<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 March 31, 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 No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at May 13, 1998
---------------------------
Common Stock at $.01 par value 25,456,037 Shares
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $236,741,779 $ 94,373,610
Restricted assets 22,000,000 22,000,000
Accounts receivable:
Customer, net of allowance for uncollectible accounts of
$1,110,500 and $1,060,842 in 1998 and 1997, respectively 22,698,039 21,439,365
Affiliate 2,702,079 2,011,822
Inventory 1,508,967 1,018,212
Prepaid expenses 1,216,112 534,909
Federal income tax receivable from ITC Holding 2,075,297 2,448,297
Deferred income taxes 636,680 589,799
------------ ------------
Total current assets 289,578,953 144,416,014
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 158,822,692 141,534,626
OTHER LONG-TERM ASSETS:
Intangible assets, net of accumulated amortization of
$4,196,838 and $3,634,152 in 1998 and 1997, respectively 60,814,605 61,347,786
Restricted assets 29,432,845 28,495,831
Other long-term assets 12,090,090 10,310,220
------------ ------------
Total assets $550,739,185 $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
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------------- -----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade $ 11,343,855 $ 7,714,878
Construction 7,755,376 6,770,923
Affiliate 0 534,461
Accrued interest 8,529,465 1,867,208
Accrued compensation 1,078,501 1,875,663
Unearned revenue 5,628,838 4,778,819
Other accrued liabilities 15,034,594 3,516,510
Current portion of long-term debt and
capital lease obligations 893,255 912,037
------------ ------------
Total current liabilities 50,263,884 27,970,499
------------ ------------
LONG-TERM LIABILITIES:
Deferred income taxes 1,926,749 6,890,952
Long-term debt and capital leases 362,664,062 202,977,499
------------ ------------
Total long-term liabilities 364,590,811 209,868,451
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value;
$7.40 liquidation preference; 5,000,000
shares authorized, 1,480,771
shares issued and outstanding 14,808 14,808
Common Stock, $.01 par value; 90,000,000
shares authorized; 25,372,502 and
24,817,556 shares issued and outstanding
in 1998 and 1997, respectively 253,725 248,176
Additional paid-in-capital 163,696,150 163,011,879
Accumulated deficit (28,080,193) (15,009,336)
------------- ------------
Total stockholders' equity 135,884,490 148,265,527
------------- ------------
Total liabilities and stockholders'
equity $ 550,739,185 $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 MARCH 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Operating revenues $36,694,502 $25,422,578
Cost of services 16,873,541 12,197,321
----------- -----------
Gross margin 19,820,961 13,225,257
----------- -----------
Operating expenses:
Selling, operations, and administration 13,566,958 7,888,844
Depreciation and amortization 6,320,701 3,842,689
----------- -----------
Total operating expenses 19,887,659 11,731,533
----------- -----------
Operating (loss) income (66,698) 1,493,724
----------- -----------
Other income (expense):
Interest expense (7,498,422) (3,467,314)
Interest and other income 2,833,680 24,497
Other expense (2,290,814) 0
----------- -----------
Total other income (expense) (6,955,556) (3,442,817)
----------- -----------
Loss before income taxes, preacquisition loss and
extraordinary item (7,022,254) (1,949,093)
Income tax benefit 2,387,567 575,528
----------- -----------
Loss before preacquisition loss and extraordinary item (4,634,687) (1,373,565)
Preacquisition loss 0 74,132
----------- -----------
Loss before extraordinary item (4,634,687) (1,299,433)
Extraordinary item-loss on extinguishment of debt (less
related income tax benefit of $2,133,154) (8,436,170) 0
----------- -----------
Net loss $(13,070,857) $(1,299,433)
============ ===========
Basic and diluted net loss per share:
Before extraordinary item $ (0.18) $ (0.07)
Extraordinary item (0.34) (0.00)
----------- -----------
Net loss $ (0.52) $ (0.07)
=========== ===========
Basic weighted average common shares outstanding 25,095,029 19,053,675
Diluted weighted average common shares outstanding 25,095,029 19,101,926
</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>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(13,070,857) $(1,299,433)
