<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 September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-23253
ITC/\DELTACOM, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-2301135
- ------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1241 O.G. Skinner Drive, West Point, GA 31833
- ---------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 645-3880
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at October 31, 1998
-------------------------------
Common Stock at $.01 par value 51,285,977 Shares
<PAGE>
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $107,649,503 $ 94,373,610
Restricted assets 14,300,000 22,000,000
Accounts receivable:
Customer, net of allowance for uncollectible accounts of
$1,276,487 and $1,060,842 in 1998 and 1997, respectively 27,448,449 21,439,365
Affiliate 3,181,508 2,011,822
Inventory 1,887,320 1,018,212
Prepaid expenses 730,355 534,909
Federal income tax refunds receivable 3,880,065 2,448,297
Deferred income taxes 0 589,799
------------ ------------
Total current assets 159,077,200 144,416,014
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net 222,967,810 141,534,626
OTHER LONG-TERM ASSETS:
Intangible assets, net of accumulated amortization of
$5,599,947 and $3,634,152 in 1998 and 1997, respectively 63,482,691 61,347,786
Restricted assets 12,511,424 28,495,831
Other long-term assets 11,237,230 10,310,220
------------ ------------
Total assets $469,276,355 $386,104,477
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE>
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable:
Trade $ 9,586,158 $ 7,714,878
Construction 11,740,707 6,770,923
Affiliate 0 534,461
Income tax payable to affiliates 748,128 0
Accrued interest 6,035,848 1,867,208
Accrued compensation 2,674,804 1,875,663
Unearned revenue 7,319,011 4,778,819
Other accrued liabilities 10,155,686 3,516,510
Current portion of long-term debt and
capital lease obligations 1,086,044 912,037
------------ ------------
Total current liabilities 49,346,386 27,970,499
------------ ------------
LONG-TERM LIABILITIES:
Deferred income taxes 259,536 6,890,952
Long-term debt and capital lease obligations 292,031,405 202,977,499
------------ ------------
Total long-term liabilities 292,290,941 209,868,451
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; $7.40
liquidation preference;
5,000,000 shares authorized; 1,480,771
shares issued and
outstanding in 1998 and 1997,
respectively 14,808 14,808
Common Stock, $.01 par value; 90,000,000
shares authorized;
51,284,782 and 49,635,112 shares issued
and outstanding
in 1998 and 1997, respectively 512,848 496,351
Additional paid-in capital 166,855,588 162,763,704
Accumulated deficit (39,744,216) (15,009,336)
------------ ------------
Total stockholders' equity 127,639,028 148,265,527
------------ ------------
Total liabilities and stockholders'
equity $469,276,355 $386,104,477
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE>
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues $ 45,676,120 $ 29,439,075 $ 123,222,398 $ 82,804,136
Cost of services 22,485,361 13,989,647 58,619,396 39,292,394
----------- ----------- ------------ -----------
Gross margin 23,190,759 15,449,428 64,603,002 43,511,742
----------- ----------- ------------ -----------
Operating expenses:
Selling, operations and
administration 17,252,531 10,096,717 46,290,548 27,058,041
Depreciation and amortization 8,192,194 4,518,098 21,434,941 12,791,330
----------- ----------- ------------ -----------
Total operating expenses 25,444,725 14,614,815 67,725,489 39,849,371
----------- ----------- ------------ -----------
Operating income (loss) (2,253,966) 834,613 (3,122,487) 3,662,371
----------- ----------- ------------ -----------
Other income (expense):
Interest expense (7,884,207) (7,356,316) (23,322,107) (14,917,907)
Interest income 2,004,991 977,088 7,359,160 1,860,476
Other expense (599,292) - (2,824,501) -
----------- ----------- ------------ -----------
Total other expense (6,478,508) (6,379,228) (18,787,448) (13,057,431)
----------- ----------- ------------ -----------
Loss before income taxes, preacquisition loss
and extraordinary item (8,732,474) (5,544,615) (21,909,935) (9,395,060)
Income tax benefit 1,915,966 1,186,165 5,611,225 2,191,974
----------- ----------- ------------ -----------
Loss before preacquisition loss
and extraordinary item (6,816,508) (4,358,450) (16,298,710) (7,203,086)
Preacquisition loss - - - 74,132
----------- ----------- ------------ -----------
Loss before extraordinary item (6,816,508) (4,358,450) (16,298,710) (7,128,954)
Extraordinary item -- loss on extinguishment
of debt (less related income tax benefit of
$2,133,154 and $311,057 in 1998 and
1997, respectively) - - (8,436,170) (507,515)
----------- ----------- ------------ -----------
Net loss $ (6,816,508) $ (4,358,450) $(24,734,880) $(7,636,469)
=========== =========== ============ ===========
Basic and diluted net loss per
common share:
Before extraordinary loss $ (0.13) $ (0.11) $ (0.32) $ (0.19)
Extraordinary loss - - (0.17) (0.01)
----------- ----------- ------------ -----------
Net loss $ (0.13) $ (0.11) $ (0.49) $ (0.20)
=========== =========== ============ ===========
Basic weighted average common
shares outstanding 51,243,579 38,107,350 50,861,035 38,107,350
Diluted weighted average common
shares outstanding 51,243,579 38,203,852 50,861,035 38,203,852
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (24,734,880) $ (7,636,469)
-------------- ------------
Adjustments to reconcile net loss to net
cash
provided by operating activities:
Depreciation and amortization 21,434,941 12,791,330
Amortization of bond issue costs 1,154,309 -
Deferred income taxes (6,041,617) 152,108
Preacquisition loss - (74,132)
Extraordinary item--loss on extinguishment
of debt 10,569,324 507,515
Other - 73,369
Changes in current operating assets and
liabilities:
Accounts receivable, net (7,178,770) (3,372,454)
Inventory (869,108) (263,466)
Prepaid expenses (195,446) 32,584
Income tax refunds receivable from ITC
Holding 2,448,297 (3,777,758)
Income tax receivable (3,880,065) -
Accounts payable 991,117 701,545
Accrued interest 4,168,640 1,557,124
Unearned revenue 2,540,192 3,015,867
Accrued compensation and other accrued
liabilities 7,237,717 2,868,613
Income tax payable - Affiliate 748,128 -
Other, net - 595,588
-------------- ------------
Total adjustments 33,127,659 14,807,833
-------------- ------------
Net cash provided by operating activities 8,392,779 7,171,364
-------------- ------------
Cash flows from investing activities:
Capital expenditures (100,525,275) (25,603,386)
Change in accrued construction costs 4,969,784 352,357
Change in restricted assets 23,684,407 -
Purchase of restricted assets, net of
investments released from restriction - (62,708,146)
Purchase of Gulf States FiberNet, net of
cash received - 574,600
Other (390,098) -
-------------- ------------
Net cash used in investing activities (72,261,182) (87,384,575)
-------------- ------------
Cash flows from financing activities:
Proceeds from issuance of 8 7/8% Senior
Notes, net of issuance costs 155,170,450 -
Proceeds from issuance of 11% Senior
Notes, net of issuance costs - 193,125,127
Repayment of 11% Senior Notes (70,000,000) -
Premium paid on early retirement of 11%
Senior Notes (7,700,000) -
Proceeds from issuance of other long-term
debt - 41,095,062
Payment of debt issuance cost - (2,400,000)
Repayment of debt assumed in IT Group
Communications acquisition (760,339) -
Repayment of other long-term debt and
capital lease obligations (653,666) (84,758,331)
Proceeds from advance from ITC Holding - 8,243,990
Repayment of advance from ITC Holding - (48,934,549)
Proceeds from issuance of common stock
pursuant to stock options 1,207,006 -
Proceeds from issuance of common stock - 150,000
Capital contributions from ITC Holding,
net - (624,461)
Other (119,155) -
-------------- ------------
Net cash provided by financing activities 77,144,296 105,896,838
-------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Increase in cash and cash equivalents $ 13,275,893 $25,683,627
Cash and cash equivalents at beginning of period 94,373,610 1,301,415
------------ -----------
Cash and cash equivalents at end of period $107,649,503 $26,985,042
============ ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $17,943,042 $11,747,807
=========== ===========
Cash refunds received for income taxes,
net of payments $(1,664,220) $ (612,879)
=========== ===========
NONCASH TRANSACTIONS:
IT Group Communications acquisition:
Note and capital lease obligation
and accrued liabilities assumed $ 1,174,739 $ -
=========== ===========
Equity portion $ 2,792,740 $ -
=========== ===========
Equity portion of acquisition of 64% interest
in Gulf States FiberNet and Georgia Fiber Assets $ - $17,896,665
=========== ===========
Assumption of long-term debt related to acquisition of
Georgia Fiber Assets $ - $ 9,964,091
=========== ===========
Offset of advances to ITC Holding as a reduction to related
advances from ITC Holding $ - $ 2,546,534
=========== ===========
Forgiveness of long-term advances by ITC Holding $ - $31,000,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE>
ITC/\DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, NATURE OF BUSINESS, AND BASIS OF PRESENTATION
ORGANIZATION
ITC/\DeltaCom, Inc. ("ITC/\DeltaCom" or 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"), 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
ITC/\DeltaCom Communications, Inc. (formerly 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.
GSTS held a 36% ownership in and was the managing partner of Gulf States
FiberNet ("Gulf States"), a Georgia general partnership. On March 27, 1997,
ITC Holding purchased the remaining 64% interest in Gulf States ("the Gulf
States Acquisition") and contributed this interest to GSTS as part of the
Reorganization. On December 29, 1997, GSTS was merged with and into FiberNet.
Effective October 20, 1997, as part of a further reorganization of ITC
Holding, ITC Holding transferred all of its assets, other than stock in the
Company, and all of its liabilities to another entity and then merged with and
into the Company. The Company was the surviving corporation in the merger.
NATURE OF BUSINESS
The Company provides integrated voice and data telecommunications
services to mid-sized and major regional businesses in the southern United
States ("Retail Services") and is a leading regional provider of wholesale
long-haul services to other telecommunications companies ("Carriers' Carrier
Services"). Retail Services includes local exchange services, long distance
services, 800/888 calling, calling card and operator services, Asynchronous
Transfer Mode ("ATM"), frame relay, high capacity broadband private line
services, as well as Internet, Intranet and Web page hosting and development
services, and customer premise equipment sale, installation and repair. In
connection with these businesses, the Company owns, operates and manages an
extensive fiber optic network in the southern United States.
BASIS OF PRESENTATION
The accompanying interim consolidated financial statements are unaudited
and have been prepared by Company management in accordance with the rules and
regulations of the Securities and Exchange Commission (the "Commission"). In the
opinion of management, all adjustments considered necessary for the fair
presentation of the unaudited, consolidated financial statements have been
included, and the unaudited, consolidated financial statements present fairly
the financial position and results of operations for the interim periods
presented. These unaudited, consolidated financial statements should be read in
conjunction with the audited, consolidated financial statements and related
footnotes included in the Company's Annual Report on Form 10-K, as filed with
the Commission on March 30, 1998 (File No. 0-23252).
7
<PAGE>
The comparability of the three-month and nine-month periods ended September
30, 1998 and September 30, 1997 has been affected by the Gulf States Acquisition
and the 1998 Senior Notes Offering (as defined and further discussed in Notes 2
and 4, below, respectively). The unaudited, consolidated financial statements
for the three and nine months ended September 30, 1997 reflect the total
revenues and expenses from January 1, 1997, attributable to Gulf States FiberNet
with the preacquisition loss attributable to the previous owner deducted to
determine consolidated net loss.
