NTC merger.

Based on data as of June 30, 2004, the mergers between the Company, FDN and NTC could increase the total number of business customers served by us from 50,000 to more than 120,000, increase the number of markets served by us throughout the southeastern United States from 40 to 52 markets, increase the number of our unique colocations with local telephone companies from approximately 235 to over 400, increase the number of our voice switches from 29 to 48 and increase the number of our installed access lines from approximately 378,000 to more than 635,000 total lines.

We anticipate that we will complete our mergers with FDN and NTC by early in the first quarter of 2005.

Acquisition and Integration of BTI

On October 6, 2003, we completed our acquisition of BTI, a facilities-based integrated communications provider serving markets in the mid-Atlantic and southeastern United States. BTI generated operating revenues of $56 million in the third quarter of 2003. Our acquisition of BTI has provided us with the opportunity to further our strategic initiative to increase monthly recurring revenues from end-user customers within our existing markets and has created one of the largest providers of integrated communications services in the southeastern United States. As a result of the acquisition, we have achieved, and expect to continue to generate, significant operational efficiencies by increasing utilization of our switches and network assets, eliminating duplicative network costs and transitioning each company’s voice and data traffic from previously leased long-haul facilities to our combined fiber optic network. The inclusion of BTI’s assets and operations in our business since October 6, 2003 has contributed to a significant increase in the size of our business between September 30, 2003 and September 30, 2004. Between those dates, we have:

We are integrating BTI’s operations into our existing operations to achieve significant economies of scale from the consolidation of sales and marketing, customer service, provisioning and installation, and information technology, purchasing, financial and administrative functions. We have identified, for the three categories of costs shown in the table below, net cost savings of $30 million we expect that the acquisition will generate in 2004 and an additional $10 million we expect to realize in 2005 as a result of the full-year impact of these prior-year savings. We expect to achieve annualized net cost savings of up to $50 million by the end of 2005. As we develop our plans for integrating the operations of FDN and NTC, we are emphasizing cost savings which we expect will provide the greatest short-term benefit. The following table shows the net cost savings amounts we have achieved during the first nine months of 2004 and expect to achieve over the entire 2004 fiscal year. The following table also shows the annualized costs savings amounts we have achieved as of September 30, 2004 and expect to achieve by the end of 2004.

-15-

Table of Contents

We achieved net cost savings of $9.1 million during the third quarter, which represented a net increase of $1.5 million in net cost savings over the second quarter of 2004. We anticipate that we will achieve all of the expected annualized cost savings of $40 million by the end of 2004.

We expect to realize savings in compensation and benefits costs by reducing the total number of employees of ITC^DeltaCom and BTI as of July 1, 2003 by approximately 360 employees. The employee headcount of the combined company as of July 1, 2003 was reduced by a total of approximately 341 positions, or 95% of the total planned employee force reductions, as of September 30, 2004. Of these reductions, approximately 20 were made in the three months ended September 30, 2004. The headcount reductions as of September 30, 2004 represent substantially all of the total headcount and related compensation and benefit savings that we anticipate for 2004 with respect to the integration of BTI.

The foregoing annualized cost savings amounts as of September 30, 2004 are based on the approximate combined monthly costs of ITC^DeltaCom and BTI as of July 2, 2003, which is the date on which we agreed to acquire BTI. These cost savings amounts represent the total annual cost savings we expect to realize as a result of our cost savings initiatives from that date, even if we do not implement any of the costs savings initiatives we have planned for periods following September 30, 2004.

The foregoing cost savings estimates are based upon assumptions that are uncertain and are subject to significant business, economic and competitive uncertainties which are difficult to predict and often beyond the control of our management. These assumptions are based upon our management’s judgment concerning a number of factors, including operating efficiencies, the consolidation of functions, and the integration of operations, systems, marketing methods and procedures. We may not be able to accomplish these actions successfully, and these cost savings and efficiencies may not be achieved to the extent we estimate.

Other Information About Our Business

The following tables present, as of the dates indicated, additional information about our operations and business. Because of the significance of the BTI acquisition, our operating results for these periods are not directly comparable. All revenue data are rounded and shown in thousands of dollars.

-16-

Table of Contents

Three Months and Nine Months Ended September 30, 2004 Compared to Three Months and Nine Months Ended

September 30, 2003

The following comparison of our operating results is materially affected by our acquisition in October 2003 of BTI, whose results are included in our 2004 operating results, but are not included in our operating results for the three months and nine months ended September 30, 2003. Because of the significance of the BTI acquisition, our operating results for these periods are not directly comparable.

