<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from to
---- ---
Commission file number
--------------
ITC/\DELTACOM, INC.
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(Exact name of registrant as specified in its charter)
Delaware 58-2301135
- ------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
206 West Ninth Street, West Point, GA 31833
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 645-8990
--------------
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 No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at August 13, 1997
------------------------------
Class A Common Stock at $.01 par value 0 Shares
Class B Common Stock at $.01 par value 15,000,000 Shares
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTERSTATE FIBERNET, INC. (FORMERLY ITC TRANSMISSION SYSTEMS, INC.),
ITC TRANSMISSION SYSTEMS II, INC., GULF STATES TRANSMISSION SYSTEMS, INC.,
EASTERN TELECOM, INC. D.B.A. INTERQUEST, AND DELTACOM, INC.
(REORGANIZED AS ITC/\DELTACOM, INC. AS OF JULY 25, 1997)
COMBINED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,226,757 $ 1,301,415
Restricted cash 154,818,839 0
Accounts receivable:
Customer, net allowance for uncollectible accounts of $1,134,038
and $865,858 in 1997 and 1996, respectively 17,308,908 11,029,037
Affiliate 178,360 1,227,661
Inventory 630,431 543,447
Prepaid expenses 1,348,767 1,191,287
Federal income tax refunds receivable from Parent 663,200 2,546,534
Deferred income taxes 364,302 525,660
------------ ------------
Total current assets 180,539,564 18,365,041
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net 115,852,080 31,880,556
OTHER LONG-TERM ASSETS:
Intangible assets, net of accumulated amortization of $2,644,458
and $1,431,753 in 1997 and 1996, respectively 65,397,003 55,517,575
Restricted cash 40,208,146 0
Investments 5,000 7,424,797
Other long-term assets 13,928 20,010
------------ ------------
Total assets $402,015,721 $113,207,979
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade $ 7,130,290 $ 4,192,927
Construction 3,664,666 972,215
Affiliate 0 658,990
Accrued interest expense payable to Parent 9,011,106 5,830,716
Accrued compensation 1,391,633 1,189,395
Unearned revenue 3,178,367 762,829
Other accrued liabilities 3,871,230 983,270
Advances from Parent 79,886,220 0
Current portion of long-term debt 43,875,381 290,140
Current portion of capital leases 563,153 69,471
------------ ------------
Total current liabilities 152,572,046 14,949,953
------------ ------------
LONG-TERM LIABILITIES:
Advances from Parent 0 74,227,827
Deferred income taxes 4,402,511 3,918,140
Long-term debt 208,611,385 640,112
Capital lease obligations 2,979,207 215,421
------------ ------------
Total long-term liabilities 215,993,103 79,001,500
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDER'S EQUITY
Common stock 150,826 826
Additional paid-in-capital 40,814,227 23,492,162
Accumulated deficit (7,514,481) (4,236,462)
------------ ------------
Total stockholder's equity 33,450,572 19,256,526
------------ ------------
Total liabilities and stockholder's equity $402,015,721 $113,207,979
============ ============
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
1
<PAGE>
INTERSTATE FIBERNET, INC. (FORMERLY ITC TRANSMISSION SYSTEMS, INC.),
ITC TRANSMISSION SYSTEMS II, INC., GULF STATES TRANSMISSION SYSTEMS, INC.,
EASTERN TELECOM, INC. D.B.A. INTERQUEST, AND DELTACOM, INC.
(REORGANIZED AS ITC/\DELTACOM, INC. AS OF JULY 25, 1997)
COMBINED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Operating revenues $27,942,483 $17,287,040
Cost of services 13,105,426 9,714,844
----------- -----------
Gross margin 14,837,057 7,572,196
Operating expenses:
Selling, operations, and administrative 9,072,480 5,190,006
Depreciation and amortization 4,430,543 1,635,595
----------- -----------
13,503,023 6,825,601
----------- -----------
Operating income 1,334,034 746,595
----------- -----------
Other income (expense):
Equity in losses of unconsolidated subsidiary 0 (493,643)
Interest expense, net (4,892,979) (1,643,883)
Interest and other income 839,021 74,185
----------- -----------
(4,053,958) (2,063,341)
----------- -----------
Loss before income taxes (2,719,924) (1,316,746)
Income tax benefit 741,338 370,334
----------- -----------
Loss before preacquisition loss and extraordinary item (1,978,586) (946,412)
Preacquisition loss - -
----------- -----------
Loss before extraordinary item (1,978,586) (946,412)
Extraordinary item -- loss on extinguishment
of debt (less related income tax benefits) - -
----------- -----------
Net loss $(1,978,586) $ (946,412)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
2
<PAGE>
INTERSTATE FIBERNET, INC. (FORMERLY ITC TRANSMISSION SYSTEMS, INC.),
ITC TRANSMISSION SYSTEMS II, INC., GULF STATES TRANSMISSION SYSTEMS, INC.,
EASTERN TELECOM, INC. D.B.A. INTERQUEST, AND DELTACOM, INC.
(REORGANIZED AS ITC/\DELTACOM, INC. AS OF JULY 25, 1997)
COMBINED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Operating revenues $53,365,061 $28,574,799
Cost of services 25,302,747 16,129,463
----------- -----------
Gross margin 28,062,314 12,445,336
Operating expenses:
Selling, operations, and administrative 16,961,324 8,206,621
Depreciation and amortization 8,273,232 2,832,017
----------- -----------
25,234,556 11,038,638
----------- -----------
Operating income 2,827,758 1,406,698
----------- -----------
Other income (expense):
Equity in losses of unconsolidated subsidiary -- (1,088,404)
Interest expense, net (7,561,591) (2,762,757)
Interest and other income 883,388 107,216
----------- -----------
(6,678,203) (3,743,945)
----------- -----------
Loss before income taxes (3,850,445) (2,337,247)
Income tax benefit 1,005,809 671,467
----------- -----------
Loss before preacquisition loss and extraordinary item $(2,844,636) $(1,665,780)
Preacquisition loss 74,132 --
----------- -----------
Loss before extraordinary item (2,770,504) (1,665,780)
Extraordinary item -- loss on extinguishment
of debt (less related income tax benefits of $311,057) (507,515) --
----------- -----------
Net loss $(3,278,019) $(1,665,780)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
3
<PAGE>
INTERSTATE FIBERNET, INC. (FORMERLY ITC TRANSMISSION SYSTEMS, INC.),
ITC TRANSMISSION SYSTEMS II, INC., GULF STATES TRANSMISSION SYSTEMS, INC.,
EASTERN TELECOM, INC. D.B.A. INTERQUEST, AND DELTACOM, INC.
(REORGANIZED AS ITC/\DELTACOM, INC. AS OF JULY 25, 1997)
COMBINED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,278,019) $ (1,665,780)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 8,334,065 2,832,017
Deferred income taxes 104,330 -
Equity in losses of unconsolidated subsidiary - 1,088,404
Preacquisition losses (74,132) -
Extraordinary item--loss on extinguishment of
debt, net of related income tax benefit 507,515 -
Other 73,369 13,265
Changes in current operating assets and liabilities:
Accounts receivable, net (3,055,995) (2,110,448)
Inventory (86,984) (228,299)
Prepaid expenses (101,682) (536,620)
Income tax refunds receivable from Parent (663,200) -
Accounts payable (505,512) 1,616,103
Accrued interest 3,180,390 2,650,325
Unearned revenue 2,415,538 388,927
Accrued compensation and other accrued liabilities 2,563,342 (1,505,644)
Other, net (3,246) (93,552)
------------ ------------
Total adjustments 12,687,798 4,114,478
------------ ------------
Net cash provided by operating activities 9,409,779 2,448,698
------------ ------------
Cash flows from investing activities:
Capital expenditures (14,069,380) (1,855,798)
Change in accrued construction costs 1,711,909 (424,115)
Purchase of investments - (394,923)
Investment in Gulf States FiberNet - (501,595)
Purchase of DeltaCom, net of cash received - (63,534,092)
Purchase of Gulf States FiberNet, net of cash received 574,600 -
------------ ------------
Net cash used in investing activities (11,782,871) (66,710,523)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of Senior Notes, net of issuance costs 194,250,000 -
Proceeds from issuance of other long-term debt, net of issuance costs 41,095,061 -
Repayment of other long-term debt (41,562,500) (10,327,884)
Proceeds from advance from Parent 8,243,990 74,741,047
Repayment of advance from Parent (48,329) (1,194,806)
Proceeds from issuance of common stock 150,000 -
Capital contributions from Parent, net (624,465) 1,810,412
Repayment of capital lease obligations (184,420) (6,000)
Proceeds from note receivable 6,082 -
------------ ------------
Net cash provided by financing activities 201,325,419 65,022,769
------------ ------------
Increase in cash and cash equivalents 198,952,327 760,944
Cash and cash equivalents at beginning of period 1,301,415 656,096
------------ ------------
Cash and cash equivalents at end of period $200,253,742 $ 1,417,040
============ ============
</TABLE>
The accompanying notes are an integral part of these combined statements.
4
<PAGE>
INTERSTATE FIBERNET, INC. (FORMERLY ITC TRANSMISSION SYSTEMS, INC.),
ITC TRANSMISSION SYSTEMS II, INC., GULF STATES TRANSMISSION SYSTEMS, INC.,
EASTERN TELECOM, INC. D.B.A. INTERQUEST, AND DELTACOM, INC.
(REORGANIZED AS ITC/\DELTACOM, INC. AS OF JULY 25, 1997)
COMBINED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Six Months Ended June 30,
1997 1996
-------------- -------------
<S> <C> <C>
Cash paid for interest $ 1,034,980 $1,217,972
=========== ==========
Cash paid for income taxes, net of refunds received $ (621,319) $ 362,764
=========== ==========
NONCASH TRANSACTIONS:
Equity portion of acquisition of DeltaCom $ 0 $6,000,000
=========== ==========
Equity portion of acquisition of 64% interest
in Gulf States FiberNet and Georgia Fiber Assets $17,896,665 $ 0
=========== ==========
Assumption of long-term debt related to acquisition of
Georgia Fiber Assets $ 9,964,091 $ 0
=========== ==========
Offset of advances to Parent as a reduction to related
advances from Parent $ 2,546,534 $ 0
=========== ==========
Accrued debt issuance costs related to Notes $ 289,220 $ 0
=========== ==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
5
<PAGE>
INTERSTATE FIBERNET, INC. (FORMERLY ITC TRANSMISSION SYSTEMS, INC.),
ITC TRANSMISSION SYSTEMS II, INC., GULF STATES TRANSMISSION SYSTEMS, INC.,
EASTERN TELECOM, INC. D.B.A. INTERQUEST, AND DELTACOM, INC.
(REORGANIZED AS ITC/\DELTACOM, INC. AS OF JULY 25, 1997)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION, NATURE OF BUSINESS, AND BASIS OF PRESENTATION
ORGANIZATION
ITC/\DeltaCom, Inc. (the "Company"), was incorporated on March 24,
1997 under the laws of the State of Delaware, as a wholly-owned subsidiary of
ITC Holding Company, Inc. ("ITC Holding" or "Parent"), to acquire and operate
the following wholly owned subsidiaries of ITC Holding: Interstate FiberNet,
Inc. (formerly ITC Transmission Systems, Inc. ) ("FiberNet"), ITC Transmission
Systems II, Inc. ("Transmission II"), Gulf States Transmission Systems, Inc.
("GSTS"), Eastern Telecom, Inc. (d.b.a. InterQuest) ("InterQuest") and DeltaCom,
Inc. ("DeltaCom"). On July 25, 1997, upon receipt of certain regulatory
approvals and certain other consents, ITC Holding completed the reorganization
of such subsidiaries (the "Reorganization"), as follows:
. InterQuest and Transmission II were merged with and into FiberNet.
. ITC Holding contributed to the Company all of the issued and outstanding
capital stock of FiberNet, DeltaCom and GSTS.
. The Company contributed to FiberNet all of the outstanding capital stock
of DeltaCom and GSTS.
As a result of the Reorganization, the Company became the sole stockholder of
FiberNet and FiberNet became the sole stockholder of each of GSTS and DeltaCom.
In connection with the Reorganization, approximately $31.0 million of Company
indebtedness to ITC Holding associated with the acquisition of DeltaCom was
forgiven by ITC Holding and contributed to the Company as additional equity.
NATURE OF BUSINESS
The Company provides retail long distance services to mid-sized and major
regional businesses in the southern United States and is a leading regional
provider of wholesale long-haul services to other telecommunications companies
using the Company's owned, operated and managed fiber optic network (the
"Carriers' Carrier Services"). The Company intends to become a leading regional
provider of integrated telecommunications services to mid-sized and major
regional businesses in the southern United States by offering such customers a
broad range of telecommunications services, including local exchange and long
distance data and voice, Internet and operator services and the sale and
servicing of customer premise equipment (collectively, the "Retail Services") in
a single package tailored to the business customer's specific needs.
BASIS OF PRESENTATION
The accompanying financial statements are unaudited and have been prepared
by management of the Company in accordance with the rules and regulations of the
Securities and Exchange Commission (the "SEC"). In the opinion of management,
all adjustments considered necessary for the fair presentation of the financial
statements have been included, and the financial statements present fairly the
financial position and results of operations for the interim periods presented.