NET LOSS PER SHARE
The Company adopted Statement on Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share," effective December 31, 1997. Basic net loss per
common share is computed by dividing net loss by the weighted average number of
common shares outstanding during the period. Pursuant to Commission Staff
Accounting Bulletin No. 98, for periods prior to the Company's initial public
offering, basic net loss per share is computed using the weighted average number
of shares of common stock outstanding during the period. Diluted net loss per
share is computed using the weighted average number of shares of common stock
outstanding during the period and, nominal issuances of common stock and common
stock equivalents, regardless of whether they are antidilutive. For the three
and nine-month periods ended September 30, 1997, 96,502 stock options are
included in the computation of diluted net loss per share.
2. ACQUISITION OF MAJORITY INTEREST OF GULF STATES FIBERNET AND GEORGIA
FIBER ASSETS
On March 27, 1997, ITC Holding purchased the remaining 64% partnership
interest in Gulf States FiberNet and certain assets, including a significant
long-term customer contract (the "Georgia Fiber Assets"), for approximately $28
million, plus certain contingent consideration. The purchase price included
588,411 shares of ITC Holding's Series A Convertible Preferred Stock valued at
approximately $17.9 million and an unsecured purchase money note for
approximately $10 million. The purchase price was allocated as follows: $17
million to the 64% interest in Gulf States and $10.9 million to the Georgia
Fiber Assets. The note, bearing interest at 11%, was payable in ten semi-annual
principal payments of approximately $1 million plus accrued interest, beginning
September 30, 1997. The contingent consideration was due no later than April 30,
1998, at which time the Company was obligated to deliver additional preferred
stock equal to 35.7% of 64% multiplied by 6, multiplied by the amount, if any,
by which the earnings before interest, taxes, depreciation, and amortization of
Gulf States for the year ended December 31, 1997 exceeded $11,265,696. In
October 1997, ITC Holding issued 56,742 shares of its Series A Convertible
Preferred Stock in connection with this earn-out provision. The 645,153 shares
of ITC Holding Series Preferred Stock issued in conjunction with this
acquisition were converted into 1,480,771 of the Company's Series A Convertible
Preferred Stock in conjunction with the merger. The Company recorded goodwill
totaling approximately $7.5 million in connection with this acquisition. No
further payments under the contingent consideration provision were due.
Upon the closing of these acquisitions, ITC Holding contributed the
remaining 64% partnership interest in Gulf States FiberNet to GSTS and the
Georgia Fiber Assets to FiberNet. The Gulf States partnership has been
dissolved. The purchase money note was repaid in full in November 1997.
3. NONRECURRING CHARGES
On April 2, 1998, the Company redeemed $70 million principal amount of its
11% Senior Notes due 2007 (the "11% Senior Notes"), at a redemption price of
111% of the principal amount thereof, plus accrued and unpaid interest. Upon
announcing the redemption in March 1998, the Company accrued a pre-tax
extraordinary loss of approximately $10.6 million (approximately $8.4 million
after tax), consisting of a $7.7 million premium and a $2.9 million write off of
debt issue costs related to the early redemption of this debt. Additionally, as
a result of the receipt by the Company of the proceeds from the 1998 Senior Note
Offering (as defined in Note 4, below), the Company's interest rate swap
agreement no longer may be accounted for as a hedge of an anticipated
transaction, but rather must be treated as a trading security. This change in
classification required the Company to record the payable related to the
interest rate swap agreement on the consolidated balance sheet at fair market
value at the time of receipt of the proceeds
8
<PAGE>
from the 1998 Senior Notes Offering. The loss, charged against earnings, was
approximately $2.5 million. The interest rate swap agreement is marked to market
on a monthly basis. For the three and nine months ended September 30, 1998, the
Company recognized approximately $599,000 and $2,825,000, respectively, in
expense from the mark-to-market of the interest rate swap.
4. OFFERING OF 8 7/8% SENIOR NOTES
On March 3, 1998, the Company issued $160 million principal amount of 8 7/8%
Senior Notes due 2008 (the "8 7/8% Senior Notes"), at a price of 99.9% (the
"1998 Senior Notes Offering"), yielding net proceeds of approximately $155
million. The Company is using these proceeds (i) to replace portions of the
proceeds from the Company's initial public offering in October 1997, which the
Company used in April 1998 to redeem $70 million of its 11% Senior Notes at a
redemption price of 111% (as discussed in Note 3, above), (ii) to fund continued
market and fiber optic expansion and (iii) to replace funds that would have
otherwise been available under the Company's secured credit facility (the
"Credit Facility"), which was modified to, among other things, reduce available
borrowings thereunder from $100 million to $50 million.
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long term debt and capital lease obligations at September 30, 1998 and
December 31, 1997 consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
11% Senior Notes $130,000 $200,000
8 7/8% Senior Notes 159,849 -
Capital lease obligations at varying interest rates,
maturing through June 2006 2,934 3,249
Other 334 640
-------- --------
Total long-term debt and capital leases 293,117 203,889
Less current maturities (1,086) (912)
-------- --------
Total $292,031 $202,977
======== ========
</TABLE>
In connection with the 1998 Senior Notes Offering, the Company modified
its Credit Facility to reduce available borrowings to $50 million and to amend
and/or delete various covenants.
6. STOCK SPLIT
On July 29, 1998, the Company announced a two-for-one stock split to be
effected in the form of a stock dividend on the Common Stock (the "Stock
Split"). The record date for the Stock Split was August 18, 1998 and the payment
date was September 4, 1998. The Common Stock began trading giving effect to the
Stock Split on September 8, 1998. All references to the number of shares of
Common Stock issued and outstanding, the number of stock options issued and
outstanding, and to per share information in the consolidated financial
statements have been adjusted to reflect the Stock Split on a retroactive basis.
7. COMMITMENTS AND CONTINGENCIES
At September 30, 1998, the Company had entered into agreements with vendors
to purchase approximately $23.9 million of equipment related to the improvement
and installation of switches, other network expansion efforts and certain
services.
9
<PAGE>
8. ACQUISITION OF IT GROUP
On May 20, 1998, the Company completed its acquisition of certain assets
and liabilities of PSP Marketing Group, Inc., d/b/a IT Group Communications
Company ("IT Group Communications"), a Jackson, Mississippi-based long distance
carrier. The Company issued 177,106 shares of common stock and assumed
liabilities of approximately $1.2 million to consummate the transaction.
9. SUBSEQUENT EVENTS
On November 5, 1998, the Company issued $125 million principal amount of 9
3/4% Senior Notes due 2008 (the "9 3/4% Senior Notes"), yielding net proceeds of
approximately $122 million. The Company plans to use these proceeds to (i) fund
an accelerated market expansion of the Company's telecommunications business,
including expansion of the Company's fiber optic network, expansion of its ISP
local telecommunications services and the opening of new sales offices, and (ii)
for additional working capital and other general corporate purposes. The Company
also announced that it had amended its secured revolving credit facility with
NationsBank, N.A., to permit the issuance of and payment on the 9 3/4% Senior
Notes, and to maintain the lenders' commitment under the facility at $50
million.
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This quarterly report on Form 10-Q contains certain forward-looking
statements that involve risks and uncertainties. In addition, members of the
Company's senior management may, from time to time, make certain forward-looking
statements concerning the Company's operations, performance and other
developments. The Company's actual results could differ materially from those
anticipated in such forward-looking statements as a result of various factors.
The following analysis should be read in conjunction with the Annual Report of
Form 10-K and 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 Company's industry. EBITDA
represents earnings before extraordinary item, net interest, other expense,
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.
See the notes to the unaudited, consolidated financial statements appearing
elsewhere in this report for definitions of certain terms used in the following
analysis.
OVERVIEW
The Company provides integrated voice and data telecommunications services
to mid-size and major regional businesses in the southern United States and is a
leading regional provider of wholesale long-haul services to other
telecommunications companies. In connection with these businesses, the Company
owns, operates and manages an extensive fiber optic network in the southern
United States. The Company had revenues of $45.7 million and $29.4 million for
the three months ended September 30, 1998 and 1997, respectively, and $123.2
million and $82.8 million for the nine months ended September 30, 1998 and 1997,
respectively.
The Company provides wholesale long-haul services (the "Carriers' Carrier
Services") to other telecommunications carriers, including AT&T, Sprint, MCI
WorldCom, Cable & Wireless, Frontier and IXC. The Company's Carriers' Carrier
business generated revenues of $13.2 million and $8.2 million for the three
months ended September 30, 1998 and 1997, respectively, and $36.5 million and
$21.6 million for the nine months ended September 30, 1998 and 1997,
respectively.
The Company also provides integrated retail telecommunications services to
mid-sized and major regional businesses in a bundled package tailored to the
business customer's specific needs. These services (the "Retail Services")
include local exchange services, long distance services, 800/888 calling,
calling card and operator services, Asynchronous Transfer Mode ("ATM"), frame
relay, high capacity broadband private line services, as well as Internet,
Intranet and Web page hosting and development services, and customer premise
equipment sale, installation and repair. As of September 30, 1998, the Company
provided Retail Services to over 10,000 business customers in 21 metropolitan
areas and had sold approximately 33,200 access lines, of which approximately
25,500 had been installed. The Company intends to provide a full range of Retail
Services in a total of approximately 40 metropolitan areas throughout the
southern United States over the next five years. The Company's Retail Services
business generated revenue of $32.5 million and $21.3 million for the three
months ended September 30, 1998 and 1997, respectively, and $86.7 million and
$61.2 million for the nine months ended September 30, 1998 and 1997,
respectively.
The Company's fiber optic network reaches over 70 points of presence
("POPs") in ten southern states (Alabama, Arkansas, Florida, Georgia, Louisiana,
Mississippi, North Carolina, South Carolina, Tennessee and Texas) and extends
approximately 7,000 route miles, of which approximately 3,800 miles are Company-
owned and approximately 3,200 miles are owned and operated principally by three
public utilities (Duke Power Company, Florida Power & Light Company and Entergy
Technology Company) and managed and marketed by the Company. The Company expects
to add approximately 1,200 owned and operated route miles to its fiber network
by the end of the second quarter of 1999 through a combination of
11
<PAGE>
construction and long-term dark fiber leases. The Company's network includes one
Nortel DMS-250 and five Nortel DMS-500 voice switches, eleven Ascend 9000 frame
relay switches and five ATM switches
During the three months ended September 30, 1998, the Company's operational
highlights included the following: (i) installation of six additional Nortel
access nodes, raising the total number of operational BellSouth collocations to
fourteen, (ii) installation of its Atlanta, Georgia, and Anniston, Alabama,
Nortel DMS-500 switches, as well as one additional ATM and frame relay switch in
Anniston, and (iii) opening of two new branch offices, Ocala and Orlando,
Florida, expanding our market coverage to 21 southeastern markets with 22 branch
offices operational at the end of the third quarter. In addition, the Company
received competitive local exchange carrier ("CLEC") certification in Texas
during the third quarter of 1998 and successfully negotiated interconnection
agreements with GTE South Incorporated in Alabama and Sprint-Florida,
Incorporated in Florida, opening up markets for facilities based services in
Dothan, Alabama and portions of Orlando, Tallahassee and Ocala, Florida. The
Company continues to increase its market penetration and capacity by opening new
sales offices, expanding its fiber network and increasing its data and voice
switching capability at a local and regional level.