------------ -----------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 6,320,701 3,842,689
Amortization of bond issue costs 359,365 878,056
Deferred income taxes (5,011,084) (224,009)
Preacquisition loss 0 (74,132)
Extraordinary item-loss on extinguishment of debt 10,569,324 0
Other 0 16,899
Changes in current operating assets and liabilities:
Accounts receivable, net (1,948,931) (1,803,880)
Inventory (490,755) (132,654)
Prepaid expenses (681,203) (422,389)
Income tax receivable from ITC Holding 373,000 149,610
Accounts payable 2,748,814 (994,506)
Accrued interest 6,662,257 1,590,195
Unearned revenue 850,019 1,607,340
Accrued compensation and other accrued liabilities 3,020,916 614,441
----------- -----------
Total adjustments 22,772,423 5,047,660
------------ -----------
Net cash provided by operating activities 9,701,566 3,748,227
------------ -----------
Cash flows from investing activities:
Capital expenditures (23,025,659) (4,250,082)
Change in accrued construction costs 984,453 458,764
Change in restricted assets (937,014) 0
Purchase of Gulf States FiberNet, net of cash received 0 574,600
Other 12,340 0
------------ -----------
Net cash used in investing activities (22,965,880) (3,216,718)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of 8-7/8% Senior Notes,
net of issuance costs 155,170,450 0
Proceeds from issuance of stock options 653,616 0
Proceeds from advance from ITC Holding 0 287,159
Repayment of advance from ITC Holding 0 (48,329)
Capital contributions from ITC Holding, net 0 (624,465)
Other (191,583) 0
------------ -----------
Net cash provided by (used in) financing activities 155,632,483 (385,635)
------------ -----------
Increase in cash and cash equivalents 142,368,169 145,874
Cash and cash equivalents at beginning of period 94,373,610 1,301,415
------------ -----------
Cash and cash equivalents at end of period $236,741,779 $ 1,447,289
============ ===========
</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)
SUPPLEMENTAL CASH FLOW DISCLOSURES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1998 1997
------------- ---------------
<S> <C> <C>
Cash paid for interest $ 379,532 $ 23,033
========= ===========
Cash refunds received for income taxes,
net of payments $(146,155) $ (621,319)
========= ===========
NONCASH TRANSACTIONS:
Equity portion of acquisition of 64% interest
in Gulf States FiberNet and Georgia Fiber Assets $ 0 $17,896,665
========= ===========
Assumption of long-term debt related to acquisition of
Georgia Fiber Assets $ 0 $ 9,964,091
========= ===========
</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
Interstate FiberNet, Inc. (formerly ITC Transmission Systems, Inc.)
("FiberNet"), ITC Transmission Systems II, Inc. ("Transmission II"), Gulf States
Transmission Systems, Inc. ("GSTS"), and Eastern Telecom, Inc., d.b.a.
InterQuest, ("InterQuest") (collectively the "Fiber Companies"), as well as
ITC/\DeltaCom Communications, Inc. (formerly DeltaCom, Inc.) ("DeltaCom"), were
wholly owned subsidiaries of ITC Holding Company, Inc. ("ITC Holding").
ITC/\DeltaCom, Inc. (the "Company") was incorporated on March 24, 1997 under the
laws of the State of Delaware, as a wholly owned subsidiary of ITC Holding, to
acquire and operate the Fiber Companies and DeltaCom. Upon receipt of certain
regulatory approvals and certain other consents on July 25, 1997, 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 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 retail long distance services to mid-sized and major
regional businesses in the southern United States and is a leading regional
provider of wholesale long-haul services to other telecommunications companies
using the Company's owned, operated and managed fiber optic network (the
"Carriers' Carrier Services"). The Company intends to become a leading regional
provider of integrated telecommunications services to mid-sized and major
regional businesses in the southern United States by offering such customers a
broad range of telecommunications services, including local exchange and long
distance data and voice, Internet and operator services and the sale and
servicing of customer premise equipment (collectively, the "Retail Services") in
a single package tailored to the business customer's specific needs.
BASIS OF PRESENTATION
The accompanying 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 SEC on March 30,
1998 (File No. 0-23252).
The comparability of the three-month periods ended March 31, 1998 and March
31, 1997 has been affected by the Gulf States Acquisition (as further discussed
in Note 2, below). The unaudited, consolidated financial statements for the
three months ended March 31, 1997 reflect the total revenues and expenses from
7
<PAGE>
January 1, 1997, attributable to Gulf States FiberNet with the preacquisition
losses 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 the 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-
month period ended March 31, 1997, 48,251 stock options are included in the
computation of diluted net loss per share.
For periods subsequent to the Company's initial public offering, the effect
of the Company's potential common stock equivalents was not included in the
computation of diluted net loss per share as their effect is antidilutive.
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 A Preferred Stock issued in conjunction with this
acquisition were converted into 1,480,771 of the Company's Preferred Stock in
connection 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 made.
Upon closing of these acquisitions, ITC Holding contributed the 64%
ownership interest in Gulf States 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 March 3, 1998, the Company announced its intention to redeem $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. The Company accrued a pre-tax extraordinary loss of
approximately $10.6 million (approximately $8.4 million after tax), recognizing
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 of 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 from the 1998 Senior Note Offering. The loss,
charged against earnings, was approximately $2.5 million. The interest rate
swap agreement was marked to market at March 31, 1998, resulting in income of
approximately $200,000.
8
<PAGE>
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 (the "8-7/8% Senior Notes") due 2008, at a price of 99.9%
("the 1998 Senior Note 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, which has been 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 March 31, 1998 and December
31, 1997 consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ------------
<S> <C> <C>
11% Senior Notes $200,000 $200,000
8-7/8% Senior Notes 159,841 0
Capital lease obligations at varying interest rates,
maturing through June 2006 3,076 3,249
Other 640 640
-------- --------
Total long-term debt and capital leases 363,557 203,889
Less current maturities (893) (912)
-------- --------
Total $362,664 $202,977
======== ========
</TABLE>
In connection with the 1998 Senior Note Offering, the Company modified its
Credit Agreement to reduce the available credit to $50 million and to amend
and/or delete various covenants.
6. COMMITMENTS AND CONTINGENCIES
At March 31, 1998, the Company had entered into agreements with vendors to
purchase approximately $23.5 million of equipment related to the improvement and
installation of switches, other network expansion efforts and certain services.
9
<PAGE>
7. ACQUISITION
On March 18, 1998, the Company announced the signing of a definitive
agreement to acquire certain assets and liabilities of IT Group Communications
Company, a Jackson, Mississippi-based long distance carrier. The Company
expects to issue approximately 110,000 shares of common stock and assume
liabilities of approximately $1.0 million to consummate the transaction. This
transaction is expected to close in the second quarter of 1998.
8. SUBSEQUENT EVENT
On April 2, 1998, the Company redeemed $70 million of the 11% Senior Notes
at a redemption price of 111% plus accrued interest (as discussed in Note 3,
above).
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 on
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 income and
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.
HISTORICAL RESULTS OF OPERATIONS
The following tables set forth certain historical data for the three-month
periods ended March 31, 1998 and 1997 for the Carriers' Carrier Services
business and the Retail Services business.