The financial statements should be read in conjunction with the combined
financial statements and related footnotes included in the Company's
Registration Statement on Form S-4, as filed with the SEC on July 16, 1997 (File
No. 333-31361) (the "Registration Statement") with respect to the Exchange Offer
(as described in Note 2, below), which has not yet been declared effective.
The comparability of the three-month and six-month periods ended June 30,
1997 and June 30, 1996 has been affected by the acquisition of DeltaCom on
January 29, 1996 (the "DeltaCom Acquisition") and the Gulf States Acquisition
(as defined in Note 2, below.) The financial statements for the three and six
months ended
6
<PAGE>
June 30, 1996 include the results of operations for DeltaCom since its
acquisition on January 29, 1996, and do not reflect the results of operations
for DeltaCom from January 1 up to the date of acquisition. For the three and six
months ended June 30, 1996, the Company's 36% interest in GSTS's results of
operations is reflected using the equity method. Due to the Gulf States
Acquisition (as defined in Note 2, below) on March 27, 1997, the financial
statements for the three and six months ended June 30, 1997 reflects the total
revenues and expenses from January 1, 1997, attributable to Gulf States FiberNet
and the Georgia Fiber Assets, with the preacquisition losses attributable to
SCANA from January 1, 1997 deducted to determine combined net loss.
2. ACQUISITION OF MAJORITY INTEREST OF GULF STATES FIBERNET AND GEORGIA FIBER
ASSETS
In August 1994, ITC Holding and SCANA Communications, Inc. ("SCANA") formed
a partnership, Gulf States FiberNet, to construct and operate a fiber optic
route primarily between Atlanta, Georgia and Shreveport, Louisiana with several
supplemental spur routes. On March 27, 1997, ITC Holding acquired SCANA's 64%
partnership interest in Gulf States FiberNet and certain assets (the "Georgia
Fiber Assets"), including one customer contract representing $3.5 million in
annual revenues through August 2001, the term of the contract (the "Gulf States
Acquisition"). Following the Gulf States Acquisition, ITC Holding contributed
the remaining 64% partnership interest in Gulf States FiberNet to GSTS and the
Georgia Fiber Assets to FiberNet. The aggregate consideration paid by
ITC Holding in the Gulf States Acquisition was approximately $27.9 million, of
which $10.0 million consisted of an unsecured purchase money note, which was
assumed by FiberNet, and $17.9 million consisted of ITC Holding preferred stock.
If the Gulf States FiberNet business achieves a specified performance target for
1997, SCANA will be entitled to receive additional ITC Holding preferred stock.
3. OFFERING OF 11% SENIOR NOTES
On June 3, 1997, the Company completed the sale of $200 million principal
amount of 11% Senior Notes due 2007 (the "Notes") in a private offering. Under
the Indenture pursuant to which the Notes were issued (the "Indenture"), the net
proceeds to the Company from the sale of the Notes (approximately $194.3
million), were held by the Notes trustee and invested in U.S. government
securities pending consummation of the Reorganization. See Note 1, above. Upon
consummation of the Reorganization on July 25, 1997, approximately $62.7 million
of such net proceeds were reinvested in U.S. government securities and are being
held by the Notes trustee in a pledged account as security for and to fund the
first six scheduled interest payments on the Notes, including .5% per annum in
the event the Exchange Offer (as defined below) is not consummated or a shelf
registration statement with respect to the Notes is not effective prior to
December 3, 1997. The balance of such net proceeds, approximately $131.6
million, was released to the Company, a portion of which was applied on July 25,
1997 as follows: (i) repayment of approximately $57.8 million of indebtedness to
ITC Holding (including approximately $9.5 million of accrued interest)
associated with the DeltaCom Acquisition and advances used by the Company for
capital expenditures; and (ii) repayment of approximately $41.6 million of
indebtedness to NationsBank, N.A. incurred to refinance an existing project
facility (the "Bridge Facility"). The Company intends to use the remaining
approximately $32.2 million of such net proceeds (i) to fund market expansion
activities of the Company's telecommunications business, including development
and construction costs of the Company's fiber optic network and its regional
sales offices; and (ii) for additional working capital and other general
corporate purposes, including the funding of cash flow deficits (after capital
expenditures). Pending such uses, the Company has invested such amounts in U.S.
government securities.
Under the Indenture, the Company is obligated to use its best efforts to
consummate an exchange offer (the "Exchange Offer") pursuant to an effective
registration statement under the Securities Act or cause resales of the Notes to
be registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to an effective shelf registration statement. If one of such
events does not occur prior to December 3, 1997, the interest rate on the Notes
will increase by .5% per annum until the consummation of the Exchange Offer or
the effectiveness of such shelf registration statement. The securities to be
exchanged for the Notes in the Exchange Offer will have the same terms as the
Notes, but generally will not be subject to restrictions on transferability
imposed under applicable securities laws. On July 16, 1997, the Company filed
the Registration Statement with respect to the Exchange Offer, which has not yet
been declared effective. See Note 1.
7
<PAGE>
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long term debt and capital lease obligations at June 30, 1997 and December
31, 1996 consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
11% Senior Notes Due 2007 $200,000 $ 0
Advances from ITC Holding, paid or 79,886 74,228
forgiven on July 25, 1997
$41.6 million bridge facility, interest payable at Libor
plus 2.25% (8.25% at June 30, 1997), paid in full on
July 25, 1997 41,600 0
$10.0 million term facility, interest payable at 11%
Maturing on March 31, 2002 9,964 0
Capital lease obligations at varying interest rates,
Maturing through June 2006 3,542 285
Other 923 930
-------- -------
Total Long-term debt and capital leases 335,915 75,443
Less current maturities (44,439) (360)
-------- -------
Total $291,476 $75,083
======== =======
</TABLE>
In May 1997, FiberNet entered into a commitment letter with NationsBank,
N.A. for a five-year term and revolving credit facility of up to $100 million
(the "Credit Facility"), to be used for working capital and other corporate
purposes, including capital expenditures and permitted acquisitions. The Credit
Facility is expected to consist of a $50 million multi-draw term facility and a
$50 million revolving credit facility, and will contain restrictions on the
Company and its subsidiaries and require the Company to comply with certain
financial tests and to maintain certain financial ratios.
5. COMMITMENTS AND CONTINGENCIES
At June 30, 1997, the Company had entered into agreements with vendors to
purchase approximately $11.5 million of equipment related to the improvement and
installation of switches, other network expansion efforts and certain services.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this report. The Company
has included EBITDA data in the following analysis because it is a measure
commonly used in the industry. EBITDA represents earnings before extraordinary
item, net interest, preacquisition loss, income taxes, depreciation and
amortization. EBITDA is not a measure of financial performance under generally
accepted accounting principles and should not be considered an alternative to
net income as a measure of performance or to cash flows as a measure of
liquidity. EBITDA is not necessarily comparable with similarly titled measures
for other companies. Unless otherwise indicated, dollar amounts have been
rounded to the nearest hundred thousand.
OVERVIEW
Company Background. ITC/\ DeltaCom was incorporated in March 1997 as a
wholly owned subsidiary of ITC Holding to acquire and operate ITC Holding's
Retail Services and Carriers' Carrier Services businesses.
ITC Holding has provided operator and directory assistance services since
March 1992 through InterQuest. Carriers' Carrier Services have been offered
since late 1992 through Interstate FiberNet, a partnership originally formed by
ITC Holding (with a 49% interest) and SCANA (with a 51% interest). In August
1994, ITC Holding acquired SCANA's interest in Interstate FiberNet. Also in
August 1994, ITC Holding formed a second partnership with SCANA, Gulf States
FiberNet, to construct and operate a fiber optic route primarily between
Atlanta, Georgia and Shreveport, Louisiana with several supplemental spur
routes. In the Gulf States Acquisition, ITC Holding acquired SCANA's 64%
partnership interest in Gulf States FiberNet and the Georgia Fiber Assets, which
included one customer contract representing $3.5 million in annual revenues
through August 2001, the term of the contract. Members of the Company's
management have been managing the businesses of both Interstate FiberNet and
Gulf States FiberNet since their inception. In 1995, the Company began offering
SS7 services to its Carriers' Carrier customers.
In January 1996, as a result of the DeltaCom Acquisition, ITC Holding
entered the retail long distance business and acquired several fiber optic
routes within the state of Alabama that complemented the existing networks
operated by Interstate FiberNet and Gulf States FiberNet. DeltaCom, a provider
of telecommunications services since its inception in 1982, provides long
distance services to mid-sized businesses primarily in the state of Alabama.
The aggregate consideration paid by ITC Holding in the DeltaCom Acquisition
was approximately $71.4 million, consisting of approximately $65.4 million in
cash and $6.0 million of ITC Holding common stock. Concurrently with its
acquisition of DeltaCom, ITC Holding advanced $8.6 million to DeltaCom to repay
DeltaCom's outstanding debt. The DeltaCom Acquisition has been accounted for
under the purchase method. To finance the DeltaCom Acquisition and to refinance
DeltaCom's existing debt, ITC Holding incurred approximately $74.0 million of
indebtedness, which was pushed down to DeltaCom (the "DeltaCom
Indebtedness").
The aggregate consideration paid by ITC Holding in the Gulf States
Acquisition was approximately $27.9 million, consisting of a $10.0 million
note, which was assumed by FiberNet and $17.9 million of ITC Holding preferred
stock. Under an earn-out provision, SCANA will be entitled to receive additional
preferred stock of ITC Holding if the Gulf States FiberNet business achieves a
specified performance target for 1997. The Company accounted for the Gulf States
Acquisition under the purchase method. Of the purchase price, approximately
$17.0 million was allocated to the Gulf States FiberNet partnership interest and
$10.9 million was allocated to the Georgia Fiber Assets.
In connection with the Reorganization, approximately $31.0 million of the
DeltaCom Indebtedness was forgiven by ITC Holding and contributed to the Company
as additional equity. Following the Reorganization, the Company repaid the
remaining $43.0 million of the DeltaCom Indebtedness, accrued interest on all
$74.0 million of such indebtedness and the $41.6 million of indebtedness
outstanding under the Bridge Facility and accrued interest thereon. See "--
Liquidity and Capital Resources."
Revenues. The Company derives revenues primarily from two business
segments: (i) Retail Services, which encompass the retail sale of long distance,
data, Internet services and the sale and installation of customer premise
equipment to mid-sized and major regional business customers and certain
switched services telecommunications companies, and (ii) Carriers' Carrier
Services, which encompass the sale of long-haul private line services on a
wholesale basis to other telecommunications companies, using the Company's owned
and managed fiber optic network.
9
<PAGE>
The Company currently offers a wide range of Retail Services, including
retail long distance services such as traditional switched and dedicated long
distance, 800/888 calling, calling card and operator services, ATM and frame
relay, high capacity broadband private line, as well as Internet, Intranet and
Web page hosting and development services, and customer premise equipment
installation and repair. Since January 1996, the Company has expanded its
retail long distance operations into the following markets: Pensacola, Florida;
Atlanta, Georgia; Charlotte, North Carolina; Greenville, South Carolina; and New
Orleans and Baton Rouge, Louisiana. As of June 30, 1997, the Company
provided Retail Services to over 6,600 business customers and approximately
7,100 residential customers. Such residential customers represented less than
5% of the Company's revenues for the year ended 1996 and the six months ended
June 30, 1997.
In July 1997, the Company began offering local services in Birmingham,
Alabama and Montgomery, Alabama. The Company expects to offer local exchange
services as part of its Retail Services in a total of six to nine markets
(including Birmingham and Montgomery) during the second half of 1997 by
reselling the services of incumbent local exchange carriers and by using its own
local switching facilities. In connection with offering local exchange services,
the Company has entered into the Interconnection Agreement with BellSouth to (i)
resell BellSouth's local exchange services and (ii) interconnect the Company's
network with BellSouth's network for the purpose of gaining access to unbundled
network elements. This agreement will allow the Company to enter new markets
with minimal capital expenditures and to offer local exchange service to its
current customer base.
As the Company begins to offer local service on a facilities rather than
resale basis, it will begin to sell switched access and termination services to
carriers terminating calls to its local end user customers, and originating
switched access to long distance companies where the end users choose a carrier
other than the Company for that service. Certain incumbent local exchange
companies, including BellSouth, have taken the position that when a carrier
seeking to provide local service obtains all necessary elements (loops and
switches) from the incumbent local exchange carrier in a combined form, the
incumbent local exchange carrier retains the right to receive the access
revenues associated with service to the customers served on that basis.
Although a recent Eighth Circuit Court of Appeals decision appears to reject
this position, further legal challenges are likely and important issues related
to this form of interconnection remain open.
The Company provides Carriers' Carrier Services using its owned and managed
fiber optic network, which reaches over 60 POPs in ten southern states
(Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina,
South Carolina, Tennessee and Texas). Of the network's approximately 5,000
route miles, approximately 2,100 are Company-owned and operated and
approximately 2,900 are owned and operated by three public utilities, Duke
Power Company, Florida Power & Light Company and Entergy Technology Company,
with which the Company has marketing and management arrangements. The Company's
arrangement with Entergy is exclusive. In addition, the Company has a buy-sell
agreement with Carolinas Fibernet, LLC, which manages fiber optic facilities in
North Carolina and South Carolina. This agreement enables the parties to buy
and sell capacity on each other's networks and allows the Company to provide
customers with access to POPs throughout those states. The Company expects to
add approximately 1,200 owned and operated route miles to its fiber network by
the end of 1997 through construction or long-term dark fiber leases. To the
extent that the Company elects to expand its network through long-term leases in
lieu of construction, the Company expects such leases to have a negative effect
on EBITDA; however, the Company expects any such expansion of its network would
provide opportunities to generate additional revenues.
The Company derives commission revenues from the marketing, sale and
management of capacity on the utility-owned portions of the Company's network.
Negligible incremental costs are associated with these commissions, because the
Company uses the same marketing and sales force in servicing the utility-owned
portions of the network as it does for the portions owned by the Company. In
1996, the Company's commission revenues from these arrangements amounted to
approximately $170,000 because, although the utility-owned portions owned by
Duke Power Company began generating revenues in late 1995, the portions owned by
Florida Power & Light Company and Entergy Technology Company began generating
revenues in late 1996. For the six months ended June 30, 1997, the Company's
commission revenues from these arrangements amounted to approximately
$451,000. The Company expects commissions associated with the utility-owned
portions of the network, which will become fully operational in the current
year, to continue to increase in 1997.
The Company provides long-haul services to its carrier customers on a "take
or pay" long-term basis, on an individual circuit basis, or on a month-to-month
basis after the initial term of the "take or pay" or individual circuit
contract. As of June 30, 1997, on a pro forma basis, the Company had remaining
10
<PAGE>
future long-term contract commitments totaling approximately $75.8 million.
These contracts expire on various dates through 2006 and are expected to
generate approximately $56.0 million in revenues to the Company through
2001. No single Carriers' Carrier Services customer or Retail Services customer
represented over 10% of the Company's total revenues for the six months ended
June 30, 1997.
The customer contracts for Retail Services generally provide for payment in
arrears based on minutes of use for switched services and payment in advance for
private line services. The contracts generally also provide that the customer
may terminate the affected services without penalty in the event of certain
outages in service, and for certain other defined causes. To date, no customers
have terminated any services under these provisions. The contracts also
typically provide that the customer must use at least a minimum dollar amount of
switched long distance services per month for the term of the contract. During
the past several years, market prices for many telecommunications services
segments have been declining, which the Company believes will likely continue.
In response to these and other competitive pressures, the Company recently
modified certain of its retail contracts to extend to certain customers lower
rates over longer terms as a means of maintaining and developing the Company's
customer base. In the future, in response to competitive considerations, the
Company may decide to modify certain other retail customer contracts in a
similar manner, emphasizing lower pricing and longer commitment periods. A
substantial portion of the Company's total revenues are from retail long
distance services. Revenue per minute from such services has been declining and
is expected to continue to decline. This decline will have a negative effect on
the Company's gross margin which may not be offset completely by savings from
decreases in the Company's cost of services.
Operating Expenses. The Company's principal operating expenses consist of
cost of services, selling, operations and administration expenses, and
depreciation and amortization. Cost of services related to Retail Services
consists primarily of access charges and local facility charges paid to local
exchange carriers, as well as wholesale carrier origination, termination and
interexchange facility charges paid to other interexchange carriers. Cost of
services related to Carriers' Carrier Services are substantially all fixed costs
attributable to (i) the leasing of dark fiber under long-term operating leases,
(ii) the leasing of capacity outside the Company's owned or managed network
(off-net capacity) to meet customer requirements, (iii) labor associated with
operator services and (iv) network costs associated with the provision of SS7
services. The Company purchases off-net capacity to fill additional
requirements of a contract which are otherwise substantially met on the
Company's network or to meet contract requirements in cases where the Company
plans to construct its own network to replace the off-net portion. Selling,
operations and administration expenses consist of expenses of selling and
marketing, field personnel engaged in direct network maintenance and monitoring,
customer service and corporate administration. Depreciation and amortization
include depreciation of the Company's telecommunications network and equipment
and amortization of goodwill and other intangible assets related to
acquisitions, primarily the DeltaCom Acquisition.
As the Company continues to expand into new geographic markets, add new
sales offices and facilities and enlarge its current product offerings to
include local telephone and other services, cost of services and selling,
operations and administration expenses are expected to increase substantially.
Therefore, the Company expects to incur increasing operating losses over the
next few years. Although the Company anticipates that it will continue to
generate positive cash flow from operations, it expects that such cash flows
will be more than offset by capital expenditures during the next several years
as it implements its business plan. The Company also expects that the addition
of local service to its bundle of telecommunications services will have an
adverse impact on its gross margin, because the gross margin on the resale of
local services through incumbent local exchange carrier facilities will be lower
than the gross margin on the Company's existing businesses. As the Company
increasingly uses incumbent local exchange carrier unbundled network elements
instead of resold services, the Company expects gross margin on local service to
improve. Such improvement is expected to result from reduced access charges and
efficiencies realized through increased reliance on the Company's owned network.
Such improved margins, however, could be offset by competitive market pressures
to reduce prices for Retail Services, as discussed above. There can be no
assurance that growth in the Company's revenues or customer base will continue
or that the Company will be able to achieve or sustain profitability or positive
net cash flows.
11
<PAGE>
HISTORICAL RESULTS OF OPERATIONS
The following tables set forth certain historical data for the three and
six month periods ended June 30, 1997 and the three and six month periods ended
June 30, 1996 for the Carriers' Carrier Services business and the Retail
Services business.
<TABLE>
<CAPTION>
CARRIERS' CARRIER SERVICES
---------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------- ---------------------------------------
1997 % 1996 % 1997 % 1996 %
---------- --- ---------- --- ----------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $7,560,592 100% $1,471,962 100% $13,444,647 100% $2,724,874 100%
Cost of Services 870,663 12% 652,927 44% 1,774,736 13% 1,126,438 41%
---------- --- ---------- --- ----------- --- ---------- ---
Gross Margin 6,689,929 88% 819,035 56% 11,669,911 87% 1,598,436 59%
---------- --- ---------- --- ----------- --- ---------- ---
Operating Expenses:
Selling, operations
and administrative 2,066,449 27% 392,226 27% 3,790,864 28% 851,662 31%
Depreciation and
amortization 2,959,950 39% 385,331 26% 5,315,500 40% 759,366 28%
---------- --- ---------- --- ----------- --- ---------- ---
Total operating expenses 5,026,399 66% 777,557 53% 9,106,364 68% 1,611,028 59%
---------- --- ---------- --- ----------- --- ---------- ---
Operating income (loss) $1,663,530 22% $ 41,478 3% $ 2,563,547 19% ($12,592) 0%
========== === ========== === =========== === ========== ===
</TABLE>
<TABLE>
<CAPTION>
RETAIL SERVICES
------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ----------------------------------------
1997 % 1996 % 1997 % 1996 %
----------- --- ----------- --- ----------- --- ----------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $20,381,891 100% $15,815,078 100% $39,920,414 100% $25,849,925 100%
Cost of Services 12,234,763 60% 9,061,917 57% 23,528,011 59% 15,003,025 58%
----------- --- ----------- --- ----------- --- ----------- ---
Gross Margin 8,147,128 40% 6,753,161 43% 16,392,403 41% 10,846,900 42%
----------- --- ----------- --- ----------- --- ----------- ---
Operating Expenses:
Selling, operations
and administrative 7,006,031 34% 4,797,780 30% 13,170,460 33% 7,354,959 28%
Depreciation and
amortization 1,470,593 7% 1,250,264 8% 2,957,732 7% 2,072,651 8%
----------- --- ----------- --- ----------- --- ----------- ---
Total operating expenses 8,476,624 42% 6,048,044 38% 16,128,192 40% 9,427,610 36%
----------- --- ----------- --- ----------- --- ----------- ---
Operating income (loss) ($329,496) (2)% $ 705,117 4% $ 264,211 1% $ 1,419,290 5%
=========== === =========== === =========== === =========== ===
</TABLE>
The comparability of the three-month and six-month periods ended June 30,
1997 and 1996 has been affected by the DeltaCom Acquisition and the Gulf States
Acquisition. The financial statements for the three months and the six months
ended June 30, 1996 include the results of operations for DeltaCom since its
acquisition on January 29, 1996, and do not reflect the results of operations
for DeltaCom from January 1 up to the date of acquisition. For the six months
ended June 30, 1996, the Company's 36% interest in Gulf States FiberNet's
results of operations is reflected using the equity method. Due to the Gulf
States Acquisition on March 27, 1997, the three and six months ended June 30,
1997 reflects the total revenues and expenses from January 1, 1997 attributable
to Gulf States FiberNet and the Georgia Fiber Assets, with the preacquisition
losses attributable to SCANA from January 1, 1997 deducted to determine combined
net loss.ex
REVENUES
Total revenue was $27.9 million for the three months ended June 30, 1997
compared to $17.3 million for the three months ended June 30, 1996. Of the $10.6
million (62%) increase, $4.6 million was attributable to additional revenues
generated by Retail Services. Revenues attributable to long distance services
increased $3.9 million, sales of customer premises equipment increased $.3
million and Internet sales and services (which were introduced during the second
half of 1996) contributed $.4 million for the three months ended June 30, 1997.
Revenues from Carriers' Carrier Services increased to $7.6 million for the three
months ended June 30, 1997 from $1.5 million for the three months ended June 30,
1996. Of the $6.1 million increase, $4.7 million was attributable to revenues
generated during the three months ended June 30, 1997 by Gulf States FiberNet
and $.9 million was attributable to revenue from the Georgia Fiber Assets , as a
result of the Gulf States Acquisition on March 27, 1997. The remaining $.5
million of the increase was attributable to growth in SS7 services, managed
network services and increased demand for Carriers' Carrier Services.
Total revenue for the six months ended June 30, 1997 was $53.4 million, an
increase of $24.8 million (87%) from $28.6 million for the six months ended June
30, 1996. Revenues from Retail Services increased $14.1 million from $25.8
million for the six months ended June 30, 1996 to $39.9 million for the six
months ended June 30, 1997. Results for the six months ended June 30, 1996
reflect only five months of Retail Services revenues because the DeltaCom
Acquisition occurred on January 29, 1996. Revenues from Carriers' Carrier
Services increased from $2.7 million for the six months ended June 30, 1996 to
$13.4 million for the six months ended June 30, 1997. Of the $10.7 million
increase, $8.8 million was attributable to revenues generated during the six
months ended June 30, 1997 by Gulf States FiberNet. Excluding revenues
attributable to Gulf States FiberNet Carriers' Carrier Services increased $1.9
million, of which $.9 million was attributable to revenue from the Georgia Fiber
Assets acquired March 27, 1997.
Cost of Services
Total cost of services increased to $13.1 million for the three months
ended June 30, 1997 from $9.7 million for the three months ended June 30, 1996.
Cost of services for Retail Services' operations increased $3.1 million for the
three months ended June 30, 1997 to $12.2 million compared to $9.1 million for
the three months ended June 30, 1996. Cost of services for Retail Services'
operations as a percentage of revenue increased to 60% for the three months
ended June 30, 1997 compared to 57% for the three months ended June 30, 1996.
This increase was attributable to the cost of new facilities in order to service
expanded retail markets, and the impact of increased minutes of usage at lower
prices per minute. Cost of services attributable to Carriers' Carrier Services
increased $.2 million from $.7 million for the three months ended June 30, 1996
to $.9 million for the three months ended June 30, 1997. Cost of services for
Carriers' Carrier Services as a percentage of revenue decreased to 12% for the
three months ended June 30, 1997 compared to 44% for the three months ended June
30, 1996.
Total cost of services increased $9.2 million to $25.3 for the six months
ended June 30, 1997 from $16.1 million for the six months ended June 30, 1996.
Cost of services for Retail Services operations increased $8.5 million to $23.5
million for the six months ended June 30, 1997 from $15.0 million for the six
12
<PAGE>
months ended June 30, 1996, which reflect only five months of cost of services
attributable to Retail Services operations because the DeltaCom Acquisition
occurred on January 29, 1996. Cost of services for Retail Services' operations
as a percentage of revenue increased to 59% for the six months ended June 30,
1997 compared to 58% for the six months ended June 30, 1996. Cost of services
attributable to Carriers' Carrier Services increased $.7 million from $1.1
million for the six months ended June 30, 1996 to $1.8 million for the six
months ended June 30, 1997. Cost of services for Carriers' Carrier Services as a
percentage of revenue decreased to 13% for the six months ended June 30, 1997
compared to 41% for the three months ended June 30, 1996.
Selling, Operations and Administration Expense
Total selling, operations and administration expense increased from $5.2
million for the three months ended June 30, 1996 to $9.1 million for the three
months ended June 30, 1997. Selling, operations and administration expense
attributable to Retail Services increased $2.2 million from $4.8 million (30% as
a percentage of revenue) for the three months ended June 30, 1996 to $7.0
million (34% as a percentage of revenue) for the three months ended June 30,
1997. This increase resulted from employment of additional sales, information
services and provisioning personnel directly related to the Company's
geographical market and product expansion as the Company prepared to offer local
service. Selling, operations and administration expense attributable to
Carriers' Carrier Services increased from $.4 million for the three months
ended June 30, 1996 to $2.1 million for the three months ended June 30, 1997,
and remained constant at 27% as a percentage of revenue. $.9 million of the $1.7
million increase was attributable to the acquisition of Gulf States FiberNet.
The remaining $.8 million of this increase was attributable to increased costs
of administrative personnel employed to support expansion of the business.
Total selling, operations and administration expense increased $8.8 million
from $8.2 million (29% as a percentage of revenue) for the six months ended June
30, 1996 to $17.0 million (32% as a percentage of revenue) for the six months
ended June 30, 1997. Selling, operations and administration expense attributable
to Retail Services increased $5.8 million from $7.4 million for the six months
ended June 30, 1996 to $13.2 million for the six months ended June 30, 1997, an
increase from 28% to 33% as a percentage of revenue. Results for the six months
ended June 30, 1996 reflect only five months of selling, operations and
administration expense attributable to Retail Services because the DeltaCom
Acquisition occurred on January 29, 1996. Selling, operations and administration
expense attributable to Carriers' Carrier Services increased $2.9 million from
$.9 million for the six months ended June 30, 1996 to $3.8 million for the six
months ended June 30, 1997, decreasing from 31% to 28% as a percentage of
revenue.
Depreciation and Amortization
Depreciation and amortization expense increased $2.8 million from $1.6
million for the three months ended June 30, 1996 to $4.4 million for the three
months ended June 30, 1997. Retail services accounted for $.2 million of the
increase. This increase was primarily related to installation of new central
office equipment. For the three months ended June 30, 1997, depreciation and
amortization for Carriers' Carrier Services operations accounted for $2.6
million of the increase and was primarily related to the acquisition of Gulf
States FiberNet.
For the six months ended June 30, 1997 depreciation and amortization
expense increased $5.5 million to $8.3 million from $2.8 million for the six
months ended June 30, 1996. Retail services accounted for $.9 million of the
increase. This increase was primarily related to installation of new central
office equipment. For the six months ended June 30, 1997, depreciation and
amortization for Carriers' Carrier Services operations accounted for $4.6
million of the increase and is primarily related to the acquisition of Gulf
States FiberNet.
Interest Expense
Interest expense increased from $1.6 million for the three months ended
June 30, 1996 to $4.9 million for the three months ended June 30, 1997. Of this
$3.3 million increase, $1.8 million was attributable to the Notes, $1.2 million
was attributable to the acquisition of Gulf States FiberNet and $.3 million was
attributable to Carriers' Carrier Services route acquisitions. Interest expense
increased from $2.8 million for the six months ended June 30, 1996 to $7.6
million for the six months ended June 30, 1997. Of this $4.8 million increase,
$1.8 million was attributable to the Notes, $2.2 million was attributable to the
acquisition of Gulf States FiberNet, $.5 million was attributable to the
DeltaCom Indebtedness, and the balance was attributable to Carriers' Carrier
Services route acquisitions.
Income Taxes
The Company is included in the consolidated federal income tax returns of
its parent, ITC Holding, which results in the Company receiving benefit for
certain of its net operating losses. The benefit received as a percentage of
taxable income was 27% and 28% for the three month periods ended June 30, 1997
and 1996, respectively, and 26% and 29% for
13
<PAGE>
the six month periods ended June 30, 1997 and 1996, respectively.
EBITDA
EBITDA increased from $2.4 million for the three months ended June 30, 1996
to $5.8 million for the three months ended June 30, 1997. Carriers' Carrier
Services accounted for $4.2 million of the increase. EBITDA attributable to
Retail Services for the three months ended June 30, 1996 was $2.0 million,
compared to $1.1 million for the three months ended June 30, 1997. EBITDA
attributable to Retail Services decreased from 12% of revenues for the three
months ended June 30, 1996 to 6% for the three months ended June 30, 1997,
primarily due to increased costs associated with the expansion of new sales
offices and the employment of additional support personnel to position this
segment for growth and expansion.
EBITDA increased from $4.2 million for the six months ended June 30, 1996
to $11.1 million for the six months ended June 30, 1997. Carriers' Carrier
Services accounted for $7.1 million of the increase. EBITDA attributable to
Retail Services for the six months ended June 30, 1996 was $3.2 million,
compared to $3.5 million for the six months ended June 30, 1997. EBITDA
attributable to Retail Services decreased from 14% of revenues for the six
months ended June 30, 1996 to 8% for the six months ended June 30, 1997,
primarily due to increased costs associated with the expansion of new sales
offices and the employment of additional support personnel to position this
segment for growth and expansion. The Company expects that EBITDA for Retail
Services will continue to decline through at least 1998 as the Company opens
additional sales offices and prepares to offer local service.
Liquidity and Capital Resources
The Company generated net cash from operating activities of $9.4 million
and $2.4 million for the six months ended June 30, 1997 and 1996, respectively.
Cash flows from operations (consisting of net loss adjusted for depreciation,
amortization, deferred income taxes, equity in losses of investee,
preacquisition losses, extraordinary item-loss on extinguishment of debt and
other) totaled $5.7 million for the six months ended June 30, 1997, compared to
$2.2 million for the six months ended June 30, 1996. Changes in working capital
provided $3.7 million for the six months ended June 30, 1997 compared to $.2
million for the six months ended June 30, 1996, primarily due to increases in
unearned revenue, accrued liabilities and income tax refunds receivable, offset
by increases in accounts receivable for the six months ended June 30, 1997.
Cash used for investing activities was $11.8 million and $66.7 million for
the six months ended June 30, 1997 and 1996, respectively. The cash used in
1996 was primarily attributable to the investment of $63.5 million, net of cash
received, in connection with the DeltaCom Acquisition in January 1996. The
Company made capital expenditures of $12.4 million and $2.3 million for the six
months ended June 30, 1997 and 1996, respectively. Of the $12.4 million of
capital expenditures for the six months ended June 30, 1997, $6.7 million
related to Carriers' Carrier Services and $5.7 million related to Retail
Services.
Cash provided by financing activities was $201.3 million and $65.0 million
for the six months ended June 30, 1997 and 1996, respectively. Cash provided by
financing activities for the six months ended June 30, 1997 consisted primarily
of net proceeds of $194.3 million from the sale of the Notes, $8.2 million of
advances received from ITC Holding, less $.7 million return of capital to ITC
Holding, and $.5 million of other cash used in financing activities. Cash
provided by financing activities for the six months ended June 30, 1996
consisted primarily of $74.7 million advances received from ITC Holding less
$1.2 million repayment of advances to ITC Holding, $1.8 million of capital
contributions from ITC Holding, and less $10.3 million repayment of long-term
debt and capital lease obligations.
Upon consummation of the Reorganization on July 25, 1997, approximately
$62.7 million of the $194.3 million of net proceeds from the sale of the Notes
were reinvested in U.S. government securities and are being held by the Notes
trustee in a pledged account as security for and to fund the first six scheduled
interest payments on the Notes. The balance of such net proceeds, approximately
$131.6 million, was released to the Company, a portion of which was applied on
July 25, 1997 as follows: (i) repayment of approximately $57.8 million of
indebtedness to ITC Holding (including approximately $9.5 million of accrued
interest) associated with the DeltaCom Acquisition and advances used by the
Company for capital expenditures; and (ii) repayment of approximately $41.6
million incurred under the Bridge Facility. The Company intends to use the
remaining approximately $32.2 million of such net proceeds (i) to fund market
expansion activities of the Company's telecommunications business, including
development and construction costs of the Company's fiber optic network and its
regional sales offices; and (ii) for additional working capital and other
general corporate purposes, including the funding of cash flow deficits (after
capital expenditures). Pending such uses, the Company has invested such amounts
in U.S. government securities. In connection with the Reorganization, $31.0
million of the DeltaCom Indebtedness was forgiven by ITC Holding and contributed
to the Company as additional equity.
14
<PAGE>
In January 1995, Gulf States FiberNet entered into an interest rate swap
agreement with a $47.5 million principal amount. The agreement swapped the
applicable three-month LIBOR rate selected under Gulf States FiberNet's project
facility with a fixed rate of 8.25%. As of June 30, 1997, Gulf States FiberNet
would have been required to pay $2,142,916 to terminate the interest rate swap.
Gulf States FiberNet made payments totaling $540,997 and $645,373 for the six
months ended June 30, 1997 and 1996, respectively, in connection with this
interest rate swap agreement. Although the related debt (the Bridge Facility)
has been repaid, the Company does not currently intend to terminate this
interest rate swap agreement. The interest rate swap agreement expires in
December 2002.
To achieve its business plan, the Company will need significant financing
for capital expenditure and working capital requirements, including repayment of
indebtedness and operating losses. Expansion of the Company's network,
operations and services will require significant capital expenditures. The
Company currently estimates that its aggregate capital requirements will total
approximately $104 million in 1997 and 1998, of which approximately $50 million
is expected to be incurred in 1997 and approximately $54 million is expected to
be incurred in 1998. The Company expects to make substantial capital
expenditures thereafter. Capital expenditures will be primarily for: (i)
addition of facilities-based local telephone service to its bundle of integrated
telecommunications services, including acquisition and installation of switches
and related equipment, (ii) market expansion, (iii) continued development and
construction of its fiber optic network (including transmission equipment) and
(iv) infrastructure enhancements, principally for information systems. At June
30, 1997, the Company had entered into agreements with vendors to purchase
approximately $11.5 million of equipment and services, and, for the six months
ended June 30, 1997, had made capital expenditures of $12.4 million. The actual
amount and timing of the Company's capital requirements may differ materially
from the foregoing estimate as a result of regulatory, technological and
competitive developments (including market developments and new opportunities)
in the Company's industry.
In May 1997, FiberNet entered into a commitment letter with NationsBank,
N.A. for a five-year term and revolving credit facility of up to $100 million,
to be used for working capital and other corporate purposes, including capital
expenditures and permitted acquisitions. The Credit Facility is expected to
consist of a $50 million multi-draw term facility and a $50 million revolving
credit facility, and will contain restrictions on the Company and its
subsidiaries and require the Company to comply with certain financial tests and
to maintain certain financial ratios.
The Company will be dependent on additional capital to fund its growth, as
well as to fund continued operating losses and working capital. The Company
believes that the net proceeds from the Senior Notes, together with cash flow
from operations and borrowings expected under the Credit Facility, will provide
sufficient funds to enable the Company to expand its business as currently
planned through the maturity of the Credit Facility in 2002, after which the
Company will need to seek additional financing to fund capital expenditures and
working capital. Because the Credit Facility is expected to mature in 2002, the
Company may not have a ready source of liquidity after 2002. In the event that
the Company's plans or assumptions change or prove to be inaccurate, the
foregoing sources of funds may prove to be insufficient to fund the Company's
currently planned growth and operations. In addition, if the Company
successfully completes any acquisitions, the Company may be required to seek
additional capital sooner than currently anticipated. Additional sources may
include equity and debt financings and other financing arrangements, such as
vendor financing. There can be no assurance that the Company will be able to
generate sufficient cash flow from operations or that additional financing
arrangements will be available, or if available, that they can be concluded on
terms acceptable to the Company. Failure to generate or obtain sufficient funds
would result in delay or abandonment of some or all of the Company's development
and expansion plans, which could have a material adverse effect on the Company's
ability to service its debt.
15
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger, dated as of July 24, 1997,
by and between Eastern Telecom, Inc. and Interstate
FiberNet, Inc.
2.2 Agreement and Plan of Merger, dated as of July 24, 1997,
by and between ITC Transmission Systems II, Inc. and
Interstate FiberNet, Inc.
2.3 Stock Assignment and Contribution Agreement, dated as of
July 25, 1997, by and between ITC Holding Company, Inc.
and ITC/\DeltaCom, Inc.
2.4 Stock Assignment and Contribution Agreement, dated as of
July 25, 1997, by and between ITC/\DeltaCom, Inc.
and Interstate FiberNet, Inc.
4 Assignment and Assumption Agreement Pursuant to Pledge
and Security Agreement, dated as of July 25, 1997, by and
among ITC/\DeltaCom, Inc., Interstate FiberNet, Inc.
and United States Trust Company of New York, as Trustee.
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
16
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ITC/\DELTACOM, INC.
------------------------------
(Registrant)
Date: August 13, 1997 By: /s/ Foster O. McDonald
-- -------------------------------
Foster O. McDonald
President
Date: August 13 , 1997 By: /s/ Douglas A. Shumate
-- -------------------------------
Douglas A. Shumate
Senior Vice President and
Chief Financial Officer
17
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit Exhibit Description Sequentially
- ------- ------------------- ------------
Number Numbered
- ------ --------
Page
----
2.1 Agreement and Plan of Merger, dated as of July 24, 1997,
by and between Eastern Telecom, Inc. and Interstate
FiberNet, Inc.
2.2 Agreement and Plan of Merger, dated as of July 24, 1997,
by and between ITC Transmission Systems II, Inc. and
Interstate FiberNet, Inc.
2.3 Stock Assignment and Contribution Agreement, dated as of
July 25, 1997, by and between ITC Holding Company, Inc.
and ITC/\DeltaCom, Inc.
2.4 Stock Assignment and Contribution Agreement, dated as of
July 25, 1997, by and between ITC/\DeltaCom, Inc.
and Interstate FiberNet, Inc.
4 Assignment and Assumption Agreement Pursuant to Pledge
and Security Agreement, dated as of July 25, 1997, by and
among ITC/\DeltaCom, Inc., Interstate FiberNet, Inc.
and United States Trust Company of New York, as Trustee.
27 Financial Data Schedule
18
<PAGE>
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER ("Merger Agreement") is entered into
as of July 24, 1997 by and between EASTERN TELECOM INC., a Georgia corporation
("ETI"), and INTERSTATE FIBERNET, INC., a Delaware corporation formerly known as
ITC Transmission Systems, Inc. ("IFN" or the "Surviving Corporation").
WHEREAS, IFN is a corporation duly organized and existing under the
laws of the State of Delaware;
WHEREAS, ETI is a corporation duly organized and existing under the
laws of the State of Georgia;
WHEREAS, IFN has an authorized capitalization of Ten Thousand (10,000)
shares of Common Stock, par value $.01 per share ("IFN Common Stock");
WHEREAS, 100 shares of IFN Common Stock are currently outstanding, all
of which are owned by ITC Holding Company, Inc. (the "IFN Stockholder");
WHEREAS, ETI has an authorized capitalization of One Hundred Thousand
(100,000) shares of Common Stock, par value $1.00 per share ("ETI Common
Stock");
WHEREAS, 530 shares of ETI Common Stock are currently outstanding, all
of which are owned by ITC Holding Company, Inc. (the "ETI Stockholder");
WHEREAS, each of the respective Boards of Directors of IFN and ETI has
determined that it is advisable that ETI be merged into IFN (the "Merger") on
the terms and conditions hereinafter set forth and has, by resolutions duly
adopted, approved this Merger Agreement; and
WHEREAS, each of the respective Boards of Directors of IFN and ETI
has, by resolutions duly adopted and directed that this Merger Agreement be
submitted to the IFN Stockholder or the ETI Stockholder, as the case may be, for
approval; and
WHEREAS, by written consents, each dated July 23, 1997, the IFN
Stockholder and the ETI Stockholder have approved this Merger Agreement and
related documents, and the ETI Stockholder has waived the exercise of any
dissenting shareholder rights under Section 14-2-1302(1)(A) of the Georgia
Business Corporation Code, as amended (the "GBCC"), or any successor act; and
WHEREAS, the Merger is intended to qualify for federal income tax
<PAGE>
purposes as a "reorganization" under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants herein contained, the parties hereby agree, in accordance with the
applicable provisions of the laws of the States of Delaware and Georgia and
subject to the conditions set forth herein, that ETI shall be merged into IFN,
and such parties further hereby adopt and agree to the following agreements,
terms and conditions relating to the Merger and the manner of carrying the same
into effect:
1. Merger. ETI shall be merged with and into IFN, and IFN shall be
------
the surviving corporation (hereinafter sometimes referred to as the "Surviving
Corporation"). Subject to and in accordance with the terms and conditions of
this Merger Agreement, the General Corporation Law of the State of Delaware, as
amended (the "DGCL") and the GBCC, (i) this Merger Agreement (or in lieu thereof
a certificate of merger) shall be executed, acknowledged and filed with the
Secretary of State of the State of Delaware and the Secretary of State of the
State of Georgia, with such other documents, instruments or certificates as may
be required by the DGCL or the GBCC, and (ii) the Merger shall become effective
at 9:00 a.m. Eastern Standard Time on the 24th day of July, 1997 (the "Effective
Time"), and each document filed pursuant to the DGCL and the GBCC shall
expressly so state. At the Effective Time, the separate corporate existence of
ETI shall cease forthwith.
2. Governing Documents. (a) The Certificate of Incorporation of IFN
-------------------
as in effect immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation without change or amendment until
thereafter amended in accordance with the provisions thereof and applicable law.
(b) The Bylaws of IFN as in effect immediately prior to the Effective
Time shall be the Bylaws of the Surviving Corporation without change or
amendment until thereafter amended in accordance with the provisions thereof and
applicable law.
3. Officers and Directors. The persons who are officers and
----------------------
directors of IFN immediately prior to the Effective Time shall, after the
Effective Time, be the officers and directors of the Surviving Corporation,
without change until their successors have been duly elected and qualified.
4. Effect of Merger. At the Effective Time, the separate corporate
----------------
existence of ETI shall cease, and the Surviving Corporation shall possess all
the rights, privileges, powers and franchises of a public and private nature and
be subject to all the restrictions, disabilities and duties of ETI; and all and
singular, the rights, privileges, powers and franchises of ETI, and all
property, real, personal and mixed, and all debts due to ETI on whatever
account, as well as for share subscriptions and all other things in action,
shall be vested in the Surviving Corporation; and all property, rights,
privileges, powers and franchises, and all and
- 2 -
<PAGE>
every other interest shall be thereafter as effectually the property of the
Surviving Corporation as they were of ETI, and the title to any real estate
vested by deed or otherwise shall not revert or be in any way impaired by reason
of the Merger; but all rights of creditors and all liens upon any property of
ETI shall be preserved unimpaired, and all debts, liabilities and duties of ETI
shall thenceforth attach to the Surviving Corporation and may be enforced
against it to the same extent as if such debts, liabilities and duties had been
incurred or contracted by it. All corporate acts, plans, policies, agreements,
arrangements, approvals and authorizations of ETI, the ETI Stockholder, Board of
Directors and committees thereof, officers and agents which were valid and
effective immediately prior to the Effective Time shall be taken for all
purposes as the acts, plans, policies, agreements, arrangements, approvals and
authorizations of the Surviving Corporation and shall be as effective and
binding thereon as the same were with respect to ETI. The employees and agents
of ETI shall become the employees and agents of the Surviving Corporation and
continue to be entitled to the same rights and benefits which they enjoyed as
employees and agents of ETI.
5. Further Assurances Regarding ETI. From time to time, as and when
--------------------------------
required by the Surviving Corporation or by its successors and assigns, there
shall be executed and delivered by the former officers and directors of ETI on
behalf of ETI such deeds, assignments and other instruments, and there shall be
taken or caused to be taken by them all such further and other action, as shall
be appropriate or necessary in order to vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation the title to and possession of all
property, interests, assets, rights, privileges, immunities, powers, franchises
and authority of ETI and otherwise to carry out the purposes of this Merger
Agreement, and the officers and directors of the Surviving Corporation are fully
authorized, in the name and on behalf of ETI or otherwise, to take any and all
such action and to execute and deliver any and all such deeds, assignments and
other instruments.
6. Conversion of Shares. At the Effective Time, by virtue of the
--------------------
Merger and without any action on the part of the holder thereof, each share of
ETI Common Stock outstanding immediately prior to the Effective Time, whether
certificated or uncertificated, shall be converted into one fully paid and
nonassessable share of IFN Common Stock. No fractional shares of Common Stock
shall be issued pursuant to such conversion, and any fractions resulting from
such conversion shall be eliminated in each case by rounding upward to the
nearest whole share.
7. Stock Certificates; Uncertificated Shares. (a) At and after the
-----------------------------------------
Effective Time, all of the outstanding certificates which immediately prior to
the Effective Time represented shares of ETI Common Stock shall be deemed for
all purposes to evidence ownership of, and to represent shares of, IFN Common
Stock into which the shares of ETI Common Stock, as the case may be, formerly
represented by such certificates have been converted as herein provided, and no
- 3 -
<PAGE>
certificates representing such shares need be surrendered. The registered owner
on the books and records of ETI or its transfer agent of any such outstanding
stock certificate shall, until such certificate shall have been surrendered for
transfer or otherwise accounted for to the Surviving Corporation or its transfer
agent, have and be entitled to exercise any voting and other rights with respect
to and to receive any dividends and other distributions upon the shares of IFN
Common Stock evidenced by such outstanding certificate as above provided. After
the Effective Time, when any such certificate shall be surrendered for transfer
or otherwise accounted for to the Surviving Corporation or its transfer agent,
the certificates issued will reflect the name and state of incorporation of the
Surviving Corporation.
(b) At and after the Effective Time, with respect to any
uncertificated shares of ETI, the registered owner on the books and records of
ETI or its transfer agent shall, until a request shall have been made to the
Surviving Corporation or its transfer agent for certificated shares of the
Surviving Corporation, have and be entitled to exercise any voting and other
rights with respect to and to receive any dividends and other distributions upon
an equal number of shares of IFN Common Stock. At and after the Effective Time,
the ownership by such registered owner of uncertificated shares shall be
reflected on the books and records of IFN or its transfer agent, and, upon
request therefor by such registered owner to the Surviving Corporation pursuant
to the bylaws of the Surviving Corporation and applicable law, the certificates
issued to evidence any or all of such uncertificated shares will reflect the
name and state of incorporation of the Surviving Corporation.
8. Conditions. Consummation of the Merger and related transactions
----------
is subject to satisfaction of the following conditions prior to the Effective
Time:
(a) The Merger shall have been approved by the ETI Stockholder and the
IFN Stockholder, and all necessary action shall have been taken to authorize the
execution, delivery and performance of this Merger Agreement by ETI and IFN.
(b) All regulatory approvals necessary or desirable in connection with
the consummation of the Merger and the transactions contemplated thereby shall
have been obtained.
(c) No suit, action, proceeding or other litigation shall have been
commenced or threatened to be commenced which, in the opinion of ETI or IFN,
would pose a material restriction on or impair consummation of the Merger,
performance of this Merger Agreement or the conduct of the business of IFN after
the Effective Time, or create a risk of subjecting ETI or IFN, or their
respective shareholders, officers, or directors, to material damages, costs,
liability or other relief in connection with the Merger or this Merger
Agreement.
- 4 -
<PAGE>
9. Amendment. Subject to applicable law and subject to the rights of
---------
the ETI Stockholder further to approve any amendment which would have a material
adverse effect on such stockholder, this Merger Agreement may be amended,
modified or supplemented by written agreement of the parties hereto at any time
prior to the Effective Time (including after approval by the ETI Stockholder)
with respect to any of the terms contained herein.
10. Deferral or Abandonment. At any time prior to the Effective
-----------------------
Time, this Merger Agreement may be terminated and the Merger may be abandoned or
the time of consummation of the Merger may be deferred for a reasonable time by
the Board of Directors of either ETI or IFN or both, notwithstanding approval of
this Merger Agreement by the ETI Stockholder or the IFN Stockholder, or both, if
circumstances arise which, in the opinion of the Board of Directors of ETI or
IFN, make the Merger inadvisable or such deferral of the time of consummation
advisable.
11. Governing Law. This Merger Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Georgia applicable to
contracts entered into and to be performed wholly within the State of Georgia,
except to the extent that the laws of the State of Delaware are mandatorily
applicable to the Merger.
12. Counterparts. This Merger Agreement may be executed in any
------------
number of counterparts each of which when taken alone shall constitute an
original instrument and when taken together shall constitute but one and the
same Agreement.
13. Further Assurances of ETI and IFN. ETI and IFN agree to execute
---------------------------------
any and all documents, and to perform such other acts, which may be necessary or
expedient to further the purposes of this Merger Agreement.
[Rest of page intentionally left blank.]
- 5 -
<PAGE>
IN WITNESS WHEREOF, ETI and IFN have caused this Agreement and Plan of
Merger to be signed by their respective duly authorized officers and delivered
as of this 24th day of July, 1997.
EASTERN TELECOM, INC.
A Georgia corporation
By: /s/ Andrew M. Walker
----------------------
Name: Andrew M. Walker
Title: Chief Executive Officer and
President
ATTEST
By: /s/ J. Douglas Cox
--------------------
Name: J. Douglas Cox
Title: Assistant Secretary
INTERSTATE FIBERNET, INC.
A Delaware corporation
By: /s/ Andrew M. Walker
----------------------
Name: Andrew M. Walker
Title: Chief Executive Officer and
President
ATTEST:
By: /s/ J. Douglas Cox
--------------------
Name: J. Douglas Cox
Title: Assistant Secretary
- 6 -
<PAGE>
CERTIFICATE OF THE SECRETARY OF INTERSTATE FIBERNET, INC.,
A DELAWARE CORPORATION
The undersigned, the Secretary of Interstate FiberNet, Inc. a Delaware
corporation ("IFN"), does hereby certify that the Agreement and Plan of Merger
(the "Merger Agreement") to which this Certificate is attached, relating to the
merger of Eastern Telecom, Inc., a Georgia corporation, with and into IFN, after
first having been duly adopted and approved by the Board of Directors of IFN and
executed and acknowledged by IFN in accordance with Section 252 of the DGCL, has
been duly approved and adopted by the sole stockholder of IFN entitled to vote
thereon in accordance with Section 252 of the DGCL, as of July 23, 1997 by
written consent in accordance with Section 228 of the DGCL.
This Certificate shall be deemed an integral part of the Merger Agreement
to which it is attached.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the
24th day of July, 1997.
/s/ J. Douglas Cox
-------------------
J. Douglas Cox
Assistant Secretary
<PAGE>
CERTIFICATE OF THE SECRETARY OF EASTERN TELECOM, INC.,
A GEORGIA CORPORATION
The undersigned, the Secretary of Eastern Telecom, Inc., a Georgia
corporation ("ETI"), does hereby certify that the Agreement and Plan of Merger
(the "Merger Agreement") to which this Certificate is attached, relating to the
merger of ETI with and into Interstate FiberNet, Inc., a Delaware corporation
("IFN"), after first having been duly adopted and approved by the Board of
Directors of ETI and executed and acknowledged by ETI in accordance with Section
14-2-120 of the GBCC, has been duly approved and adopted by the sole stockholder
of ETI entitled to vote thereon in accordance with Section 14-2-1103 of the
GBCC, as of July 23, 1997 by written consent in accordance with Section 14-2-704
of the GBCC.
This Certificate shall be deemed an integral part of the Merger Agreement
to which it is attached.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the
24th day of July, 1997.
/s/ J. Douglas Cox
-------------------
J. Douglas Cox
Assistant Secretary
<PAGE>
Exhibit 2.2
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER ("Merger Agreement") is entered into
as of July 24, 1997 by and between ITC TRANSMISSION SYSTEMS II, INC., a Delaware
corporation ("Transmission II"), and INTERSTATE FIBERNET, INC., a Delaware
corporation formerly known as ITC Transmission Systems, Inc. ("IFN" or the
"Surviving Corporation").
WHEREAS, IFN and Transmission II are each corporations duly organized
and existing under the laws of the State of Delaware;
WHEREAS, IFN has an authorized capitalization of Ten Thousand (10,000)
shares of Common Stock, par value $.01 per share ("IFN Common Stock");
WHEREAS, 630 shares of IFN Common Stock are currently outstanding, all
of which are owned by ITC Holding Company, Inc. (the "IFN Stockholder");
WHEREAS, Transmission II has an authorized capitalization of Ten
Thousand (10,000) shares of Common Stock, par value $.01 per share
("Transmission II Common Stock");
WHEREAS, 1,000 shares of Transmission II Common Stock are currently
outstanding, all of which are owned by ITC Holding Company, Inc. (the
"Transmission II Stockholder");
WHEREAS, each of the respective Boards of Directors of IFN and
Transmission II has determined that it is advisable that Transmission II be
merged into IFN (the "Merger") on the terms and conditions hereinafter set forth
and has, by resolutions duly adopted, approved this Merger Agreement; and
WHEREAS, each of the respective Boards of Directors of IFN and
Transmission II has, by resolutions duly adopted and directed that this Merger
Agreement be submitted to the IFN Stockholder or the Transmission II
Stockholder, as the case may be, for approval; and
WHEREAS, by written consents, each dated July 23, 1997, the IFN
Stockholder and the Transmission II Stockholder have approved this Merger
Agreement and related documents; and
WHEREAS, the Merger is intended to qualify for federal income tax
purposes as a "reorganization" under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants herein contained, the parties hereby agree, in accordance with
<PAGE>
the applicable provisions of the laws of the State of Delaware and subject to
the conditions set forth herein, that Transmission II shall be merged into IFN,
and such parties further hereby adopt and agree to the following agreements,
terms and conditions relating to the Merger and the manner of carrying the same
into effect:
1. Merger. Transmission II shall be merged with and into IFN, and
-------
IFN shall be the surviving corporation (hereinafter sometimes referred to as the
"Surviving Corporation"). Subject to and in accordance with the terms and
conditions of this Merger Agreement and the General Corporation Law of the State
of Delaware, as amended (the "DGCL"), (i) this Merger Agreement (or in lieu
thereof a certificate of merger) shall be executed, acknowledged and filed with
the Secretary of State of the State of Delaware, with such other documents,
instruments or certificates as may be required by the DGCL, and (ii) the Merger
shall become effective [at 9:15 a.m. Eastern Standard Time on the 24th day of
July, 1997] (the "Effective Time"), and each document filed pursuant to the DGCL
shall expressly so state. At the Effective Time, the separate corporate
existence of Transmission II shall cease forthwith.
2. Governing Documents. (a) The Certificate of Incorporation of IFN
-------------------
as in effect immediately prior to the Effective Time shall be the Certifcate of
Incorporation of the Surviving Corporation without change or amendment until
thereafter amended in accordance with the provisions thereof and applicable law.
(b) The Bylaws of IFN as in effect immediately prior to the Effective
Time shall be the Bylaws of the Surviving Corporation without change or
amendment until thereafter amended in accordance with the provisions thereof and
applicable law.
3. Officers and Directors. The persons who are officers and
----------------------
directors of IFN immediately prior to the Effective Time shall, after the
Effective Time, be the officers and directors of the Surviving Corporation,
without change until their successors have been duly elected and qualified.
4. Effect of Merger. At the Effective Time, the separate corporate
----------------
existence of Transmission II shall cease, and the Surviving Corporation shall
possess all the rights, privileges, powers and franchises of a public and
private nature and be subject to all the restrictions, disabilities and duties
of Transmission II; and all and singular, the rights, privileges, powers and
franchises of Transmission II, and all property, real, personal and mixed, and
all debts due to Transmission II on whatever account, as well as for share
subscriptions and all other things in action, shall be vested in the Surviving
Corporation; and all property, rights, privileges, powers and franchises, and
all and every other interest shall be thereafter as effectually the property of
the Surviving Corporation as they were of Transmission II, and the title to any
real estate vested by deed or otherwise shall not revert or be in any way
impaired by reason of the Merger; but all rights
-2-
<PAGE>
of creditors and all liens upon any property of Transmission II shall be
preserved unimpaired, and all debts, liabilities and duties of Transmission II
shall thenceforth attach to the Surviving Corporation and may be enforced
against it to the same extent as if such debts, liabilities and duties had been
incurred or contracted by it. All corporate acts, plans, policies, agreements,
arrangements, approvals and authorizations of Transmission II, the Transmission
II Stockholder, Board of Directors and committees thereof, officers and agents
which were valid and effective immediately prior to the Effective Time shall be
taken for all purposes as the acts, plans, policies, agreements, arrangements,
approvals and authorizations of the Surviving Corporation and shall be as
effective and binding thereon as the same were with respect to Transmission II.
The employees and agents of Transmission II shall become the employees and
agents of the Surviving Corporation and continue to be entitled to the same
rights and benefits which they enjoyed as employees and agents of Transmission
II.
5. Further Assurances Regarding Transmission II. From time to time,
--------------------------------------------
as and when required by the Surviving Corporation or by its successors and
assigns, there shall be executed and delivered by the former officers and
directors of Transmission II on behalf of Transmission II such deeds,
assignments and other instruments, and there shall be taken or caused to be
taken by them all such further and other action, as shall be appropriate or
necessary in order to vest, perfect or confirm, of record or otherwise, in the
Surviving Corporation the title to and possession of all property, interests,
assets, rights, privileges, immunities, powers, franchises and authority of
Transmission II and otherwise to carry out the purposes of this Merger
Agreement, and the officers and directors of the Surviving Corporation are fully
authorized, in the name and on behalf of Transmission II or otherwise, to take
any and all such action and to execute and deliver any and all such deeds,
assignments and other instruments.
6. Conversion of Shares. At the Effective Time, by virtue of the
--------------------
Merger and without any action on the part of the holder thereof, each share of
Transmission II Common Stock outstanding immediately prior to the Effective
Time, whether certificated or uncertificated, shall be converted into one fully
paid and nonassessable share of IFN Common Stock. No fractional shares of
Common Stock shall be issued pursuant to such conversion, and any fractions
resulting from such conversion shall be eliminated in each case by rounding
upward to the nearest whole share.
7. Stock Certificates; Uncertificated Shares. (a) At and after the
-----------------------------------------
Effective Time, all of the outstanding certificates which immediately prior to
the Effective Time represented shares of Transmission II Common Stock shall be
deemed for all purposes to evidence ownership of, and to represent shares of,
IFN Common Stock into which the shares of Transmission II Common Stock, as the
case may be, formerly represented by such certificates have been converted as
herein provided, and no certificates representing such shares need be
surrendered. The
-3-
<PAGE>
registered owner on the books and records of Transmission II or its transfer
agent of any such outstanding stock certificate shall, until such certificate
shall have been surrendered for transfer or otherwise accounted for to the
Surviving Corporation or its transfer agent, have and be entitled to exercise
any voting and other rights with respect to and to receive any dividends and
other distributions upon the shares of IFN Common Stock evidenced by such
outstanding certificate as above provided. After the Effective Time, when any
such certificate shall be surrendered for transfer or otherwise accounted for to
the Surviving Corporation or its transfer agent, the certificates issued will
reflect the name and state of incorporation of the Surviving Corporation.
(b) At and after the Effective Time, with respect to any
uncertificated shares of Transmission II, the registered owner on the books and
records of Transmission II or its transfer agent shall, until a request shall
have been made to the Surviving Corporation or its transfer agent for
certificated shares of the Surviving Corporation, have and be entitled to
exercise any voting and other rights with respect to and to receive any
dividends and other distributions upon an equal number of shares of IFN Common
Stock. At and after the Effective Time, the ownership by such registered owner
of uncertificated shares shall be reflected on the books and records of IFN or
its transfer agent, and, upon request therefor by such registered owner to the
Surviving Corporation pursuant to the bylaws of the Surviving Corporation and
applicable law, the certificates issued to evidence any or all of such
uncertificated shares will reflect the name and state of incorporation of the
Surviving Corporation.
8. Conditions. Consummation of the Merger and related transactions
----------
is subject to satisfaction of the following conditions prior to the Effective
Time:
(a) The Merger shall have been approved by the Transmission II
Stockholder and the IFN Stockholder, and all necessary action shall have been
taken to authorize the execution, delivery and performance of this Merger
Agreement by Transmission II and IFN.
(b) All regulatory approvals necessary or desirable in connection with
the consummation of the Merger and the transactions contemplated thereby shall
have been obtained.
(c) No suit, action, proceeding or other litigation shall have been
commenced or threatened to be commenced which, in the opinion of Transmission II
or IFN, would pose a material restriction on or impair consummation of the
Merger, performance of this Merger Agreement or the conduct of the business of
IFN after the Effective Time, or create a risk of subjecting Transmission II or
IFN, or their respective shareholders, officers, or directors, to material
damages, costs, liability or other relief in connection with the Merger or
-4-
<PAGE>
this Merger Agreement.
9. Amendment. Subject to applicable law and subject to the rights of
---------
the Transmission II Stockholder further to approve any amendment which would
have a material adverse effect on such stockholder, this Merger Agreement may be
amended, modified or supplemented by written agreement of the parties hereto at
any time prior to the Effective Time (including after approval by the
Transmission II Stockholder) with respect to any of the terms contained herein.
-5-
<PAGE>
10. Deferral or Abandonment. At any time prior to the Effective
-----------------------
Time, this Merger Agreement may be terminated and the Merger may be abandoned or
the time of consummation of the Merger may be deferred for a reasonable time by
the Board of Directors of either Transmission II or IFN or both, notwithstanding
approval of this Merger Agreement by the Transmission II Stockholder or the IFN
Stockholder, or both, if circumstances arise which, in the opinion of the Board
of Directors of Transmission II or IFN, make the Merger inadvisable or such
deferral of the time of consummation advisable.
11. Governing Law. This Merger Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware applicable to
contracts entered into and to be performed wholly within the State of Delaware.
12. Counterparts. This Merger Agreement may be executed in any
------------
number of counterparts each of which when taken alone shall constitute an
original instrument and when taken together shall constitute but one and the
same Agreement.
13. Further Assurances of Transmission II and IFN. Transmission II
---------------------------------------------
and IFN agree to execute any and all documents, and to perform such other acts,
which may be necessary or expedient to further the purposes of this Merger
Agreement.
[Rest of page intentionally left blank.]
-6-
<PAGE>
IN WITNESS WHEREOF, Transmission II and IFN have caused this Agreement
and Plan of Merger to be signed by their respective duly authorized officers and
delivered as of this 24th day of July, 1997.
ITC TRANSMISSION SYSTEMS II, INC.
A Delaware corporation
By: /s/ Andrew M. Walker
---------------------------------------------
Name: Andrew M. Walker
Title: Chief Executive Officer and President
ATTEST
By: /s/ J. Douglas Cox
-----------------------
Name: J. Douglas Cox
Title: Asst. Secretary
INTERSTATE FIBERNET, INC.
A Delaware corporation
By: /s/ Andrew M. Walker
---------------------------------------------
Name: Andrew M. Walker
Title: Chief Executive Officer and President
ATTEST:
By: /s/ J. Douglas Cox
-----------------------
Name: J. Douglas Cox
Title: Asst. Secretary
-7-
<PAGE>
CERTIFICATE OF THE SECRETARY OF INTERSTATE FIBERNET, INC.,
A DELAWARE CORPORATION
The undersigned, the Assistant Secretary of Interstate FiberNet, Inc. a
Delaware corporation ("IFN"), does hereby certify that the Agreement and Plan of
Merger (the "Merger Agreement") to which this Certificate is attached, relating
to the merger of ITC Transmission Systems II, Inc., a Delaware corporation, with
and into IFN, after first having been duly adopted and approved by the Board of
Directors of IFN and executed and acknowledged by IFN in accordance with Section
251 of the DGCL, has been duly approved and adopted by the sole stockholder of
IFN entitled to vote thereon in accordance with Section 251 of the DGCL, as of
July 23, 1997 by written consent in accordance with Section 228 of the DGCL.
This Certificate shall be deemed an integral part of the Merger Agreement
to which it is attached.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the
24th day of July, 1997.
/s/ J. Douglas Cox
-------------------
J. Douglas Cox
Assistant Secretary
<PAGE>
CERTIFICATE OF THE SECRETARY OF ITC TRANSMISSION SYSTEMS, II, INC.,
A DELAWARE CORPORATION
The undersigned, the Assistant Secretary of ITC Transmission Systems II,
Inc. a Delaware corporation ("Transmission II"), does hereby certify that the
Agreement and Plan of Merger (the "Merger Agreement") to which this Certificate
is attached, relating to the merger of Transmission II with and into Interstate
FiberNet, Inc., a Delaware corporation, after first having been duly adopted and
approved by the Board of Directors of Transmission II and executed and
acknowledged by Transmission II in accordance with Section 251 of the DGCL, has
been duly approved and adopted by the sole stockholder of Transmission II
entitled to vote thereon in accordance with Section 251 of the DGCL, as of July
23, 1997 by written consent in accordance with Section 228 of the DGCL.
This Certificate shall be deemed an integral part of the Merger Agreement
to which it is attached.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the
24th day of July, 1997.
/s/ J. Douglas Cox
-------------------
J. Douglas Cox
Assistant Secretary
<PAGE>
Exhibit 2.3
STOCK ASSIGNMENT AND CONTRIBUTION AGREEMENT
This STOCK ASSIGNMENT AND CONTRIBUTION AGREEMENT (this "AGREEMENT") is made
and entered into as of July 25, 1997 by and between ITC HOLDING COMPANY, INC., a
Delaware corporation ("ITC Holding"); ITC/\DELTACOM, INC., a Delaware
corporation ("ITC/\"); INTERSTATE FIBERNET, INC., a Delaware corporation
formerly known as ITC Transmission Systems, Inc. ("IFN"); Gulf States
Transmission Systems, Inc., a Delaware corporation ("GSTS"); and DeltaCom, Inc.,
an Alabama corporation ("DeltaCom") (collectively, the "Companies").
WHEREAS, each of the Companies is party to that certain Placement Agreement
dated May 29, 1997 (the "PLACEMENT AGREEMENT"), pursuant to which ITC/\ issued
and sold to the Placement Agents (as defined in the Placement Agreement)
$200,000,000 in aggregate principal amount of 11% Senior Notes due 2007 (the
"NOTES"); and
WHEREAS, ITC/\ and United States Trust Company of New York (the "TRUSTEE")
have entered into that certain Indenture dated June 3, 1997 (as amended,
restated, supplemented or otherwise modified from time to time, the
"INDENTURE"), pursuant to which ITC/\ issued the Notes on June 3, 1997;
WHEREAS, on June 3, 1997 pursuant to the Placement Agreement and the
Indenture, ITC/\ caused to be deposited with the Trustee proceeds from the
sale of the Notes in the amount of $194 million (the "FUNDS");
WHEREAS, pursuant to, and in accordance with the provisions of, that
certain Pledge and Security Agreement dated as of June 3, 1997 (the "PLEDGE
AGREEMENT") the Trustee invested the Funds in the Collateral (as more fully
described in the Pledge Agreement), which has been held by the Trustee for the
benefit of the Holders of the Notes to secure ITC/\'s obligation to (i)
provide for payment in full of the first six scheduled interest payments due on
the Notes, (ii) secure repayment of the principal, premium and interest on the
Notes in the event that the Notes become due and payable prior to such time as
the first six scheduled interest payments thereon shall have been paid in full
and (iii) redeem all of the Notes in the event that the Reorganization (as
defined in the Indenture) were not consummated by September 15, 1997;
WHEREAS, consummation of the Reorganization is a condition precedent to
disbursement by the Trustee pursuant to Section 7(c) of the Pledge Agreement of
certain Funds and/or Cash Equivalents to, or as directed by, ITC/\;
WHEREAS, the respective Boards of Directors of each of ITC Holding and
ITC/\ have, by resolutions duly adopted, approved and authorized all actions
<PAGE>
necessary or appropriate, in the judgment of officers of the respective
corporations, to consummate the Reorganization; and
WHEREAS, as part of the Reorganization, the officers of ITC Holding have
determined that it is in the best interests of ITC Holding to assign and
contribute to ITC/\ all of the shares of capital stock of each of IFN, GSTS
and DeltaCom owned by ITC Holding;
NOW, THEREFORE, in consideration of the mutual promises set forth herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows:
1. Defined Terms. Unless otherwise specified or defined herein,
-------------
capitalized terms used herein shall have the meanings ascribed to them in the
Pledge Agreement.
2. Assignment and Acceptance. Effective as of the date hereof, ITC
-------------------------
Holding hereby transfers and assigns to ITC/\, and ITC/\ hereby accepts, all of
ITC Holding's ownership interests in IFN, GSTS and DeltaCom, consisting of the
following:
(i) all of the outstanding capital stock of IFN, consisting of 1,630 shares
of common stock, par value $.01 per share, all of which shares are duly
authorized, validly issued, fully paid and nonassessable;
(ii) all of the outstanding capital stock of GSTS, consisting of 1,000
shares of common stock, par value $.01 per share, all of which shares are duly
authorized, validly issued, fully paid and nonassessable; and
(iii) all of the outstanding capital stock of DeltaCom, consisting of
80,000 shares of common stock, par value $.01 per share, all of which shares are
duly authorized, validly issued, fully paid and nonassessable.
3. Further Agreements. ITC Holding and ITC/\ hereby direct, and each of
------------------
IFN, GSTS or DeltaCom, as the case may be, hereby agree (in each case subject to
their respective bylaws and certificates of incorporation and applicable law)
(i) to take all actions necessary or appropriate to reflect in their official
corporate and stock records the assignment and transfer of stock effected by
this Agreement; (ii) to cancel any stock certificates issued and outstanding in
the name of ITC Holding; and (iii) to issue such stock certificates as may be
requested by ITC/\ to evidence ITC/\'s record ownership of such stock.
4. Effectiveness of Agreement. The time of effectiveness of this
--------------------------
Agreement shall be concurrent with the effectiveness of the First Union Release.
5. Section Headings. Section headings contained in this Agreement are
----------------
inserted for convenience of reference only, shall not be deemed to be a part of
this
-2-
<PAGE>
Agreement for any purpose, and shall not in any way define or affect the
meaning, construction or scope of any of the provisions hereof.
6. Governing Law. This Agreement, the rights and obligations of the
-------------
parties hereto, and any claims or disputes relating thereto, shall be governed
by and construed in accordance with the laws of the State of Delaware (but not
including the choice of law rules thereof).
7. Counterparts. To facilitate execution, this Agreement may be executed
------------
in as many counterparts as may be required. It shall not be necessary that the
signatures of, or on behalf of, each party, or that the signatures of all
persons required to bind any party, appear on each counterpart, but it shall be
sufficient that the signature of, or on behalf of, each party, or that the
signatures of the persons required to bind any party, appear on one or more of
the counterparts. All counterparts shall collectively constitute a single
agreement. It shall not be necessary in making proof of this Agreement to
produce or account for more than a number of counterparts containing the
respective signatures of, or on behalf of, all of the parties.
[Rest of page intentionally left blank.]
-3-
<PAGE>
IN WITNESS WHEREOF, each party has executed this Stock Assignment and
Contribution Agreement by its duly authorized representative as of the date
first above written.
ITC HOLDING COMPANY, INC., a Delaware corporation
By: /s/ Campbell B. Lanier
---------------------------------------------
Its: Chairman and Chief Executive Officer
---------------------------------------------
ITC/\DELTACOM, INC., a Delaware corporation
By: Andrew M. Walker
------------------------------------------------
Its: Chief Executive Officer
------------------------------------------------
INTERSTATE FIBERNET, INC., a Delaware corporation
-------------------------------------------------
By: /s/ Andrew M. Walker
------------------------------------------------
Its: Chief Executive Officer and President
------------------------------------------------
GULF STATES TRANSMISSION SYSTEMS, INC., a Delaware
corporation
By: /s/ Andrew M. Walker
------------------------------------------------
Its: Chief Executive Officer and President
---------------------------------------
DELTACOM, INC., an Alabama corporation
By: /s/ Andrew M. Walker
------------------------------------------------
Its: Chief Executive Officer
------------------------------------------------
4
<PAGE>
EXHIBIT 2.4
STOCK ASSIGNMENT AND CONTRIBUTION AGREEMENT
This STOCK ASSIGNMENT AND CONTRIBUTION AGREEMENT (this "AGREEMENT") is made
and entered into as of July 25, 1997 by and between; ITC/\DELTACOM, INC., a
Delaware corporation ("ITC/\"); INTERSTATE FIBERNET, INC., a Delaware
corporation formerly known as ITC Transmission Systems, Inc. ("IFN"); Gulf
States Transmission Systems, Inc., a Delaware corporation ("GSTS"); and
DeltaCom, Inc., an Alabama corporation ("DeltaCom") (collectively, the
"Companies").
WHEREAS, each of the Companies is party to that certain Placement Agreement
dated May 29, 1997 (the "PLACEMENT AGREEMENT"), pursuant to which ITC/\ issued
and sold to the Placement Agents (as defined in the Placement Agreement)
$200,000,000 in aggregate principal amount of 11% Senior Notes due 2007 (the
"NOTES"); and
WHEREAS, ITC/\ and United States Trust Company of New York (the "TRUSTEE")
have entered into that certain Indenture dated June 3, 1997 (as amended,
restated, supplemented or otherwise modified from time to time, the
"INDENTURE"), pursuant to which ITC/\ issued the Notes on June 3, 1997;
WHEREAS, on June 3, 1997 pursuant to the Placement Agreement and the
Indenture, ITC/\ caused to be deposited with the Trustee proceeds from the sale
of the Notes in the amount of $194 million (the "FUNDS");
WHEREAS, pursuant to, and in accordance with the provisions of, that
certain Pledge and Security Agreement dated as of June 3, 1997 (the "PLEDGE
AGREEMENT") the Trustee invested the Funds in the Collateral (as more fully
described in the Pledge Agreement), which has been held by the Trustee for the
benefit of the Holders of the Notes to secure ITC/\'s obligation to (i)
provide for payment in full of the first six scheduled interest payments due on
the Notes, (ii) secure repayment of the principal, premium and interest on the
Notes in the event that the Notes become due and payable prior to such time as
the first six scheduled interest payments thereon shall have been paid in full
and (iii) redeem all of the Notes in the event that the Reorganization (as
defined in the Indenture) were not consummated by September 15, 1997;
WHEREAS, consummation of the Reorganization is a condition precedent to
disbursement by the Trustee pursuant to Section 7(c) of the Pledge Agreement of
certain Funds and/or Cash Equivalents to, or as directed by, ITC/\;
WHEREAS, the Board of Directors of ITC/\ has, by resolutions duly adopted,
approved and authorized all actions necessary or appropriate, in the judgment of
officers of the Corporation, to consummate the Reorganization;
<PAGE>
WHEREAS, as part of the Reorganization, ITC Holding Company, Inc., the sole
stockholder of ITC/\, transferred and assigned to ITC/\ all of the issued and
outstanding capital stock of each of IFN, GSTS and DeltaCom; and
WHEREAS, also as part of the Reorganization, the officers of ITC/\
have determined that it is in the best interests of ITC/\ to assign and
contribute to IFN all of the shares of capital stock of each of GSTS and
DeltaCom owned by ITC/\;
NOW, THEREFORE, in consideration of the mutual promises set forth herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows:
1. Defined Terms. Unless otherwise specified or defined herein,
-------------
capitalized terms used herein shall have the meanings ascribed to them in the
Pledge Agreement.
2. Assignment and Acceptance. Effective as of the date hereof, ITC/\
-------------------------
hereby transfers and assigns to IFN, and IFN hereby accepts, all of ITC/\'s
ownership interests in GSTS and DeltaCom, consisting of the following:
(i) all of the outstanding capital stock of GSTS, consisting of 1,000
shares of common stock, par value $.01 per share, all of which shares are duly
authorized, validly issued, fully paid and nonassessable; and
(ii) all of the outstanding capital stock of DeltaCom, consisting of 80,000
shares of common stock, par value $.01 per share, all of which shares are duly
authorized, validly issued, fully paid and nonassessable.
3. Further Agreements. ITC/\ and IFN hereby direct, and each of
------------------
GSTS or DeltaCom, as the case may be, hereby agree (in each case subject to
their respective bylaws and certificates of incorporation and applicable law)
(i) to take all actions necessary or appropriate to reflect in their official
corporate and stock records the assignment and transfer of stock effected by
this Agreement; (ii) to cancel any stock certificates issued and outstanding in
the name of ITC/\; and (iii) to issue such stock certificates as may be
requested by IFN to evidence IFN's record ownership of such stock.
4. Effectiveness of Agreement. The time of effectiveness of this
--------------------------
Agreement shall be concurrent with the effectiveness of the First Union Release.
5. Section Headings. Section headings contained in this Agreement are
----------------
inserted for convenience of reference only, shall not be deemed to be a part of
this Agreement for any purpose, and shall not in any way define or affect the
meaning, construction or scope of any of the provisions hereof.
6. Governing Law. This Agreement, the rights and obligations of the
-------------
parties hereto, and any claims or disputes relating thereto, shall be governed
by
-2-
<PAGE>
and construed in accordance with the laws of the State of Delaware (but not
including the choice of law rules thereof).
7. Counterparts. To facilitate execution, this Agreement may be executed
------------
in as many counterparts as may be required. It shall not be necessary that the
signatures of, or on behalf of, each party, or that the signatures of all
persons required to bind any party, appear on each counterpart, but it shall be
sufficient that the signature of, or on behalf of, each party, or that the
signatures of the persons required to bind any party, appear on one or more of
the counterparts. All counterparts shall collectively constitute a single
agreement. It shall not be necessary in making proof of this Agreement to
produce or account for more than a number of counterparts containing the
respective signatures of, or on behalf of, all of the parties.
[Rest of page intentionally left blank.]
-3-
<PAGE>
IN WITNESS WHEREOF, each party has executed this Stock Assignment and
Contribution Agreement by its duly authorized representative as of the date
first above written.
ITC/\DELTACOM, INC., a Delaware corporation
By: /s/ Andrew M. Walker
-----------------------------------------------
Its: Chief Executive Officer
-----------------------------------------------
INTERSTATE FIBERNET, INC., a Delaware corporation
By: /s/ Andrew M. Walker
-----------------------------------------------
Its: Chief Executive Officer and President
-----------------------------------------------
GULF STATES TRANSMISSION SYSTEMS, INC., a Delaware
corporation
By: /s/ Andrew M. Walker
-----------------------------------------------
Its: Chief Executive Officer and President
-----------------------------------------------
DELTACOM, INC., an Alabama corporation
By: /s/ Andrew M. Walker
-----------------------------------------------
----------------------
Its: Chief Executive Officer
-----------------------------------------------
-4-
<PAGE>
Exhibit 4
ASSIGNMENT AND ASSUMPTION AGREEMENT
PURSUANT TO PLEDGE AND SECURITY AGREEMENT
This ASSIGNMENT AND ASSUMPTION AGREEMENT (this "AGREEMENT") is made and
entered into as of July 25, 1997 by and among ITC/\DELTACOM, INC., a Delaware
corporation (the "PLEDGOR") and INTERSTATE FIBERNET, INC., a Delaware
corporation formerly known as ITC Transmission Systems, Inc. and a wholly owned
subsidiary of the Pledgor (the "ASSIGNEE"), and accepted and agreed to as of the
same date by UNITED STATES TRUST COMPANY OF NEW YORK, a banking and trust
company duly organized and existing under the laws of the State of New York, as
trustee (the "TRUSTEE") for itself and the holders (the "HOLDERS") of the Notes
(as defined herein) issued by the Pledgor under the Indenture referred to below.
WHEREAS, the Pledgor is party to that certain Placement Agreement dated May
29, 1997 (the "PLACEMENT AGREEMENT"), pursuant to which the Pledgor issued and
sold to the Placement Agents (as defined in the Placement Agreement)
$200,000,000 in aggregate principal amount of 11% Senior Notes due 2007 (the
"NOTES"); and
WHEREAS, the Pledgor and the Trustee have entered into that certain
Indenture dated June 3, 1997 (as amended, restated, supplemented or otherwise
modified from time to time, the "INDENTURE"), pursuant to which the Pledgor
issued the Notes on June 3, 1997;
WHEREAS, on June 3, 1997 pursuant to the Placement Agreement and the
Indenture, the Pledgor caused to be deposited with the Trustee proceeds from the
sale of the Notes in the amount of $194 million (the "FUNDS");
WHEREAS, pursuant to, and in accordance with the provisions of, that
certain Pledge and Security Agreement dated as of June 3, 1997 (the "PLEDGE
AGREEMENT") the Trustee invested the Funds in the Collateral (as more fully
described in the Pledge Agreement), which has been held by the Trustee for the
benefit of the Holders of the Notes (i) to secure payment of the first six
scheduled interest payments due on the Notes; (ii) to secure repayment of the
principal, premium and interest on the Notes in the event that the Notes become
due and payable prior to such time as the first six scheduled interest payments
thereon shall have been paid in full; and (iii) to secure the redemption of the
Notes in the event that the Reorganization (as defined in the Indenture) is not
consummated, by September 15, 1997 (collectively, the "SECURED OBLIGATIONS");
and
WHEREAS, the Reorganization has been consummated and certain related
conditions specified in the Indenture have been satisfied; and
<PAGE>
WHEREAS, pursuant to Section 7(c) of the Pledge Agreement, the Trustee has
applied approximately $62.7 million of the Funds to the purchase of U. S.
Government Obligations as the Collateral to secure the remaining Obligations of
the Pledgor and disbursed the balance of the Funds (or corresponding Cash
Equivalents, as defined in the Pledge Agreement) to, or as directed by, the
Pledgor; and
WHEREAS, consistent with Section 10(a) of the Pledge Agreement, the Pledgor
wishes to assign to the Assignee its beneficial interest in and to the
Collateral, subject to the terms and conditions of the Pledge Agreement and this
Agreement; and
NOW, THEREFORE, in consideration of the mutual promises set forth herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows:
1. Defined Terms. Unless otherwise specified or defined herein,
-------------
capitalized terms used herein shall have the meanings ascribed to them in the
Pledge Agreement.
2. Assignment, Assumption and Acceptance. Effective as of the date
-------------------------------------
hereof, the Pledgor hereby transfers and assigns to the Assignee the Pledgor's
entire beneficial interest in the Collateral, subject in all respects to the
rights and interests of the Trustee and the Holders of the Notes under the
Pledge Agreement, including, without limitation, the security interest created
under the Pledge Agreement. The Assignee hereby accepts such transfer and
assignment, and assumes all of the Pledgor's Obligations under the Pledge
Agreement, including but not limited to, the Pledgor's obligation to permit the
Collateral to be held as security for the Secured Obligations and otherwise
applied in accordance with the Pledge Agreement; provided, however, that except
-----------------
for the continuing recourse to the Collateral, as provided under the Pledge
Agreement and this Agreement, neither the Trustee nor any of the Holders of the
Notes shall have any recourse to the Assignee for payment on the Notes.
3. Further Agreements by the Assignee. The Assignee hereby further
----------------------------------
agrees that:
(i) the first six scheduled interest payments due on the Notes shall be
paid from the Collateral;
(ii) it will not enter into any agreement that would interfere with or
prohibit payment of the first six scheduled interest payments due on the Notes
from the Collateral;
(iii) it will not (and will not purport to) sell or otherwise dispose of,
or grant any option or warrant with respect to, any of the Collateral or its
beneficial interest therein; and
-2-
<PAGE>
(iv) it will not create or permit to exist any Lien (as defined in the
Indenture) upon or other adverse interest in or with respect to its
beneficial interest in any of the Collateral (except for the security
interests granted under the Pledge Agreement).
4. Representations and Warranties of the Pledgor. The Pledgor hereby
---------------------------------------------
represents and warrants to the Assignee and to the Trustee (for itself and the
Holders of the Notes) that, as of the date hereof:
(i) it is duly organized, validly existing, and in good standing as a
corporation under the laws of the State of Delaware;
(ii) it has the corporate power and corporate authority to enter into,
execute, deliver and perform its obligations under this Agreement;
(iii) it is the sole legal and beneficial owner of all of the outstanding
capital stock of the Assignee, and it owns such stock free and clear of any
liens or encumbrances;
(iv) execution, delivery and performance by the Pledgor of this Agreement
have been duly authorized by its Board of Directors (which authorization has not
been modified or rescinded and is in full force and effect) and this Agreement
constitutes a valid and binding obligation of the Pledgor; and
(v) the execution and delivery by the Pledgor of this Agreement and the
transfer and assignment by the Pledgor of its beneficial interest in the
Collateral do not violate any agreement or instrument to which the Pledgor is a
party.
5. Representations and Warranties of the Assignee. The Assignee hereby
----------------------------------------------
represents and warrants to the Pledgor and to the Trustee (for itself and the
Holders of the Notes) that, as of the date hereof:
(i) it is duly organized, validly existing, and in good standing as a
corporation under the laws of the State of Delaware;
(ii) it has the corporate power and corporate authority to enter into,
execute, deliver and perform its obligations under this Agreement and the Pledge
Agreement;
(iii) all of the outstanding capital stock of the Assignee is owned of
record (and, to Assignee's knowledge, beneficially) by the Pledgor;
(iv) execution, delivery and performance by the Assignee of this Agreement
have been duly authorized by its Board of Directors (which authorization has not
been modified or rescinded and is in full force and effect) and this Agreement
constitutes a valid and binding obligation of the Assignee; and
(v) execution and delivery by the Assignee of this Agreement; acceptance by
the Assignee of the Pledgor's beneficial interest in the Collateral; and
-3-
<PAGE>
assumption by the Assignee of the Pledgor's obligations under the Pledge
Agreement, including, but not limited to, the Obligations and the payment of the
interest payments on the Notes from the Collateral (but excluding the Pledgor's
recourse obligations under the Notes, as further set forth in the Pledge
Agreement and the Indenture) do not violate any agreement or instrument to which
the Assignee is a party.
6. Notices. Any notice or communication which may be or are required to
-------
be given, served or sent by any party to the Pledgor pursuant to the Pledge
Agreement shall be given in writing concurrently and by the same means (whether
delivered in person or mailed by first class mail, commercial courier service or
telecopier communication) to the Assignee, addressed as follows:
Interstate FiberNet, Inc.
206 West Ninth Street
West Point, Georgia 31833
Attention: Douglas A. Shumate
7. Section Headings. Section headings contained in this Agreement are
----------------
inserted for convenience of reference only, shall not be deemed to be a part of
this Agreement for any purpose, and shall not in any way define or affect the
meaning, construction or scope of any of the provisions hereof.
8. Governing Law. This Agreement, the rights and obligations of the
-------------
parties hereto, and any claims or disputes relating thereto, shall be governed
by and construed in accordance with the laws of the State of New York (but not
including the choice of law rules thereof).
9. Counterparts. To facilitate execution, this Agreement may be executed
------------
in as many counterparts as may be required. It shall not be necessary that the
signatures of, or on behalf of, each party, or that the signatures of all
persons required to bind any party, appear on each counterpart, but it shall be
sufficient that the signature of, or on behalf of, each party, or that the
signatures of the persons required to bind any party, appear on one or more of
the counterparts. All counterparts shall collectively constitute a single
agreement. It shall not be necessary in making proof of this Agreement to
produce or account for more than a number of counterparts containing the
respective signatures of, or on behalf of, all of the parties.
[Rest of page intentionally left blank.]
-4-
<PAGE>
IN WITNESS WHEREOF, each party has executed this Assignment and Assumption
Agreement Pursuant to Pledge and Security Agreement by its duly authorized
representative as of the date first above written.
ITC/\DELTACOM, INC., a Delaware
corporation, as Pledgor
By: /s/ Andrew M. Walker
----------------------------------------
Its: Chief Executive Officer
---------------------------------------
INTERSTATE FIBERNET, INC., a Delaware
corporation, as Assignee
By: /s/ Andrew M. Walker
----------------------------------------
Its: Chief Executive Officer and President
---------------------------------------
ACCEPTED AND AGREED TO:
UNITED STATES TRUST COMPANY OF NEW YORK,
a New York banking and trust company, as Trustee, for
itself and the Holders of the Notes
By: /s/ Louis Young
---------------
Its: Vice President
---------------
-5-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 200,254
<SECURITIES> 0
<RECEIVABLES> 18,621
<ALLOWANCES> (1,134)
<INVENTORY> 630
<CURRENT-ASSETS> 198,248
<PP&E> 132,893
<DEPRECIATION> (17,401)
<TOTAL-ASSETS> 402,016
<CURRENT-LIABILITIES> 152,572
<BONDS> 252,487
0
0
<COMMON> 151
<OTHER-SE> 33,300
<TOTAL-LIABILITY-AND-EQUITY> 402,016
<SALES> 53,365
<TOTAL-REVENUES> 53,365
<CGS> 25,303
<TOTAL-COSTS> 50,537
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 391
<INTEREST-EXPENSE> (7,562)
<INCOME-PRETAX> (3,850)
<INCOME-TAX> 1,006
<INCOME-CONTINUING> (2,845)
<DISCONTINUED> 0
<EXTRAORDINARY> (508)
<CHANGES> 0
<NET-INCOME> (3,278)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