Operating Revenues. Total operating revenues increased $37.3 million, or 34.5%, from $108.1 million for the three months ended September 30, 2003 (the “2003 quarter”) to $145.4 million for the three months ended September 30, 2004 (the “2004 quarter”). Total operating revenues increased $134.2 million, or 43.3%, from $309.6 million for the nine months ended September 30, 2003 (the “2003 nine-month period”) to $443.8 million for the nine months ended September 30, 2004 (the “2004 nine-month period”). Integrated communications services revenues increased 69.4%, or $48.0 million, for the 2004 quarter, and 75.8%, or $153.5 million, for the 2004 nine-month period over the corresponding periods of 2003. The increases in total operating revenues and revenues from our integrated communications services were primarily attributable to our acquisition of BTI in the fourth quarter of 2003.

        Total operating revenues decreased $3.9 million, or 2.6%, to $145.4 million for the 2004 quarter from $149.3 million for the second quarter of 2004. Most of the decrease was due to lower integrated communications services revenues, which decreased $2.2 million, or 1.9%, to $117.2 million for the 2004 quarter from $119.4 million for the preceding quarter. The reduction in revenues from integrated communications services in the 2004 quarter was primarily attributable to increased customer turnover, or churn, the effects of severe weather in the southeastern United States, including hurricanes Frances and Ivan, in the last two months of the quarter and reduced customer long distance usage due to the bundling of free minutes of use within our integrated local service packages. Usage-based revenues were also adversely affected in the 2004 quarter by the FCC-mandated decrease in rates we bill other carriers for access to our local network for interstate calls. We anticipated the $1.2 million revenue impact of this rate decrease, which went into effect late in the second quarter of 2004, and modified our local service pricing strategy accordingly. We experienced less net growth in local revenues than we had anticipated because of increased rate pressures and customer turnover. The severe weather in August and September 2004 caused delays in order installations, which interrupted a trend in reduced installation intervals we had achieved in the first month of the quarter. In August and September, we experienced no net local line growth. We expect that the rate pressures we experienced in the 2004 quarter will continue to constrain our revenue growth for the fourth quarter of 2004, but anticipate that our monthly net line growth will return to previously achieved levels due to stable sales of our integrated communications services, especially through our T-1-based products for business customers, and an anticipated reduction in installation intervals. In October 2004, we achieved a net increase of approximately 3,200 installed lines. We expect continued pressure on long distance and data revenues due to customer turnover and the continuing product shift of free long distance services into our bundled local T-1 product.

We expect that our residential services revenues will decline in the fourth quarter of 2004, as we exit our programs to add new residential customers. We have decided to discontinue our new residential sales efforts effective October 1, 2004 because of customer turnover and the uncertainty surrounding the costs of providing such services using a UNE-P platform as a result of FCC and court

-17-

Table of Contents

actions discussed in this management’s discussion and analysis under “Recent Regulatory Developments.” We will continue to service our existing residential customers.

Revenues from equipment sales and related services declined by 67.8%, or $10.1 million, in the 2004 quarter and 56.7%, or $18.6 million, in the 2004 nine-month period from the prior corresponding periods. These declines were primarily attributable to the discontinuation of our integrated technology services business in October 2003. Excluding revenues from this discontinued business, revenues from equipment sales and related services declined $0.3 million in the 2004 quarter compared to both the second quarter of 2004 and the 2003 quarter. Our equipment installations, like our local service installations, experienced delays in the 2004 quarter due to severe weather.

Revenues generated by sales of wholesale services for the 2004 quarter declined by $0.6 million, or 2.7%, from the 2003 quarter and by $1.4 million, or 5.7%, from the second quarter of 2004, primarily as a result of competitive market pressures to reduce prices and reduced reciprocal compensation billed to other carriers for network access relating to local interconnection services. The decline in reciprocal compensation billings was attributable to the termination of local interconnection services by a customer who was acquired by a competitive provider. Local interconnection revenues for the fourth quarter of 2004 are expected to reflect the benefit of penalties for early service terminations of approximately $0.8 million. We also expect that the loss of the local interconnection revenues in the 2004 quarter will be offset in part by new orders for local interconnection services we anticipate receiving in the fourth quarter of 2004. Because of these expected new orders and the relative stability we have experienced in our other wholesale services revenues during recent periods, we anticipate only a moderate decline in wholesale services revenues for the fourth quarter of 2004.

Cost of Revenues. Total cost of revenues of $72.1 million, or 49.6% of total operating revenues, for the 2004 quarter represented an increase of $17.5 million from total cost of revenues of $54.6 million, or 50.5% of total operating revenues, for the 2003 quarter. Total cost of revenues of $218.7 million, or 49.3% of total operating revenues, for the 2004 nine-month period represented an increase of $65.6 million from total cost of revenues of $153.2 million, or 49.5% of total operating revenues, for the 2003 nine-month period. The increase in total cost of revenues for the 2004 quarter and the 2004 nine-month period was primarily attributable to our acquisition of BTI.