<TABLE>
<CAPTION>
CARRIERS' CARRIER SERVICES
Three Months Ended
March 31,
1998 % 1997 %
----------- ---- ---------- ---
<S> <C> <C> <C> <C>
Revenues $11,111,940 100% $5,884,055 100%
Cost of services 1,211,401 11% 904,073 15%
----------- --- ---------- ---
Gross margin 9,900,539 89% 4,979,982 85%
----------- --- ---------- ---
Operating expenses:
Selling, operations
and administrative 3,512,316 31% 1,724,415 29%
Depreciation and
amortization 4,106,517 37% 2,355,550 40%
----------- --- ----------- ---
Total operating expenses 7,618,833 68% 4,079,965 69%
----------- --- ----------- ---
Operating income $ 2,281,706 21% $ 900,017 16%
=========== === =========== ===
RETAIL SERVICES
Three Months Ended
March 31,
1998 % 1997 %
----------- ---- ---------- ---
Revenues $25,582,562 100% $19,538,523 100%
Cost of services 15,662,140 61% 11,293,248 58%
----------- --- ----------- ---
Gross margin 9,920,422 39% 8,245,275 42%
----------- --- ----------- ---
Operating expenses:
Selling, operations
and administrative 10,054,642 39% 6,164,429 31%
Depreciation and
amortization 2,193,760 9% 1,487,139 8%
----------- --- ----------- ---
Total operating expenses 12,248,402 48% 7,651,568 39%
----------- --- ----------- ---
Operating (loss) income $ (2,327,980) (9)% $ 593,707 3%
============ === =========== ===
</TABLE>
11
<PAGE>
Revenues
Total revenue increased $11.3 million (44.5%), from $25.4 million for the
three months ended March 31, 1997 to $36.7 million for the three months ended
March 31, 1998. Revenues from Retail Services increased $6.1 million (31.3%),
from $19.5 million for the three months ended March 31, 1997 to $25.6 million
for the three months ended March 31, 1998. This increase was attributable to
an increase in the number of business customers, from 6,000 as of March 31,
1997 to over 8,100 as of March 31, 1998, continued geographic and product
expansion, growth in long distance minutes of use, growth in local lines in
service, and stability in the rate of revenue loss from lost customers from
period to period. The Company expects the revenue per customer in its Retail
Services segment to continue to increase as existing and new customers
purchase multiple products from the Company. Revenues from Carriers' Carrier
Services increased $5.2 million (88.1%), from $5.9 million for the three
months ended March 31, 1997 to $11.1 million for the three months ended
March 31, 1998. The driving factors behind the increase in revenue for the
Carriers' Carrier segment include the continued increasing demand for
bandwidth and continued route expansions in both owned routes and the managed,
monitored, and marketed routes.
Pursuant to its interconnection agreement (the "Interconnection Agreement")
with BellSouth Telecommunications, Inc. ("BellSouth"), the Company began billing
BellSouth during the first three months of 1998 for reciprocal interconnection
charges related to the provision by the Company of facilities-based local
exchange services. 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 is expected to refuse to pay compensation for
such terminations either to the Company or to other CLECs operating under
similar interconnection agreements. This same issue is a matter of dispute
between incumbent local exchange carriers ("ILECs") and CLECs across the
country. For the three months ended March 31, 1998, such charges to BellSouth
amounted to approximately $780,000, none of which have been paid. The Company
believes that its position 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 who 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.
In view of BellSouth's stated position with respect to such charges, and the
fact that the ultimate outcome of this controversy before the state regulatory
authorities and in the courts is uncertain, the Company did not record any
revenue for these charges during the three months ended March 31, 1998, and
reserved directly against the amounts billed to BellSouth. 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 $1.0
million during each of the three remaining quarters of 1998. The Interconnection
Agreement expires on July 1, 1999, and by its terms, provides the parties are to
begin to negotiate renewal terms by July 1, 1998. Such negotiations have not
begun, and 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.
Cost of Services
Total cost of services increased $4.7 million, from $12.2 million for the
three months ended March 31, 1997 to $16.9 million for the three months ended
March 31, 1998. Cost of services for Retail Services operations increased $4.4
million, from $11.3 million for the three months ended March 31, 1997 to $15.7
million for the three months ended March 31, 1998. Cost of services for
Carriers' Carrier operations increased $0.3 million, from $0.9 million for the
three months ended March 31, 1997 to $1.2 million for the three months ended
March 31, 1998. The cost of services as a percentage of revenue for Retail
Services operations increased to 61% for the three months ended March 31, 1998
compared to 58% for the three months ended March 31, 1997. Cost of services for
the Retail Services segment increased primarily due to the expansion of local
services and other retail services, which have a lower margin, as well as the
geographical expansion of facilities for the provision of such services. The
cost of services as a percentage of revenue for Carriers' Carrier operations
decreased to 11% for the three months ended March 31, 1998 compared to 15% for
the three months ended March 31, 1997. Cost of services as a percentage of
revenue for the Carriers' Carrier segment decreased because the cost of
services are primarily fixed costs and any
12
<PAGE>
incremental revenue has a favorable impact on gross margins. Effective April 13,
1998, the Company accepted the fibers under a long term dark fiber operating
lease for a route from Dallas to Longview, Texas. This lease will increase the
cost of services, which will have a direct negative impact on gross margin. The
Company anticipates this negative effect to be offset as customers are added on
this route.
Selling, Operations and Administration Expense
Total selling, operations and administration expense increased $5.7
million, from $7.9 million (31% as a percentage of revenue) for the three months
ended March 31, 1997 to $13.6 million (37% as a percentage of revenue) for the
three months ended March 31, 1998. Selling, operations and administration
expense attributable to Retail Services increased $3.9 million, from $6.2
million (32% as a percentage of revenue) for the three months ended March 31,
1997 to $10.1 million (39% as a percentage of revenue) for the three months
ended March 31, 1998. The increase in selling, operations and administration
expense as a percentage of revenue for the Retail Services segment is related to
continued geographic expansion and introduction of new services, primarily local
services. Selling, operations and administration expense attributable to the
Carriers' Carrier segment increased $1.8 million, from $1.7 million (29% as a
percentage of revenue) for the three months ended March 31, 1997 to $3.5 million
(32% as a percentage of revenue) for the three months ended March 31, 1998. The
increase in selling, operations, and administration expense for the Carrier's
Carrier segment was primarily due to additions of personnel resulting from the
geographic expansion of the Company network. Selling, operations, and
administration expense is generally expected to continue to increase as a
percentage of revenue through at least the end of 1998 due to the continued
expansion of the Retail Services segment. The Company currently anticipates
that, by early 1999, when it expects to have substantially completed this
expansion, selling, operations and administration expense as a percentage of
revenue will begin to decline.
Depreciation and Amortization
Total depreciation and amortization increased $2.5 million, from $3.8
million for the three months ended March 31, 1997 to $6.3 million for the three
months ended March 31, 1998. Retail Services accounted for $0.7 million of the
increase, which was primarily related to installation of new central office
equipment. Carriers' Carrier Services operations accounted for $1.8 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 as new facilities
are added and the fiber optic network is expanded.
Interest Expense
Total interest expense increased $4.0 million, from $3.5 million for the
three months ended March 31, 1997 to $7.5 million for the three months ended
March 31, 1998. The increase in interest expense is due primarily to interest
on the 11% Senior Notes and the 8-7/8% Senior Notes issued by the Company.
Interest Income
Total interest income increased from $25,000 for the three months ended
March 31, 1997 to $2.8 million for the three months ended March 31, 1998, as a
result of the investment of excess cash balances.
13
<PAGE>
Other Expenses
The Company changed the accounting for its interest rate swap agreement as
a hedge of an anticipated transaction to a trading security resulting in a loss
charged against earnings of approximately $2.3 million, net.
Extraordinary Loss
The Company accrued a pre-tax extraordinary loss of $10.6 million ($8.4
million after tax), related to the redemption on April 2, 1998 of $70 million of
the 11% Senior Notes consisting of a $7.7 million redemption premium and a $2.9
million write-off of related debt issuance costs.
EBITDA
EBITDA increased $1.0 million, from $5.3 million for the three months ended
March 31, 1997 to $6.3 million for the three months ended March 31, 1998.
EBITDA attributable to Carriers' Carrier Services increased $3.1 million during
the three months ended March 31, 1998 as compared to the three months ended
March 31, 1997. EBITDA attributable to Retail Services for the three months
ended March 31, 1998 was $(100,000) compared to $2.1 million for the three
months ended March 31, 1997. EBITDA attributable to Retail Services decreased
from 11% of revenues for the three months ended March 31, 1997 to (0.5)% of
revenues for the three months ended March 31, 1998, primarily due to building
the infrastructure to support future revenue including increased costs
associated with the expansion of new branch offices and employment of additional
support personnel to position this segment for growth and expansion. The Company
expects EBITDA for Retail Services to continue to decline through at least the
remainder of 1998 as the Company continues to position itself for future
operations and revenue growth through building additional infrastructure.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated net cash from operating activities of $9.7 million
and $3.7 million for the three months ended March 31, 1998 and 1997,
respectively. The components of cash flow from operations (consisting of net
loss adjusted for depreciation, amortization, deferred income taxes,
preacquisition loss, extraordinary item-loss on extinguishment of debt and
other) totaled $(800,000) and $3.1 million for the three months ended March 31,
1998 and 1997, respectively. Changes in working capital were $10.5 million and
$(600,000) for the three months ended March 31, 1998 and 1997, respectively. The
change for the three months ended March 31, 1998 resulted primarily from an
increase in accrued interest, accounts payable, unearned revenue, and other
accrued liabilities, partially offset by an increase in accounts receivable and
prepaid expenses. For the three months ended March 31, 1997, such changes were
primarily due to increases in unearned revenue and accrued liabilities, offset
by increases in accounts receivable and prepaid expenses and decreases in
accounts payable.
Cash used in investing activities was $23.0 million and $3.2 million for
the three months ended March 31, 1998 and 1997, respectively. The Company made
capital expenditures of $22.0 million and $3.8 million for the three months
ended March 31, 1998 and 1997, respectively. Of the capital expenditures made
during the three months ended March 31, 1998, $13.0 million related to Retail
Services and $9.0 million related to Carriers' Carrier Services. Of the $3.8
million of capital expenditures made during the three months March 31, 1997,
$2.0 million related to Retail Services and $1.8 million related to Carriers'
Carrier Services. The significant increase in cash used in investing activities
is indicative of the Company's commitment to expand its existing network and
facilities as it implements its business plan. Cash flows used for investing
activities during the second, third and fourth quarters of 1998 are expected to
be much higher than the corresponding quarters of 1997 as the Company continues
to expand its operations.
Cash provided by (used in) financing activities was $155.6 million and
$(400,000) for the three months ended March 31, 1998 and 1997, respectively. Net
cash provided by financing activities for the
14
<PAGE>
three months ended March 31, 1998 consisted primarily of net proceeds of $155.2
million from the sale of the 8-7/8% Senior Notes.
The Company is using 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 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 March 18, 1998, the Company announced the signing of a definitive
agreement to acquire certain assets and liabilities of IT Group Communications
Company, a Jackson, Mississippi-based long distance carrier. The Company
expects to issue approximately 110,000 shares of common stock and assume
liabilities of approximately $1.0 million to consummate the transaction.
Through this transaction, which is currently expected to close in the second
quarter of 1998, the Company expects to acquire approximately 900 customers,
predominantly located in Mississippi, and an important network point of
presence in Jackson, Mississippi.
At March 31, 1998, the Company had entered into agreements with vendors to
purchase approximately $23.5 million of equipment and services, and, for the
three months ended March 31, 1998, had made capital expenditures of $22.0
million. The Company currently estimates that its aggregate capital requirements
will total approximately $160.0 million in 1998 and 1999, of which a total of
approximately $105.0 million is expected to be incurred in 1998 (inclusive of
the $23.5 million in commitments as of March 31, 1998) and approximately $55.0
million is expected to be incurred in 1999. The Company expects to make
substantial capital expenditures thereafter. Capital expenditures will be
primarily for the following: (i) addition of facilities-based local telephone
service to its bundle of integrated telecommunications services, including
acquisition and installation of switches and related equipment; (ii) market
expansion; (iii) continued development and construction of its fiber optic
network (including transmission equipment); and (iv) infrastructure
enhancements, principally for information systems. 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.
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, cash flow from operations and available borrowings under the
Company's secured revolving credit facility (the "Credit Facility"), will
provide sufficient funds to enable the Company to expand its business as
currently planned through the maturity of the Credit Facility in 2003, after
which the Company will need to seek additional financing to fund capital
expenditures and working capital. Because the Credit Facility will mature in
2003, the Company may not have a ready source of liquidity after the maturity of
the Credit Facility in 2003. In the event that the Company's plans or
assumptions change or prove to be inaccurate, the foregoing sources of funds may
prove to be insufficient to fund the Company's currently planned growth and
operations. In addition, if the Company successfully completes any acquisitions,
the Company may be required to seek additional capital sooner than currently
anticipated. Additional sources may include equity and debt financings and other
financing arrangements, such as vendor financing. There can be no assurance that
the Company will be able to generate sufficient cash flow from operations or
that additional financing arrangements will be available, or if available, that
they can be concluded on terms acceptable to the Company. 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 and the 8-7/8% 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 is the result of computer programs using two digits
rather than four to define the applicable year. Date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of
operations, including, among others, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has commenced an analysis, which it expects to complete during the
second quarter of 1998, to determine the extent to which its own information,
customer service and billing systems and the systems of its major vendors and
third party network service providers (insofar as they relate to the Company's
business) are vulnerable to the Year 2000 issue. To date, the Company has
incurred $320,000 in costs to analyze the existing systems and applications. The
Company currently estimates that its total cost related to the analysis and
remediation of Year 2000 issue will be less than $2.0 million. This cost will
be expensed as incurred during 1998 and 1999. If the
15
<PAGE>
Company does not effectively address the Year 2000 issue, there could be a
significant disruption of the Company's ability to transact business with its
major customers and suppliers, as well as possible shutdown of certain computer-
operated activities.
Effects of 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 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 its consolidated financial
statements.
INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
16
<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 5,750,000 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 March 3, 1998, the Company issued notice of its intention to redeem $70
million principal amount of its 11% Senior Notes, at a redemption price
of 111% plus accrued and unpaid interest. As required by the terms of 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 redemption was completed on April 2, 1998. The net proceeds from
the Equity Offering not used for the redemption (approximately $10 million) have
been temporarily invested in short-term, interest bearing, investment grade
securities.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
99.1 Press release dated March 4, 1998 (Filed as exhibit 99.1 to the
Current Report on Form 8-K, File No. 0-23253, filed with the
Securities and Exchange Commission on March 5, 1998).
(b) Reports on Form 8-K
On March 5, 1998, in connection with the 8-7/8% Senior Note Offering,
the Company filed a Current Report on Form 8-K.
17
<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: May 15, 1998 By: /s/ Foster O. McDonald
----------------------
Foster O. McDonald
President
Date: May 15, 1998 By: /s/ Douglas A. Shumate
----------------------
Douglas A. Shumate
Senior Vice President and
Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This financial data schedule contains summary financial information extracted
from the balance sheets of ITC/\DeltaCom, Inc. as of March 31, 1998 and the
related combined statements of operations for the quarter ended March 31, 1998.
This information is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 236,741,779
<SECURITIES> 0
<RECEIVABLES> 26,510,618
<ALLOWANCES> 1,110,500
<INVENTORY> 1,508,967
<CURRENT-ASSETS> 289,578,953
<PP&E> 190,385,732
<DEPRECIATION> 31,563,040
<TOTAL-ASSETS> 550,739,185
<CURRENT-LIABILITIES> 50,263,884
<BONDS> 362,664,062
0
14,808
<COMMON> 253,725
<OTHER-SE> 135,615,957
<TOTAL-LIABILITY-AND-EQUITY> 550,739,185
<SALES> 36,694,502
<TOTAL-REVENUES> 36,694,502
<CGS> 16,873,541
<TOTAL-COSTS> 36,761,200
<OTHER-EXPENSES> 2,290,814
<LOSS-PROVISION> 199,245
<INTEREST-EXPENSE> 7,498,422
<INCOME-PRETAX> (7,022,254)
<INCOME-TAX> (2,387,567)
<INCOME-CONTINUING> (4,634,687)
<DISCONTINUED> 0
<EXTRAORDINARY> (8,436,170)
<CHANGES> 0
<NET-INCOME> (13,070,857)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> (.52)
</TABLE>