During the third quarter of 1998, the Company made capital expenditures of
approximately $10 million to upgrade its existing switch sites and switches, in
connection with accelerated expansion of the Company's local service product
offering to ISPs, one of the Company's key initiatives for 1998. In July 1998,
the Company expanded local service to ISPs by offering high capacity
connectivity, including the collocation of the ISPs' terminal equipment such as
modems, routers, and/or network servers. The Company initially expected to make
additional capital expenditures in connection with the ISP initiative of
approximately $8 million during the remainder of 1998 and into 1999. The Company
is reviewing its planned additional capital expenditures in connection with the
ISP initiative. During the third quarter, the Company continued to pursue its
1998 initiatives in the Carriers' Carrier segment, making progress on the
construction of its Gulf Coast route, which the Company expects to complete by
the end of the first quarter of 1999. During the nine months ended September 30,
1998, the Company's total capital expenditures were approximately $95.6 million,
including $46.3 million during the third quarter. Management currently expects
aggregate capital expenditures for 1998 to be approximately $130 million.
In July 1998, the Company announced its intentions to expand its existing
fiber optic network and retail services market in Texas by (i) extending its
current network from Dallas and Houston to Austin and San Antonio, (ii) opening
branch offices in each of those cities by the end of 1999 and (iii) adding two
DMS-500 switches and additional ATM and frame relay switches. The Company is in
the process of securing POP space in Dallas and Houston to accommodate regional
switching centers and is currently evaluating plans to deploy switches for these
locations. The Company is also in the process of reviewing its capital
expenditure plans for 1999 and may decide to open the Austin and San Antonio
offices in early 2000 instead. Management believes that market demand for
bandwidth will increase during the remainder of 1998 and 1999 and is therefore
considering accelerating capital expenditures to further enhance its fiber
network, principally by accelerating the installation of DWDM (dense wavelength
division multiplexing) optronics on conventional routes and accelerating
protection of the network by geographically diverse routing (also called a "self
healing ring"). Approximately 55% of the Company's owned and operated fiber
optic network is protected by a self healing ring, which the Company expects to
increase to 80% by the first quarter of 1999.
12
<PAGE>
QUARTERLY STATISTICAL HIGHLIGHTS*
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31,
1998 1998 1998 1997
-------------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Statistical Data:
Cumulative markets 21 19 16 15
Business customers served -
Retail Services 10,000 9,600 8,100 7,700
Route miles 7,000 7,000 6,800 6,300
Collocations 14 8 4 0
Voice switches 6 4 3 3
ATM switches 5 4 2 0
Frame relay switches 11 10 7 6
Number of employees 1,025 870 740 650
Lines sold cumulative 33,200 23,200 16,000 8,700
Lines installed cumulative 25,500 17,800 10,800 3,450
Lines installed/Lines sold percentage 77% 77% 67% 40%
</TABLE>
*Data rounded except as to markets, collocations and switches.
Pursuant to its interconnection agreement (the "Interconnection Agreement")
with BellSouth Telecommunications, Inc. ("BellSouth"), the Company continued to
bill BellSouth for reciprocal interconnection charges related to the provision
by the Company of facilities-based local exchange services during the second
quarter of 1998. The majority of such charges are attributable to call
terminations by the Company to customers that are Internet service providers.
BellSouth has stated that it views termination to such Internet service
providers as not included under the reciprocal charge arrangements set forth in
the Interconnection Agreement, and has refused to pay compensation for such
terminations either to the Company or to other CLECs operating under similar
interconnection agreements. The Alabama Public Service Commission (the "Alabama
PSC"), in reponse to a request from the Company, held hearings on September 3
and 4, 1998, at which the issue reviewed was the failure by BellSouth to pay the
disputed charges. The Alabama PSC has not yet ruled on this issue. The Company
is reviewing all potential remedies and claims in remaining jurisdictions. This
same issue is a matter of dispute between incumbent local exchange carriers
("ILECs") and CLECs across the country. In view of BellSouth's stated position
that such charges with respect to ISPs are excluded from the reciprocal charge
arrangements set forth in the Interconnection Agreement, and the fact that the
ultimate outcome of this controversy before the state regulatory authorities and
in the courts is uncertain, the Company does not record any revenue for the ISP
charges and reserves directly against the amounts billed to BellSouth for these
charges. For the three and nine months ended September 30, 1998, total
reciprocal interconnection charges to BellSouth amounted to approximately $2.3
million and $4.8 million, respectively. As of September 30, 1998, the Company
had recognized revenue of an amount equal to approximately 10% of the total
cumulative local interconnection billings to BellSouth which reflects
BellSouth's estimate of the local minutes terminated to the Company exclusive of
any minutes related to traffic terminated to an Internet service provider. The
Company recorded revenue and received subsequent payment of approximately
$230,000 and $482,000 during the three and nine months ended September 30, 1998,
respectively, and continued to reserve against the remaining $4.3 million of
cumulative local interconnection billings.
The Company believes its position with respect to the remaining $4.3
million of billings is supported by the terms of the Interconnection Agreement,
as do other CLECs who are strongly contesting ILEC refusals to pay compensation
in these circumstances. Many regulatory authorities that have addressed the
issue have ruled in favor of CLECs, but the issue generally remains under appeal
in those circumstances. Most of the state regulatory authorities in the
Company's markets have not yet formally ruled on this issue. Although the
provision of facilities-based local services involves high fixed costs,
associated variable costs are generally low. Consequently, a resolution of the
controversy with respect to payment of such charges by BellSouth in favor of the
Company could have a positive impact on both gross margin and EBITDA for the
remainder of 1998. Assuming current levels of such local minutes continue or
increase, the Company expects such charges to BellSouth to be at least $2
million during the fourth quarter of 1998. The Interconnection Agreement
expires, however, on July 1, 1999, and by its terms, provides that the parties
are to begin to negotiate renewal terms by July 1, 1998. Although preliminary
discussions have
13
<PAGE>
taken place between the parties, there can be no assurance that the
Interconnection Agreement will be renewed on the same terms with respect to the
disputed charges, or at all. Therefore, even if the controversy regarding such
charges is resolved in favor of the Company under the current Interconnection
Agreement, there can be no assurance that any positive effect on the Company's
financial position will continue beyond July 1, 1999.
14
<PAGE>
HISTORICAL RESULTS OF OPERATIONS
The following tables set forth certain historical data for the three and
nine month periods ended September 30, 1998 and 1997 for the Carriers' Carrier
Services business and the Retail Services business.
The comparability of the historical financial data set forth below for the
three and nine months ended September 30, 1998 and 1997 has been affected by the
Gulf States Acquisition completed on March 27, 1997. The results of operations
for the three and nine months ended September 30, 1997 reflect the total
revenues and expenses from January 1, 1997 attributable to Gulf States FiberNet
with the pre-acquisition loss attributable to the previous owner from January 1,
1997 through March 27, 1997, deducted to determine the Company's consolidated
net loss.
<TABLE>
<CAPTION>
CARRIERS' CARRIER SERVICES
----------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1998 % 1997 % 1998 % 1997 %
------------- ----- ------------ ---- ------------- ----- ------------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $13,161,215 100% $ 8,157,294 100% $ 36,531,391 100% $21,601,941 100%
Cost of services 2,095,861 16% 1,034,865 13% 5,130,553 14% 2,809,601 13%
----------- ---- ----------- --- ------------ ---- ----------- ---
Gross margin 11,065,354 84% 7,122,429 87% 31,400,838 86% 18,792,340 87%
----------- ---- ----------- --- ------------ ---- ----------- ---
Operating expenses:
Selling, operations
and administration 3,543,812 27% 2,200,346 27% 10,613,729 29% 5,991,210 28%
Depreciation and
amortization 5,026,208 38% 3,027,455 37% 13,737,344 38% 8,342,955 39%
----------- ---- ----------- --- ------------ ---- ----------- ---
Total operating
expenses 8,570,020 65% 5,227,801 64% 24,351,073 67% 14,334,165 67%
----------- ---- ----------- --- ------------ ---- ----------- ---
Operating income $ 2,495,334 19% $ 1,894,628 23% $ 7,049,765 19% $ 4,458,175 20%
=========== ==== =========== === ============ ==== =========== ===
RETAIL SERVICES
----------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1998 % 1997 % 1998 % 1997 %
----------- ---- ----------- --- ------------ ---- ----------- ---
Revenues $32,514,905 100% $21,281,781 100% $ 86,691,007 100% $61,202,195 100%
Cost of services 20,389,500 63% 12,954,782 61% 53,488,843 62% 36,482,793 60%
----------- ---- ----------- --- ------------ ---- ----------- ---
Gross margin 12,125,405 37% 8,326,999 39% 33,202,164 38% 24,719,402 40%
----------- ---- ----------- --- ------------ ---- ----------- ---
Operating expenses:
Selling, operations
and administration 13,708,719 42% 7,896,371 37% 35,676,819 41% 21,066,831 34%
Depreciation and
amortization 3,145,562 10% 1,490,643 7% 7,636,325 9% 4,448,375 7%
----------- ---- ----------- --- ------------ ---- ----------- ---
Total operating
expenses 16,854,281 52% 9,387,014 44% 43,313,144 50% 25,515,206 41%
----------- ---- ----------- --- ------------ ---- ----------- ---
Operating loss $(4,728,876) (15)% $(1,060,015) (5)% $(10,110,980) (12)% $ (795,804) (1)%
=========== ==== =========== === ============ ==== =========== ===
</TABLE>
15
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues
Total revenue increased $16.3 million (55.4%), from $29.4 million for the
three months ended September 30, 1997 to $45.7 million for the three months
ended September 30, 1998. Revenues from Retail Services increased $11.2
million (52.6%), from $21.3 million for the three months ended September 30,
1997 to $32.5 million for the three months ended September 30, 1998. The
increase in Retail Services revenue was attributable to (i) a continued
increase in the number of business customers to over 10,000 as of September
30, 1998, (ii) continued geographic and product expansion, (iii) continued
growth in local lines in service to approximately 25,500 as of September 30,
1998, (iv) continued growth in long distance minutes of use and (v) continued
stability in the rate of revenue loss from lost customers from period to
period. Additionally, revenues attributable to the IT Group Communications
acquisition amounted to approximately $1.0 million during the three months
ended September 30, 1998. The Company anticipates that, during the fourth
quarter of 1998, revenue attributable to the Retail Services segment may
decrease slightly as a result of reduced long-distance minutes of usage by
business customers during the holiday season. Revenues from Carriers' Carrier
Services increased $5.0 million (61.0%), from $8.2 million for the three
months ended September 30, 1997 to $13.2 million for the three months ended
September 30, 1998. This increase was attributable to the continued
increasing demand for bandwidth from all carriers and by the Company's growing
reputation for network availability, service and reliability. The Company
expects to see increased competition for price and primary route segments as
more competitors enter the market during the remainder of 1998 and 1999. The
Company believes that this pressure will be at least partially offset by the
increasing demand for bandwidth, especially for higher OC-N applications.
Cost of Services
Total cost of services increased $8.5 million, from $14.0 million for the
three months ended September 30, 1997 to $22.5 million for the three months
ended September 30, 1998. Cost of services for Retail Services increased $7.4
million, from $13.0 million for the three months ended September 30, 1997 to
$20.4 million for the three months ended September 30, 1998. Cost of
services, as a percentage of revenue for Retail Services was 63% for the three
months ended September 30, 1998, compared to 61% for the three months ended
September 30, 1997, primarily due to an increase in revenues generated by
sales of local services on a resale basis, which has a significantly higher
cost of sales compared to facilities-based local services. The Company
expects this upward pressure on cost of sales to lessen over time as the
Company provides more facilities-based local service. Also contributing to
the increase in cost of sales during the third quarter were temporary trunking
and routing inefficiencies incurred as the Company made improvements to its
network as part of its continuing efforts to shift its local service offering
from a resale to a facilities based product. During the third quarter, the
Company collocated additional dedicated facilities in BellSouth offices,
resulting in additional costs of $130,000 per month. Because of the addition
of these facilities, the Company expects continued increases during the fourth
quarter of 1998 in its consolidated cost of services related to local service
offerings, partially offset by developing network efficiencies as the Company
brings more local services traffic on-net. During the fourth quarter of 1998
and the first quarter of 1999, respectively, the Company also expects
increases in its consolidated cost of services related to deployment of the
Gulfport DMS-500 and the Greensboro DMS-500 switches. The Company believes
these increases should begin to be offset by mid-1999 by continued migration
to facilities-based local services and as a result of increasing operational
efficiencies.
Cost of services attributable to Carriers' Carrier Services increased
$1.1 million, from $1.0 million for the three months ended September 30, 1997
to $2.1 million for the three months ended September 30, 1998. Cost of
services as a percentage of revenue for Carriers' Carrier Services increased
to 16% for the three months ended September 30, 1998 from 13% for the three
months ended September 30, 1997. The increase in cost of services as a
percentage of revenue for the Carriers' Carrier Services was attributable
mainly to increased pricing pressures as new competitors enter the market.
The Company expects these pricing pressures to be offset in the future by
increasing demand for bandwidth.
16
<PAGE>
Selling, Operations and Administration Expense
Total selling, operations and administration expense increased $7.2
million, from $10.1 million (34.3% as a percentage of revenue) for the three
months ended September 30, 1997 to $17.3 million (37.8% as a percentage of
revenue) for the three months ended September 30, 1998. Selling, operations
and administration expense attributable to Retail Services increased $5.8
million, from $7.9 million (37% as a percentage of revenue) for the three
months ended September 30, 1997 to $13.7 million (42% as a percentage of
revenue) for the three months ended September 30, 1998. The increase resulted
from (i) an increase over the second quarter of 1998 in expenses related to
the Company's Year 2000 readiness program of approximately $235,000 to
approximately $422,000 for the third quarter of 1998 and (ii) employment of
additional sales, information services and provisioning personnel to support
the Company's continued geographical market and product expansion. The
Company expects to see a similar increase in expenses in the fourth quarter of
1998 related to the Year 2000 program and additions to personnel. See "---
Liquidity and Capital Resources--The Year 2000 Issue." Selling, operations
and administration expense attributable to Carriers' Carrier Services
increased $1.3 million, from $2.2 million (27% as a percentage of revenue) for
the three months ended September 30, 1997 to $3.5 million (27% as a percentage
of revenue) for the three months ended September 30, 1998. The increase in
selling, operations and administration expense resulted from additions to
personnel as the Company expanded its existing fiber optic network. The
Company expects selling, operations and administration expense to continue to
increase as a percentage of revenue through the end of 1999 as new offices are
opened and the Company continues to expand its products, markets and fiber
optic network and adds personnel.
Depreciation and Amortization
Total depreciation and amortization expense increased $3.7 million, from
$4.5 million for the three months ended September 30, 1997 to $8.2 million for
the three months ended September 30, 1998. Retail Services accounted for $1.7
million of the increase, which was primarily related to installation of new
equipment. Carriers' Carrier Services operations accounted for $2.0 million
of the increase, which was primarily due to the continued expansion of the
fiber optic network operations. The Company expects depreciation and
amortization to continue to increase during the remainder of 1998 and through
1999 as the Company adds new switches and other facilities to its network and
expands into new markets.
Interest Expense
Total interest expense increased $0.5 million, from $7.4 million for the
three months ended September 30, 1997 to $7.9 million for the three months
ended September 30, 1998. The $0.5 million increase in interest expense is
attributable to the interest payments on the 8 7/8% Senior Notes.
Interest Income
Total interest and other income increased $1.0 million, from $1.0 million
for the three months ended September 30, 1997 to $2.0 million for the three
months ended September 30, 1998 as a result of the investment of excess cash
balances.
Other Expense
In March 1998, the Company changed the accounting for its interest rate
swap agreement from a hedge of an anticipated transaction to a trading
security resulting in a loss charged against earnings of approximately $2.5
million. This change in classification required the Company to record the
payable related to the interest rate swap agreement on the consolidated
balance sheet at fair market value at the time of receipt of the proceeds from
the 1998 Senior Notes Offering. The interest rate swap agreement is marked to
market on a monthly basis. For the three months ended September 30, 1998, the
Company recognized approximately $599,000 in expense from the mark-to-market
of the interest rate swap.
17
<PAGE>
EBITDA
EBITDA increased $0.5 million, from $5.4 million for the three months
ended September 30, 1997 to $5.9 million for the three months ended September
30, 1998. EBITDA attributable to Carriers' Carrier Services increased $2.6
million for the three months ended September 30, 1998 compared to the three
months ended September 30, 1997. EBITDA attributable to Retail Services was
$(1.6) million for the three months ended September 30, 1998 compared to $0.4
million for the three months ended September 30, 1997. EBITDA attributable to
Retail Services decreased from 2.0% of revenues for the three months ended
September 30, 1997 to (4.9)% for the three months ended September 30, 1998.
This decrease was primarily due to (i) increased costs associated with the
local resale product, (ii) increased costs associated with the expansion of
new sales offices and network facilities and (iii) the employment of
additional support personnel to position this segment for growth and
expansion. The Company expects a continued decrease in EBITDA and EBITDA as a
percentage of revenue for the Retail Services business through the remainder
of 1998 and 1999 as the Company continues to position itself for future
operations through the expansion of its products and markets.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997
Revenues
Total revenue increased $40.4 million (48.8%), from $82.8 million for the
nine months ended September 30, 1997 to $123.2 million for the nine months
ended September 30, 1998. Revenues from Retail Services increased $25.5
million (41.7%), from $61.2 million for the nine months ended September 30,
1997 to $86.7 million for the nine months ended September 30, 1998. This
increase was attributable to an increase in business customers to over 10,000
as of September 30, 1998, continued geographic and product expansion, growth
in local lines in service, growth in long distance minutes of use and
stability in the rate of revenue loss from lost customers from period to
period. Additionally, revenues attributable to the IT Group Communications
acquisition amounted to approximately $1.5 million during the nine months
ended September 30, 1998. The Company anticipates that, during the fourth
quarter of 1998, revenue attributable to the Retail Services segment may
decrease slightly as a result of reduced long-distance minutes of usage by
business customers during the holiday season. Revenues from Carriers' Carrier
Services increased $14.9 million (69.0%), from $21.6 million for the nine
months ended September 30, 1997 to $36.5 million for the nine months ended
September 30, 1998. This increase was attributable to increasing demand for
bandwidth, continued owned and operated route expansions and by the Company's
growing reputation for network availability, service and reliability. The
Company expects to see increased competition for price and primary route
segments as more competitors enter the market during the remainder of 1998 and
1999. The Company believes that this pressure will be at least partially
offset by the increasing demand for bandwidth, especially for higher OC-N
applications.
Cost of Services
Total cost of services increased $19.3 million, from $39.3 million for
the nine months ended September 30, 1997 to $58.6 million for the nine months
ended September 30, 1998. Cost of services for Retail Services increased
$17.0 million, from $36.5 million for the nine months ended September 30, 1997
to $53.5 million for the nine months ended September 30, 1998. Cost of
services as a percentage of revenue for Retail Services increased slightly to
62% for the nine months ended September 30, 1998 from 60% for the nine months
ended September 30, 1997. This increase was primarily due to an increase in
revenues generated by sales of local services on a resale basis, which has a
significantly higher cost of sales compared to facilities-based local
services. The Company expects this upward pressure on cost of sales to lessen
over time as the Company provides more facilities-based local service. Cost
of services attributable to Carriers' Carrier Services increased $2.3 million,
from $2.8 million for the nine months ended September 30, 1997 to $5.1 million
for the nine months ended September 30, 1998. The increase in cost of
services for the Carriers' Carrier Services was primarily attributable to
costs associated with the expansion of the Company's network from 6,300 owned
and operated and managed, monitored and marketed route miles to approximately
7,000 owned and operated and managed, monitored and marketed route miles.
Cost of
18
<PAGE>
services as a percentage of revenue for Carriers' Carrier Services increased
to 14% for the nine months ended September 30, 1998 from 13% for the nine
months ended September 30, 1997.
Selling, Operations and Administration Expense
Total selling, operations and administration expense increased $19.2
million, from $27.1 million (32.7% as a percentage of revenue) for the nine
months ended September 30, 1997 to $46.3 million (37.6% as a percentage of
revenue) for the nine months ended September 30, 1998. Selling, operations and
administration expense attributable to Retail Services increased $14.6
million, from $21.1 million for the nine months ended September 30, 1997 to
$35.7 million for the nine months ended September 30, 1998, which represented
an increase from 34% to 41% as a percentage of revenue. This increase
resulted primarily from employment of additional sales, information services
and provisioning personnel to support the Company's continued geographical
market and product expansion as well as cost associated with the opening of
new offices. Selling, operations and administration expense attributable to
Carriers' Carrier Services increased $4.6 million, from $6.0 million for the
nine months ended September 30, 1997 to $10.6 million for the nine months
ended September 30, 1998, representing an increase from 28% to 29% as a
percentage of revenue. The increase in selling, operations and administration
expenses for the Carriers' Carrier Services was due primarily to the hiring of
additional personnel in connection with the Company's expansion of its fiber
optic network. The Company expects selling, operations and administration
expense to continue to increase as a percentage of revenue through the end of
1999 as new offices are opened and the Company continues to expand its
products, markets and fiber optic network and adds new personnel.
Depreciation and Amortization
Total depreciation and amortization expense increased $8.6 million, from
$12.8 million for the nine months ended September 30, 1997 to $21.4 million
for the nine months ended September 30, 1998. Retail Services accounted for
$3.2 million of the increase, which was primarily related to installation of
new telephony and office equipment. Carriers' Carrier Services accounted for
$5.4 million of the increase, which was primarily due to the continued
expansion of the fiber optic network operations. The Company expects
depreciation and amortization expense to continue to increase through the
remainder of 1998 and through 1999 as new facilities are added and the fiber
optic network is expanded.
Interest Expense
Total interest expense increased $8.4 million, from $14.9 million for the
nine months ended September 30, 1997 to $23.3 million for the nine months
ended September 30, 1998. The $8.4 million increase was attributable to
interest payments on the 11% Senior Notes and the 8 7/8% Senior Notes.
Interest Income
Total interest income increased $5.5 million, from $1.9 million for the
nine months ended September 30, 1997 to $7.4 million for the nine months ended
September 30, 1998 as a result of the investment of excess cash balances.
Other Expense
In March 1998, the Company changed the accounting for its interest rate
swap agreement from a hedge of an anticipated transaction to a trading
security resulting in a loss charged against earnings of approximately $2.5
million. This change in classification required the Company to record the
payable related to the interest rate swap agreement on the consolidated
balance sheet at fair market value at the time of receipt of the proceeds from
the 1998 Senior Notes Offering. The loss, charged against earnings, was
approximately $2.5 million. The interest rate swap agreement is marked to
market on a monthly basis. For the nine months ended September 30, 1998, the
Company recognized approximately $2.8 million in expense from the mark to
market of the interest rate swap.
19
<PAGE>
Extraordinary Loss
The Company incurred a pre-tax extraordinary loss of $10.6 million ($8.4
million after tax) related to the redemption of $70 million of the 11% Senior
Notes consisting of $7.7 million redemption premium and a $2.9 million write-
off of related debt-issuance costs during the nine months ended September 30,
1998. In March 1997, the Company incurred a pre-tax extraordinary loss of
$818,572 ($507,515 after tax) from write-off of unamortized debt issuance
costs related to the bridge facility refinancing of the Gulf States
indebtedness of approximately $41.6 million.
EBITDA
EBITDA increased $1.8 million, from $16.5 million for the nine months
ended September 30, 1997 to $18.3 million for the nine months ended September
30, 1998. EBITDA attributable to Carriers' Carrier Services increased $8.0
million for the nine months ended September 30, 1998 compared to nine months
ended September 30, 1997. EBITDA attributable to Retail Services decreased
from 6.0% of revenues for the nine months ended September 30, 1997 to (2.9)%
of revenues for the nine months ended September 30, 1998, primarily due to
increased costs associated with the opening of new sales offices, increased
sales of the Company's local resale product 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 the remainder of 1998 and 1999 as the Company opens additional sales
offices, expands its product offerings and continues its geographic expansion
of its fiber optic network.
Liquidity and Capital Resources
The Company generated net cash from operating activities of $8.4 million
and $7.2 million for the nine months ended September 30, 1998 and 1997,
respectively. The components of cash flows from operations (consisting of net
loss adjusted for depreciation, amortization, deferred income taxes, pre-
acquisition loss, extraordinary item-loss on extinguishment of debt and other)
totaled $2.4 million for the nine months ended September 30, 1998, compared to
$5.8 million for the nine months ended September 30, 1997. Changes in working
capital provided $6.0 million for the nine months ended September 30, 1998,
resulting primarily from increases in accrued interest, unearned revenue,
accrued compensation and other accrued liabilities and accounts payable and a
decrease in income tax refund receivable from ITC Holding offset by increases
in accounts receivable, income tax refund receivable, inventory and prepaid
expenses. Changes in working capital provided $1.4 million for the nine
months ended September 30, 1997, primarily due to increases in unearned
revenue, accounts payable, accrued compensation and other accrued liabilities
and accrued interest offset by increases in accounts receivable, inventory and
income tax refunds receivable from ITC Holding.
Cash used for investing activities was $72.3 million and $87.4 million
for the nine months ended September 30, 1998 and 1997, respectively. The
Company made capital expenditures of $95.6 million and $25.3 million for the
nine months ended September 30, 1998 and 1997, respectively. Of the $95.6
million of capital expenditures for the nine months ended September 30, 1998,
$40.0 million related to Carriers' Carrier Services and $55.6 million related
to Retail Services. The significant increase in cash used in investing
activities between the nine months ended September 30, 1998 and 1997 is
attributable to the Company's execution of its business plan as it expands its
existing network and facilities. The Company expects its cash flows used in
investing activities to continue to increase as the Company continues the
buildout of its network infrastructure.
Cash provided by financing activities was $77.1 million and $105.9
million for the nine months ended September 30, 1998 and 1997, respectively.
Cash provided by financing activities for the nine months ended September 30,
1998 consisted primarily of net proceeds of $155.2 million from the sale of
the 8 7/8% Senior Notes, less $70.0 million repayment of principal on the 11%
Senior Notes and $7.7 million premium payment on the early extinguishment of
debt, net repayments of other long term debt, proceeds from the issuance of
common stock pursuant to option exercise and other financing activities of
$0.3 million. Cash provided by financing activities for the nine months ended
September 30, 1997 consisted primarily of net proceeds of $193.1 million from
the sale of the 11% Senior Notes, $8.2 million of advances
20
<PAGE>
received from ITC Holding, less $48.9 million repayment of advances to ITC
Holding, net repayments of other long-term debt of $43.3 million, and $3.2
million of other cash used in financing activities.
The Company used the net proceeds from the sale of the 8-7/8% Senior
Notes (i) to replace portions of the proceeds from the Company's initial
public offering in October 1997 which the Company used in April 1998 to redeem
$70 million principal amount of its 11% Senior Notes, at a redemption price of
111%, (ii) to fund continued market and fiber optic network expansion, and
(iii) to replace funds that would have otherwise been available under the
Company's secured credit facility, which has been modified to, among other
things, reduce available borrowings thereunder from $100 million to $50
million.
On May 20, 1998, the Company completed its acquisition of certain assets
and liabilities of IT Group Communications, a Jackson, Mississippi-based long
distance carrier. The Company issued 177,106 shares of common stock and
assumed liabilities of approximately $1.2 million to consummate the
transaction. The Company acquired approximately 900 customers, predominately
located in Mississippi, and an important network point of presence in Jackson,
Mississippi.
At September 30, 1998, the Company had entered into agreements with
vendors to purchase approximately $23.9 million of equipment and services, and
for the nine months ended September 30, 1998, had made capital expenditures of
$95.6 million. The Company currently estimates that its capital expenditures
will total approximately $240.0 million in 1998 and 1999, of which a total of
approximately $130.0 million is expected to be incurred in 1998 (inclusive of
the $23.9 million in commitments as of September 30, 1998) and approximately
$110.0 million is expected to be incurred in 1999. The Company expects to
make substantial expenditures thereafter. Capital expenditures will be
primarily for the following: (i) continued development and construction of
its fiber optic network (including transmission equipment); (ii) continued
addition of facilities-based local telephone service to its bundle of
integrated telecommunications services, including acquisition and installation
of switches and related equipment; (iii) the addition of switching capacity,
electrical equipment and additional collocation space in connection with the
expansion of the Company's ISP local telecommunications services; (iv) market
expansion; and (v) infrastructure enhancements, principally for information
systems. The actual amount and timing of the Company's capital requirements
may differ materially from the foregoing estimate as a result of regulatory,
technological and competitive developments (including market developments and
new opportunities) in the Company's industry.
On November 5, 1998, the Company completed a private offering of $125
million of 9 3/4% Senior Notes due 2008 (the "9-3/4% Senior Notes"), yielding
net proceeds of approximately $122 million. The Company intends to use the
net proceeds from the private offering primarily to fund market expansion, the
on-going development and construction of the Company's fiber optic network,
product development and general corporate purposes. Concurrently with the 9-
3/4% Senior Notes, the Company amended its secured revolving credit facility
with NationsBank, N.A. (the "Credit Facility"), to permit the issuance of and
payments on the 9-3/4% Senior Notes, and to maintain the lenders' commitment
under the Credit Facility at $50 million (which otherwise would have been
reduced to $12.5 million as a result of the offering.) No amounts are
outstanding under the Credit Facility.
The Company may require additional capital to fund its growth, as well as
to fund continued operating losses and working capital. The Company believes
that cash on hand, including the proceeds from the 9-3/4% Senior Notes
offering, cash flow from operations and borrowings under the Credit Facility
(subject to compliance with applicable covenants), will provide sufficient
funds to enable the Company to expand its business as currently planned
through the second quarter of 2001, after which the Company may need to seek
additional financing to fund capital expenditures and working capital. If the
Credit Facility or other sources of funds are unavailable, the Company may not
have a ready source of liquidity. 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
financing and other financing agreements, 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
21
<PAGE>
the Company. Inability 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.
Although the Company's liquidity has improved, the Company's level of
indebtedness and debt service obligations significantly increased as a result
of the Company's issuance of the 11% Senior Notes, the 8-7/8% Senior Notes and
the 9-3/4% Senior Notes. The successful implementation of the Company's
strategy, including expansion of its network and obtaining and retaining a
significant number of customers, and significant and sustained growth in the
Company's cash flow are necessary for the Company to be able to meet its debt
service requirements. There can be no assurance that the Company will
successfully implement its strategy or that the Company will be able to
generate sufficient cash flow from operating activities to improve its
earnings before fixed charges, or to meet its debt service obligations and
working capital requirements. The ability of the Company to meet its
obligations will be dependent upon the future performance of the Company,
which will be subject to prevailing economic conditions and to financial,
business and other factors.
The Year 2000 Issue. The Year 2000 issue is the result of computer
programs using two digits rather than four to define the applicable year.
Because of this programming convention, software, hardware or firmware may
recognize a date using ''00'' as the year 1900 rather than the year 2000.
This could result in system failures, miscalculations or errors causing
disruptions of operations or other business problems, including, among others,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
The Company's Program. The Company has undertaken a comprehensive program
---------------------
to address the Year 2000 issue with respect to the following: (i) the
Company's information technology and operating systems (including network
switching, customer service, call detail and billing systems), (ii) the
Company's non-information technology systems (such as buildings, plant,
equipment and other infrastructure systems that may contain embedded
microcontroller technology); (iii) the systems of its major vendors, third
party network service providers and other material service providers (insofar
as they relate to the Company's business); and (iv) the Company's major
Carrier's Carrier and Retail Services customers. As explained below, the
program involves (i) a wide-ranging assessment of the Year 2000 problems that
may affect the Company, (ii) the development of remedies to address the
problems discovered in the assessment phase, (iii) testing of the remedies,
and (iv) the preparation of contingency plans to deal with worst case
scenarios.
Assessment Phase. As part of the assessment phase of this program, the
----------------
Company has identified substantially all of the major components of the
systems described above. In order to determine the extent to which such
systems are vulnerable to the Year 2000 issue, the Company evaluated its
internally developed software applications. In addition, the Company sent
letters to substantially all of its significant hardware, software and other
equipment vendors, third party network service providers, other material
service providers and material customers, requesting detailed, written
information related to Year 2000 compliance.
To date, the Company has received and analyzed responses from a
substantial majority of its major vendors and service providers. The Company
has also received responses from approximately one fifth of its customers to
which inquiries were sent, which includes its major Carrier's Carrier and
Retail Services customers. Based upon the responses received to date, and
assuming contradictory responses are not received in the future from the third
parties who have been solicited, the Company believes that its Nortel and
Ascend system switches and third party computer operating systems dedicated to
the Company's customer service, call detail records and billing systems either
already are Year 2000 compliant or will be by end of 1998. The Company is in
the process of investigating, and intends to closely monitor, the Year 2000
readiness of the three public utilities that own and operate approximately
3,200 miles of the Company's approximately 7,000-mile fiber optic network. Two
of these utilities have indicated that they intend to be Year 2000 compliant
by year-end and one has stated that its goal is to be compliant by mid-1999.
The Company has been informed by the financial institutions that provide
services to the Company that they each have undertaken Year 2000 programs and
expect to be Year 2000 compliant. The Company's two largest Carrier's Carrier
customers, which together represented approximately 10.8% of the Company's
consolidated revenues for the nine months ended
22
<PAGE>
September 30, 1998, have responded that they are on target to be compliant by
the end of 1998 in one case, and the second quarter of 1999 in the other. Of
the Company's five largest Retail Services customers, which represented an
aggregate of approximately 11.7% of the Company's consolidated revenues for
the nine months ended September 30, 1998, four have either informed the
Company or made public disclosures to the effect that they have undertaken
Year 2000 compliance programs. In addition, the Company has begun to follow up
with respect to those entities that have not yet responded to the Company's
Year 2000 inquiries.
Remediation and Testing Phase. Based upon the results to date of the
-----------------------------
Company's assessment efforts, the Company has begun its remediation and
testing phase. The activities conducted during this phase are intended to
affirmatively address potential Year 2000 problems in the Company-developed
computer software in its information technology and non-information technology
systems and then demonstrate that this software will be made Year 2000
compliant on a timely basis. In this phase, the Company first evaluates a
program application and, if a potential Year 2000 problem is identified, steps
are taken to remediate the problem and the application is then individually
tested to confirm that the remediating changes are effective and have not
adversely affected the functionality of that application. Similar remediation
and testing are being undertaken with respect to the hardware and other
equipment that runs or is run by the software. After the individual
applications and system components have been remediated and tested, integrated
testing will be conducted to demonstrate functional integrated systems
operation. The Company intends to complete this phase by the second quarter
of 1999. After the Company completes its internal, integrated systems
testing, it intends to conduct laboratory-simulated integrated systems testing
in an effort to demonstrate Year 2000 compliance of the Company's systems as
they interface with external systems and equipment of major vendors, third
party network providers, other material service providers and customers.
Contingency Plans. The Company has begun to develop contingency plans to
-----------------
handle its most reasonably likely worst case Year 2000 scenarios, which have
not yet been identified fully. The Company intends to complete its
determination of worst case scenarios after it has received and analyzed
responses to substantially all of the inquiries it has made. Following that
phase, the Company intends to develop a timetable for completing its
contingency plans.
Costs Related to the Year 2000 Issue. Through the end of 1998, the
------------------------------------
Company expects to have incurred approximately $1.2 million in costs for its
Year 2000 program. The Company currently estimates that it will incur
additional expenses during 1999 to complete its Year 2000 compliance work,
which are not expected to exceed approximately $800,000. These costs, which
may vary from the estimates, have been, and will continue to be, expensed as
incurred.
Risks Related to the Year 2000 Issue. Although the Company's Year 2000
------------------------------------
efforts are intended to minimize the adverse effects of the Year 2000 issue on
the Company's business and operations, the actual effects of the issue cannot
be known until the Year 2000. Failure by the Company and/or its major
vendors, third party network service providers, and other material service
providers and customers to adequately address their respective Year 2000
issues in a timely manner (insofar as they relate to the Company's business)
could have a material adverse effect on the Company's business, results of
operations, and financial condition.
Effects on Accounting Standards
SFAS No. 130, Reporting Comprehensive Income, issued by the Financial
Accounting Standards Board, establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company adopted SFAS No. 130, effective January 1, 1998, with
no material impact on the consolidated financial statements.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for the way that public business
enterprises report information about operating segments, in
23
<PAGE>
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company adopted SFAS No. 131, effective January 1, 1998, with
no material impact on the consolidated financial statements.
SFAS No. 133, Accounting for Derivative Instruments and for Hedging
Activities, establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in
the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. A company may also implement SFAS No. 133 as of the beginning
of any fiscal quarter after June 15, 1998. SFAS No. 133 cannot be applied
retroactively. SFAS No. 133 must be applied to (i) derivative instruments and
(ii) certain derivative instruments embedded in hybrid contracts that were
issued, acquired, or substantively modified after December 31, 1997. The
Company expects to implement SFAS No. 133 for the fiscal year beginning
January 1, 2000, and does not expect the adoption of SFAS No. 133 will have a
material effect on its consolidated financial statements.
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, provides guidance on accounting for
the costs of computer software developed or obtained for internal use and is
required to be adopted no later than the Company's 1999 fiscal year. The
Company does not expect adoption of this statement to have a material impact
on its consolidated financial statements.
Inflation
The Company does not believe that inflation has had a significant impact
on the Company's consolidated operations.
24
<PAGE>
P A R T II
OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company completed its initial public offering (the "Equity
Offering") of its common stock, $.01 par value (the "Common Stock"), on October
29, 1997. The registration statement relating to the Equity Offering (File No.
333-31361) was declared effective by the SEC on October 22, 1997. The managing
underwriters of the Equity Offering were Morgan Stanley & Co. and Wheat, First
Securities, Inc. The number of shares of Common Stock registered and sold in the
Equity Offering was 11,500,000 and the aggregate price of the Equity Offering
amount registered and sold was $94,875,000. All shares were sold by the Company.
Net proceeds from the Equity Offering were approximately $87.5 million.
On April 2, 1998, the Company redeemed $70 million principal amount of
its 11% Senior Notes, at a redemption price of 111% plus accrued and unpaid
interest. In accordance with the indenture pursuant to which the 11% Senior
Notes were issued, the redemption price was paid with a portion of the remaining
net proceeds from the Equity Offering. The net proceeds from the Equity Offering
not used for the redemption (approximately $10 million) were temporarily
invested in short-term, interest bearing, investment grade securities. The
Company used the remaining proceeds of approximately $10 million during the
period from July 1, 1998 to September 30, 1998 to purchase additional equipment
for its Retail Services segment operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.15.2 Amendment to the Revised and Restated Fiber Optic Facilities and
Services Agreement, dated as of January 1, 1998, by and among
Southern Company Energy Solutions, Inc. (f/k/a Southern
Development and Investment Group, Inc.), on behalf of itself and
as agent for Alabama Power Company, Georgia Power Company, Gulf
Power Company, Mississippi Power Company, Savannah Electric and
Power Company, Southern Electric Generating Company and Southern
Company Services, Inc. and Interstate FiberNet, Inc.
10.35.4 Fifth Amendment to Interconnection Agreement, dated July 22,
1998, by and between DeltaCom, Inc., and BellSouth
Telecommunications, Inc.
27.1 Financial Data Schedule
99.1 Press Releases Related to Private Offering of $125 Million of 9-
3/4% Senior Notes Due 2008
(b) Reports on Form 8-K
On July 31, 1998, in connection with the two-for-one Stock Split, the
Company filed a Current Report on Form 8-K.
25
<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: November 13, 1998 By: /s/ Foster O. McDonald
----------------------
Foster O. McDonald
President
Date: November 13, 1998 By: /s/ Douglas A. Shumate
----------------------
Douglas A. Shumate
Senior Vice President and
Chief Financial Officer
26
<PAGE>
EXHIBIT 10.15.2
---------------
AMENDMENT TO THE REVISED
AND RESTATED FIBER OPTIC FACILITITES
AND SERVICES AGREEMENT
This Amendment entered into as of January 1, 1998, by and between SOUTHERN
COMPANY ENERGY SOLUTIONS, INC. (formerly known as Southern Development and
Investment Group, Inc.), a Delaware corporation, on behalf of itself and as
agent for ALABAMA POWER COMPANY, GEORGIA POWER COMPANY, GULF POWER COMPANY,
MISSISSIPPI POWER COMPANY, SAVANNAH ELECTRIC AND POWER COMPANY, SOUTHERN
ELECTRIC GENERATING COMPANY and SOUTHERN COMPANY SERVICE, INC. (collectively
referred to as "SES"), and INTERSTATE FIBERNET, INC. ("IFN"), a Delaware
corporation, to hereby amend the Revised and Restated Fiber Optic Facilities and
Services Agreement entered into by SES and MPX Systems, Inc. as of June 9, 1995
(the "Agreement").
PREMISES
SES and IFN, the successor in interest to MPX Systems, Inc., are parties to
the Agreement for the installation and use of fiber optic cable on route
segments identified in Exhibits A through H of the Agreement.
The Parties desire to add additional route Segments from the western border
of the state of Mississippi to Plant Scholz, Florida and the parties desire to
have such segments governed by the terms and conditions of the Agreement, as
amended.
IFN desires to reimburse Gulf Power Company ("Gulf Power") for its capital
expense in developing fiber optic cable along a route segment running from
Crestview, Florida to Gulf Power's Hiland City substation and the route will be
governed by the terms and conditions of the Agreement as an SES Route Segment.
Gulf Power desires to treat issues of title relating to route segments in
Florida the same way title is granted for route segments in Mississippi.
Accordingly, for value received, the parties agree as follows:
TERMS AND CONDITIONS
1. ADDITIONAL ROUTE SEGMENTS - MISSISSIPPI SECTION.
-----------------------------------------------
1.1 Mississippi State Line/Logtown. IFN will install a New Route Segment
-------------------------------
from the Mississippi State line to Logtown, Mississippi as set forth
in Exhibit H-16 attached hereto and which is hereby incorporated into
the Agreement.
1
<PAGE>
1.3 Bayou La Crouix/Kiln. IFN will install a New Route Segment from Bayou
---------------------
La Crouix, Mississippi to Kiln, Mississippi as set forth in Exhibit H-
18 attached hereto and which is hereby incorporated into the
Agreement.
1.4 Kiln/Pass Christian. IFN will install a New Route Segment from Kiln,
-------------------
Mississippi to Pass Christian, Mississippi as set forth in Exhibit H-
19 attached hereto and which is hereby incorporated into the
Agreement.
1.5 Pass Christian/Long Beach. IFN will install a New Route Segment from
-------------------------
Pass Christian, Mississippi to Long Beach, Mississippi as set forth in
Exhibit H-20 attached hereto and which is hereby incorporated into
the Agreement.
1.6 Long Beach/29/th/ Avenue, Gulfport. IFN will install a New Route
----------------------------------
Segment from Long Beach, Mississippi to 29/th/ Avenue in Gulfport,
Mississippi as set forth in Exhibit H-21 attached hereto and which is
hereby incorporated into the Agreement.
1.7 29/th/ Avenue/Texas Avenue. IFN will install a New Route Segment from
--------------------------
29/th/ Avenue in Gulfport, Mississippi to Texas Avenue in Gulfport,
Mississippi as set forth in Exhibit H-22 attached hereto and which is
hereby incorporated into the Agreement.
1.8 Texas Avenue/Fernwood. IFN will install a New Route Segment from Texas
---------------------
Avenue in Gulfport, Mississippi to Fernwood, Mississippi as set forth
in Exhibit H-23 attached hereto and which is hereby incorporated into
the Agreement.
1.9 Fernwood/Plant Watson. IFN will install a New Route Segment from
---------------------
Fernwood, Mississippi to Plant Watson, Mississippi as set forth in
Exhibit H-24 attached hereto and which is hereby incorporated into
the Agreement.
1.10 Plant Watson/Ocean Springs. IFN will install a New Route Segment from
--------------------------
Plant Watson, Mississippi to Ocean Springs, Mississippi as set forth
in Exhibit H-25 attached hereto and which is hereby incorporated into
the Agreement.
1.11 Ocean Springs/Singing River. IFN will install a New Route Segment from
---------------------------
Ocean Springs, Mississippi to Singing River, Mississippi as set forth
in Exhibit H-26 attached hereto and which is hereby incorporated into
the Agreement.
1.12 Singing River/Pascagoula. IFN will install a New Route Segment from
------------------------
Singing River, Mississippi to Pascagoula, Mississippi as set forth in
Exhibit H-27 attached hereto and which is hereby incorporated into
the Agreement.
2
<PAGE>
1.13 Pascagoula/Moss Point East. IFN will install a New Route Segment from
--------------------------
Pascagoula, Mississippi to Moss Point East, Mississippi as set forth
in Exhibit H-28 attached hereto and which is hereby incorporated into
the Agreement.
1.14 Moss Point East/Alabama State Line. IFN will install a New Route
----------------------------------
Segment from Moss Point East, Mississippi to the Alabama State Line,
as set forth in Exhibit H-29 attached hereto and which is hereby
incorporated into the Agreement.
1.15 Moss Point East/Plant Daniel. IFN will install a New Route Segment
----------------------------
from Moss Point East, Mississippi to Plant Daniel, as set forth in
Exhibit H-30 attached hereto and which is hereby incorporated into
the Agreement.
2. ADDITIONAL ROUTE SEGMENTS - ALABAMA SECTION
-------------------------------------------
2.1 Mississippi State Line/North Theodore. IFN will install a New Route
-------------------------------------
Segment from the Mississippi State Line to North Theodore, Alabama as
set forth in Exhibit H-31 attached hereto and which is hereby
incorporated into the Agreement.
2.2 North Theodore/Theodore. IFN will install a New Route Segment from
-----------------------
North Theodore, Alabama to Theodore, Alabama as set forth in
Exhibit H-32 attached hereto and which is hereby incorporated into the
Agreement.
2.3 Theodore/Hollingers Island. IFN will install a New Route Segment from
--------------------------
Theodore, Alabama to Hollingers Island, Alabama as set forth in
Exhibit H-33 attached hereto and which is hereby incorporated into the
Agreement.
2.4 Hollingers Island/Cloverleaf. IFN will install a New Route Segment
----------------------------
from Hollingers Island, Alabama to Cloverleaf, Alabama as set forth in
Exhibit H-34 attached hereto and which is hereby incorporated into the
Agreement.
2.5 Cloverleaf/Halls Mill Road. IFN will install a New Route Segment from
--------------------------
Cloverleaf, Alabama to Halls Mill Road in Mobile, Alabama as set forth
in Exhibit H-35 attached hereto and which is hereby incorporated into
the Agreement.
2.6 Halls Mill Road/Skyland Tap. IFN will install a New Route Segment from
---------------------------
Halls Mill Road, in Mobile, Alabama to Skyland Tap in Mobile, Alabama
as set forth in Exhibit H-36 attached hereto and which is hereby
incorporated into the Agreement.
2.7 Skyland Tap/Navco. IFN will install a New Route Segment from Skyland
-----------------
Tap in Mobile to Navco in Mobile, Alabama as set forth in Exhibit H-37
attached hereto and which is hereby incorporated into the Agreement.
3
<PAGE>
2.8 Navco/Dog River. IFN will install a New Route Segment from Navco in
---------------
Mobile, Alabama to Dog River, Alabama as set forth in Exhibit H-38
attached hereto and which is hereby incorporated into the Agreement.
2.9 Dog River/South Mobile. IFN will install a New Route Segment from Dog
----------------------
River, Alabama to South Mobile, Alabama as set forth in Exhibit H-39
attached hereto and which is hereby incorporated into the Agreement.
2.10 South Mobile/Van Antwerp Building. IFN will install a New Route
---------------------------------
Segment from South Mobile, Alabama to the Van Antwerp Building in
Mobile, Alabama as set forth in Exhibit H-40 attached hereto and which
is hereby incorporated into the Agreement.
2.11 Van Antwerp Building/Blakely Island. IFN will install a New Route
-----------------------------------
Segment from Van Antwerp Building in Mobile, Alabama to Blakely
Island, Alabama as set forth in Exhibit H-41 attached hereto and which
is hereby incorporated into the Agreement.
2.12 Blakely Island/Alabama-Florida State Line. IFN will install a New
-----------------------------------------
Route Segment from Blakely Island, Alabama to the Alabama-Florida
State line as set forth in Exhibit H-42 attached hereto and which is
hereby incorporated into the Agreement.
2.13 Mobile/Motgomery. IFN's route segment from Mobile, Alabama is hereby
----------------
deemed an MPX Route Segment as set forth in Exhibit F-7 attached
hereto and which is hereby incorporated into the Agreement.
2.14 Tuscaloosa Ring. The parties hereby amend and restate Exhibit H-9 in
---------------
its entirety to properly reflect the existing fiber count in the
Tuscaloosa Ring (formerly, the "Tuscaloosa Loop") as set forth in
Exhibit H-9 attached hereto and which is hereby incorporated into the
Agreement.
2.15 Anniston T.S./Talladega. IFN will install a New Route Segment from the
-----------------------
Anniston T.S. in Anniston, Alabama to Talladega, Alabama as set forth
in Exhibit H-43 attached hereto and which is hereby incorporated into
the Agreement.
2.16 Anniston Control Center/Anniston T.S.. IFN will install a New Route
-------------------------------------
Segment from the Anniston Control Center in Anniston, Alabama to the
Anniston T.S. in Anniston, Alabama as set forth in Exhibit H-44
attached hereto and which is hereby incorporated into the Agreement.
2.17 Anniston T.S./Oxanna Str. #543AA. IFN will install a New Route Segment
--------------------------------
from the Anniston T.S. in Anniston, Alabama to the Oxanna Strucutre
#543AA (the splice point of the Atlanta/Birmingham/Shreveport Route
Segments), as set forth in Exhibit H-45 attached hereto and which is
hereby incorporated into the Agreement.
4
<PAGE>
2.18 Gadsden/Oneonta. IFN will install a New Route Segment from Gadsden,
---------------
Alabama to Oneonta, Alabama as set forth in Exhibit H-46 attached
hereto and which is hereby incorporated into the Agreement.
2. ADDITIONAL ROUTE SEGMENTS - GULF SECTION.
-----------------------------------------
3.1 Alabama -Florida State Line/Chase Street. IFN will install a New Route
----------------------------------------
Segment from the Alabama-Florida State line to Chase Street in
Pensacola, Florida as set forth in Exhibit H-47 attached hereto and
which is hereby incorporated into the Agreement.
3.2 Chase Street/Goulding. IFN will install a New Route Segment from Chase
---------------------
Street in Pensacola, Florida to Goulding, Florida as set forth in
Exhibit H-48 attached hereto and which is hereby incorporated into the
Agreement.
3.3 Goulding/Crist. IFN will install a New Route Segment from Goulding,
--------------
Florida to Crist, Florida as set forth in Exhibit H-49 attached hereto
and which is hereby incorporated into the Agreement.
3.4 Crist/Shoals River. IFN will install a New Route Segment from Crist,
------------------
Florida to Shoals River, Florida as set forth in Exhibit H-50 attached
hereto and which is hereby incorporated into the Agreement.
3.5 Shoals River/Crestview. IFN will install a New Route Segment from
----------------------
Shoals River, Forida to Crestview, Florida as set forth in Exhibit H-
51 attached hereto and which is hereby incorporated into the
Agreement.
3.6 Crestview/Holmes Creek. IFN will install a New Route Segment from
----------------------
Crestview, Florida to Holmes Creek, Florida as set forth in Exhibit H-
52 attached hereto and which is hereby incorporated into the
Agreement.
3.7 Holmes Creek/Marianna. IFN will install a New Route Segment from
---------------------
Holmes Creek, Florida to Marianna, Florida as set forth in Exhibit H-
53 attached hereto and which is hereby incorporated into the
Agreement.
3.8 Marianna/Plant Scholz. IFN will install a New Route Segment from the
---------------------
Marianna, Florida to Plant Scholz as set forth in Exhibit H-54
attached hereto and which is hereby incorporated into the Agreement.
3.9 Crestview/Panama City. The fiber optic route segment from Crestview,
---------------------
Florida to Panama City, Florida developed by Gulf Power Company is
hereby deemed an SES Route Segment as set forth on Exhibit E-8
attached hereto and which is hereby incorporated into the Agreement.
IFN will pay Gulf Power Company $2,700,000 within 10 business days
after executing this Amendment in order to reimburse Gulf Power
Company for its costs in developing the route segment.
5
<PAGE>
4. GULF POWER-ISSUES OF TITLE. In order to divide title to the various types
--------------------------
of property that make up a route segment in Florida the same way title to
property is divided in Mississippi, Section 8 of the Agreement is hereby amended
as follows:
After "Mississippi Power" is noted anywhere in Sections 3 or 8, "or
Gulf Power" hereby follows.
5. CAPITALIZED TERMS. Capitalized terms used, but not defined in this
-----------------
Amendment have the same meanings as prescribed to them in the Agreement.
6. FORCE AND EFFECT. Except as modified herein, all terms and conditions of
----------------
the Agreement shall remain in full force and effect.
SIGNED AND DELIVERED.
SOUTHERN COMPANY ENERGY
SOLUTIONS, INC.
By: /s/ J. Kevin Fletcher
-----------------------------
Name J. Kevin Fletcher
-----------------------------
Its: President
-----------------------------
Date: August 27, 1998
----------------------------
INTERSTATE FIBERNET, INC.
By: /s/ Doug Shumate
------------------------------
Name: Doug Shumate
----------------------------
Its: Service V.P. CFO
----------------------------
Date: 9-14-98
---------------------------
6
<PAGE>
EXHIBIT 10.35.4
---------------
FIFTH AMENDMENT
TO
INTERCONNECTION AGREEMENT BETWEEN
DELTACOM, INC. AND
BELLSOUTH TELECOMMUNICATIONS, INC.
DATED MARCH 12, 1997
Pursuant to this Agreement (the "Fifth Amendment"), DeltaCom, Inc.
("DeltaCom") and BellSouth Telecommunications , Inc. ("BellSouth"), hereinafter
referred to collectively as the "Parties", hereby agree to further amend that
certain Interconnection Agreement, as heretofore amended, between the Parties
dated March 12, 1997 ("Interconnection Agreement").
NOW THEREFORE, in consideration of the mutual provisions contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, DeltaCom and BellSouth hereby covenant and agree as
follows:
1 Article V of the Agreement is hereby modified to include the
following:
C.5. Attachment G of this Agreement contains the Rates, Terms and
Conditions for local interconnection of Frame Relay services.
2 Attachment G, shown here as Exhibit A, is hereby incorporated herein by
reference to the Agreement.
3 The Parties agree that all of the other provisions of the Agreement, dated
March 12, 1997, shall remain in full force and effect including any amendments
thereto.
4 The Parties further agree that either or both of the Parties are authorized
to submit this Amendment to the appropriate state public service commission or
other regulatory body having jurisdiction over the matter of this Amendment, for
approval subject to Section 252(e) of the federal Telecommunications Act of
1996. However, this Amendment is effective without further approval needed.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Amendment to be
executed by their respective duly authorized representatives on the date
indicated below.
___________________________ __________________________________
DeltaCom, Inc. BellSouth Telecommunications, Inc.
By:/s/ Steven D. Moses By:/s/ Jerry D. Hendrix
------------------------ -------------------------------
Name: Steven D. Moses Name: Jerry D. Hendrix
---------------------- -----------------------------
Title: Sr. Vice President, Title: Director-Interconnection
---------------------
Network Services Services/Pricing
Date: 7/21/98 Date: 7/22/98
---------------------- -----------------------------
<PAGE>
Exhibit A
---------
Attachment G
A. Frame Relay Service Traffic
The following provisions will apply only to Frame Relay Service and
Exchange Access Frame Relay Service in those states in which DeltaCom is
certified and providing Frame Service as a Local Exchange Carrier and where
traffic is being exchanged between DeltaCom and BellSouth Frame Relay Switches
in the same LATA.
A.1 The Parties agree to establish two-way Frame Relay facilities between
their respective Frame Relay Switches to the mutually-agreed upon Frame Relay
Service point(s) of interconnection ("POIs") within the LATA. All POIs shall be
within the same Frame Relay Network Serving Area as defined in Section A40
of BellSouth's General Subscriber Services Tariff.
A.1.1 Upon the request of either Party, such interconnection will be
established where BellSouth and DeltaCom have Frame Relay
Switches in the same LATA. Where there are multiple Frame Relay
switches in the central office of a Party, an interconnection
with any one of the switches will be considered an
interconnection with all of the switches at that central office
for purposes of routing packet traffic.
A.1.2 The Parties agree to provision local and IntraLATA Frame Relay
Service and Exchange Access Frame Relay Service (both
intrastate and interstate) over Frame Relay Trunks between the
respective Frame Relay switches and the POIs.
A.1.3 The Parties agree to assess each other reciprocal charges for
the facilities that each provides to the other according to the
Percent Local Circuit use ("PLCU") factor PLCU, determined as
follows:
(i) Frame Relay framed packet data is transported within
Virtual Circuits ("VC"). For the purposes of calculating
the PLCU, if all the data packets transported within a VC
remain within the LATA, then consistent with the local
definitions in this Agreement, the traffic on that VC is
local ("Local VC").
Page 1 of 4
<PAGE>
Exhibit A
---------
Attachment G
(ii) If the originating and terminating locations of the two way
packet data traffic are not in the same LATA, the traffic
on that VC is interLATA.
(iii) The PLCU shall be determined by dividing the total number
of Local VCs, by the total number of VCs on each Frame
Relay facility at the end of the reporting period. The
Parties agree to renegotiate the method for determining the
PLCU, at either Parties' request, and within 90 days, if
either Party notifies the other that it has found that this
method does not adequately represent the PLCU.
(iv) If there are no VCs on a facility when it is billed, the
PLCU will be zero.
A.2 BellSouth will provide the Frame Relay Trunk(s) between the Parties
respective Frame Relay Switches. The Parties will be compensated as follows:
BellSouth will invoice, and DeltaCom will pay, the total non-recurring and
recurring charges for the trunk facility. DeltaCom will then invoice, and
BellSouth will pay, an amount calculated by multiplying the BellSouth billed
charges for the trunk facility by one-half of the DeltaCom's PLCU.
A.3 Each Party will provide a Frame Relay network-to-network interface
("NNI") port to the other Party for each trunk facility provided pursuant to
A.2, above. Compensation for NNI ports shall be based upon the NNI rates set
forth in the BellSouth F.C.C. Tariff No.1. Pursuant to that tariff, DeltaCom may
select a month-to-month or term rate structure for the NNI ports BellSouth
provides to DeltaCom. Whatever rate structure DeltaCom selects shall be deemed
to be the same rate structure that applies to the NNI port DeltaCom provides to
BellSouth. There shall be no termination liability to either party for the local
portion of the NNI port as determined by the Deltacom PLCU at the time of
termination.
A.4 Compensation for the NNI ports shall be calculated as follows:
A.4.1 For NNI ports provided by BellSouth to DeltaCom, BellSouth will
invoice, and DeltaCom will pay, the total non-recurring and
recurring charges for the NNI port. DeltaCom will then invoice,
and BellSouth will pay, an amount calculated by multiplying the
BellSouth billed non-recurring and recurring charges for the
NNI port by one-half of DeltaCom's PLCU.
Page 2 of 4
<PAGE>
Exhibit A
---------
Attachment G
A.4.2 For NNI ports provided by DeltaCom to BellSouth, DeltaCom will
invoice, and BellSouth will pay, the total non-recurring and
recurring charges for the NNI port. BellSouth will then
invoice, and DeltaCom will pay, an amount determined as
follows: DeltaCom's combined interLATA and local usage will
be calculated by subtracting one-half of DeltaCom's PLCU factor
from one hundred percent. The difference will then be
multiplied by the total charges intially billed by DeltaCom for
the NNI port. BellSouth will then invoice, and BeltaCom will
pay, this amount to BellSouth.
A.5 A Permanent Virtual Circuit ("PVC") is a logical channel from a frame
relay network interface (e.g., NNI or User Network Interface) to another frame
relay network interface. A PVC is created when a Data Link Channel Identifier
("DLCI") is mapped together with another DLCI. Neither Party will charge the
other Party any DLCI or Committed Information Rate ("CIR") charges for the PVC
from its Frame Relay switch to its own subscriber's premises.
A.6 For the PVC between the DeltaCom and BellSouth Frame Relay switches,
compensation for the DLCI and CIR charges are based upon the rates in the
BellSouth FCC Tariff No. 1. Compensation for PVC and CIR rate elements shall be
calculated as follows:
For PVCs between the Bell South Frame Relay switch and the DeltaCom Frame Relay
switch, BellSouth will invoice, and DeltaCom will pay, the total non-recurring
and recurring DLCI an CIR charges. If the VC is a Local VC, DeltaCom will
invoice and BellSouth will pay, 100% of the DLCI and CIR charges initially
billed by BellSouth for that PVC. If the VC is not local, no compensation will
be paid to DeltaCom for the PVC.
A.6.2 Each Party will compensate the other Party for any applicable
Feature Change or Transfer of Service Charges as set forth in
BellSouth's Tariff F.C.C. No. 1.A.6.3. The Parties agree to
limit the sum of the CIR for the VCs on a given NNI port to
not more than two times the port speed.
A.7 Except as expressly provided herein, this Agreement does not address
or alter in any way either Party's provision of Exchange Access Frame Relay
Service or interLATA Frame Relay Service. All charges by each Party to
Page 3 of 4
<PAGE>
Exhibit A
---------
Attachment G
the other for carriage of Exchange Access Frame Relay Service or interLATA Frame
Relay Service are included in the BellSouth access tariffs.
A.8 Until such time as BellSouth obtains authority to provide in-
region, interLATA service, DeltaCom will identify and report its PLCU to
BellSouth on a quarterly basis.
A.9 Either Party may request a review or audit of the various service
components, including but not limited to a Party's determination of its PLCU,
consistent with the provisions of section E2 of the BellSouth State Access
Services tariffs or Section 2 of the BellSouth FCC No.1 Tariff.
A.10 If during the term of this Agreement, BellSouth obtains authority
to provide in-region, interLATA service, the Parties shall renegotiate the
provisions of A.2, A.4, A.6 and A.8 to account for BellSouth's PLCU. In the
event the parties are unable to reach agreement within one hundred eighty (180)
days of the date BellSouth receives interLATA authority, the matter shall be
resolved pursuant to the dispute resolution provisions set forth in the
Interconnection Agreement.
Page 4 of 4
<PAGE>
Exhibit 99.1
------------
FOR IMMEDIATE RELEASE
Douglas A. Shumate
Chief Financial Officer
706-645-8189
ITC/\DELTACOM, INC. COMPLETES PRIVATE DEBT OFFERING
WEST POINT, GEORGIA (November 5, 1998)--ITC/\DeltaCom, Inc. (NASDAQ/NMS: ITCD)
today announced completion of a private offering of $125 million of 9-3/4%
Senior Notes due 2008 (the "Notes"). Interest on the Notes will be payable
semi-annually on May 15 and November 15, commencing May 15, 1999.
The Company intends to use the net proceeds from the private offering to fund
market expansion, the on-going development and construction of the Company's
fiber optic network, product development and general corporate purposes. The
Company also announced that it has amended its secured revolving credit facility
with NationsBank, N.A., to permit the issuance of and payments on the Notes, and
to maintain the lenders' committment under the facility at $50 million. No
amounts are outstanding under the credit facility.
The Notes have not been registered under the Securities Act of 1933 or any state
securities laws and, unless so registered, may not be offered or sold in the
United States, except pursuant to an exemption from the registration
requirements of the Securities Act of 1933 and applicable state securities laws.
ITC/\DeltaCom, Inc., headquartered in West Point, GA, provides integrated
telecommunications 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 communications companies. The Company's business
communication services include local exchange service, long distance, enhanced
data, Internet, and operator services, and the sale and maintenance of customer
premise equipment. The Company operates 22 branch offices in eight states, and
its 10-state, 6,970-mile fiber optic network reaches over 70 points of presence.
The Company has an interconnection agreement with BellSouth Corporation for
resale and access to unbundled network elements, and is a certified Competitive
Local Exchange Carrier (CLEC) in all nine BellSouth states.
<PAGE>
FOR IMMEDIATE RELEASE
Douglas A. Shumate
Chief Financial Officer
706-645-8189
ITC/\DELTACOM, INC. UNDERTAKES PRIVATE DEBT OFFERING
WEST POINT, GEORGIA (October 29, 1998)--ITC/\DeltaCom, Inc. (NASDAQ/NMS: ITCD)
announced today that it intends to commence a private offering of $125 million
of 9-3/4% Senior Notes due 2008 (the "Notes").
The Company intends to use the net proceeds from the private offering primarily
to fund market expansion, the on-going development and construction of the
Company's fiber optic network, product development and general corporate
purposes, and to replace available borrowings under the Company's $50 million
secured revolving credit facility which, after the private offering, will no
longer be available to the Company.
The Notes to be offered will not be registered under the Securities Act of 1933
or any state securities laws and may not be offered or sold in the United States
unless registered, except pursuant to an exemption from the registration
requirements of the Securities Act of 1933 and applicable state securities laws.
ITC/\DeltaCom, Inc., headquartered in West Point, GA, provides integrated
telecommunications 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 communications companies. The Company's business
communication services include local exchange service, long distance, enhanced
data, Internet, and operator services, and the sale and maintenance of customer
premise equipment. The company operates 22 branch offices in eight states, and
its 10-state, 6,970-mile fiber optic network reaches over 70 points of presence.
The Company has an interconnection agreement with BellSouth Corporation for
resale and access to unbundled network elements, and is a certified Competitive
Local Exchange Carrier (CLEC) in all nine BellSouth states.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED BALANCE SHEET OF ITC/\DELTACOM, INC. AS OF SEPTEMBER 30, 1998
AND THE RELATED UNAUDITED, CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 1998. THE INFORMATION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 107,649,503 107,649,503
<SECURITIES> 0 0
<RECEIVABLES> 31,906,444 31,906,444
<ALLOWANCES> 1,276,487 1,276,487
<INVENTORY> 1,887,320 1,887,320
<CURRENT-ASSETS> 159,077,200 159,077,200
<PP&E> 268,201,128 268,201,128
<DEPRECIATION> 45,233,318 45,233,318
<TOTAL-ASSETS> 469,276,355 469,276,355
<CURRENT-LIABILITIES> 49,346,386 49,346,386
<BONDS> 292,031,405 292,031,405
0 0
14,808 14,808
<COMMON> 512,848 512,848
<OTHER-SE> 127,111,372 127,111,372
<TOTAL-LIABILITY-AND-EQUITY> 469,276,355 469,276,355
<SALES> 45,676,120 123,222,398
<TOTAL-REVENUES> 45,676,120 123,222,398
<CGS> 22,485,361 58,619,396
<TOTAL-COSTS> 47,930,086 126,344,885
<OTHER-EXPENSES> 599,292 2,824,501
<LOSS-PROVISION> 114,098 533,335
<INTEREST-EXPENSE> 7,884,207 23,322,107
<INCOME-PRETAX> (8,732,474) (21,909,935)
<INCOME-TAX> (1,915,966) (5,611,225)
<INCOME-CONTINUING> (6,816,508) (16,298,710)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (8,436,170)
<CHANGES> 0 0
<NET-INCOME> (6,816,508) (24,734,880)
<EPS-PRIMARY> (.13) (.49)
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