The decrease in our cost of revenues as a percentage of revenues for the 2004 periods resulted primarily from our ongoing consolidation and integration of the ITC^DeltaCom and BTI networks and our decision to de-emphasize lower margin, nonrecurring sales. We expect this trend to continue for the remainder of 2004 as a result in part of the discontinuation of our residential sales acquisition programs.

Selling, Operations and Administration Expense. Selling, operations and administration expense increased $15.2 million from $39.3 million, or 36.4% of total operating revenues, for the 2003 quarter to $54.5 million, or 37.5% of total operating revenues, for the 2004 quarter. Selling, operations and administration expense increased $52.0 million from $113.6 million, or 36.7% of total operating revenues, for the 2003 nine-month period to $165.6 million, or 37.3% of total operating revenues, for the 2004 nine-month period. The increase in selling, operations and administration expense in the 2004 quarter and 2004 nine-month period was primarily attributable to our acquisition of BTI. Selling, operations and administration expense decreased $0.8 million in the 2004 quarter from the second quarter of 2004. The net cost savings in selling, operations and administration expense attributable to the integration of BTI achieved in the 2004 quarter were partially offset by an increase of approximately $0.7 million in selling, operations and administration expense associated with compensation and benefits relating to an additional working day in the 2004 quarter. We expect a continued downward trend in selling, operating and administrative expense through the end of 2004 due to the benefits of the BTI integration and the reduction of employees in our residential operating unit. We expect that the discontinuation of our residential acquisition programs will result in net savings in the fourth quarter of 2004 of approximately $0.5 million of acquisition and other costs associated with operating the residential unit.

The number of employees decreased from 2,412 at December 31, 2003 to 2,304 at September 30, 2004. The decrease during the 2004 nine-month period primarily reflects employee reductions resulting from our integration of BTI’s operations, which were partially offset by selected hiring to support our growth and strategic initiatives.

Depreciation and Amortization. Depreciation and amortization expense increased $7.4 million from $14.3 million for the 2003 quarter to $21.7 million for the 2004 quarter, and $20.6 million from $43.3 million for the 2003 nine-month period to $63.9 million for the 2004 nine-month period. These increases in depreciation and amortization expense were primarily attributable to our acquisition of BTI. We expect that our depreciation and amortization expense will continue to be significantly higher in 2004 compared to 2003 as a result of the BTI acquisition and the expansion of our network capacity earlier in 2004.

Interest Expense. Interest expense increased $2.0 million from $3.3 million for the 2003 quarter to $5.3 million for the 2004 quarter, and $5.5 million from $10.3 million for the 2003 nine-month period to $15.8 million for the 2004 nine-month period. These increases in interest expense were primarily attributable to our assumption of $111.4 million of additional indebtedness in connection with the BTI acquisition and, to a lesser extent, higher average rates of interest accruing on our variable-rate credit facility borrowings.

-18-

Table of Contents

EBITDA. EBITDA represents net loss before interest, taxes, depreciation and amortization. EBITDA increased $4.0 million from $14.0 million for the 2003 quarter to $18.0 million for the 2004 quarter, and $13.9 million from $42.2 million for the 2003 nine-month period to $56.1 million for the 2004 nine-month period. The increase in EBITDA was primarily attributable to the revenue growth and integration activities related to our acquisition of BTI.

The positive effect on EBITDA for the 2004 quarter attributable to the cost savings in selling, general and administration expense related to BTI integration activities was partially offset by the increase in selling, operations and administration expense associated with compensation and benefit expense relating to an additional working day in the 2004 quarter. EBITDA for the 2004 quarter, which represented a decline of $2.7 million from the second quarter of 2004, was negatively affected by the decline in gross margin associated with the decline in wholesale revenues, increased customer turnover and rate pressures affecting our integrated communications services revenues, and the effects of severe weather in the southeastern United States where we generate substantially all of our operating revenues. The positive impact of our line cost audit and verification efforts and the favorable results associated with our BTI integration activities served to offset the impact on EBITDA of the revenue decline experienced in the 2004 quarter.

We have included data with respect to EBITDA because our management evaluates and projects the performance of our business using several measures, including EBITDA. Our management considers this measure to be an important supplemental indicator of our performance, particularly as compared to the performance of our competitors, because it eliminates many differences among companies in financial, capitalization and tax structures, as well as some recurring non-cash and non-operating charges to net income or loss. For these reasons, our management believes that EBITDA provides important supplemental information to investors regarding our operating performance and facilitates comparisons by investors between our operating performance and the operating performance of our competitors. Our management believes that consideration of EBITDA should be supplemental, because EBITDA is not a measurement of financial performance under generally accepted accounting principles and may not be comparable to similarly titled measures reported by other companies. As a result, EBITDA should not be considered an alternative to net income (loss), as calculated in accordance with generally accepted accounting principles, as a measure of performance.

The following table sets forth, for the periods indicated, a quantitative reconciliation of the differences between EBITDA and net loss, as net loss is calculated in accordance with generally accepted accounting principles: